A Aaaaaaaaaa

.
Babasaheb Dr. B.R. Ambedkar

(14th April 1891 - 6th December 1956)
BLANK
Grammar of Anarchy
We must hold fast to constitutional methods of achieving
our social and economic objectives. It means that we must
abandon the method of civil disobedience, non-co-operation
and satyagraha. When there was no way left for constitutional
methods for achieving economic and social objectives, there was
some justification for unconstitutional methods for achieving
economic and social objectives. But where constitutional methods
are open there can be no justification for these unconstitutional
methods. These methods are nothing but the Grammar of
Anarchy and the sooner they are abandoned the better for us.
—Dr. B. R. Ambedkar
in the Constituent Assembly
on 25th November 1949
DR. BABASAHEB AMBEDKAR
WRITINGS AND SPEECHES
Vol. 6
Compiled
by
Vasant Moon
Dr. Babasaheb Ambedkar : Writings and Speeches
Vol. 6
First Edition by Education Department, Govt. of Maharashtra : 10 October, 1989

Re-printed by Dr. Ambedkar Foundation : January, 2014
ISBN (Set) : 978-93-5109-064-9
Courtesy : Monogram used on the Cover page is taken from

Babasaheb Dr. Ambedkar’s Letterhead.
©
Secretary
Education Department
Government of Maharashtra
Price : One Set of 1 to 17 Volumes (20 Books) : Rs. 3000/-
Publisher:
Dr. Ambedkar Foundation
Ministry of Social Justice & Empowerment, Govt. of India
15, Janpath, New Delhi - 110 001
Phone : 011-23357625, 23320571, 23320589
Fax : 011-23320582
Website : www.ambedkarfoundation.nic.in
The Education Department Government of Maharashtra, Bombay-400032

for Dr. Babasaheb Ambedkar Source Material Publication Committee
Printer
M/s. Tan Prints India Pvt. Ltd., N. H. 10, Village-Rohad, Distt. Jhajjar,
Haryana
Minister for Social Justice and Empowerment
& Chairperson, Dr. Ambedkar Foundation
Kumari Selja
MESSAGE
Babasaheb Dr. B.R. Ambedkar, the Chief Architect of Indian Constitution was
a scholar par excellence, a philosopher, a visionary, an emancipator and a true
nationalist. He led a number of social movements to secure human rights to the
oppressed and depressed sections of the society. He stands as a symbol of struggle
for social justice.
The Government of Maharashtra has done a highly commendable work of
publication of volumes of unpublished works of Dr. Ambedkar, which have brought
out his ideology and philosophy before the Nation and the world.
In pursuance of the recommendations of the Centenary Celebrations Committee
of Dr. Ambedkar, constituted under the chairmanship of the then Prime Minister
of India, the Dr. Ambedkar Foundation (DAF) was set up for implementation of
different schemes, projects and activities for furthering the ideology and message
of Dr. Ambedkar among the masses in India as well as abroad.
The DAF took up the work of translation and publication of the Collected Works
of Babasaheb Dr. B.R. Ambedkar published by the Government of Maharashtra
in English and Marathi into Hindi and other regional languages. I am extremely
thankful to the Government of Maharashtra’s consent for bringing out the works
of Dr. Ambedkar in English also by the Dr. Ambedkar Foundation.
Dr. Ambedkar’s writings are as relevant today as were at the time when
these were penned. He firmly believed that our political democracy must stand on
the base of social democracy which means a way of life which recognizes liberty,
equality and fraternity as the principles of life. He emphasized on measuring the
progress of a community by the degree of progress which women have achieved.
According to him if we want to maintain democracy not merely in form, but also
in fact, we must hold fast to constitutional methods of achieving our social and
economic objectives. He advocated that in our political, social and economic life,
we must have the principle of one man, one vote, one value.
There is a great deal that we can learn from Dr. Ambedkar’s ideology and
philosophy which would be beneficial to our Nation building endeavor. I am glad
that the DAF is taking steps to spread Dr. Ambedkar’s ideology and philosophy
to an even wider readership.
I would be grateful for any suggestions on publication of works of Babasaheb
Dr. Ambedkar.
(Kumari Selja)
Collected Works of Babasaheb Dr. Ambedkar (CWBA)
Editorial Board
Kumari Selja
Minister for Social Justice & Empowerment, Govt. of India
and
Chairperson, Dr. Ambedkar Foundation
Shri Manikrao Hodlya Gavit

Minister of State for Social Justice & Empowerment, Govt. of India
Shri P. Balram Naik

Minister of State for Social Justice & Empowerment, Govt. of India
Shri Sudhir Bhargav

Secretary
Shri Sanjeev Kumar

Joint Secretary
and
Member Secretary, Dr. Ambedkar Foundation
Shri Viney Kumar Paul

Director
Dr. Ambedkar Foundation
Shri Kumar Anupam

Manager (Co-ordination) - CWBA
Shri Jagdish Prasad ‘Bharti’

Manager (Marketing) - CWBA
Shri Sudhir Hilsayan

Editor, Dr. Ambedkar Foundation
Dr. Babasaheb Ambedkar Source Material Publication
Committee, Maharashtra State
EDITORIAL BOARD
1 SHRI KAMALKISHOR KADAM … … PRESIDENT
MINISTER FOR EDUCATION
2 PROF. JAVED KHAN … … VICE-PRESIDENT
EDUCATION MINISTER FOR
STATE
3 SHRI R. S. GAVAI … … VICE-PRESIDENT
4 SHRI DADASAHEB RUPAVATE … … EXECUTIVE
PRESIDENT
5 SHRI B. C. KAMBLE … … MEMBER
6 DR. P. T. BORALE … … MEMBER
7 SHRI GHANSHYAM TALVATKAR … … MEMBER
8 SHANKARRAO KHARAT … … MEMBER
9 SHRIMATI SHANTABAI DANI … … MEMBER
10 SHRI WAMAN NIMBALKAR … … MEMBER
11 SHRI PRAKASH AMBEDKAR … … MEMBER
12 SHRI R. R. BHOLE … … MEMBER
13 SHRI S. S. REGE … … MEMBER
14 DR. BHALCHANDRA PHADKE … … MEMBER
15 SHRI DAYA PAWAR … … MEMBER
16 SHRI LAXMAN MANE … … MEMBER
17 PROF. N. D. PATH … … MEMBER
18 PROF. MORESHWAR VANMALI … … MEMBER
19 PROF. JANARDAN WAGHMARE … … MEMBER
20 BARRISTER P. G. PATIL … … MEMBER
21 DR. M. P. MANGUDKAR … … MEMBER
22 PROF. G. P. PRADHAN … … MEMBER
23 SHRI B. M. AMBHAIKAR … … MEMBER
24 SHRI N. M. KAMBLE … … MEMBER
25 PROF. J. C. CHANDURKAR … … MEMBER
26 SECRETARY, EDUCATION … MEMBER
DEPARTMENT
27 DIRECTOR OF EDUCATION … … MEMBER-
SECRETARY
28 SHRI V. W. MOON, O.S.D. … … MEMBER

ACKNOWLEDGEMENTS
Her Majesty’s Government, U.K.; Columbia
University, New York, U.S.A.; London School of
Economics and political Science U.K.; Reserve Bank of
India Library, Bombay ; Legislative Council Library,
Bombay; Bombay University Library ; Dr. Ambedkar
Research Institute, Nagpur; Gokhale Institute of
Politics and Economics, Pune ; Siddharth College
Library, Bombay.
PREFATORY
In presenting the 6th volume of the writings and speeches
of late Dr. B. R. alias Babasaheb Ambedkar, the State
Government has the satisfaction of fulfilling its promise and
commitment though not in a full measure but substantially.
The volume contains reprints of (1) Problem of the Rupee,
(2) Evolution of Provincial Finance in British India and it
also contains a unique document which is almost a graphic
socio-economic balance-sheet of the British rule in India viz.
his dissertation on the administration and finance of the East
India Company. It is, as readers will judge for themselves, an
outstanding achievement for a young man of 24 years that
was Dr. Ambedkar in 1915
Apart from these writings, the volume also contains
occasional essays, reviews and other miscellaneous reflections
on socio-economic topics of the day. In all these writings,
Dr. Ambedkar emerges as a profound thinker with strong
awareness of his immediate environment. He could see the
Indian society of his time in contact with the liberal influences
of Western education and like other eminent Indians of the
day, he recognised the need for synthesis and assimilation
of Western critical outlook with the emerging social ethos of
democracy and the welfare state.
The objectivity and criticality of outlook of Dr. Ambedkar
may be summed up in the words of Edwin R. A. Seligman of
Columbia University, New York. Writes Seligman : “The value
of Mr. Ambedkar’s contribution to this discussion lies in the
objective recitation of the facts and the impartial analysis of
the interesting development that has taken place in his native
country.”
Dr. Ambedkar’s exposition of the Problem of the Rupee evoked
appreciation of Edwin Cannan, the eminent economist, who
frankly acknowledges the gifts of objectivity which Dr. Ambedkar
displayed. He writes, “I do not share Mr. Ambedkar’s hostility to
the system nor accept most of his arguments against it and its
(viii) DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES
advocates. But he hits some nails very squarely on the

head.” Indeed, it is needless to quote words of appreciation
of Englishmen who were impressed by the critical faculties of
analysis of Dr. Ambedkar.
The life of Dr. Ambedkar was spent in the service of
the Indian society to the restructuring of which he gave
unremittingly all his intellectual and moral gifts which
Providence granted him in a generous measure.
He dreamt of India in which every citizen would be
Indian first and Indian last. While expressing himself on the
Constitution of the Government of Bombay Presidency before
the Indian Statutory Commission, he said, “For, I am of opinion
that the most vital need of the day is to create amongst the
mass of the people the sense of a common nationality, the feeling
not that they are Indians first and Hindus, Mohamedans or
Sindhis and Canarese afterwards but they are Indians first and
Indians last. If that be the ideal, then it follows that nothing
should be done which will harden local patriotism and group
consciousness.”
Progress of mankind is the progress of ideas and march of
ideals. Law itself embodies ideal. For Dr. Ambedkar, the ideal
was equality, liberty and fraternity. The present generation
has much to be indebted to this great son of India.
(Sharad Pawar)
Chief Minister of Maharashtra
INTRODUCTION
This is the 6th volume of the writings and speeches of
Dr. Babasaheb Ambedkar consisting of the reprints of his works viz.
(1) The Evolution of Provincial Finance in British India ;
(2) The Problem of the Rupee
and his unpublished dissertation on ‘ Administration and
Finance of the East India Company’ submitted to the Columbia
University, U.S.A. for his M.A. degree. It also contains his evidence
before the Royal Commission on Indian Currency and Finance.
His contributions, reviews and prefaces on matters, economic and
financial, are also included so as to bring together in the sequence
of a single volume his writings on the subject.
His published works (1) Evolution of Provincial Finance in
British India and (2) Problem of the Rupee have been out of print
for quite some time and the present generation has little or no
knowledge of his contributions to the subject of public finance
or economics and these will be found useful and instructive as
introduction to the evolution of the present federal structure of
the Indian polity.
Dr. Ambedkar had the unique distinction of being closely
associated with the events and policies that eventually climaxed
into the political federation with strong Centre and autonomous
states after the inauguration of the Constitutional Government
in India in 1950.
His evidence before the Royal Commission on Indian
Currency shows a new facet of his multi-dimensional
personality as an expert in public finance whose words evoked
appreciation and attention of English scholars of his time. His
dissertation on the finances of the East India Company is a
memorable document that finds place in the present volume
for which thanks are due to the University of Columbia.
Dr. Ambedkar was then 24 years of age. It may perhaps interest
the readers to know his reactions to the finance of the East India
Company. There are flashes of his genius and his acute mind
could consider pros and cons in a balance. It is difficult to resist
the temptation to quote his words from the said dis-sertation of
1915, which constitute the balance-sheet of the British Empire.
Writes Dr. Ambedkar:
“It remains, however, to estimate the contribution of
England to India. Apparently the immenseness of India’s
contribution to England is as much astounding as the
nothingness of England’s contribution to India. Both are,
however, true statements if looked at from economic points of
(x) DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES
view. But from another point of view, if India’s tribute cannot

be weighed in the scales of justice and humanity then England’s
contribution cannot be weighed in the scales of gold and silver.
The last statement is both literally as well as figuratively true.
England has added nothing to the stock of gold and silver in
India ; on the contrary, she has depleted India— ‘the sink of
the world.’
“Her contribution lies in an uneconomic realm: but just the
same, it is too great to be measured in terms of coin.
“Englishmen can look back on their work in India, if not
with unalloyed satisfaction, at least with some legitimate
pride. They have conferred on the people of India what is
the greatest human blessing—Peace. They have introduced
Western education, bringing an ancient civilized nation in
touch with modern institutions and life. They have built up
an administration which, though it requires reform with the
progress of the times, is yet, strong and efficacious. They have
framed wise laws, and have established Courts of Justice, the
purity of which is as absolute as in any country on the face of
the earth. These are results which no honest critic of British
work in India regards without high admiration.
“ But whether mere animal peace is to be
preferred to economic destitution, let every one
decide for himself.” (emphasis supplied)
In the present volume as in the previous ones, there
are several passages that show the varied aspects of the
charismatic personality of Dr. Ambedkar. He was a pragmatist
par excellence, a stylist of high order, and a profound social
philosopher who never allowed himself to be swayed by
abstract ideas and dogmas. He was a patriot and nationalist
whose commitment to the welfare of the Indian society divided
by castes and creeds, is transparent in all his writings and
speeches which, as in the above passage brings out antinomies
of life in all their varieties and complexities.
The present volume thus fulfils a long-felt need to have
in compact form thoughts and views of Dr. Ambedkar on
matters, economic and financial. It will also serve as a source
of material of contemporary historical relevance. We hope that
the layman as well as the research worker will both benefit
by the present publication.
(Kamalkishor Kadam)
Education Minister
CONTENTS
PAGE
PREFATORY ... vii
INTRODUCTION ... ix
BOOK 1
ADMINISTRATION AND FINANCE OF THE EAST INDIA 5
COMPANY.
BOOK 2
THE EVOLUTION OF PROVINCIAL FINANCE IN 51
BRITISH INDIA
REVIEW IN THE JOURNAL OF THE ROYAL ECONOMIC 313
SOCIETY, LONDON
BOOK 3
THE PROBLEM OF THE RUPEE ... 315
BOOK 4
MISCELLANEOUS ESSAYS ... 621
1 STATEMENT OF EVIDENCE ... 625
2 COPY OF THE MEMORANDUM CIRCULATED TO ... 634
WITNESSES IN INDIA BY THE COMMISSION
3 EVIDENCE ... 636

4 THE PRESENT PROBLEM IN INDIAN CURRENCY-I ... 671
5 THE PRESENT PROBLEM IN INDIAN CURRENCY-II ... 677
REVIEWS ON :
6 CURRENCY AND EXCHANGE ... 683
7 REPORT OF THE TAXATION ENQUIRY COMMITTEE, 1926 689
FOREWORDS TO :
8 COMMODITY EXCHANGE ... 692
9 SOCIAL INSURANCE AND INDIA ... 693
BLANK
z:\ ambedkar\vol-06\vol6-02.indd MK SJ+YS 23-9-2013/YS-10-11-2013 1
Book 1
Blank
ADMINISTRATION AND
FINANCE OF THE
EAST INDIA COMPANY
By
Bhimrao R. Ambedkar
Submitted in partial fulfilment of the requirements of

the degree of Master of Arts
May 15,1915
Blank
Administration and Finance of

the East India Company
The copy of this dissertation was secured from the Columbia
University by Dr. Frank F. Conlon of the Department of
History, University of Washington, U.S.A. and was presented
to Mr. Vasant Moon of Dr. Ambedkar Research Institute,
Nagpur, in 1979.
The editors are grateful to the University of Columbia,
U.S.A. for their kind permission to publish this unpublished
dissertation which is in their ownership and possession. They
also appreciate Dr. Conlon’s gesture of generosity and the
assistance of Dr. Ambedkar Research Institute, Nagpur, for
making this paper available for printing to the Government
of Maharashtra.
Blank
W ITHOUT going into the historical development of it, the

administration of the East India Company may be
conveniently described as follows :
I. The Court of Proprietors
It was “composed of the shareholders of the East India
stock to a certain amount, who elect from their own body by
ballot a certain number of representatives (twenty-four) to
whom the proprietory confide the planning and carrying into
effect whatever measures may be deemed most conducive to
the interests of India and England, reserving to themselves
a surveillance and limited control over the proceedings of the
delegated authority.”
The requirements of a seat and a vote in this Court were
as follows :
A proprietor of £ 500 stock was entitled to a seat in this Court.
A proprietor of £ 1,000 stock was entitled to one vote.
A proprietor of £ 3,000 stock was entitled to two votes.
A proprietor of £ 6,000 stock was entitled to three votes.
A proprietor from £ 10,000 to £ 1,00,000 and upward stock was
entitled to four votes.
Besides this, the stock must have been held for at least one
year before voting. There was no voting by proxy and minors
were ruled as incapable of voting.
The voters counted Lords, Commoners, women, clergy, and
officers civil and military, both of the king and the company.
The sessions of the Court were quarterly—March, June,
September, December. Nine qualified proprietors were quite
sufficient to ask for a special session of the Court. The speaker
was ex-officio the chairman who presided at the session,
brought forward all motions requiring the sanction of the Court,
and laid before the members the accounts of the Company’s
transactions.
The Court was authorized—
(1) To elect qualified persons to constitute what is known
as the Court of Directors.
(2) To declare the dividends on the capital stock of the
company within certain parliamentary restrictions.
8 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES
(3) To frame, alter, or repeal such of the by-laws as hinder

the good government of the East India Company,
provided they do not conflict with the Acts of Parliament.
(4) To control in general any increase in a salary or pension
above £ 200 a year, or over any gratuity beyond £600.
(5) To confer pecuniary reward for good service.
II. The Court of Directors
It consisted of twenty-four members. The Directors were
elected by such of the Proprietors as were qualified for a vote.
The qualification of a candidate for the Court of Directors were :
(1) He must be a natural, or naturalized subject of Great
Britain.
(2) He must possess £ 2,000 stock (no matter for what
previous period).
(3) He must not be a director of the Bank of England or
the South Sea Company.
(4) He must be a resident of England for two years after
holding office in the Court.
(5) He must not have held any maritime office in the Service
of the Company for two years previous to his proposed
election.
(6) He must not have under any plea or pretence whatsoever,
endeavored to obtain, directly or indirectly, a vote for
the election of himself or any other person to be a
Director.
(7) He must take an oath
(a) not to carry on any private trade.
(b) not to have any dealing with the company except
as a private individual.
(c) not to hold any place or office of emolument under
the Crown.
In order to fulfill the various duties, the work was assigned
to several Committees into which the Court was sub-divided.
They were:
1. Secret Committee 8. buying committee
2. Correspondence Committee 9. Warehouses Committee
3. Treasury Committee 10. India House Committee
4. Govt. Troops and Stores Committee 11. Shipping Committee
5. Legal Proceedings Committee 12. Private Trade Committee
6. Military Proceedings Committee 13. Civil College
7. Accounts Committee 14. Military College
ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 9
All appointments such as writers, cadets, and assistant

surgeons etc. were made by the Directors. The Civil and
Military Services were recruited from the graduates of the
two colleges which were merely a burden on the revenues
of the Company.
III. The Board of Commissioners for the Affairs of
India (The Board of Control).
The powers of the Board are :
(1) “The superintendence and control over all the British
territorial possessions in the East Indies, and over
the affairs of the United Company of merchants
trading thereto.”
(2) “To superintend, direct and control all acts, operations,
and concerns, which in any wise relate to the civil
or military government or revenues of the British
territorial possessions in the East Indies, in the
manner hereinafter directed.”
“All the members of the said Board, at all convenient
times, have access to all palers and muniments of
the said United Company, and are furnished with
such extracts, or copies thereof, as they require.
The Court of Directors are directed to deliver to the
Board copies of all minutes, orders, resolutions, and
other proceedings of all General or Special Courts
of Proprietors of the Company, and of the Court of
Directors, so far as relate to the civil or military
government or revenues of the British territorial
possessions in the East Indies, within eight days after
the holding of such respective Courts; and also copies
of ail despatches which the Directors receive from any
of their servants in the East Indies, immediately after
the arrival thereof; also copies of all letters, orders
and instructions whatsoever, relating to the civil
and military government or revenues of the British
territorial possessions in the East Indies, proposed
to be sent or despatched by the Court of Directors
to any of the servants of the Company in the East
Indies; the Court of Directors are required to pay
due obedience to, and to be governed and bound by
such orders and directions as they shall, from

time to time, receive from the Board, touching the
civil or military government and revenues of the
British territorial possessions in the East Indies.”
“Whenever the Court of Directors neglect to transmit
to the Board their intended despatches on any
subject, within fourteen days after requisition is
made, it is lawful for the Board to prepare and send
to the Directors (without waiting for the receipt
of the copies of despatches intended to be sent
by the said Court of Directors, as aforesaid), any
orders or instructions to any of the governments or
presidencies aforesaid, concerning the civil or military
government of the British territories and possessions
in the East Indies : and the Directors are required
to transmit despatches, in the usual form (pursuant
to the tenor of the said orders and instructions to be
transmitted to them), to the respective governments
and presidencies in India, unless on any representation
made by the Directors to the Board, touching such
orders or instructions, the Board shall direct any
alteration to be made in the same, which directions
the Court of Directors are bound to conform to.”
The Board of Control was sub-divided into six departments
to answer its functions : (1) Accounts, (2) Revenue,
(3) Judicial, (4) Military, (5) Secret and Political, (6) Foreign
and Public.
The mode of local administration in India was as
follows :—
The country was divided into three presidencies namely,
Bengal, Madras and Bombay, the seat of government being
respectively at Fort William, Fort St. George, and Bombay
itself.
In the beginning the Supreme Local Administration of
India was distributed among these three governments, each
one enjoying coordinate status. With a view to centralization,
the Supreme Local Administration of India was vested in
the Governor of Fort William in Bengal, making the other
two Governors subordinate to that of Bengal who was made
the Governor-General of India.
The appointment of the Governor-General was made by

the Court of Directors subject to the approval of the Crown.
The Governor-General was aided by a Council known as
the Supreme Council, originally composed of four members,
three of whom necessarily had to be the servants of the
Company in India of at least ten years’ standing. The fourth
one must not have belonged to the Company’s Service. The
Commander-in-Chief of forces in India was an ex-officio
member of the Governor-General’s office. This Supreme
Council of five members was expanded by adding to it in
1853, six Legislative members who were authorized only to
sit and vote on the framing of Laws and Regulations. Four
of these six Legislative members were required to be the
Civil Servants of the Company of ten years’ standing in
Bombay, Madras, Bengal and the North-Western Provinces.
The two remaining places were filled up by the Chief Justice
and one other Judge of the Supreme Court of Calcutta. The
Governor-General was authorized to add two more members
to this Council of eleven, under Section 22 of Statute 16 and
17 Victoria Chapter 95, but the power was not exercised at
best up to the time of the mutiny.
This Supreme Council of India, therefore, was composed
of six members including the Governor-General and
the Commander-in-Chief for the purposes of Executive
Government and twelve members for the purposes of the
Legislatures : seven members were deemed sufficient to
form a quorum.
The power of the Governor-General was so great that he
was nearly an autocrat. He could not only veto all legislation
in the Council but could initiate and carry out measures
independently of the Council. All “political” appointments
including those of the Residents to the native States and
the Commissioners to the non-regulated provinces were
made by him. He could appoint the Lieutenant-Governor of
Bengal and of the North-West Provinces and the judges of
the lower courts and controlled military patronage in Bengal
and the North-West provinces.
All districts not included within the limits of any of the four
Subordinate Governments were under the direct jurisdiction
of the Governor-General in Council who also exercised such
power over the native states as accrued to him through treaty
obligation. The official staff of the Governor-General was divided
into four departments, each one represented by a Secretary.
These were :
(1) The Foreign Department (foreign in relation to the
native states).
(2) The Home Department, handling the judicial and
revenue correspondence.
(3) The Financial Department.
(4) The Military Department.
Besides these the Political and Finance Secretaries had their
respective Secret Departments which were entrusted with
secret despatches.
The Subordinate Governments of Madras and Bombay
were administered thus : Each had its respective Governors
and Councils consisting of three members (including the
Commander-in Chief ). Both the Governors and the Councillors
were appointed by the Court of directors. Bengal and the
North-west Provinces were each governed by the Lieutenant-
Governors who were appointed by the Governor-General. The
Subordinate Governments were denied the power of legislation
or creating any new office, nor could they “grant any salary,
gratuity, or allowance without the previous sanction of the
Governor-General of India in Council.” This extreme strictness
though required by law was not required by custom : in order
not to overburden the Governor-General, minor matters were
executed by the Governor who submitted a quarterly report
of the same to the higher authorities who reviewed it and
as a matter of fact sanctioned it. The Bombay and Madras
Governments were privileged to hold direct correspondence
with the Court of Directors and did send the abstracts of their
proceedings to the Court and to the Government of India. The
instruments of Indian Government were furnished by what was
and is known as the Civil (covenanted and uncovenanted), the
Military, the Naval and the Ecclesiastical Service. The collection
of revenue and administration of justice were relegated to the
Civil Service.
For Civil and Military recruitment, the East India Company

had maintained two colleges in England (1) the Haileburg
College and (2) the Adiscombe Academy : Each student cost
the Company about £ 96 a year during his period of training.
All revenue was collected in the name of the Supreme
Government of India and was transferred to and controlled
by the Supreme Treasury. There was absolutely no local fiscal
autonomy : the deficit in one province was made up by the
surplus in another and the entire India revenue was held
responsible for the debts borrowed for wars in one particular
province : in short, both Finance and Administration were
absolutely centralized as in France under the ancienne regime.
So much for the pure system of Administration. The criticism
of it we will postpone till we come to the next chapter.
The last chapter must have made it clear how and why
Western Europe was at a death grapple for the control of
India. We followed the armies of the different leaders of
different nations— fighting for a country the people of which
had very little to choose in the final destiny—the Cama, the
Albuquerques, the Busseys, the Lallys, the Clives, the Malcolms,
the lakes and the shores as though enacting the train of ghosts
of Banquo’s line all that terrified Shakespeare’s Macbeth out
of his senses.
II
In this chapter we have more particularly to deal with the
East India Company as a Political Sovereign and the Finances
without dilating upon its development from a Commercial
Concern into a Political Sovereign.
There is nothing strange in the fact that the East India
Company succeeded in establishing its suzerainty over India
as might have been seen from our past discussion. Having
gotten a foothold in the various provinces it extended its
rule over the entire peninsula and established by law
what is known as the British Government in India : in
other words, it established the State and carried on the
political and commercial functions jointly. As a result of this
combined activity the fiscal administration of the Company
in India was an entangled phenomenon. The commercial and
revenue returns were merged together without any attempt at

distinction. Any student of finance, therefore, has to pass over
the entire period ending in 1814 when by an Act of Parliament
the Company was compelled to keep separate accounts of
Finance and Commerce.
With this caution we will now turn to the heads of Revenue.
(1) The Land Revenue
In spite of the early industrialization in parts of India, the
country as a whole maybe classed as an agricultural country
and land, today as in former times, furnished the state with
a major part of its revenue.
The British Government rightly or wrongly established the
principle of state landlordship versus the principle of private
property and regulated its land revenue system in keeping
with that policy.
There are different systems of land revenue in India : It
may be well to describe them in the words of Parliamentary
Blue-Books.
(I) The Zemindary Settlement of Cornwallis
The most obvious feature of advantage in this system is
the facility of collection, as it is a much more simple thing to
obtain the revenue of a large district from a certain moderate
number of Zemindars or contributors, than it is to perform
the collection in details by the officers of the government
themselves, and another advantage undoubtedly is the greater
degree of certainty in the result of 1831 C. 3339.
This system of land tenure arose thus : When the East India
Company came into possession of the revenues of the Dewanee
of Bengal, Behar and Orissa, they found the land revenue
collected through the mediation of officers (subhedars) under the
Mohamedan government, who had charge of districts sometimes
of more, sometimes of less extent, with various titles, such as
Zemindars and Talookdars, and who paid the revenue into
the treasury in one sum, for which they were found managing
considerable districts whose obligations consisted in paying a
certain annual amount to the Government. Many of them held
their districts or estates under this condition hereditarily. [2. cf.
1831 C. 3114, 3115, 3215.] On the East India Company

becoming possessed of the Bengal territory, great abuses
were found to prevail, and to be practised by the different
sorts of people employed in the collection of the revenue.
The detail of the business was so great, that it frightened
Lord Cornwallis and the Government of the day, and they
conceived that no better method for the protection of the
Ryots or small cultivators, could be invented, than to create a
species of landlords, from whom they expected much benefit
to arise : the ground upon which they principally went was
this, that those zemindars, having a permanent interest in
the land assigned to them, would have an interest in the
prosperity of the Ryots, in the same manner as a landlord
in England feels an interest in the prosperity of his tenants.
This was expected to produce two good effects, to create a
landed aristocracy in the country, and above all to afford
protection to the Ryots or small cultivators, from the kind of
paternal feeling that was expected to pervade the zemindars.
[1. cf. 1831 C. 3136.] With a view to the protection of the
whole mass of agricultural population, and with the best
motives, the zemindars in 1793, whether cultivators or
officers in actual charge of districts, hereditary or by special
appointment, were created landholders of the country by
which a property in the soil was vested in them, in nearly as
full a sense as it is to the holder of a fee-simple in England.
The sum which a zemindar had been in the habit of paying
was ascertained by the observation of a few prior years, the
assessment or tax was fixed forever, and an engagement
was made that this amount of land revenue should never be
raised on him. Such is the nature of the settlement known
by the name of “the Zemindary or Permanent Settlement”.
[2. cf. 1831. C. 3115, 3116, 3136, 3215; 1832. R.C. p. 21.]
II. Village Land Revenue System
The institution of village community was and is mainly
to be found in northern India. The proprietary right of
land is vested in the entire community residing in the
village. The administration of the village is handed over
to a headman elected by the villagers and is subject to
their removal. Under this system the lands are let out
to men sometimes in the same village, sometimes in the
neighbouring village, while certain portions and certain rights

are possessed by the different craftsmen or artisans of the
village, such as the schoolmaster, the washerman, the barber,
the carpenter, the blacksmith, the watchman, the village
accountant, etc. who have each a right to a certain portion
set aside for certain recognized expenses of the village, and
for defraying its hospitality towards strangers [1. cf. 1830,
L. 398, 399, 405, 406, 529.] These village communities are
little republics, having nearly everything that they want within
themselves, and almost independent of any foreign relations.
Dynasty after dynasty tumbles down : revolution succeads
revolution. Hindoo, Pathan, Mogul, Maratha, Sikh, English,
are all masters in turn, but the village communities remain
the same. In times of trouble they arm and fortify themselves;
[2. cf. 1832 Commons’ Rev. Committee, p. 29.] It is difficult to
state the proportion of the produce of the village paid to the
Government: the authorities know little of the precise property
of any of the proprietors; it is not the interest or the wish of
the village that the Government should scrutinize and know
their possessions, therefore if any one of the brotherhood fails
to pay his proportion, that is a matter for the villagers at large
to settle, and they will often come forward to pay it for him,
but these are all private arrangements kept to themselves : and
the Moceadim has no power from the Government to enforce
this assessment, what each man in the village has to pay is an
internal arrangement, which it is desirable for the Government
not to interfere in, the villagers settling among themselves
what each has to pay, the total assessment being calculated
after enquiry into the state of prosperity in the village : what
it has hitherto paid : what it is capable of paying : the state
of the village lands, and what assessment they ought to bear
with reference to the produce. [3. cf. 1830 L. 401, 402, 404,
528, 583, 584.]
Surveys of considerable expense have been made by the
Government : a minute account taken of the state of the land
in each village, the fields examined in the presence of surveying
officers with all the assistance they can procure, not only from
their own servants, but from the village communities, the people
themselves interested, and also the ryots and people of the
neighbouring villages who are invited to attend. The exact

limits of the village are put down, and even the details of land
within the village, the productions, the houses, fruit-bearing
trees, and son on : the assessment is grounded upon these
particulars [1. cf. 1831 C. 3492.]
III. The Ryotwar System
The peculiar principle of the third sort of assessment termed
Ryotwar is to fix a maximum of assessment upon all the lands
of the country [2. cf. 1831 C. 45, 65.] The money rent of each
individual oultivator for the fields in his occupation is defined
with as much permanency as possible, the aggregate of such
rents making the total assessment, which varies each year
with the increase or decrease of cultivation. Another main
principle of the Ryotwar system is to protect the rights of all
ryots or cultivators, as they now exist in every village, from
infringement: and to prevent all encroachment upon those
rights [3 cf. 1831. C. 5156 :] Thus, in the Ryotwar system,
the details of the interest of the respective Ryots are known
completely, and not at all in the zemindary system; and the
former effectually does what the latter proposes to do, but
never has done, and never can do, that is, fix an assessment
upon all lands in the country. Under the Ryotwar system,
the assessment goes from land to the aggregate : it respects
property of every class, that of the largest landholder, and
that of the smallest: it measures and assess every portion of
an estate, and thus facilitates the transfer of landed property,
as the first question when taken into market is—What is
the amount of public demand upon the land ? [4 cf. 1831 C.
4565, 4567, 4568.] The Ryotwar Settlement is applicable in
every state of things : where there are proprietors it may
be concluded with farmers or cultivators : it may be equally
made for the largest or for the smallest quantity of land,
for millions of acres or for only a few. The owner of a single
field may make his terms directly with the Government, and
turn to his cultivation, knowing that he cannot be called on
to pay more than a certain sum : for although the assessment
under this system varies according to the value of the land,
difference of soil, population, situation, and other localities :
and although inferior land, paying a lower assessment, becomes
liable when sufficiently improved to pay the higher assessment,

there is nevertheless, a maximum for the best land beyond
which all produce is for the benefit of the landholder, and
there are remissions in cases of urgent distress. [1. cf. 1832
C.R. P. No. 20.] Another advantage which the Ryotwar system
possesses over the Zemindary is in the creation of a great body
of independent proprietors, instead of a few who are proprietors
only in name : and there is an advantage for the great mass of
the people, but in the case of the Zamindary they accumulate
for the benefit of the few, while in the Ryotwar system there
is also tendency in a considerable degree to the accumulation
of capital. [2. cf. 1831 C. 4577, 4578, 4579.]
Such was and is the system of land revenue in India under
the regime of the East India Company. A critical estimation
of the system we will reserve for the future.
The next important head of revenue is the Opium revenue.
The opium revenue yielded next in amount to the land revenue
and was levied in two different ways :
(1) “ By an exclusive system of cultivation and sale carried on
by the Government in Bengal.”
(2) “ By a high export duty levied in Bombay on opium
grown in the native states of Malwa and shipped from
Bombay.”
By Regulation VI of 1799 section 3, poppy cultivation was
prohibited in Bengal, and in the North-West Provinces by
Regulation XLI of 1803 Section 2.
“Annual engagements are entered into by the
Government with the Ryots in certain selected districts,
to sow a certain quantity of land with the white poppy,
under a system of pecuniary advances, the produce to
be delivered in the form of opium to the Government at
a fixed rate........The total net receipts from the opium
monopoly in Bengal amounted in 1856 to 2,767,136.”
The revenue derived from transit of opium has a pretty little
history : prior to 1831 the British used to buy the opium from the
native states (to keep a strict monopoly of the article) through
the Resident and hammer it out at Bombay or at Calcutta. But to
prevent the large smuggling into the Portuguese Settlements the
monopoly policy was given up in favour of the transit duties

recovered by way of “passes” at a specified rate to cover the
transportation cost to Bombay. The transit duty was at first
fixed at Rs. 175 per chest of 140 lbs. each. This process showed
a diminution in the returns, consequently the rate was reduced
to Rs. 125 per chest.
The conquest of Sindh closed the additional gate of smuggling
the opium into the Portuguese territories : consequently it
was hoped and rightly that a higher transit duty would give
added return as the change in the direction of the trade was
impossible. So in 1843 October, the rate was increased to
Rs. 200 per chest, in 1845 to Rs. 300 per chest and in 1847
to Rs. 400 per chest.
III. The Salt Tax
Salt is obtained in India in different ways and is taxed in
different ways in different parts of the country.
It is obtained either by boiling sea water as in Bengal,
or by solar evaporation as in Bombay and Madras or from
natural resources such as the salt mines in Punjab and the
salt lakes in Rajputana.
In Bengal the Company had a salt monopoly. It was
manufactured by the natives who contracted to deliver ail
manufactured salt to the Government at a fixed low price.
The Government then sold this quantity of salt at six different
agencies, Hidgelee, Tumlook, Chittagong, Hiracan, Cuttack,
Balasore and Khoredah, at a price which was composed of the
actual cost plus the additional amount equivalent to the duty
levied on imported salt. As a result of this “the average retail
price to the consumer” amounted to about a penny per pound.
The private manufacture of salt was also allowed at
Calcutta under a system of excise only equal in amount to
the import duty.
But on the recommendation of the select committee of the
House of Commons in 1836, there was introduced the system of
fixed prices, and open warehouses, at which the sales, instead
of being as before periodical “were constantly going on.”
In Madras, salt was manufactured on behalf of the
Government and was sold for internal consumption. The duty
on imported foreign salt was lowered from Rs. 3 per pound to
equal the difference between the cost price and the sale price
of the article.
In Bombay the salt manufacture was handed over to the

individuals under the system of an excise duty equivalent to
the import duty on the article. The salt mines of Punjab were
worked by the Government and the salt was sold on the spot.
The North-West Provinces depended upon the Lower
Provinces of Bengal, the Sambhur Salt lake in Rajputana and
parts of western India for their supply of salt. The duties were
so arranged that the salt from all parts when it reached the
North-West Provinces tended to be equal in price.
IV. Customs
There were innumerable transit or inland duties levied at
every town and on every road in the shape of tolls. But they
were abolished in Bengal by Act 14 of 1836 : in Bombay by
Act 1 of 1838 : and in Madras by Act 6, of 1844 : and uniform
system of customs was established all through British India.
The evil effects of these inland transit duties will be discussed
later on.
There remained two sources of customs revenue :
(1) The sea customs on exports and imports, the former on
salt and indigo.
(2) The land customs levied mainly on articles crossing the
frontier lines between the native and British territories.
V. Besides the salt and opium monopolies the East India
Company had the tobacco monopolies as another source of
revenue.
VI. Abkarree or revenue obtained from the sale of monopolies
to sell spirits and liquors. Licences were sold to the highest
bidder who contracted to sell at his own price, the hours of
business and the location of the shop being regulated by the
Government.
VII. The Wheel-tax was levied upon hackneys, carts,
buggys, etc.
VIII. The “Sayer duties” was a collective name for
unclassified taxes. In different parts of the country it
included different taxes. Once it included the irregular
collections made by native revenue officers. In Madras
it included the transit duties, in Bengal the pilgrim tax
was included under this head. In the Deccan “this source
of revenue” was “divided into two great heads the first
denominated mohturfa, which embraces taxes on shops, trades,
etc.: the other ballootah,* which “comprehended” taxes upon

the fees in kind received by the village artisans from the
cultivators, and upon their enam (rent free) lands when they
hold them. In one instance, the percentage upon bad coins
was found to be included under the head Sayer.”
IX. The Judicial Fees were realized in the form of stamps
requisite in cases of different amounts in order to defray legal
charges; the value of stamps varied with the amount of the suit.
Suits ranging up to Rs. 16 … the stamps amounted to Re. 1
From Rs. 16 to Rs. 32 … Rs. 2
From Rs. 150 to Rs. 300 … Rs. 16
From Rs. 300 to Rs. 800 … Rs. 32
From Rs. 800 to Rs. 1,600 … Rs. 50
From Rs. 1,600 to Rs. 3,000 … Rs. 100
From Rs. 5,000 to Rs. 10,000 … Rs. 250
From Rs. 10,000 to Rs. 25,000 … Rs. 500
From Rs. 25,000 to Rs. 50,000 … Rs. 750
From Rs. 50,000 to Rs. 1,00,000 … Rs. 1,000
From Rs. 1,00,000 and above … Rs. 2,000
Besides this the exhibits filed, summons, answers,

replications, rejoinders, supplemental pleadings, the
authorization to a lawyer to plead (sanad) are required to be
stamped, the stamp only varying according to the status of
the court.
X. The Stamp Duties first established in Bengal in 1797
were incumbent on all instruments such as contracts, deeds,
conveyances, leases, powers of attorney, policies of insurance,
promissory notes, receipts, bail bonds, and legal proceeding
generally (bills of exchange under Rs. 25 and receipts under
Rs. 50 were being exempted).
In Madras stamp paper was first introduced in 1808, chiefly
on legal proceedings: and in 1816 the duties were extended to
bonds, deeds, leases, mortgages, bills of exchange and receipts.
In Bombay the tax was first introduced in 1815.
The English mode of distributing stamps was adopted in India.
* In the Ms. the word is typed as ‘balloobeh’—Ed.
“The stamp vendors receive their supply from the

collector: the vendors give security for the stamps, and
distribute them to the parties by whom they are required,
receiving a percentage on the sales”.
XI. The Mint Revenue was collected in the shape of a
seignorage for coining of two percent on the produce, after
allowing for the difference of standard and deducting the
charges of refining when such were chargeable.
XII. The Marine Revenue was recovered by means of the
port and anchorage dues, etc. in order to keep up the useful
establishments at Calcutta, Madras and Bombay.
XIII. Subsidies from the native states payable under treaty
obligations, amounting to about a half million pounds.
These were the thirteen sources of revenue under the East
India Company, many of which continue to be so even today.
III
It will be also interesting to note the entire revenue raised
from the different sources and the percentage ratio of each to
the whole.
First the land tax : its yield and ratio to the entire revenue
of British India.
Periods Land Tax Ratio of Land Tax
Average Annual to Total Revenue
Revenue (Per cent)
1792-93 to 1796-97 … 4,068,000 50.33
1797-98 to 1801-02 … 4,126,000 42.02
1802-03 to 1806-07 … 4,582,000 31.99
1807-08 to 1811-12 … 5,078,000 31.68
1812-13 to 1816-17 … 9,018,000 52.33
1817-18 to 1821-22 … 13,263,000 66.17
1822-23 to 1826-27 … 13,567,000 61.83
1827-28 to 1831-32 … 13,112,000 60.90
1832-33 to 1836-37 … 11,942,000 57.00
1837-38 to 1841-42 … 12,380,000 59.05
1842-43 to 1846-47 … 13,432,000 55.85
1847-48 to 1851-52 … 14,947,000 56.06
1852-53 to 1855-56 … 16,183,000 55.40
1792-93 to 1855-56 … 10,349,000 54.07
The Opium Revenue : its yield and ratio to the entire

revenue of British India.
Periods Average Ratio to the
Annual Revenue Total Revenue
(Per cent)
1792-93 to 1796-97 … 264,000 3.27
1797-98 to 1881-82 … 312,000 3.18
1802-03 to 1806-07 … 579,000 4.04
1807-08 to 1811-12 … 767,000 4.79
1812-13to 1816-17 … 958,000 5.56
1817-18 to 1821-22 … 1,090,000 5.44
1822-23 to 1826-27 … 1,641,000 7.47
1827-28 to 1831-32 … 1,747,000 8.12
1832-33 to 1836-37 … 1,677,000 8.00
1837-38 to 1841-42 … 1,547,000 7.38
1842-43 to 1846-47 … 2,965,000 12.33
1847-48 to 1851-52 … 3,840,000 14.50
1852-53 to 1855-56 … 4,943,000 16.91
1792-93 to 1855-56 … 1,667,000 8.71

The Salt Tax : its yield and ratio to the entire revenue
of British India
Period Average Ratio to the
(Per cent)
1792-93 to 1796-97 … 1,207,000 14.93

1797-98 to 1801-02 … 1,188,000 12.10
1802-03 to 1806-07 … 1,589,000 11.09
1807-08 to 1811-12 … 1,785,000 11.14
1812-13to 1816-17 … 1,882,000 10.92
1817-18 to 1821-22 … 2,256,000 11.25
1822-23 to 1826-27 … 2,603,000 11.87
1827-28 to 1831-32 … 2,590,000 12.03
1832-33 to 1836-37 … 2,036,000 9.72
1837-38 to 1841-42 … 2,593,000 12.37
1842-43 to 1846-47 … 2,798,000 11.65
1847-48 to 1851-52 … 2,438,000 9.14
1852-53 to 1855-56 … 2,677,000 9.17
1792-93 to 1855-56 … 2,118,000 11.07

Customs Revenue : its yield and ratio to the entire

revenue of British India.
(Per cent)
1792-93 to 1796-97 … 192,000 2.38
1797-98 to 1881-82 … 304,000 3.10
1802-03 to 1806-07 … 596,000 4.16
1807-08 to 1811-12 … 807,000 5.04
1812-13 to 1816-17 … 1,159,000 6.68
1817-18 to 1821-22 … 1,667,000 8.32
1822-23 to 1826-27 … 1,663,000 7.58
1827-28 to 1831-32 … 1,747,000 8.12
1832-33 to 1836-37 … 1,506,000 7.19
1837-38 to 1841-42 … 1,418,000 6.76
1842-43 to 1846-47 … 1,449,000 6.02
1847-48 to 1851-52 … 1,439,000 5.40
1852-53 to 1855-56 … 1,611,000 5.52
1792-93 to 1855-56 … 1,190,000 6.22

Miscellaneous Revenue : its yield and ratio to the Entire
Revenue of British India.
(Per cent)
1792-93 to 1796-97 … 2,315,000 28.64
1797-98 to 1801-02 … 3,809,000 38.79
1802-03 to 1806-07 … 6,857,000 47.87
1807-08 to 1811-12 … 7,452,000 46.49
1812-13 to 1816-17 … 3,990,000 23.16
1817-18 to 1821-22 … 1,392,000 6.94
1822-23 to 1826-27 … 1,986,000 9.05
1827-28 to 1831-32 … 1,789,000 8.31
1832-33 to 1836-37 … 3,059,000 14.60
1837-38 to 1841-42 … 1,434,000 6.84
1842-43 to 1846-47 … 1,636,000 6.80
1847-48 to 1851-52 … 1,977,000 7.40
1852-53 to 1855-56 … 1,575,000 5.39
1792-93 to 1855-56 ... 3,043,000 15.90

This much for the sources of revenue and amounts raised

from each one of them and their proportions to the whole.
On the expenditure side we note the following heads :
(1) Charges incident to the collection of revenue.
(2) Military and naval charges.
(3) Civil, judicial and police.
(4) Public works.
(5) Interest on Bond Debt in India.
(6) Allowances and assignments to native princes under
treaties and their engagements.
(7) Home charges which included :
(a) Interest on Home Bond Debt.
(b) Dividends to Proprietors of East India stock.
(c) Payments on account of Her Majesty’s Troops
and establishment.
(d) Charges of the East India House and Board of
Control.
A tabular arrangement of the expenditure in chronological
sequence may be of some value.
Selecting the period 1800 to 1857 we my take every tenth
year as a representative year and mark the percentage ratio
of Charges to the Revenue of that particular year.
Net Charges Mili- Inter- Civil Judi- Provin- Bldgs.
Revenue tary est of & Poli- cial cial & For-
Charges Debt. tical Char- Police tifica-
Charges ges Charges tions
£ £ % % % % % %
1809-10 ... 11,238,000 11,076,000 58,877 18,010 7.221 7.525 1.991 1.639
1819-20 ... 13,016,000 12,934,000 64,290 12.805 8.900 6.800 2.093 1.756
1820-30 ... 14,200,000 13,107,000 53,754 12.124 9.575 7.107 1.535 2.810
1830-40 ... 13,742,000 13,004,000 57,721 9.756 12.296 9.565 2.062 1.428
1840-50 ... 19,510,000 16,404,000 51,662 10.512 8.902 7.100 2.062 1.661
1857 … 33,303,000 28,079,000 45,55 7.19 9.62 9.38
Public Works
According to Professor Adams the finances of a country are to
be judged from the viewpoint of developmental expenditure : and
among the developmental expenditure of a country the Public

Works take a prominent position.
Applying the same criterion we are compelled to condemn
the entire fiscal system of the East India Company.
Before 1853 the administration was engaged in war
operations and not only did not project any new scheme of
public works, but it allowed the old ones to fall rapidly into
decay.
Dr. Spray in his “Modern India” (1837) says “It is in the
territories of the independent native chiefs and princes that
great and useful works are found and maintained. In our
territories the canals, bridges and reservoirs, wells, groves,
etc., the works of our predecessors from revenues expressly
appropriated for such undertakings are going fast to decay.”
Speaking of the Public Works in India, Mr. John Bright
said “With regard to public works, if I were speaking for
the natives of India, I would state this fact, that in a single
English country there are more roads—more travelable roads—
than are to be found in the whole of India; and I would say
also, that the single city of Manchester, in the supply of its
inhabitants in the single article of water, has spent a larger
sum of money than the East India Company has spent in the
fourteen years—from 1834 to 1848— in public works of every
kind throughout the whole of its dominions. I would say that
the real activity of the Indian Government has been an activity
of conquest and annexation.”
Before the “Department of Public Works” was made uniform
for all the Presidencies of India the important branch of
administration was conducted in various ways.
In Bombay it was conducted by the Military Board : Though
subordinate, the Superintendent of Roads and Tanks was
outside the Military Board.
In Bengal the Military Board had the entire control.
In Madras the administration of this department was
threefold : There was—
(1) The Public Works Department of the Board of Revenue.
(2) The Superintendent of Roads.
(3) The Military Board.
This variety in the system was reduced to uniformity by

Lord Dulhousie who created a separate department of the
state for dealing with questions connected with Public Works.
We will review in brief the Public Works that were executed
under the regime of the East India Company.
(1) Canals
Ganges Canal—449 1/2 miles.
East and West Jumna Canal—445 miles of the West Jumna
Canal were completed.
Punjab Canals—425 miles of the Boree-Doab Canal in the
Punjab were executed in May, 1856.
Madras Irrigation Works—Tanks, reservoirs, and “annicuts”
or dams, across the beds of the Cauvery, Godavery, and Kistna
Rivers.
(2) Truck Roads miles cost
From Calcutta to Peshawar 1,423 1,423,000
From Calcutta to Bombay 1,002 500,000
From Madras to Bangalore 200 37,121
From Bombay to Agra 734 243,676
From Rangoon to Prome 200 160,000
(3) Railways
From Calcutta to Burdwan 120
From Bombay to Wassind 50
From Bombay to Compooie 10
From Madras to Vellore 81
(4) Electric Telegraphs
From Calcutta to Peshawar
From Agra to Bombay in all about 4000 miles
From Bombay to Madras
Mr. Hendricks says “Comparative to area and

population, the extension of these works has not been
either so great or so continuous as might be desired.
If we exclude those undertakings that are of a purely
military character, and review the items which may be
classed under Land and Water Channels of Communication
and Irrigation Works, or in other words, the Revenue—
productive Public Works, in recent years of most activity, it
appears that an outlay of about one million and a half

sterling has been the maximum for one year. If we take the
most immediately productive works, viz.: of Canalization,
Irrigation, it will be seen that not more than 738,015 in
the year 1853-54, and 543,333 in the year 1854-55, was
thus expended.
“The condition of the Revenue, as preventing a
more rapid and extensive outlay, has hitherto been an
answer to those who might have been disposed to urge
that even these amounts are insignificant, when the
British Indian territory of 837,000 square miles, and
its 132,000,000 of souls are considered. This answer
resolves itself purely into one of alleged difficulty. That
this difficulty is only apparent, and might be remedied,
is evident, not only from the practical testimony of the
productive results of such expenditure in the instances
before adverted to, but also from the history and policy
of the other branches of the Colonial Empire of this
country. And the history of the East India Company, or
of the trading companies of other countries, has shown
no exception to the general rule, that expenditure on
carefully selected objects of enterprise may often appear
lavish and purposeless when it is but showing the field
whose harvest is the proof of the wise economy of that
expenditure.”
The Pressure of the Revenue
This branch of our study is entirely out of question : not that
it is beyond our scope but there are innumerable drawbacks
in our way. First and foremost is, that we have no absolutely
correct statistics regarding population. Census was never
known at that period and any estimate of the population is
at nest a guess too broad and vague to be made the basis
of any scientific conclusion.
Another serious handicap in the way of such a study is
the fact that every year the East India Company saw its
territory extended by several units of miles and one often
wonders whether the swell in the revenue is due to the high
rate of taxation or the extension of territory.
Thirdly, the Revenue accounts of the East India Company are
anything but perfect. As noticed before, they were mixed with the
commercial accounts till 1813 and when they were separated by

the Parliamentary mandate they were hardly made intelligible.
These serious handicaps consequently compel us to leave
aside this important phase of our study. Certain detached
statements if grouped together may convey to us some idea
regarding the pressure of the Revenue. Speaking about the
Land Tax alone, Mr. R: C. Dutt, besides whom there is no
better authority on the subject, says, “The Land Tax levied
by the British Government is not only excessive, but, what
is worse, it is fluctuating and uncertain in many provinces.
In England, the Land Tax was between one shilling and four
shillings in the pound, i.e. between five and twenty percent of
the rental, during a hundred years before 1798, when it was
made perpetual and redeemable by William Pitt. In Bengal the
Land Tax was fixed at over ninety percent of the rental, and
in Northern India at over eighty percent of the rental, between
1793 and 1822. It is true that the British Government only
followed the precedent of the previous Mohamedan rulers who
also claimed an enormous Land Tax. But the difference was
this, that what the Mohamedan rulers claimed they could never
fully realize : what the British rulers claimed they realized
with rigor. The last Mohamedan ruler of Bengal, in the last
year of his administration (1764) realized a land revenue of
£817,553 : within thirty years the British rulers realized a
land revenue of £ 2,680,000 in the same Province. In 1802 the
Nawab of Oudh ceded Allahabad and some other rich districts
in Northern India to the British Government. The land revenue
which was claimed by the British rulers within three years
of the cessation was £ 1,682,306. In Madras, the Land Tax
first imposed by the East India Company was one-half the
gross produce of the land. In Bombay, the land revenue of the
territory conquered from the Marattas in 1817 was 800,000
in the year of the conquest: it was raised to 1,500,000 within
a few days of the British rule : and it has been continuously
raised since. “No native prince demands the rent which we
do,” wrote Bishop Heber in 1826, after travelling all through
India, and visiting British and native states. “A Land Tax which
now exists in India,” wrote Colonel Briggs in 1830, “professing
to absorb the whole of the landlord’s rent, was never known
under any government in Europe or Asia.”
“The people of Bengal and of Northern India gradually

obtained some relief from the heavy land assessment of the
early years of the British rule. In Bengal the assessment
was made permanent; and it has not been raised with
the extension of cultivation, it now bears (including Road
and Public Works assessments, which have been since
imposed on the rental) a ratio of about 35 per cent on the
rental. In Northern India the assessment was not made
permanent, but was reduced to slightly over 50 per cent
including all assessments, in 1855. But new assessments
were added : calculations were made not on the current,
but on the prospective rental until the tax rose to close
upon 60 per cent on the rental.”
In Bombay and Madras things remained pretty much the
same. In both these Presidencies the Ryotwar Settlement
prevails. The working of this Ryotwar system of land tenure
during the regime of the East India Company is best described
by Mr. Fullerton (member of the Madras Government)—
“Imagine,” he says, “the whole landed interest—that is, all
the landlords of Great Britain, and even the capital farmers,
at once swept away from off the face of the earth : imagine
a rent fixed on every field in the kingdom, seldom under,
generally above its means of payment: imagine the land so
rented, lotted out to the villagers according to the number of
their cattle and ploughs, to the extent of forty or fifty acres
each. Imagine the revenue rated as above, leviable through
the agency of one hundred thousand revenue officers, collected
or remitted at their discretion, according to their idea of the
occupant’s means of paying, whether from the produce of his
land or his separate property : and in order to encourage
every man to act as a spy on his neighbour, and report his
means of paying, that he may eventually save himself from
extra demand; imagine all the cultivators of a village liable
at all times to a separate demand, in order to make up for
the failure of one or more individuals of the parish. Imagine
collectors to every country acting under the orders of a
board, on the avowed principle of destroying all temptation
to labour, by a general equalization of assessment: seizing
and sending back runaways to each other: and lastly, imagine
the collector, the sole magistrates, or justice of the peace
of the country, through the medium and instrumentality of

whom alone, any criminal complaint of personal grievance
suffered by the subject can reach the superior courts. Imagine,
at the same time, every subordinate officer, employed in the
collection of the land revenue to be a police officer, vested
with the power to fine, confine, put in the stocks, and flog any
inhabitant within his range, on any charge, without oath of
the accuser, or sworn recorded evidence in the case.”
To this Mr. Martin adds, “If anything could open the eyes
of those who uphold the Ryotwar System at Madras, these
torture revelations ought to do so. The late Mr. Sullivan,
member of Council at Madras, declared to the author, that when
he saw the cartloads of silver leaving his cutchery (treasury)
for Madras, and remembered the poverty of the people from
whom it was collected, he shuddered at the thought of their
prospect during the ensuing year, as the demands of the
government were inexorable and a certain amount of money
must be forthcoming.”
The Pressure of Inland Transit duties will be considered
later when we come to the economic condition of India during
the Company’s rule.
As over against this pressure of taxation we have very little
information regarding the income of the people.
Nothing gives a better idea of the pressure of the tax than
its comparison with the income : but our knowledge of the
income of the people is very scanty. According to Munro the
average wages of an agricultural laborer was between 4s. and
6s. monthly and that the cost of subsistence was between 18s.
and 27s. a head per annum.
What was the pressure of the tax we do not know.
Circumstantial evidence goes to prove that it must have been
great.
IV
Mr. Martin sums up the entire financial history most
succinctly as follows :—
“The expectations raised by Clive of the prosperity
which would follow the territorial acquisitions of the
Company, were so far from being fulfilled, that it
was found on this (when the Dewanee of Bengal and
Behar was granted to the Company) and on subsequent
occasions, that increase of revenue was almost
invariably attended with more than commensurate
increase of expenditure : the cost of government by

Europeans, the growth of a standing army in each
Presidency, and other sources of legitimate or illegitimate
expense, swallowing up all the anticipated surplus, and
leaving nothing for the development of the resources of
the country or even the maintenance of roads, canals, and
other public works constructed by native rulers.”
Strange to say, the financial afairs of the Company
were woefully mismanaged. A writer of the time said, “We
have an army officered by British soldiers, manoeuvered
according to European tactics. The spirit and much of the
letter of the English law pervades our jurisprudence : our
assessments for revenue are supposed to be based upon
the doctrines laid down by Adam Smith and his followers
(?). Our finance alone is Indian. Our military men study
the strategy of Jomini : Blackstone and Bentham, Mills
and Ricardo are the text-books of our civilians, but the
system of our financiers is almost the same now as that
of Abul Fazal, Akbar’s minister some three centuries ago.”
Year Gross Revenue Gross Expenditure
£ £
1792-93 … … 5,512,761 3,873,859
1793-94 … … 8,276,770 6,593,129
1794-95 … … 8,026,193 6,567,808
1795-96 … … 7,866,094 6,888,997
1796-97 … … 8,018,171 7,508,038
1797-98 … … 8,059,880 8,015,327
1798-99 … … 8,652,033 9,139,363
1799-1800 … … 9,736,672 9,955,390
1800-01 … … 10,485,059 11,468,185
1801-02 … … 12,163,589 12,410,045
1802-03 … … 13,464,537 12,326,880
1803-04 … … 13,271,385 14,395,405
1804-05 … … 14,949,395 16,115,183
1805-06 … … 15,403,409 17,421,418
1806-07 … … 14,535,739 17,508,864
1807-08 … … 15,669,905 15,850,290
1808-09 … … 15,525,055 15,392,889
1809-10 … … 15,655,985 15,534,711
1810-11 … … 16,679,197 13,909,981
1811-12 … … 16,605,615 13,220,966
1812-13 … … 16,336,290 13,515,828
1813-14 … … 17,228,711 13,617,725
Year Gross Revenue Gross Expenditure

£ £
1814-15 … 17,297,280 15,955,006
1815-16 … … 17,237,819 17,059,968
1816-17 … … 18,077,578 17,304,162
1817-18 … … 18,375,820 18,046,194
1818-19 … … 19,459,017 20,396,587
1819-20 … … 19,230,462 19,689,107
1820-21 … … 21,352,241 20,057,252
1821-22 … … 21,803,108 19,856,489
1822-23 … … 21,171,701 20,083,741
1823-24 … … 21,280,384 20,853,997
1824-25 … … 20,750,183 22,504,156
1825-26 … … 21,128,388 24,168,013
1826-27 … … 22,383,497 23,312,295
1827-28 … … 22,863,263 24,053,837
1828-29 … … 22,740,691 21,718,560
1829-30 … … 21,695,208 20,568,358
1830-31 … … 22,019,310 20,233,890
1831-32 … … 18,317,237 17,048,173
1832-33 … … 18,477,924 17,514,720
1833-34 … … 18,267,368 16,924,332
1834-35 … … 28,856,647 16,684,496
1835-36 … … . 20,148,125 15,994,804
1836-37 … … 20,999,130 17,363,368
1837-38 … … 20,858,820 17,553,525
1838-39 … … 21,158,099 21,306,232
1839-40 … … 20,124,038 22,228,011
1840-41 … … 20,851,073 22,546,430
1841-42 … … 21,837,823 23,534,446
1842-43 … … 22,616,487 23,888,526
1843-44 … … 23,586,573 24,925,371
1844-45 … … 23,666,246 24,293,647
1845-46 … … 24,270,608 25,662,738
1846-47 … … 26,084,681 26,916,188
1847-48 … … 24,908,302 26,747,474
1848-49 … … 25,396,386 26,766,848
1849-50 … … 27,522,344 26,960,988
1850-51 … … 27,625,360 27,000,624
1851-52 … … 27,832,237 27,098,462
1852-53 … … 28,609,109 27,976,735
1853-54 … … 28,277,530 30,240,435
1854-55 … … 29,133,050 30,753,456
1855-56 … … 30,817,528 31,637,530
1856-57 … … 31,691,015 31,608,875
1857-58 … … 31,706,776 41,240,571
Taking into account the period between 1792 to 1857

Mr. Romesh Chandra Dutt says, “It will be seen that if there
were fourteen years of deficit, there were thirty-two years
of surplus; and if the deficit amounted altogether to nearly
seventeen millions the surplus amounted to nearly forty-nine
millions. The net financial results of Indian administration was
therefore a surplus of thirty-two millions during forty-six years.
But this money was not saved in India, nor devoted to irrigation
or other works of improvement. It went as a continuous tribute
to England to pay dividends to the Company’s shareholders;
and as the flow of the money from India was not sufficient
to pay the dividends, there was an increasing debt called
the Public Debt of India.” [1. R. C. Dutt. “India under Early
British Rule.” p. 408.]
There were two distinct ways in which loans were raised
in England and in India.
In India when the government was in need of money it
advertized that the Treasury was open to receive money upon
loan at certain rates specified in the advertisement and upon the
conditions there contained. So long as the loans remained open,
parties were admitted to make what payments they pleased,
and to receive what are called loan notes in acknowledgment,
and these to any amount. The money raised on loan was all
raised in India.
In England a different mode operated. The only mode, it
was so stipulated by the Parliament, by which the East India
Company was able to raise loan there was analogous to that
of other corporations viz. on bonds, and all the Home debt
was raised on bonds.
The Public Debt of India, at least under the Company’s
rule was entirely the creation of war.
We will follow the progress of these two debts separately.
The Indian Debt
In 1792 the Indian Debt was a little over £7,000,000 : within
seven years it had risen to £10,000,000. In 1800 it was £
14,625,384 carrying a total interest of £ 1,342,854. Now came
the wars of Wellesely with the Marathas and in one sweep he
raised the Indian Debt to the amount of £ 30,098,857 in 1807-08

bearing a total annual interest of £ 2,339,087. After the
conclusion of peace, attempts were made to lower the debts
by redemptions : as a consequence of this policy the Indian
Debt was brought down in 1810-11 to £ 22,545,843 and the
interest to £ 1,503,434. But wars were the rule and peace the
exception : and in 1819-20 by the Nepal War and the First
Maratha War the Indian Debt was raised to £ 31,338,855.
By 1823-24, as a result of the intervening peace, the debt
was reduced but the next year the First Burmese War of
1824-25 raised it to £ 38,316,486. In 1835-36 the debt was
reduced to £ 31,821,118 : but a train of military operations
were awaiting India. The Afghan War, the Sindh War, the
two Sikh Wars, the Second Burmese War increased the debt
which in 1852-53 amounted to £52,313,094 and the interest
to £2,479,133. In 1853-54, however, the Indian Debt was
reduced to £49,762,876. In 1853-54 the Public Works policy
was inaugurated and as a consequence of it the Indian Debt
increased to £ 55,546,650 in 1855-56. The year 1857-58
witnessed what is known as the Indian Mutiny or the War
of Independence, raising the Indian Debt to £ 60,704,084.
The Home Bond Debt (in England)

In 1800, the Home Bond Debt amounted to £ 1,487,112 at
5 % interest. But the wars of Wellesly also told upon the
Home Debt and increased to £ 4,205,275 in 1807-08 : in
1811-12 the Home Bond Debt reached its maximum limit
of £ 6,565,900 at 5 %. In 1816-17 the rate of interest was
reduced to 4 % and it never rose above it. In 1814-15 the
Home Bond Debt was reduced to £4,376,976. By occasional
reductions it lowered to £ 1,734,300 in 1840-41. As a result
of the Afghan War and the Mutiny the Home Bond Debt
rose to £ 3,894,400, besides £ 40,000,000 as the cost of the
Mutiny.
It is likely to be a matter of surprise when one
sees the smallness of the Indian Home Bond Debt as
compared with the Indian Debt. But the surprise will
no longer exist when we know that the capacity of the
East India Company to borrow in England was strictly
limited by Parliamentary Regulations. The Parliament
was ever eager to obtain the advantages of the rule of the

Company without its disadvantages. It was eager to obtain
command of the Indian Empire, but till the end was achieved
always looked upon it as problematical and did not want to
jeopardize the interests of the country in a project which in
spite of its apparent success looked anything but certain of
beneficial results. Hence, the Parliament put a strict embargo
on the Company’s raising the loans beyond a certain limit
lest the Company lose its hold upon India and bring ruin
on England by jeopardizing English capital.
V
INDIA AND THE ACT OF 1858
The East India Company in spite of the fact that she
was a source of great prosperity to England suffered great
humiliation at the hands of the British Parliament and
people.
The East India Company was jealous of her monopoly of
the Indian trade and the British were determined to derive
as large a gain as possible for allowing her that privilege.
Every weakness in the administration was made an excuse
for extortion and interference : and renewal of charter was
often an occasion to disgorge her of her wealth accumulated
by the monopoly of Indian trade.
Very early in the history of the Company a controversy
as to this monopoly of trade had arisen and pros and cons
were acrimoniously discussed. Up to 1833 the Company,
by means fair or foul, managed to win over the English
statesmen to continue her monopoly. But in that year the
cry against her monopoly had grown so loud that both the
Company and the Ministers had to give in and the East
India trade was thrown open to all the English public.
By the Act of 1834 the Company ceased to be a commercial
corporation. How the obligations of the Company were met
may be seen from the following :
“The tangible commercial property sold under the Act
of 1834, realised £15,223,480 which was thus disposed of :
£8,191,366 towards discharges of India Debt : £2,218,831

was applied in payment of territorial charges in England :
£ 1,788,525 was applied in liquidation of part of the
Home Bond Debt : £ 2,000,000 was paid into the Bank of
England, for investment in the funds, to provide a “Security
fund” at compound interest, for the ultimate redemption
of the capital stock of the Company (6,000,000) in 1874 :
£561,600 was applied in compensations to ship-owners
and other persons : and the remainder of £ 463,135 was
retained in England, as an available cash balance for the
purposes of government in India. The unavailable assets
claimed as commercial by the Company—viz. the India
House in Leaden Hall Street, one ware-house retained
for a military store department, and house property in
India, the whole valued at £ 635,445—remains in the
hands of the Company but applicable to the uses of the
Indian Government.”
Though as a trading body the Company disappeared, she
continued her existence as a political sovereign of her territories
in India. Unfortunately for the Company her days were fast
being numbered.
It is an error to suppose that the East India Company
was abolished because of her inefficiency as manifested in
the Mutiny of 1857. On the contrary, before the mutiny had
actually taken place, the discussion about the direct assumption
of the Government of India by the Crown was set afloat,
which is indicative of the fact that mutiny or no mutiny, the
British statesmen were impatient to have direct control over
the “leaves and the fishes” that came but indirectly from their
rule in India by a process of disgorging a corporation which
directly fed them on beef fat.
This round about process was tiresome and mentally
exhausting for impatient minds. Lord Palmerston having been
returned by a strong majority in 1857 as a result of his success
in the Crimean War immediately notified the Directors of the
Company to their great surprise that he proposed to introduce
a Bill for the abolition of the Company and the resumption of
the direct Government of India by the Crown.
Unfortunately, the mutiny did occur in 1857 and gave a strong

impetus to the abolition movement already in full swing.
On the 31st day of December, 1857, the Chairman and the
Deputy Chairman of the Company replied to the notification
of Palmerston urging that “an intermediate, non-political, and
perfectly independent body” similar to the Company was a
necessity for the administration of India.
Besides this the Company sent a formal petition to both
Houses of Parliament. John Stuart Mill who drafted the petition
showed the fallacy in the arguments of the mover of the Bill
for the abolition of the Company. From the very beginning the
Crown had exercized its control over the Indian Government
through its Minister presiding over the Board of Control.
Between the Government in India and the Crown Minister
there was the Court of Directors which the new Bill wanted
to do away with. Mill argued that this Court of Directors
(the organ of the East India Company), the embodiment of
experience was a good guide for the Crown Minister who really
controlled the entire administration of India, and said that if
evils have really arisen from the mode of administration the
remedy that was sought viz. of doing away with the Court of
Directors and thus making the Crown Minister an autocrat was
worse than the disease. “To believe that the administration of
India would have been more from error had it been conducted
by a Minister of the Crown without the aid of the Court of
Directors, would be to believe that the Minister, with full powers
to govern India as he pleased, has governed ill, because he
had the assistance of experienced and responsible advisers.”
A diversity of opinion prevailed as to the future connection
of India with England.
The Stanlay Review, an important newspaper in England
argued that the East India Company be maintained to keep
India away from English politics. It made quite a point of the fact
that Englishmen who went over to India became autocrats and
that in it there was a danger to democracy. It boldly proclaimed
that “India, like a colossal torpedo, will paralyze the beneficient
activities and benumb the free moral life of England”...... and
if......“brought full in sight of England, will serve her as a great
school, in which she may learn the principles of the King of

Naples and the practices of Mrs. Stowe’s Legree.”
Others, notably a certain Richard Congreve, a disciple of
Conte pleaded that India should be left to work out her own
destiny. He maintained that the rule of one people by another
is demoralizing and not wise for the better development of
humanity. In order to prevent any other nation from stepping
into India after the English had left he proposed that an
international board be appointed to regulate the administration
which was ultimately to devolve upon the Indians when they
became capable of self-government.
None of these views, however, fall in with those of the
British Parliamentarians who decided differently. They were
determined to abolish the East India Company and take
the government of India immediately-under the Crown :
they desired to substitute direct government for the double
government. As a result of this neither the petition nor the
independent public opinion proved of any effect and Palmerston
introduced his Bill for the Abolition of the Company and the
future government of India. Before the Bill was passed, the
Conspiracy Bill threw out the government of Palmerston which
was succeeded by a conservative one under the leadership of
Lord Derby. After Lord Palmerston’s Bill had gone out by his
overthrow, Benjamin Disraeli, the Chancellor under Lord Derby
introduced his India Bill. John Stuart Mill’s comparison of the
merits of the two bills is very instructing and later events
have borne out his contentions. He says :—
“The means which the Bills provide for overcoming these
difficulties (of the government of one nation by another)
consist of the unchecked power of a minister. There is no
difference of moment in this respect between the two Bills.
The minister, it is true, is to have a Council. But the most
despotic rulers have Councils. The difference between the
Council of a despot, and a Council which prevents the ruler
from being a despot is, that the one is dependent on him,
the other independent; that the one has some power of its
own, the other has not. By the first Bill (Lord Palmerston’s
Bill) the whole Council is nominated by the minister; by
the second (Disraeli’s Bill) one half of it is nominated
by him. The functions to be entrusted to it are left, in
both, with some slight exceptions, to the minister’s own

discretion.”
Disraeli’s Bill suffered worse fate than the one of Lord
Palmerston. It simply fell. A new bill was therefore introduced
in August, 1858, and passed designated as an “Act for the
better government of India.”
The Provision of this Act (of Section 75) which still largely
regulate the administration of India may be divided into classes
according to their nature :
(1) Those dealing with the past affairs.
(2) Those dealing with the future affairs.
We will first consider those that deal with the past affairs—
mainly the settlement of the fiscal and commercial obligations
of the Company. Section 42 of this Act “provided that the
dividend on the capital stock of the East India Company, should
be charged and chargeable upon the revenues of India alone.”
Amidst all the questions between India and England that
had to be settled with equity none was more prominent than
the question of the Indian debt. Who should bear the burden
of the Indian debt was the burning question of the time. The
crux of the question was who was responsible for it and what
was its purpose ?
The most enlightening commentary on the problem is that
of Major Wingate who immediately after the mutiny argued :
“Have the people of India had a voice in the
management of their affairs, or have the taxation and
expenditure of the Indian Government been regulated
with a view to the welfare of India alone, without
intervention or interference on the part of the government
of this country ? By no means, the Government of India,
whether viewed with reference to its forms or powers,
has been, from the first hour of its existence up to the
present time, the creation of the British Parliament. The
power vested in the Government of India to contract
debt, was a delegation of authority from the British
Parliament, which, up to this hour, as in the case of
the last debenture loan, exerts a right of interference
over its exercise...... The East India Company have been
declared by Parliament to have been simply trustees
for the British nation, which, in accordance with this
view, altered the conditions of their trust from time to

time, and finally relieved the trustees of its exercise
altogether. When the subject is carefully examined, it will
be found that the Government of India, so far from being
the Government of a distinct state, has been, from the
first, simply a department of the British Government. The
British ministry, acting through the President of the Board
of Control, formed the real motive power which decided
the policy of successive Indian administrations, and the
East India Company was simply a convenient screen......
If the facts be so, then, and they cannot be gainsaid, we
seem to be shut up to the conclusion that the acts of the
Government of India, from first to last, have been the
acts of the British nation. India has never had even the
shadow of a constitution, or of a national government, but
has been ruled as a conquered country, according to the
views of successive British Parliaments and the British
administrations. The Indian debt has really been
incurred by the Government of this country : and
how, then, can we possibly shake ourselves free of
Indian liabilities ?”
Mr. Wingate also appealed to the humane part of the
British public by dwelling upon the advantages to England
and the injuries to India :
“In proceeding to consider these advantages, there is
one most important fact, which should ever be present to
the mind of the reader, and that is, that those advantages,
be they great or small, have cost the nation nothing to
acquire. This may sound as a startling assertion in the ears
of Englishmen of this generation, who have not yet forgotten
the heavy bills which they have had to pay for Canada
rebellions, Caffre wars, Ceylon insurrections, and many
manumissions of West Indian Slaves; and who are annually
reminded of the cost of governing, or protecting our colonies
and dependencies, by the financial estimates submitted
to Parliament; but the assertion, nevertheless, is strictly
and liberally correct. “Strange,” may we wonderingly
exclaim, “that we, who have spent so much on our colonial
possessions, and have waged so many costly wars for
thankless foreigners, should have laid out no money in the
acquisition or improvement of our great Indian Empire.

The thing cannot be : it is too astounding for belief.”
Astounding indeed it is : but there is something still more
astonishing behind; for not only is it a fact that India has
been acquired without the expenditure of a single shilling
on the part of this country, but it is equally a fact that,
so far from involving outlay, India has regularly paid to
Great Britain a heavy tribute, which there is reason for
thinking has not fallen far short of the almost incredible
sum of a hundred millions sterling in the course of
the present century.”...... “ The Indian tribute, whether
weighed in the scales of justice, or viewed in the light
of our own true interest, will be found to be at variance
with humanity, with common sense, and with the received
maxims of economical science.”
Touching the grievances of India, Mr. Wingate asked the
English public :
“Has our policy in India been determined out of pure,
unselfish, and benevolent regard for the welfare of the
people of that country, and without the smallest regard
for the manner in which it may affect our own away ?
Was this the principle which guided us in imposing
prohibitive duties upon Indian manufactures imported
into this country, and merely nominal duties upon British
manufactures imported into India ? Was it out of pure
regard for India that cotton exported to Great Britain
from India, is exempt from duty, while it is taxed on
exportation to all parts of the world besides ? Was it Indian
interest which dictated the fixing of import duties upon
goods brought to India in British ships, at one-half of the
amount levied upon similar goods brought in ships to any
other country ? Were native interests solely concerned in
the exemption of Europeans in India from the jurisdiction
of the ordinary courts of criminal justice, by which native
redress for British wrong-doing, has been made a practical
impossibility in ninety-nine cases out of a hundred ? Was
it out of consideration for the tax paying Hindoo and
Mohamedan, that the official European in India was
provided with a costly ecclesiastical establishment before
anything else was done for their education or enlightment ?
Was it unselfish regard for the natives that dictated

the policy of obtaining, upholding and extending British
dominion in the East, by means of taxes raised in India,
in opposition to the rule obtaining in all other British
dependencies, of providing for the costs of their military
defence from the British Exchequer ? And lastly, were
the arrangements for defraying what is styled “the home
charges,” out of the Indian revenues, under which nearly
one hundred millions sterling of taxes collected in India,
have been transferred to Great Britain in the course of the
present century, devised for the purpose of benefiting the
people of India alone ? Let the candid reader thoughtfully
and conscientiously answer these questions for himself,
and then say whether British interest as well as Indian
interests have not had a share in determining the course
of our Indian policy.”
All the arguments legal and humanitarian failed to win
the day. The English Parliament flatly refused to share in
the Indian Debt which created the acquisition of the Empire.
The entire heavy load of the debt of the East India Company
amounting to £ 69,473,484—mostly unproductive—was placed
on the shoulders of the poverty-stricken natives who had no
voice in the doings of the Company. This was not all : the
unfortunate mutiny had cost £ 40,000,000, and as a legitimate
expenditure for the acquisition of an empire, England in justice
ought to have paid the cost of the mutiny. John Bright who
often expoused the cause of the Indian tax-payers appealed
to the Parliament saying “that the forty millions which the
revolt will cost is a grievous burden to place upon the people of
India. It has come from the mismanagement of the Parliament
and the people of England. If every man had what was just,
no doubt that forty millions would have to be paid out of the
taxes levied upon the people of this country (England).”
The practical outcome of these unjust arrangements was

that the people of India purchased the empire at many millions
for the debt was only a part of the cost, and made an offering
of it to the British Crown : in other words, the Empire was
either a gift or a trust.
The arrangements regarding the stock of the East India

Company are in the same iniquitous strain. The stock of the
Company was redeemed by a loan which was also added to
the already enormous debt consolidated into what is known
as the India Government Debt.
What the Act really did was to annihilate the Board of
Control : the Company though legally extinct continues to live
for all practical purposes and enjoys her dividends even to this
day in the shape of interest paid out of Indian revenues. The
astounding result of this policy was gains to England and
costs to India. When every effort at giving justice to India
failed in the British Parliament, Lord Derby moved that this
enormous debt of India be guaranteed by the Parliament so
that on the security of it the interest rate be lowered and the
Indian tax-payer be relieved. He said :
“I am aware that the uniform policy of the Parliament
and the Government of this country has been to decline all
responsibility in regard to the debt of India, which has been
held to be a charge only on the Indian Exchequer. Dealing
with the present state of affairs I may say at once that
I am not going to recommend any change in that policy.
I know well the alarm which any such proposition would
create and I know the refusal which it would inevitably
receive. But this is a question which will recur again and
again, and which will have to be considered in the future
as well as in the present.
I would likewise ask the House to bear in mind that
if ever the time should come when the established policy
in this respect should undergo a change, and when a
national guarantee should be given for those liabilities,
that guarantee would operate to reduce the interest paid
upon the Indian Debt by no less than £ 750,000 or even
£ 1,000,000 which, formed into a sinking fund, would go
far to pay off the whole.”
John Bright who through sheer short-sightedness opposed
said :
“I object to an Imperial guarantee on this ground—if we left
the services of India, after exhausting the resources of India,
to put their hands into the pockets of the English people, the
people of England having no control over Indian

expenditure, it is impossible to say to what lengths of
unimagined extravegance they would not go : and in
endeavoring to save India, may we not go far towards
ruining England ?”
Not only was there no warrant for Mr. Bright to
magnify this danger so much, but he failed “to see that
the people of England would have very soon ceased to
neglect the affairs of India, and would have obtained a
real control over Indian expenditure, if some share of the
liability of the Indian Debt had been thrown on them.”
The discussions were all abortive and did not even
recompense the breath that was wasted and in no sense
did the natives get any relief from “the direful spring of
woes unnumbered.”
Let us now see what the Act willed for the future.
Section 55 said, “excepting for preventing or repelling
actual invasion of her Majesty’s Indian possessions, or
under other sudden and urgent necessity, the revenues
of India shall not, without the consent of both Houses of
Parliament, be applicable to defray the expenses of any
military operation carried on beyond the external frontiers
of such possessions by her Majesty’s forces charged upon
such revenues.”
With profound respect for the intellect of Mr. R. C. Dutt,
one, however, cannot understand on what ground does
he characterise this section as “one salutary financial
provision”. That it was an improvement over the financial
administration of the East India Company no one
can doubt. But it is by no means salutary in that the
revenues of India have been spent outside India for non-
Indian purposes, even after the Act. The fatal error lay
in this,—the excepting clause in the above section which
sanctions the expenditure of Indian revenue outside of
India omits the vital word previous. The clause in order
to be salutary in effect ought to run—“the revenues of
India shall not, without the previous consent of both
Houses of Parliament, be applicable etc......” and not
in the way it does. An unknown writer says, “in all
probability that essential proviso was comprised in
the original draft, but afterwards eliminated by the
same mischievous hand which contrived in Sections

26,27,28 to secure the entire immunity, irresponsibility,
and personal autocracy of the secretary of state.”
After showing that Lord Stanely and the Earl of Derby
who had so much to do with the framing of the statute were
united in including the neglected proviso the writer quotes the
opinion of Mr. Gladstone regarding Section 55 as follows :—
In my view it was the purpose of this clause to require
the Preliminary consent of parliament to the issue of
Indian money for the purpose of operations carried on by
the forces charged upon India beyond the Indian frontier,
except in certain special cases, which were very carefully
defined. It was, in fact, to prevent the use of Indian money
for military operations. I remember this; for I myself was
the author of the clause, and the present Lord Derby, who
was Secretary of State for India at the time, concurred
with me as to its objects.”
The same writer goes on to say :
“There are few, if any causes, that have brought more
disaster and financial damage to “India of the Queen”
than has the utter disregard of the safeguards ostensibly
ordained under these despised and neglected provisions
of the Act. We are well aware that, even had the saving
word “previous” been included in the Section, the clamour
on behalf of pseudo-Imperial interests, or the exigencies of
party schemes, might have sufficed to override the claims
and rights of the Indian people. But that word would,
at least, have secured an invaluable respite, during
which the voice of reason might have been heard.”
The non-fiscal sections of this Act were :—
(1) The territories of the East India Company were vested
in her Majesty, the Queen, and the powers exercised
by the East India Company and the Board of Control
were vested in the Secretary of State for India. He was
to have a Council of fifteen members who would hold
office during good behaviour, and each member was
to have a salary of £ 1200 a year out of the revenues
of India. The pay of the Secretary of State and all his
establishment would similarly be charged to India.
(2) The Secretary of State was empowered to act against

the majority of the Council except in certain specified
matters. And on questions of peace and war (which
had hitherto been dealt with by the Board of Control
through the Secret Committee of the Court of Directors),
the Secretary of State was empowered to send orders to
India without consulting his council, or communicating
them to the members.
(3) The Governor-General of India and the Governors of
Madras and Bombay would henceforth be appointed
by Her Majesty the Queen; and the appointments of
Lieutenant-Governors would be made by the Governor-
General subject to the approbation of Her Majesty.
Rules should be framed by the Secretary of State for
admission into the Civil Service of India by competition.
The evil tendencies of the administrative section above
referred to have been attested to be (1) autocracy, (2) secrecy,
and (3) irresponsibility, all of which are inimical to the good
administration of the country. It is lementable that the Act
made no provision for enlisting the voice of the natives in the
administration of their own country. In this vital respect, can
any one say that the administration of the Company differed
very much from the administration of the Crown ?
In order to give publicity to the provisions of this Act,
Queen Victoria asked Lord Derby (apparently not being satisfied
with the first draft of it) to issue a Proclamation which, as
she said, “should breathe feelings of generosity, benevolence,
and religious toleration, and point out the privileges which the
Indians will receive in being placed on an equality with the
subjects of the British Crown, and the prosperity following in
the train of civilization.”
This Proclamation was read out in India and has been
regarded as the Magna Charta of India not that the Magna
Charta contained the rights of people but that it was a Great
Document.
It remains, however, to estimate the contribution of England
to India. Apparently the immenseness of India’s contribution to
England is as much astounding as the nothingness of England’s
contribution to India. Both are, however true statements if

looked at from economic points of view. But from another point
of view, if India’s tribute cannot be weighed in the scales of
justice and humanity then England’s contribution cannot be
weighed in the scale of gold and silver. The last statement is
both literally as well as figuratively true. England has added
nothing to the stock of gold and silver in India : on the contrary,
she has depleted India— “the sink of the world.”
Her contribution lies in an uneconomic realm : but just the
same, it is too great to be measured in terms of coin.
“Englishmen can look back on their work in India,
if not with unalloyed satisfaction, at least with some
legitimate pride. They have conferred on the people of
India what is the greatest human blessing—Peace. They
have introduced Western education, bringing an ancient
civilized nation in touch with modern institutions and
life. They have built up an administration which, though
it requires reform with the progress of the times, is yet,
strong and efficacious. They have framed wise laws, and
have established Courts of Justice, the purity of which
is as absolute as in any country on the face of the earth.
These are results which no honest critic of British work
in India regards without high admiration.”
But whether mere animal peace is to be preferred to
economic destitution, let every one decide for himself.

Book 2
Blank
THE EVOLUTION OF
PROVINCIAL FINANCE
IN BRITISH INDIA
A STUDY IN THE PROVINCIAL
DECENTRALIZATION OF
IMPERIAL FINANCE
By
B. R. Ambedkar
Sometime Professor of Political Economy at the Sydenham College of
Commerce and Economics, Bombay
Author of “The Problem of the Rupee,” “Castes in India,” “Small-Holdings in
India and their Remedies”
WITH A FOREWORD BY
EDWIN R. A. SELIGMAN
Professor of Economics, Columbia University, New York
[Reprint of the edition published by P. S. King & Son Ltd.

Westminster, Great Britain, 1925]
Dedicated to
HIS HIGHNESS SHRI SAYAJIRAO GAIKAWAD
MAHARAJA OF BARODA
AS A TOKEN OF MY GRATITUDE FOR HIS HELP IN THE

MATTER OF MY EDUCATION
PREFACE
For a long time to come students will be saved the conventional
humiliation of making an apology for presenting a study of
Indian Finance or Economics. But it will, on the other hand,
be necessary, I fear, for an equally long period, for them to
tender an apology for the shortcomings of their respective
investigations. Even when the treatment of a subject is
analytical, a good analytical study often requires an historical
setting. Unfortunately no spade-work has been done in the
field of Indian Finance. Consequently the difficulties which
beset a pioneer in that field are immense. There is occasionally
the difficulty owing to the antecedents of some point not
having been quite completely elucidated. Often there is the
apprehension of some error having crept in, and, when there
is hardly anyone to save the student from it, there is nothing
but to smart under a sense of irritating affliction. Not very
seldom does it happen that a pioneer student is jubilant over
his find of material bearing on his subject, but it is not without
a long and wearisome search that he is able to sift the grain
from the chaff. Again, sources sometimes prove false guides,
so that a perusal of them only ends in a considerable waste
of time and energy.
Precisely these have been the difficulties besetting the
present task. There are no books to prepare the student for his
work and hardly any savant to lighten his labour or set him
on the proper track. Notwithstanding such odds, an attempt is
made to make this study thorough without being too detailed.
This has rendered the undertaking quite a laborious one. But
I do not wish to speak of the labour that is involved, nor
do I wish to astonish the reader with what might appear to
be a formidable list of books and documents consulted in the
preparation of this monograph. What I am anxious to speak of
are its shortcomings. There are indeed many of them which a
well-versed critic may spot out. It is my hope that they are not
of such a character as seriously to impair the value which this
monograph may otherwise be said to possess. My regrets are

with regard to only a few of them. I have specified a date
as to when Local Decentralization of Finance commenced in
India; but I feel that that date may not be the earliest and
that there may be a date earlier than that one given by me.
I wish I had settled that point finally. But that would have
been a task analogous to that of searching for a needle in a
haystack, and it is doubtful whether the value of that result
would have been commensurate with that labour. Besides,
although I am not confident of my date, my feeling is that
later researches may after all confirm my statement. Another
matter which I have not dealt with, but which I would have
liked to have dealt with, was the inter-relation of Provincial
and Local Finance. This l had originally planned to do, but
left pursuing it because I found that the chief subject I was
dealing with, namely, the Provincial Decentralization of
Imperial Finance, began to be overlaid by facts and arguments
not germane to that topic. These shortcomings will, however,
be removed by a supplementary monograph on Local Finance
in British India, which is well under way and which I hope
to publish before long. Occasional repetitions may also be
pointed out as a defect of this monograph. That they should
be avoided is all very well. But where economy in the words
of explanation are likely to obscure, repetitions such as are
unavoidable must be justified, for the interests of clarification
should always outweigh the tedium they involve.
I cannot conclude this preface without thanking
Mr. Robinson, the Financial Secretary at the India Office, for
many valuable suggestions and for the loan of many important
documents bearing on the subject. I am also thankful to
Prof. Cannan, of the University of London, who has read
the rough draft of a small part of the manuscript. My debt
to Prof. Seligman, my teacher at Columbia University, is
of course immense : for from him I learned my first lessons
in the theory of Public Finance. I am obliged to my friend
Mr. C. S. Deole for assistance afforded in the dreary task of
reading the proofs.

FOREWORD
The problem discussed by Mr. Ambedkar in his excellent
dissertation is one that is arousing a growing interest in all
parts of the world. From the very beginning we find fiscal
burdens imosed by both central and local governments. As
soon as there was a political organization, the conduct of
war on the one hand and the provision of local protection
and convenience on the other called for expenditures on the
part of both state and local authorities. It was only at a later
period that there was interpolated between the local and the
central political organizations the intermediate form which
Mr. Ambedkar calls the provincial government. The names
applied to these various classes of expenditure differ with the
authorities themselves. In India we speak of local, provincial,
and imperial expenditure; in Germany, of local, state, and
imperial expenditure; in the United States and Switzerland,
of local, state, and federal expenditure; in Australia, of local,
state, and commonwealth expenditure; in South Africa and
Canada, of local, provincial, and federal expenditure; and in
France, of local, departmental, and general expenditure. In
some cases, as in the British Empire, there is being developed
a still more comprehensive class of expenditures, borne by the
empire at large.
The character and importance of these various classes of
expenditure and the relations between them are undergoing
a continual change, due to an alteration in the functions of
government. This is itself largely due to a change in the general
economic conditions, resulting in a gradual modification either
of political structure or of administrative activity. In some
countries, as in Canada, Argentine and Brazil, the provinces
are really a creation of the central government; in other
countries, as in the United States, Germany, and Switzerland,
the federal government is the creation of the originally sovereign
states. In some countries the intermediate (provincial or state)
government is suffering a loss of importance as compared
with the local or central governments; in other countries, the
reverse is true.
With the increasing pressure of taxation and the development
under modern democracies of augmented governmental functions,
the problem of the equitable distribution of burden among
these various forms of government is becoming more or less

acute. What Mr. Ambedkar calls assignments, assigned revenue,
and share revenue, is symptomatic of the choice of methods
in all countries. One of three fundamental plans must be
pursued. Either the central or the provincial government may
be maintained by the other, according to the relative degree
of strength : in former times, in the United States, and in
Germany the states were supposed to support the central
government, either wholly or in large measure; in modern times,
in Canada and Australia, the reverse is true. Or, secondly,
distinct revenues may be allocated to the separate governments :
until recently the federal government in the United States,
Germany, and Switzerland was supported primarily by indirect
taxes; the state governments by direct taxes. Or, thirdly, the
revenues may be collected by one government and a portion of
the proceeds allotted to the other : there are many instances
of a state or provincial tax being shared with the federal
government, and still more examples of a federal or central
tax being shared with the state or provincial government. In
the United States at present the proper disposition of the
inheritance tax as between state and federal government
is fast becoming a burning question; in Germany the fiscal
relations of state and federal government are in the forefront
of political discussion.
The value of Mr. Ambedkar’s contribution to this discussion
lies in the objective recitation of the facts and the impartial
analysis of the interesting development that has taken place in
his native country. The lessons are applicable to other countries
as well; nowhere, to my knowledge, has such a detailed study
of the underlying principles been made.
It is true that only half of the picture is presented. For
the situation has everywhere been complicated by the entrance
of the local authorities into the field; and by their claims to
fiscal consideration as compared with both state (provincial)
and general (federal) demands. In the United States, for
instance, the now widely debated problem of financing the
schools is largely dependent for its solution on the proper
answer to be given to the question of fiscal interrelations. To
this question Mr. Ambedkar proposes to devote himself in a
subsequent study. If he succeeds in illumining that situation
as successfully as he here deals with the initial problem, he
will lay us all under still deeper obligations.
EDWIN R. A. SELIGMAN
COLUMBIA UNIVERSITY, NEW YORK,
October, 1924
CONTENTS
CHAP. PAGE
AUTHOR’S PREFACE … … … … 53
FOREWORD BY PROFESSOR EDWIN R. A. SELIGMAN … 55
INTRODUCTION—DEFINITION AND OUTLINE OF THE SUBJECT 59
PART I
PROVINCIAL FINANCE : ITS ORIGIN
I THE IMPERIAL SYSTEM : ITS GROWTH AND ITS BREAKDOWN 65
II IMPERIALISM V. FEDERALISM … … … 89
III THE COMPROMISE—IMPERIAL FINANCE WITHOUT
IMPERIAL MANAGEMENT … … … 100
PART II
PROVINCIAL FINANCE : ITS DEVELOPMENT
IV BUDGET BY ASSIGNMENTS … … … 112
V BUDGET BY ASSIGNED REVENUES … … … 131
VI BUDGET BY SHARED REVENUES … … … 149
PART III
PROVINCIAL FINANCE : ITS MECHANISM
VII THE LIMITATIONS OF PROVINCIAL FINANCE … … 183
VIII THE NATURE OF PROVINCIAL FINANCE … … 196
IX THE ENLARGEMENT OF THE SCOPE OF PROVINCIAL FINANCE 213
PART IV
PROVINCIAL FINANCE UNDER THE
GOVERNMENT OF INDIA ACT OF 1919
X THE NECESSITY FOR A CHANGE … … … 225
XI THE NATURE OF A CHANGE … … … 245
XII A CRITIQUE OF THE CHANGE … … … 282
INDEX … … … … … 309
Blank
INTRODUCTION
DEFINITION AND OUTLINE OF
THE SUBJECT
A student of Indian Finance has two chief sources of information

and guidance open to him. One is the Annual Budget
Statement, and the other is the annual volume of Finance
and Revenue Accounts. Though separately issued, the two are
really companion volumes inasmuch as the financial Statement
forms, so to speak, an exhaustive explanatory memorandum
of the annual financial transactions, the details of which are
recorded in the volume of Finance and Revenue Accounts.
Helpful as these sources are, they are not without their
puzzles. A reference to the latest volume of Finance and
Revenue Accounts will show that the accounts therein are
classified under four different categories :—(1) Imperial,
(2) Provincial, (3) Incorporated Local, and (4) Excluded Local.
But this is by no means uniformly so. For instance, a volume
of the same series before 1870 will not be found to contain the
accounts called “Provincial”, nor will the accounts styled “Local”
be found in any volume prior to 1863. Similarly, any volume of
the Financial Statements before 1870 will be found to divide
the financial transactions covered therein into—Imperial and
Local only. But a volume of the same series after 1908 curiously
enough groups the accounts not under Imperial and Local
but under (1) Imperial, and (2) Provincial, while the financial
Statements after 1921 cover only the Imperial Transactions.
Nothing is more confusing to a beginner than the entrance of
the new, and the exit of the old, categories of accounts.1 The
1
It is surprising that the category of accounts, called “Excluded Local,” which
is to be found in the volume of Finance and Revenue Accounts, never appears in
the Financial Statement. The author has not been able to trace the reason for
its exclusion. In the Madras Manual (Vol. I, Chapter V, pp. 467-9) it is argued
that the ground for the exclusion is technical and consists in the circumstance
that the Excluded Funds are not collected by the ordinary revenue collecting
agency of the Central Government and are not subject to its interference. Another
technical ground may also be found in a ruling given in the third edition of the
Civil Account Code (p. 137), according to which Funds were called Excluded, i.e.
from the Financial Statement, because they were not required to be lodged in the
Government Treasury. But a ruling on the same point given in the seventh and
latest edition (p. 122) of the same seems to imply that every public fund must of
necessity be lodged in a Government Treasury. The more probable explanation is
that given in the Moral and Material Progress Report for 1882-3 (Part I, p. 107),
where it is said that these funds have no place in General Finance because they
“consist chiefly of special trusts and endowments.”
natural question that he will ask is, how did these different
categories evolve, and how are they related to one another ?
In the present study an endeavour is made to explain the
rise and growth of one of them, namely, the “Provincial.” But in
order that there may be no difficulty in following the argument
it is deemed advisable to preface this study with an outline
defining its subject-matter and indicating the interrelations
of the parts into which it is divided. To facilitate a thorough
understanding of the subject the study is divided into four
parts, each one dealing with the Origin, Development and
Organization of Provincial Finance and the final form in which
it was cast by the constitutional changes of 1919. In Part I
a somewhat thorny, untrodden and yet necessary ground has
been covered in order to give a complete idea of the origin of
Provincial Finance. While due homage is paid to the adage
which requires students of the present to study the past,
nothing more than the past of the present has been dealt with.
In Chapter I, Part I, an attempt is made to present a picture
of the system of Finance as it existed before the inauguration
of the Provincial Finance and to state the causes that called
for a change in its organization. In Chapter II a rival system
of Finance proposed during the period of reconstruction is
brought to light and shown why it failed of general acceptance.
Chapter III is devoted to the discussion of a plan which was
a compromise between the existing system and its rival, and
the circumstances which forced its reception.
Having explained the Origin in Part I, the Development
of Provincial Finance is made the subject of Part II. How far
the arrangement followed in Part I is helpful must in the
absence of anything to compare with it be left to the opinion
of the reader. In regard to Part II, however, it is to be noted
that the arrangement is different from what is adopted in the
only fragmentary sketch published on the subject of Provincial
Finance in 1887 by the late Justice Ranade. As will be seen
from a perusal of Part II, one of the features of Provincial
Finance was that the revenues and charges incorporated
into the Provincial Budgets were revised every fifth year.
Justice Ranade in his pamphlet, which simply covers the
ground traversed in Part II of this study, and that too up
INTRODUCTION 61
to 1882 only, has taken this feature as a norm by which to

mark off the different stages in the growth of Provincial Finance
from one to another. Consequently, each quinquennial period to
him becomes a stage, and in his hands the history of Provincial
Finance falls into as many stages as the quinquenniums into
which it can be divided. It may, however, be submitted that
if every revision had changed the fundamentals of Provincial
Finance, such an arrangement would not have been illogical.
But as a matter of fact, Provincial Finance did not change its
hue at every revision. What the revisions did was to temper
the wind to the shorn lamb. If the history of the development
of Provincial Finance is to be divided into stages according to
the changes in the fundamental basis thereof, then emphasis
has to be laid on features altogether different in character.
Writers on the theory of Public Finance seem to conceive the
subject as though it were primarily a matter of equity in
taxation and economy in expenditure. But to a Chancellor of
the Exchequer finance is eminently practical with a problem to
solve, namely, how to bring about an equilibrium in the Budget.
If we scan the history of Provincial Finance in British India
with a view to discover the method of meeting the problem of
equilibrium in Provincial Budgets and the changes introduced
in it from time to time, we shall find that Provincial Finance
has evolved through three distinct stages, each with its own
mode of supply, namely, Assignments, Assigned Revenues
and Shared Revenues. Consequently, instead of following the
mechanical plan of Justice Ranade, it is believed to be more
logical and instructive to divide the stages in the growth of
Provincial finance according to the method of supply to the
Provincial Governments adopted by the Government of India.
Consequently, Part II, which deals with the Development of
Provincial Finance, is divided into three Chapters : (1) Budget
by Assignment, (2) Budget by Assigned Revenues, and
(3) Budget by Shared Revenues.
This discussion of the Origin and Development
of Provincial Finance is followed in Part III by an
examination of its Organization. Chapter VII in Part
III is devoted to the analysis of the hitherto neglected
rules of limitations on the financial powers of Provincial
Governments primarily to bring out the fact that Provincial

Finance was not independent in its organization. The analysis of
the true position of Provincial Finance is, however, reserved for
Chapter VIII, in which the conclusion is fortified by a reference
to the character of these limitations, that, notwithstanding
the high-sounding appellation of Provincial Finance, there
were neither provincial revenues nor provincial services as
separate from Imperial revenues and Imperial services, so
that instead of being federal in its organization the system
remained essentially Imperial. Chapter IX discusses how far
it was possible to enlarge the scope of Provincial Finance
without jeopardy to the constitutional responsibilities of the
Government of India under the old law.
Part IV is a discussion of the changes introduced into the
mechanism of Provincial Finance by the Reforms Act of 1919.
Chapter X of this Part is devoted to the analysis of the causes
which led to these changes. In Chapter XI a full description of
the changes effected by the new law is given, while Chapter
XII forms a critique of the new regime.
In view of the fact that students of Indian Finance
ordinarily content themselves with the phrase “Decentralization
of finance,” to indicate Provincial Finance, a word of
explanation in justification of what may rather be called
the too cumbersome title of this study. No student of Indian
Finance, who is sufficiently acquainted with the branching
off of the system in different directions, will fail to mark
the inadequacy of the phrase Decentralization of Finance to
mean Provincial Finance. If there were in the Indian system
only the Provincial Decentralization there would have been
no necessity to labour for a new title. As a matter of fact,
the starting points of decentralization are by no means the
same, and the systems evolved through it are quite different
in character. For instance, the centre of decentralization and
the systems evolved by the policy of decentralization brought
into operation in 1855 were different from the centre and the
systems evolved therefrom by the policy of decentralization
initiated in 1870. Again, the centre which is gradually being
decentralized since 1892, be it noted, is different from those
affected by the decentralization of 1855 or 1870. To put
INTRODUCTION 63
it more clearly, the decentralization of 1855 was the

decentralization of Indian Finance resulting in—
(I) the separation of Local from Imperial Finance.
The decentralization of 1870 was the decentralization of
Imperial Finance resulting in—
(II) the separation of Provincial from Imperial Finance.
And the decentralization commencing from 1882 is the
decentralization of Provincial Finance resulting in—
(III) the separation of Local from Provincial Finance.
Obviously then, “Decentralization of finance” far from
being indicative of Provincial Finance, is a general name for
this variegated and multifarious process of decentralization
described above, and it cannot but be confusing to use as a title
to the study of one line of decentralization a phrase which can
be generically applied to all the three lines of decentralization
distinguished above. In order, therefore, that this study may
not be taken to pertain to a line of decentralization other
than the one it purports to investigate, it has been thought
proper to designate it “The Evolution of Provincial Finance
in British India” with a sub-title, “A Study in the Provincial
Decentralization of Imperial Finance,” where the words
Provincial and Imperial must be read with the emphasis due to
them. How careless the phraseology often is may be instanced
by the fact that Justice Ranade’s pamphlet referred to above
is styled “Decentralization of Provincial Finance.” Although it
deals with the development of Provincial Finance, it is likely
to be passed over by the student, for its title implies that its
subject-matter must be the growth of Local Finance. If Justice
Ranade had been conscious of the varieties of decentralization,
he would have probably realized that the title of his pamphlet
was false to its contents.

Blank
PART I
PROVINCIAL FINANCE : ITS ORIGIN
CHAPTER I
THE IMPERIAL SYSTEM
ITS GROWTH AND ITS BREAKDOWN
The Imperial system of Government in India dates from the
year 1833.
Of the two chief motives which led Parliament to establish
it, one was to replace the existing multiplicity in the systems of
justice and police by a uniform system of the same, common as
far as possible to the whole of India with its varieties classified
and systematized. Under the existing system then prevailing
such multiplicity was inevitable, for not only the civil and
military government and the ordering and management of the
revenues of each of the three Presidencies, Bengal,1 Madras,2
and Bombay,3 were vested in their respective Governors in
Council, but each Governor in Council was also empowered
to make and issue such rules, ordinances and regulations
for the good order and civil government of the territories he
individually commanded, provided that they were just and
reasonable and not repugnant to the laws of the British realm.
To the codes of law promulgated by these authorities must be
added the whole body of English Statute law introduced in
India so far as it was applicable, by the charter of George I
in 1726 and such other English Acts subsequent to that date
as were expressly extended to particular parts of the country.
The work of administering such a diverse body of laws
proved so embarrassing that it was the view of the supreme
Court of Calcutta that
“no one person can pronounce an opinion or form a
judgment... upon any disputed right of persons, respecting
which doubt and confusion may not be raised by those who may
choose to call it in question; for very few of the public or persons
1
13 Geo. III, c. 63. s. 36.
2
39 and 40 Geo. Ill, c. 79, s. 11.
3
47 Geo. Ill, Sess. 2, c. 68, s. 3.
in office at home, not even the Law Officers, can be

expected to have so comprehensive and clear a view of the
Indian system of law, as to know readily and familiarly
the bearings of each part of it on the rest.”1
The other motive was to create a strong central government
to deal effectively with the European settlers in the country.
It is to be noted that if the native population suffered under
the uncertainties of law, the British population lived under
the most galling restrictions. The revelations of oppressions
by Englishmen practised, in the early days of British Rule,
contained in the report of the Secret Committee of the House
of Commons appointed in 1771 to inquire into the affairs of
the East India Company, were followed by very stringent
laws governing the entry and residence of private British
subjects in India. No British subject of European birth was
allowed to reside in India beyond 10 miles from any one of
the principal settlements without having previously obtained
a special license from the Company or the Governor-General
of India or the Governor of the principal settlement in
question.2 The Court of Directors of the Company, subject to
revision of the Board of Control,3 were empowered to refuse
such licenses4 and the Governments in India were strictly
enjoined not to sanction the residence of British subjects on
their own authorities except under special circumstances5
and were authorized, in cases they deemed proper, to declare
licenses otherwise valid as void.6 Counterfeiting licenses7 and
unlicensed residence8 were made crimes punishable with fine
or imprisonment; and persons who were dismissed from, and
who had resigned service, were declared guilty of illicit trade
if they lingered beyond the 10-mile limit after their time
had expired.9 Unlicensed British subjects were made liable
to be deported,10 and such as were licensed were required to
register themselves in the court of the district in which they
resided.11 Subjected as they were to the regulations of the Local
Government12 they were made amenable to justice in India
as well as in Great Britain for all illegal acts done in British
Quoted in Herbert Cowell’s The History of the Constitution of Courts and

1
Legislative Authorities in India, Calcutta.

2
33 Geo III, c. 52, s. 98. 7
Ibid., s. 120.
3
Ibid, s. 38. 8
33 Geo. III, c. 52, s. 131.
4
Ibid, s. 33. 9
Ibid., s. 134.
5
Ibid., s. 37. 10
53 Geo III, c. 155, s. 104.
6
53 Geo. III, c. 155, s. 36. 11
Ibid., s. 108.
12
Ibid., s. 35.
THE IMPERIAL SYSTEM 67
India,1 or in Native States.2 To render them impotent to cause

complications, they were not allowed to lend money to or be
concerned in raising any for native princes3 or foreign companies
or foreign European merchants. Similarly to protect the natives
from their oppression they were forbiden to lend money to the
latter at a rate of interest exceeding 12 per cent. per annum
on penalty of forfeiting for every offence treble the value,4 and
they were placed under the jurisdiction of the Justices of the
Peace in all cases involving assault or trespass5 on, and small
debts6 due to, the natives of India. Moreover, every British
subject of European birth was required to register in the office
of his district the name, etc., of his native stewards, agents, and
partners,7 on penalty of being disentitled to recover or receive
any sum or sums of money by reason of the joint concern or
to compel an account thereof by any suit in law or equity in
any court within the provinces.8
The ruling race had long chafed at these restrictions, under
which it was placed, without much avail. They were evidently
aimed at keeping out an element dangerous to the stability of
the Indian Empire, but, as time went on, and as the Indian
Empire was consolidated by successive victories over the native
princes, there was raised against these restrictions such a storm
of indignant criticism that even those who had acquiesced in
their virtue were forced to admit that they had outlived their
purpose. While the British Parliament could not help abiding
by the sentiments of the time, it refused to disregard the
consequences which it thought would inevitably attend upon the
free ingress of British subjects of European birth under the then
existing system of government. It realized that a harmonious
treatment of the immigrants and an effective control over
them was absolutely essential. Parliament was afraid that
the different governments armed as they were with co-equal
and independent powers of legislation and administration by
exercising these powers with regard to the immigrants entering
their respective territories, with different views and according to
inconsistent principles might integrate the whole mass of them
into a disaffected body difficult to be dealt with. Besides the
1
24 Geo, III, c. 25, s. 44. 5
53 Geo. Ill, c. 155, s. 105.
2
26 Geo. Ill, c. 57, s. 67. 6
‘Ibid., s. 106.
3
37 Geo. Ill, c. 142, s. 28. 7
21 Geo. ill, c. 70, s. 13.
4
13 Geo. Ill, c. 63, s. 30. 8
Ibid., s. 16
necessity of a harmonious treatment based on uniform

principles, the fears of Parliament that the ingress of British
immigrants would result in the revival of oppression on the
natives were not completely allayed. As its recrudescence was
felt to be a likely event, Parliament desired to subject them
to a strong and uniform central control, so that the offender
in one jurisdiction might not be able to find an asylum in
another. Thus, whether considered from the standpoint of
bringing about uniformity of laws or securing stringency of
control over elements subversive of order, the then existing
system of government with its divided jurisdiction was ill-
suited for the purpose held in view. An all-powerful Central
Government legislating for and controlling the affairs of
India as a whole was deemed to be the only solution for the
emergency. Accordingly there came to be enacted in 1833 that
“the Governor-General in Council (at Fort William in
Bengal) shall have power to make laws and regulations for
repealing, amending, or altering any laws or regulations,
whatever, now in force or hereafter to be in force in the
said territories or any part thereof, and to make laws
and regulations for all persons, whether British or native,
foreigners or others, and for all Courts of Justice, whether
established by His Majesty’s Charters or otherwise and
the jurisdictions thereof, and for all places and every
part of the said territory, and for all servants of the said
Company within the dominions of princes and states in
alliance with the said Company. . . . ;”1
A Central government was thus created by vesting the
legislative power exclusively in the Governor-General of India
in Council. But it could not have been all-powerful had the two
Presidencies of Madras and Bombay remained as heretofore
invested, by law, with the civil and military government of
their respective territories. On the other hand, if Parliament
had stopped short of divesting them, there would have ensued
the possibility of a conflict between these governing authorities
and the sole legislative authority newly created. Being
responsible for peace, order and good government, the former
could have refused to govern according to laws made by the
latter, and all the gain expected to arise from the institution
of a central and strong government would have been lost.
To eliminate this element of weakness in the Indian polity
1
Sec. 43 of 3 and 4 Will. IV, c. 85, an Act for effecting an arrangement with
the East India Company, and for the better government of His Majesty’s Indian
territories.
newly established, Parliament proceeded to divest the

presidencies of Bombay and Madras of the high status which
they hitherto occupied as responsible governments, so that
according to the new Constitution
“......the Executive Government of each of the several
Presidencies ...... (was to be) administered by (not vested
in as heretofore) a Governor and three Councillors”1
While
“......the Superintendence, Direction, and Control of the
whole civil and military government of all the......territories
and Revenues in India (was) vested in a Governor General
and councillors styled the Governor-General of India in
Council.”2
Thus came to be established in India the Imperial system
of government. It is true that long before its establishment
the Government of Bengal3 had the supreme power, not
only of superintending and controlling the government and
management of the Presidencies of Madras and Bombay in
the matter of commencing hostilities, or declaring or making
war against any Indian prince or power, or for negotiating
or concluding any treaty of peace or other treaty with them,
except in case of emergency, but it also possessed by a later
enactment the power of superintendence in all such points
as related to the collection or application of revenues, or to
the forces employed, or to the civil or military government
of the said presidencies.4 But it must not be supposed, as
is often done, that before 1833 the two Presidencies were
in any real sense subordinate to Bengal in their domestic
affairs. The fact that Madras and Bombay were required
constantly and diligently to transmit to the Government of
Bengal true and exact copies of all orders and resolutions
and their acts in Council, and were enjoined to pay due
obedience to the orders of the Government of Bengal, must
not be construed to mean any subordination in their internal
affairs. For, barring the extra territorial authority vested in
the Government of Bengal, it must be borne in mind that,
1
Sec. 43 of 3 and 4 Will. IV, c. 85, an Act for effecting an arrangement with
the East India Company, and for the better government of His Majesty’s Indian
territories.
2
Ibid., s. 56. By sec. 57 power was given to reduce the number of councillors
at the Presidencies or suspend them altogether, leaving the Executive Government
at the Presidency to be carried on by a Governor alone. This power was exercised
in 1833 by reducing the executive councillors at Bombay and Madras from three
to two respectively.
3
and 4 Will. IV, c. 85, s. 39 4
13 Geo. III, c. 52, s. 40.
equally with Bengal,1 the Governments of Madras and Bombay

were vested each2 with the civil and military government
and also with the ordering and management of all territorial
acquisitions and their revenues. Along with the Government
of Bengal they possessed as stated before co-equal and
independent powers of legislation within their respective
jurisdictions. A truer view therefore seems to be that they
forwarded the copies of their proceedings to the Government
of Bengal for information rather than for orders. At any rate,
such seems to have been the view taken by the Government
of Bengal itself, for, though it had the power to issue orders
and compel obedience to them it had in practice confined its
supervision and control “to pointing out an irregularity and
requesting that it be not repeated.” More than this was thought
inadvisable3 and it is doubtful4 whether it would have been
constitutional.
The Imperial system of Government was necessarily
accompanied by the Imperial system of Finance. Before the
inauguration of the Imperial system of Administration the
several Presidencies were like separate clocks each with its own
mainspring in itself. Each possessed the powers of sovereignty,
such as the legislative, the penal, and the taxing powers. They
were independent in their finance. Each was responsible for
the maintenance of services essential for peace, order and
good government within its jurisdiction and was free to find
money by altering or levying taxation or borrowing on credit
to meet its obligations. For their ways and means they often
drew upon the resources of one another, not, however, because
their exchequers were not distinct, but because they were parts
of a common exchequer belonging to the East India Company.
All this was changed by the Act of 1833, which vested the
revenues and the government of the different territories in
the Governor-General of India in Council. The revenues and
the services became by law the revenues and the services of
the Government of India. The provinces became the collecting
and the spending agencies of the Government of India.
They ceased to levy any new taxes or to collect the old ones
13 Geo. III, c. 63, s. 7.
1
33 Geo. III, c. 52, s. 24.

2
3
Of. Min. on the Constitution of the Indian Government by the Governor-
General, Lord William Bentinck, dated September 14, 1831. Also Memorandum
re the same by the Secretary to the Government of Bengal accompanying the
despatch of Lord Canning dated December 9, 1859, published in H. of C. Return
307 of 1861.
4
Cf. the despatch of the Court of Directors to the Government of Bengal No.
44 dated December 10, 1834, original draft in the India Office Records.
in their own name. In like manner the services they

administered became a charge of the Government of India,
which distributed among the various provinces sums from
the consolidated fund for the maintenance of the services. It
was by law provided that without the previous sanction of the
Government of India the provinces were not to spend the fund
allowed to them in creating any new office or granting any
salary, gratuity, or allowance.1 The public debt was no longer
a charge upon the revenues of any particular Presidency alone,
nor did there remain any question of primary or secondary
liability as between the revenues of the other Presidencies. All
the provincial debts became the debts of the Government of
India and were charged to the revenues of India as a whole.
In short, the financial system which was roughly analogous
to the system of separation of sources and contributions from
the yield was changed into a system of aggregation of sources
and distribution of the yield; for, as observed in a Government
Resolution by virtue of the Act of 1833,
“British India, though for the sake of convenience
subdivided into Presidencies under separate locally
controlled governments, (became) in reality one sole grand
Power in dependence on Great Britain, having undivided
interests, a single exchequer, and controlled in all essential
and general principles by one Government—the Governor-
General in Council......The entire resources of India
(were) applicable to one purpose only, the discharge of its
engagements and those connected with its management
in England, and to whatever section of British India
funds (were) wanting, funds (were) supplied, as a matter
of course, without any reference to the particular source
from which they were derived.”2
So comprehensive did the system of Imperial Finance
become in time that when in 1858 the Crown took over from
the Company the government of India it was found that
“no province had any separate power of legislation,
any separate financial resources, or practically any power
of creating or modifying any appointments in the public
service; and the references to the Government of India
which this last restriction involved gave that Government
the opportunity of interference with all the details of
provincial administration.”3
1
3 and 4 Will. IV, c. 85, s. 59.
2
Government of India, Financial Department Resolution, dated November
22, 1843.
3
Report of the Royal Commission on Decentralization in British India, p. 24.
Whatever may have been the merits of the Imperial system

of Government from the military, political, legislative, or
administrative points of view, it is a melancholy fact that as
a system of finance it proved unequal to the strain imposed
upon it. From its very start it suffered from the fatal disease
of financial inadequacy, and it was only occasionally that the
efforts of the Finance Ministers were successful in restoring
an equilibrium and staving off the hour of crisis. How chronic
the deficits were may be seen from the following figures :—1
INSUFFICIENCY OF IMPERIAL FINANCES
Year Surplus Deficit Year Surplus Deficit
£ £ £ £
1834-35 … 194,477 1846-47 … 971,322
35-36 1,441,513 … 47-48 … 1,911,986
36-37 1,248,224 … 48-49 … 1,473,225
37-38 780,318 … 49-50 354,187 …
38-39 … 381,787 50-51 415,443 …
39-40 … 2,138,713 51-52 531,265 …
40-41 … 1,754,852 52-53 424,257 …
41-42 … 1,771,603 53-54 … 2,044,117
42-43 … 1,346,011 54-55 … 1,707,364
43-44 … 1,440,259 55-56 … 972,791
44-45 … 743,893 56-57 … 143,597
45-46 … 1,496,865 57-58 … 7,864,222
Anyone who ponders upon this pitiable story of Indian
Finance as revealed by these deficits can hardly fail to wonder
with Disraeli who remarked in the House of Commons that—
“able as has ever been the administration of India,
considerable and distinguished as have been the men
whom that administration had produced, and numerous
as have been the great Captains, the clever diplomatists,
and able administrators of large districts with whom the
Government has abounded, the v state of the finances of
India has always been involved in perplexity, and India
that has produced so many great men, seems never to
have produced a Chancellor of the Exchequer.”2
1
From the Financial Statement of British India for 1860-1 by Mr. Wilson. H.
of C Return 33 of 1860, p. 100.
2
Sir Charles Woods’ Administration, by West, pp. 65-6.
The causes of this collapse, however, are not far to seek.

The inadequacy of Indian Finances is mainly to be ascribed to
an unsound fiscal policy. The policy was unsound for various
reasons. In matters of state economy it is usual to argue that
the expenditure to be incurred should determine the magnitude
of revenue to be raised. But experience has shown that this
stock maxim has proved ruinous wherever its limitations have
failed to receive their due weight. It cannot be too often said
that the growing expenditure of the State can only be sustained
from the growing wealth of the society. Nor can it be too
strongly emphasized that the test of sound finance does not
merely consist in being capable of raising the requisite amount
of revenue. It must be remembered that the mode of raising
the revenue is an aspect of the question which is fraught with
tremendous consequences for the stability and productivity of
the nation. It is too obvious to be denied that a tax system by
its unequal incidence may cause social upheavals, just as by
its unwise incidence on trade and industry it may impoverish
society by setting out of gear its economic mechanism and
technique and eventually beggar the State by impairing the
productive powers of society. Wisdom therefore requires that
those who are entrusted with the financial management of
the State should look beyond the more immediate object of
raising and spending of money, for the “hows” of finance are
very important, and can be seldom neglected in practice with
impunity. The wealth of society is the only patrimony on which
the State can draw, and the State that damages it cannot
but end in damning itself. History abounds with instances of
States wrecked by the unwise neglect of these evident truths,
but if an illustration be wanted in further proof thereof, the
system of Imperial Finance established in India is matchless
for the purpose.
The land tax was the heaviest impost of the Imperial
revenue system in operation. The underlying doctrine of the
tax in India has been that it is of the nature of rent paid by
the cultivator to the State in virtue of the theory that the
land in India has from immemorial times been regarded as
the property owned by the State. The cultivator is not the
proprietor, but is the occupier of the land. The land is let to
him and the State is therefore justified in claiming the whole
of the economic rent arising from the land. On this assumption
the land tax has been imposed irrespective of the question of
necessity or justice.
Besides this legal fiction of State landlordism there was

also another economic principle which was taken to be the
justification for the enhancement of the land revenue. There
is reason to believe that the Physiocratic doctrine of produit
net had its influence in the management and fixing of the
land tax in India. We find high officials in India arguing in
the early stages of the revenue management that “whether or
not the principle of the French Economists of laying all the
taxes on the land be......erroneous or otherwise, it is certainly
conformable to the prevalent system in India; nor is that theory
supported by the French alone, but by respectable authorities
in England, who contend that all taxes fall ultimately on the
products of the soil, and that in advancing a different doctrine
the eminent author of The Wealth of Nations is at variance with
himself, inasmuch as his previous data lead to that conclusion.”1
Whatever may have been the reasons for augmenting the land
tax, few can deny that a heavy consolidated impost on the
first exertions of any species of industry absorbing the whole
or nearly the whole of its profits in ruinous and impolitic. It
becomes an effectual bar to the creation of that produce on
which the future exertions might be profitably employed and
through the medium of which individual wealth and public
revenue may be increased to an almost inconceivable extent. A
land tax of this nature was sure to blast the very production
of that wealth which industry would have otherwise brought
into being. The land tax was so heavy that the system of tax
prevailing in India might well have been called a near approach
to the single tax system.2
1
For this remarkable controversy, which has escaped even the comprehensive
eye of Baden Powell, see House of Commons paper 306 of 1812-13.
2
The ratio of the land revenue to the total revenues of India was as given
below :—
Year Ratio Year Ratio Year Ratio

1792-3 50.33 1817-8 66.17 1842-3 55.85
to to to
1796-7 1821-2 1846-7
1797-8- 42.02 1822-3 61.83 1847-8 56.06
to to to
1801-2 1826-7 1851-2
1802-3 31.99 1827-8 60.90 1852-3 55.40
to to to
1806-7 1831-2 1855-6
1807-8 31.68 1832-3 57.00 Average, 54.07
to to for 64
1811-2 1836-7 years
1812-3 52.33 1837-8 59.05
to to
1816-7 1841-2
While the land tax prevented the prosperity of the

agricultural industry the customs taxes hampered the
manufactures of the country. There were internal customs
and external customs, and both were equally injurious to
trade and industry. The internal customs1 were made up of
transit and town duties. For the purposes of transit duties
the country was artificially divided into a number of small
customs areas. Goods may be manufactured and consumed ad
libitum within each customs area, but the moment they left
their own division they became liable to duty. The injurious
effects of this regulation, though concealed, were none the
less real. The transit duties held up trade, which in its turn
reacted adversely on the manufacturers of the country. Adam
Smith has told us how the growth of industry depends upon
the extent of the market. Here for the purposes of the transit
duties the whole country was cut up into small bits after the
manner of squares on a chess board. What wonder is there if
trade, and its handmaid, industry, both languished to a serious
extent. The adverse effect on the transit duties was also felt in
another way. In every country somewhat industrially advanced
there is not only a social division of labour, but there is also
a territorial division of labour, otherwise called localization of
industry. Evidence is not wanting to show that the localization
of industry formed a prominent feature of Indian economy.2
Under it each locality in India specialized in a particular art or
industry; for instance, cotton was grown in one locality, woven
in another, and bleached in a third place. But it often happened
that these localities were situated in different customs areas,
and a raw good might have had to pay the transit duty many
a time before it reached its finished stage. To avoid this each
locality was obliged to waste its energies along unprofitable
lines in order to escape the transit duties.
The town duties, which formed a part of the internal customs,
also worked in their effects towards de-urbanization. Commercial
entrepots are admittedly vast instruments of the trade of a country.
The opportunity of ready purchase and sale of almost every kind
of commodity in any quantity, accumulated capital, extended
1
Mr. Travelyan, who closely studied the system, was so much horrified by its
injurious effects that he wrote “although we now have ocular demonstration of its
existence, yet when it has once been abolished the world will find it difficult to
believe that such a system could have been tolerated by us for the better part of
a century.”—System of Transit and Town Duties in the Bengal Presidency, p. 6.
2
See M. Martin’s Eastern India, 3 vols.
credit, general information all meet here as in a centre. They

support, encourage and give lift to commerce and to the trade
of a country. But the direct effect of the town duty was to
distract and drive away trade, for under the system every
article which was subject to it had, after the payment of transit
duty, to pay on entry, in the town, the town duty and, if it
underwent any change of form by manufacture within the town
of entry, it could not have been furnished to any neighbouring
place without a second impost being paid upon it under the
transit duty system, enhanced in proportion to the increase
of value it might have acquired from the labour and the skill
bestowed upon it, The consequence was that towns dwindled
both in trade and industry owing to the reason that merchants
ceased to frequent them and that no manufactures of articles
subject to the transit duty were capable of being established
in them except for their own supply.
It was in this depressed condition that the Indian industries
were called upon to meet foreign competitors. But the external
customs cannot be said to have protected, much less fostered
them. As a rule commercial tariffs are based upon what is
called commodity competition. The import tariffs are designed
to check by means of higher duties the importation of such
foreign commodities as are likely to interfere in the successful
manufacture of the same commodities at home and the export
tariffs are framed principally with a view to give bounties to
such of the home commodities as have a chance of securing a
foothold in foreign markets. But the theory of external customs
in India had no connection with the theory of commodity
competition. In comparison with the policy actually adopted
even a protectionist would have preferred to see trade left
perfectly free, for the tariff was based on political rather than
economic considerations. The Indian Import Tariff varied not
with the nature of the imports but with the origin of the imports
and the bottom on which they were shipped. Being political in
character it was preferential in design and in its framework.
It is to be regretted all the more that the preference involved
an unmitigated loss to the people and to the government. It
was excusable to have admitted into India goods of English
origin and shipped on English bottoms at a rate half of what
goods of foreign origin and shipped on foreign bottoms were
charged with. But nothing can extenuate the sacrifice imposed
upon the Indian industries by letting in British goods at
lower rates than what the Indian goods had to pay under
the internal customs; and this was done when, be it remembered,

England was prohibiting by high tariff the entry of India-made
goods and India-built ships ! But while the import tariff made
it easy for the foreigners to compete successfully with Indian
manufactures burdened as they heavily were by the weight of
the internal customs, Indian goods found it considerably difficult
to compete in foreign markets under the incubus of export duties
which formed one of the most lamentable features of the Indian
tariff and which endured long into the nineteenth century.1
Thus the customs laws internal and external blockaded trade
and smothered industry. The comparatively paltry revenues
derived from them is the best proof of their ruinous effects.2
When these resources failed the Government resorted to
some very questionable means of raising revenue.
On an impartial survey of the revenue system as prevailed
under the Imperial regime one is constrained to say that
justice in taxation was conspicuous by its absence. It was
a cruel satire, or at best an idle maxim, for the lancet
was directed not where the blood was thickest but to that
part of the body politic which on account of its weakness
and poverty most meekly bore the pang. The landlords
who passed their lives in conspicuous consumption and
vicarious leisure on the earnings of the poor tenants, or the
1
It is difficult to cite references to every statement made above. The tariff
history of India is yet unwritten, but ample evidence bearing on the point will
be found in the Parliamentary Committee on Trade in 1821 and the Evidence
submitted to the Committees appointed by Parliament to investigate into the
affairs of the East India Company in 1813 and 1853. Particular attention is
invited to the Report and Evidence of the Committee on East India Produce, 1846.
2
The following table gives the ratio of the Customs Revenue to the total
revenue :—
1792-3 2.38 1817-8 8.32 1842-3 6.02
to to to
1796-7 1821-2 1846-7
1797-8 3.10 1822-3 7.58 1847-8 5.40
to to to
1801-2 1826-7 1851-2
1802-3 4.16 1827-8 8.12 1852-3 5.52
to to to
1806-7J 1831-2 1855-6
1807-8 5.04 1832-3 7.19 Average 6.22
to to for 64
1811-12 1836-7 years
1812-13 6.68 1837-8 6.76
to to
1816-17 1841-2
Hendricks, op. cit., p. 286.
many European civil servants who fattened themselves on pay

and pickings, were supremely exempted from any contribution
towards the maintenance of the Government whose main activities
were directed towards the maintenance of pomp and privilege.
On the other hand, the salt tax1 and the Moturpha,2 and other
oppressive taxes3 continued to harass the industrious poor. It is
indeed true that many petty and vexatious taxes prevalent under
the native rule were abolished; there is, however, enough evidence
to show that the revenue thus lost was made up by enhancing
those that were continued to be levied, particularly the land tax.
The latter charge has always been officially denied,4 but none
the less it remains true that the land tax has been consolidated
and increased concurrently with, if not consequently upon,
1
The percentage ratio of the salt revenue to the total revenue at different times was
as follows :—
1792-3 14.13 1817-8 11.25 1842-3 11.65
to to to
1796-7 1821-2 1846-7
1797-8 12.10 1822-3 11.87 1847-8 9.14
to to to
1801-2 1826-7 1851-2
1802-3 11.09 1827-8 12.03 1852-3 9.17
to to to
1806-7 1831-2 1855-6
1807-8 11.14 1832-3 9.72 Average, 11.07
to to for 64)
1811-2 1836-7 years
1812-3 10.92 1837-8 12.37
to to
1816-7 1841-2
Hendricks, op. cit., p. 283.
2
In a petition drawn up by the Madras Native Association to the House of Commons in
1858 it was described as “a tax on trades and occupations embracing weavers, carpenters, all
workers in metals, all salesmen whether possessing shops which are also taxed separately,
or vending by the road-side, etc., some paying imposts on their tools, others for permission
to sell, extending to the most trifling articles of trade, and the cheapest tools the mechanics
can employ, the cost of which is frequently exceeded six times over by the Moturpha, under
which the use of them is permitted.” Quoted by Raghuvaiyangar in his Progress of the
Madras Presidency, 1893, p. 113.
3
Dr. Francis Buchanan in his Journey from Madras, Vol. II, notes that” at Sati-Mangalam
3 1
in Coimbatore, South India, a new stamp duty of + of a Vir-Raya Fanam, or about
4 3 3
3
1 4
5 d , has been levied on every two pieces of fine cloth; and of of a Vir-Raya Fanam,
4 8
3
or of about 2 , on every two pieces of coarse cloth. The weavers in consequence have given
4
up work, and gone in a body to the Collector, to represent their case. The tax is levied in
place of a duty of 4 or 5 Fanams a year, that was formerly levied on every loom; by the
weavers it is considered as heavier”—pp. 240-1. He also notes “at Dodara Pallyam which
contains 50 houses of weavers, the weavers are quite clamorous about the new stamp duty;
which, they say, will for every loom cost them 20 Fanams in place of 5 which they formerly
paid.” Ibid., p. 242.
4
Parliamentary papers, Vol. V of 1831, Minutes of Evidence on the East India Company’s
affairs, Q. 3864-66.
the abolition of such other taxes as being raised from the poor
cost the Government more than their yield.
Under the injurious revenue system described above, the
taxing capacity of the people decayed so that notwithstanding
its numerous resources1 from which it derived its revenues the
Imperial Government was unable to make both ends meet. It
ought to serve as an object lesson to all financiers to show
that when their revenue laws are harmful to the resources
of the people they must blame none but themselves for their
empty treasury.
1
The following is a conspectus of the taxes levied :—
Source of Amount o Period
Revenue Revenue Locality and Date of Commencement
No. of Dates
raised in
Years
Millions
Land 662.308 64 1792-3 Throughout the period in Bengal, Bombay and

Revenue to Madras since 1834-5 in N.W.P. and 1849-50 in
1855-6 the Punjab.
Sekyer & 9.729 20 1836-7 Throughout the period in Bengal, N.W.P., Madras
Abkary to and Bombay, and since 1849-50 in Punjab.
1855-6
Excise 4.987 ,, ,, Bengal accounts exclusively.
Moturpha 6.455 ,, ,, Madras accounts exclusively.
Salt 135.532 64 1792-3 Bengal since 1792, Madras 1822, Bombay
to 1822, N.W.P. 1839.
1855-6
Opium 106.707 ,, ,, Bengal since 1792, Bombay since 1820.
Post 8.888 ,, ,, Bengal and Madras since 1792, Bombay since 1813,
Office Punjab 1849, N.W.P. 1835.
Stamps 16.697 59 1797-8 Bengal from 1797, Madras from 1813, Bombay from
to 1819, N.W.P. from 1834, Punjab from 1849.
1855-6
Customs
Duties
Internal :
1. Transit 1792-3 Bengal, Madras and Bombay from 1792-3, N.W.P.
2. Town 76.179 64 to from 1834-5, Punjab since 1849-50.
External : 1855-6
1. Import
2. Export
Mint Bengal from 1792, Madras and Bombay from
3.221 ,, ,,
Revenue 1813.
Tobacco 1.437 18 1836-7 Madras 1836 on.
to
1853-4
Miscel- 194.777 64 1792-3 Same as under land revenue.
laneous to
1855-6
Was the money raised by such injurious taxes without

reference to their effect on the productive powers of the country
spent on such public utilities as were calculated to enrich
and elevate the economic life of the tax-paying population ?
A glance at the following table giving the distribution of the
expenditure by decades on the different services will show how
the money was spent :—
Distribution of the Expenditure*
Percentage Ratio of In the Year
Total Expenditure on 1809-10 1819-20 1829-30 1839-40 1849-50 1857
Military … 58.877 64.290 53.754 57.721 51.662 45.55
Interest on debt … 18.010 12.805 12.124 9.756 10.512 7.19
Civil and Political … 7.221 8.900 9.575 12.296 8.902 9.62
Judicial … 7.525 6.800 7.107 9.565 7.180
Provincial Police … 1.991 2.093 1.535 2.062 2.062 9.38
Buildings, Fortifications, etc. 1.639 1.756 2.810 1.428 1.661 ...
* “Past, Present and Prospective Financial Condition of British India,” by Colonel
Sykes, Journal of the Royal Statistical Society, 1859, Vol. XXII, p. 457.
Prominent among this array of figures are those on the
military expenditure and though they have dwindled in years
they have invariably consumed more than one half of the total
revenues of the country. But the stupendous figures opposite
military do not represent the true burden of that expenditure.
To them must be added the figures for the interest charge on
debt, for the debt incurred was entirely a war debt. India was
all throughout this period a battle-ground between the Country
Powers and the East India Company. The two Mahratta Wars,
the three Mysore Wars, the two Burmese Wars, the two Afghan
Wars, and the Carnatic Wars, not to speak of the numerous
other minor engagements, were fought in the interests of adding
India to the dominions of the Company and of the Crown.
While Parliament claimed that the dominions of the East India
Company were the dominions of the Crown it must be borne in
mind that it refused to pay a farthing of the purchase money. On
the other hand, the entire cost of these wars was borne by India
as so much dead weight on her scanty resources. The charges
shown separately under buildings and fortifications must also
be included in the military expenditure, to which category
they really belonged. On making these needful additions we
find the unparalled fact of a country wasting between 52 to
80 per cent. of its precious little money on war services. It
may, perhaps be argued on the other hand that much of the

military expenditure, large though it was, went back into the
coffers of the Indians themselves as they formed the bulk of
the forces employed in the country. The Indians of course,
formed a very large portion of the military,1 and if the scales
of salaries fixed for the European and native forces were
equal the result would have been favourable to the natives
of the country, though it cannot be said to have excused that
huge military expenditure. But the scales of salaries for the
Europeans and natives were so grossly unequal2 that one
European drew on an average more than the salaries of four
natives put together. So this expenditure, whether from the
standpoint of public utility or private employment, did not
benefit the population which contributed to the revenues of
the State.
1
This may be seen from the following figures :—
STRENGTH OF THE INDIAN ARMY BEFORE THE MUTINY*
European Native Total

Artillery ... 6,419 9,138 15,577
Sappers ... 110 3,043 3,153
Cavalry ... 3,456 30,533 32,989
Infantry ... 29,760 188,660 218,420
Total ... 38,745 231,374 270,119
*Report of Major-General Hancock on the Reorganization of the Indian Army,
Parliamentary paper of the year 1859, p. 21.
2
This is indicated by the following table :—
COST OF AN INFANTRY REGIMENT PER MONTH
EUROPEAN
Details Total
Officers Rs. As. Ps. Rs. As. Ps.
37 Officers … … 14,734 14 3
Staff and Establishment … … 4,515 12 4 21,779 2 7
Command and other allowances 2,528 8 0
Men
117N.CO.S. … … 2,289 4 5
950 Privates … … 11,203 8 4
Rations, clothing and other charges 12,506 11 3 25,999 8 0
Total 47,778 10 7
The civil and political charges which absorbed nearly 10 per

cent. of the revenue can hardly be said to be recuperative in
their effect. This part of the expenditure again was not shared
by the native population which bore its burden. As a result
of conquest the natives naturally came to occupy a secondary
position; but the conquest had done more than merely degrade
their status. It had engendered a certain sense of distrust
for the natives in the minds of Englishmen. Conquered and
distrusted the natives since the commencement of British rule
had come to be excluded from the higher administrative posts
of the country.1 It was to remove this injustice that Parliament
in the Act of 1833 provided
“that no native of the said territories, nor any natural-
born subject of His Majesty resident therein, shall, by
reason only of his religion, place of birth, descent, colour
or any of them be disabled from holding any place, office,
or employment under the said Company” (sec. 87).
NATIVE
Details Total
Officers Rs. As. Ps. Rs. As. Ps.
26 Europeans … … 9,861 2 1
20 Natives … … 940 0 0 13,527 8 7
Staff and … … 1,209 1 4
Establishment
Command and other … 1,517 5 2
allowances
Men
140 N.C.O.s. … … 1,780 0 0
1,000 Sepoys … … 7,000 0 0 9,606 14 0
Charges … … 826 14 0
Total 23,134 6 7
It is evident from this table that if we deduct the salary of 26 European
officers and command and other allowances shown under the heading “Native”
which amounts to Rs. 11,378 7. 3. we shall find that 1,104 Europeans drew Rs.
47,778 10. 7. while 1,160 natives drew only Rs. 11,755 15. 4.
1
Before 1833 the very meagre scale on which they were employed is disclosed
by the following figures :—
Native Civil Servants Bengal Madras Bombay Total
of the 1st Class attached Total Total Total Total
No. No. No. No.
to the Secretariat of the Salary Salary Salary Salary
3 Precidencies Drawn Drawn Drawn Drawn
Receiving per Month
Salaries of :—
Rs. 500 and upwards 5 2,700 … … 5 2,500
Rs. 400 ” 2 800 … … 1 400
Rs. 350 ” 4 1,400 1 350 1 350
Rs. 300 ” 3 900 … … 2 600
Rs. 250 ” 5 1,250 … … 1 250 89 20,690
From Rs. 250 to 200 17 3,460 5 1,155 1 200
From Rs, 200 to 150 10 1,590 4 682½ … …
From Rs. 100 to 150 5 550 5 525 5 330
Below Rs. 100 6 470 1 87½ 2 140
Total 57 13,120 16 2,800 16 4,770
But, as a matter of fact, till after the Mutiny not one of

the natives was appointed to any office except such as they
were eligible for before this Statute was passed, because the
Court of Directors in interpreting it advised the Government
of India at the very start that by this enactment
“practically......no very marked difference of results
will be occasioned. The distinction between the situations
allotted to the convenanted service and all other situations
of any official or public nature will remain generally as
at present.”1
The Judicial and police charges, which together absorbed
something like 10 per cent. of the total revenue raised, can only
be regarded as protective in their character. Thus the bulk of
the money raised by injurious taxes was spent in unproductive
ways. The agencies of war were cultivated in the name of peace,
and they absorbed so much of the total funds that nothing
practically was left for the agencies of progress. Education
formed no part of the expenditure incurred and useful public
works were lamentably few. Railways, canals for navigation
or irrigation and other aids to the development of commerce
and industry for a long time found no corner in the Imperial
budget. For a total area of 837,000 square miles there were
constructed a few miles of railways, 2,157 miles of land ways,
580 miles of waterways and 80 miles of telegraph. Or speaking
in terms of money spent, we find that for the entire period of
fifteen years from 1837-8 to 1851-2 the average expenditure
of a productive character amounted only to £ 299,732
1
Despatch to Bengal No. 44 dated December 10, 1834, para. 107.
*Report of the Civil Finance Committee on Native Establishment at the three
Presidencies,—Bengal Financial Consultations dated April 13, 1830. India Office
Records. The subordinate establishments of uncovenanted Christian and native
servants attached to the several presidencies were divided by the Committee
into four classes, (1) comprehending Head clerks, Registrars, Managers and
their assistants, Examiners, Investors, etc., employed under the Secretaries in
superintending and conducting the business of the office; (2) Current Business
Writers, and permanent Copyists; (3) Sectioners or copyists paid by piece work,
and (4) all inferior servants. The Committee found that
Para. 35. The salaries received by the Current Business Writers in Calcutta
vary from Rs. 20 to Rs. 300 per mensem, an average for each individual Rs. 104;
in Bombay they vary from Rs. 15 to 120, an average Rs. 48; at Madras it is an
established rule that the average remuneration to servants of this description in
the Secretariat at that Presidency is Rs. 27½ , which is distributed at various
rates from 10½ to 87½, rupees, according to the claims of the individuals from
length of service and utility......
Sectioners in the Secretariat office, Bengal, were paid at the rate of 750 words
per rupee; while at the other two Presidencies it was about 1333 words for a rupee.
Para. 51. The present charge for servants attached to the Secretariat in Bengal
is Rs. 1,142 per month; at Madras, including mochies (cobblers), Rs. 455; and
at Bombay, Rs. 261. In Bengal there were 186 servants; in Madras 56; and in
Bombay 42.
a year.1 There is a principle well known to farmers that constant

cropping without manuring ends in the exhaustion of the soil.
It is, however, capable of wider application, and had it been
observed in the State economy of India the taxing capacity of
the country would have grown to the benefit of the treasury
and the people. Unfortunately it was lost upon the financiers
of India to the detriment of both.
But if the chance of augmenting the resources by judicious
taxes and productive expenditure to cover the chronic deficits
was forfeited, there was at least the way open for economy
in expenditure. As might be supposed, a strong Central
Government of the kind established in 1833 was capable of
effecting economy wherever possible. As a matter of fact,
the centralization was of the weakest kind. De jure there
was an Imperial system of administration, but the de facto
administration was conducted as though the primary units
of executive government were the Provinces and that the
Government of India was only a co-ordinating authority. This
was obvious from a variety of circumstances. Legislation was,
it is true, centred in the Government of India; none the less
the laws that were passed by the Government of India were
passed for the different provinces as though the initiative in
legislation still lay in the Provinces and that the Government
of India was only a sanctioning authority. Each Province had
its own customs, internal as well as external, a survival of
their sovereign status. Each Province continued to have its
own Army. Notwithstanding centralization, the account system
still remained provincial, sustaining the sense of their financial
independence. The work of administration and collection of
revenue being still conducted by them, the provinces behaved
as though they were the lawful authorities charged with the
responsibilities of Government. This spirit of independence
bred insubordination, and some of the Provinces, particularly
Bombay and Madras, endeavoured to resist the attempts of the
Government of India to tax the people under their jurisdiction
when the cost of the mutiny compelled it to levy fresh burdens.
The point to be borne in mind is that the Act of 1833 made
an unfortunate divorce between the legal and administrative
responsibility. The Imperial Government were responsible
in law but did not administer the country. The Provincial
1 Statistical paper relative to British India. Edited by Thornton, 1853.
Governments administered the country but had no responsibility

in law. This divorce had a fatal effect on the economy in
the finances of the country. As was inevitable extravagance
in expenditure had become the rule in practice and it was
inherent in the Imperial system itself. Economy is begotten
of responsibility, and responsibility is obtained where a
government has to find the resources to meet the charges
it desires to incur. Prior to the inauguration of the Imperial
system the Provincial Government had the obligation to raise
money for the charges included in their budgets. Consequently
they had to be economical. But under the Imperial system,
while the budgets for the various services were prepared by
the provincial authorities, the responsibility for finding the
ways and means rested on the Government of India. Formerly
they knew the limits of the purse they had to draw upon, but
under the Imperial system they
“had no means of knowing the measure by which
their annual demands upon the Government of India
ought to be regulated. They had a purse to draw upon of
unlimited because of unknown depth. They saw on every
side the necessity for improvements, and their constant
and justifiable desire was to obtain for their own provinces
as large a share as they could persuade the Government
of India to give them out of the general revenues of the
Empire. They found by experience that the less economy
they practised, and the more importunate their demands,
the more likely they were to persuade the Government
of India of their requirements. In representing these
requirements, they felt that they did what was right, and
they left to the Government of India, which had taken
upon itself, the responsibility of refusing to provide the
necessary means.”1
To these extravagant demands the Government of India
had often to yield; for, till very late, it did not possess the
machinery to appraise the demands and to control the
expenditure on them. It is not usual to expect much efficiency
from any Imperial system of administration, much less when
it covers not a department, not a province, but a country
as big as a continent. Merely from being huge it is slow to
move. Much slower would it necessarily be if it were a system
as unorganized and unconsolidated as the Indian system
was. First of all, the Imperial system in India was without
1
The Administration of the Earl of Mayo, as Viceroy and Governor-General
of India— a Minute by the Honourable John Strachey, a member of the Council
and late acting Governor-General, dated April 30, 1872. Calcutta Office of the
Superintendent of Government Printing, 1872, p. 46.
its executive machinery of control. The Act which created it

must be said to have grievously erred in uniting into one the
Government of Bengal and the Government of India. As a result
of this fusion the machinery was overstrained. Its duties as
the Government of Bengal left it very little time to attend to
its duties as the Government of India. There was not only a
common executive, but there was also a common Secretariat
charged with the work of the two Governments. Overworked
as the Secretariat was, its efficiency was considerably lowered
by the absence of any officer specially charged with the duty
of handling the finance of the country till 1843. It was in
that year that Lord Ellenborough, the then Viceroy of India,
separated the Secretariat of Bengal from that of India,1 and
attached to the latter a distinct office called the Financial
Secretary to the Government of India,2 unencumbered with
the details of any other Department of State except that
of finance. But while the want of a scrutinizing officer was
thus made good by this appointment of a distinct Secretary
of Finance, it was not possible for him to enforce economy in
expenditure in the absence of a centralized system of audit and
account and of an appropriation budget. Notwithstanding the
establishment of the Imperial system of finance, the officers of
audit and account remained attached to the Secretariats of the
various Provincial Governments. They were not accountable to
the supreme Government on whom the responsibility for the
ordering and the management of the revenues of India had
by law devolved. Being attached to the provincial Secretariat
the Government of India could issue orders with regard to the
accounts and the audits not directly but only through, and
with the interpretation of, the Local Government concerned.
Secondly, the budget system, though good enough for the
purposes of mercantile accounts, that is, record, was useless
for the first and elementary purpose of all good State accounts,
namely, check. There were indeed three estimates (sketch,
regular, and budget) prepared for the purposes of the financial
administration of the country showing the amount of money
required for the carrying on of each of the different services.
But this distribution of public money on the different services
was not held to mean appropriation. It was only treated as
cash requirements. Owing to this fact the grants were never
carefully prepared nor was the limit set on them observed in
1
Government of India Resolution, Home Department, April 29, 1843.
2
Government of India Resolution dated January 4, 1843.
practice. As there was no budget of specific votes or sanctions

for each of the services the audit and account was simply
concerned with noting whether record was kept of all the money
that was received and paid through the public treasury. It is
evident that in the absence of an appropriation budget the
primary object of all State accounts and audit, namely check
on the spending authority to abide by the sanction, was never
achieved. The Provincial Governments, extravagant in their
demands, were also careless in the matter of expenditure.
So long as the Government of India remained without an
appropriation budget and a centralized system of audit and
account, it continued to be only a titular authority in the
matter of financial control, and the provinces, though by law
the weakest of authorities in financial matters, were really
the masters of the situation.
To its inability to curb the extravagant habits of the
provincial authorities generated by a financial irresponsibility
on the part of the Provincial Governments and inefficiency
on the part of the Central Government must be added the
general spirit of apathy which marked the Executive Council
of the Government of India in matters of finance. While it
was true that nothing could be spent from the revenues of
India without the specific vote of the Executive Council, it
does not appear that the Council from its way of working
could have taken any keen interest in promoting economy in
expenditure. The Council acted collectively, and there was no
distribution of executive work among the different members
which composed it. With the exception of the Department of
War and Legislation the whole work of the Government was
brought before the Governor-General and his Councillors. As
a result of its collective working
“every case actually passed through the hands of each
member of the Council, circulating at a snail’s pace in little
mahogany boxes from one Councillor’s house to another.”1
Under such a system nobody was a Chancellor of the
Exchequer to urge economy, because everybody was supposed to
be one. The result was that finance in being everybody’s business
1 W. W. Hunter, Life of Mayo, Vol. I, p. 190.

suffered from being nobody’s business, so that funds were

distributed not according to the genuine needs of the services,
but according to the relative claims and persistency of the
clamour made for them.
Sufficient evidence has been given to show that the collapse
of the Imperial system was due to a faulty fiscal system
marked by injurious taxes and unproductive and extravagant
expenditure. It must not, however, be supposed that this
faulty fiscal policy commenced with the inauguration of the
Imperial system. On the other hand, it was a heritage which
descended to the Imperial system from the past. None the
less it is obvious that a timely revision of the fiscal policy
and the strengthening of central control would have solidified
the foundation of the Imperial system. But a much too long
continuance thereof undermined its financial foundations, and
as it could get no more money to meet its rising expenditure
from a people whom it had beggared, the Imperial system
succumbed to the shock of the Mutiny, never to rise again in
its original garb.

CHAPTER II
IMPERIALISM V. FEDERALISM
As the result of the cost of the Mutiny of 1857 the already
precarious condition of the Imperial Finance became so grave
that no problem during the succeeding decade can be said
to have engrossed the attention of responsible authorities as
the one relating to the rehabilitation of that tottering system.
Although the controversy as to the proper line of reconstruction
to be adopted was long drawn out, the causes of the collapse
were so patent that all those who had anything to do with
Indian Finance unmistakably laid their finger on one supreme
defect in the system whose breakdown they had witnessed,
namely, the irresponsible extravagance it engendered in the
Provincial Governments. To obviate this evil it was sought on
the one hand by some responsible authorities
“to make the Local Governments partners in the great
joint stock of Indian Finances, and, so to enlist their
interest and animated co-operation with the Government
of India, instead of keeping them on the footing of agents
and servants, who, having no motive for economy and using
the means of their masters, think only of enhancing their
own demands by comparisons more or less well founded,
with the indulgence conceded to others.”1
This view gradually led to the formation of a considerable body
of well-trained opinion for changing united India into the United
States of India,2 by making the provinces into separate and
sovereign States. The aim was to substitute a Federal system for
the Imperial system and to assimilate the financial position of the
Central authority in India to that of the Central authority in the
1
Minute by H.E. Sir W. R. Mansfield, Commander-in-Chief, dated October 17,
1867. Papers, etc. on the extension of Financial Powers to Local Governments,
pp. 99-103.
2
Cf. the Note of Col. R. Strachey dated August 17, 1867, in J. F. Finlay’s
History of Provincial Financial Arrangements, List of extracts, p. 3.
United States. For the consummation of the Federal plan

it was urged that the revenues of India should not be dealt
with as one income, collected into the Imperial Treasury and
thence distributed among the different Provincial Governments.
According to the plan each province was to be allowed to keep
its revenues and meet its charges from them. The Central
Government was to have its own separate resources and, if
need be, supplemented by contributions from the provinces
as their share of the expenditure of the Central Government
based on some equitable standard. Thus under the Federal
plan the consolidated Imperial Budget with its formal division
between Imperial and Provincial was sought to be replaced
by the creation of distinctly separate budgets, Central and
Provincial, based on a genuine division of services and allocation
of revenues.
Many advantages were claimed in favour of the Federal
plan. First it was believed that the separation of the revenues
and services would lead the ways and means of the Central as
well as of the Provincial Governments to be clearly defined, so
that each one of them would be responsible for administering
its affairs within the funds allotted to it. Heretofore the
Provincial Governments sent up their estimates of revenue
and expenditure as returns unconnected with each other,
and the task of balancing them was left to be done by the
Supreme Government upon the aggregate of the different
provincial estimates submitted to it. Under the Federal plan
the provincial estimates would have to be balanced accounts
of receipts and charges made over to them. Though primary
it was not the only advantage which the Federalists claimed
for their plan, for it was advanced not only as a measure
to set bounds to the extravagant expenditure of the Local
Governments by limiting the funds on which they were to
draw, but also as a measure for setting bounds to the growing
expenditure of the Central Government as well. The Federalists
did not conceal the fact that the Central Government, being
in a position to draw upon the total resources of India as a
whole, was inclined to be extravagant in its own expenditure.
They therefore thought that the Federal plan, involving as it
did the allocation of revenues and services, would result in
enforcing economy on the Central as well as on the Provincial
Government.
IMPERIALISM V. FEDERALISM 91
The Federal plan was not only proposed by its advocates

in the interests of economy and responsibility, but also in the
interests of plenty. The Federalists denied that India offered
few sources of revenue for the growing expenditure of the
State. Though the Indian Finance ferry was water-logged,
it was their view that there were many sources of taxation
with the outpourings of which it could be set afloat. But they
argued that these available sources were left untapped, as the
Imperial Government, which could tap them, would not do so
because of their restricted locale; and Provincial Government,
which would like to tap them, because of their restricted locale
could not do so under the existing constitutional law. But if the
Provincial Governments were vested or rather re-vested with
the powers of taxation as they would be under the Federal
plan, such sources of taxation as were given up for being too
regional-in character by the Imperial Government would be
used by the Provincial Government to the great relief of Indian
Finance as a whole.
Not only was Federalism advocated in the interests of
economy and plenty, but also in the interests of equity. It was
contended that the existing system resulted in an iniquitous
treatment of the different provinces. If we take public works
of provincial utility and the expenditure incurred upon them
in the different provinces as the criterion, the criticism of the
Federalists cannot be said to have been unfounded. On the
other hand, the following figures go to substantiate a very
large part of their arguments :—
OUTLAY ON PUBLIC WORKS
Average for the years 1937-8 to 1845-6
Expenditure
Revenues in on Public
Population Area in
Province hundreds of works in
in thousands sq. miles
Rs. hundreds of
Rs.
Bengal 40,000,000 1,65,443 10,239,500 1,79,812
N.W. P. 23,200,000 71,985 5,699,200 1,41,450
Madras 22,000,000 1,45,000 5,069,500 30,300
Complied from Calcutta Review, 1851, Vol. XVI, p. 466.

Thus the outlay on public works was in Bengal 13/4 per

cent.; in North-Western Provinces, 2½ per cent.; and in
Madras a little over ½ per cent. of their respective revenues.
This favoured treatment of some provinces as against the
others was justified by the Imperial Government, which
distributed the funds, on the ground that the favoured
provinces showed surpluses in their accounts. But the
Federalists pointed out these deficits and surpluses ascribed
to the different provinces were grossly fictitious. They were
the result of a bad system of accounts. The system was
bad for the reason that it continued to show the accounts
of the financial transactions of the country not according
to Heads of Account but according to the provinces in
which they occurred as used to be the case before 1833
when there was no common system of finance. With the
passing of the Act of 1833 this system of accounts had
become quite out of keeping with the spirit and letter of
that Act. This would not have mattered very much if the
All-India items were separated from the purely provincial
items in the General Heads of Account. In the absence of
this the evils of the system were aggravated by entering
exclusively into the accounts of a province the charges for
what was really an All-India Service, so that it continued
to show deficits, while others which escaped continued to
show surpluses and claim in consequence the favoured
treatment given to them. The Presidency of Bombay offered
to the Federalists a case in point. The demands of the
Presidency were invariably received with scant courtesy by
the Government of India, for in its history Bombay seldom
showed any surplus in her accounts. But, if it had been
realized that the deficits were caused by the barbarous
system of accounts which kept on charging the Presidency
with the cost of the Indian Navy, it undoubtedly would have
fared better. Such vicious ways of appointment were not
the only evil features of the system of accounts. Under it it
was quite common to charge one Presidency with the cost
of a service and to credit another with the receipts thereof.
How the deficits found in the Madras accounts were inflicted
upon it by the erroneous system of accounts may be seen
from the following :—

Cost of the Army of Revenues derived from the Occupied
Occupation. Territory
Debited to Amount Credited to Amount
Rs. Rs.
Madras 79,83,000 Bombay ... 20,00,000
Bengal ... 1,04,22,870
Compiled from ibid, p. 475.
Taking into consideration the iniquities involved in such
a system of accounts, it is beyond dispute that the advantage
claimed by the Federalists for their plan was neither fictitious
nor petty. A division of functions between the Federal and
Provincial Governments would have in itself been an advantage
by comparison with the existing chaos. And, if it did not result
in equity, it had at least the merit of opening a way for it.
When however the Federal plan was put before the
authorities in the form of a practical proposal, it gave rise to
a determined opposition. The challenge was at once taken up
by the supporters of the Imperial system who, be it noted,
were mostly military men in civil employ. They opened their
attack on the Federal plan from two sides, that of practicability
and expediency.
Is it possible, asked the Imperialists, to localize the revenues
and charges of India as belonging distinctively to one particular
province ? They insisted that
“from the commencement of (the British) power (in
India).....the interests and affairs of (the) presidencies
and the provinces have been interwoven and interlaced—
one often overlapping the other, and vice versa—in a
manner from which extrication or disentanglement is now
impossible, without making changes which would entail
inconveniences greater than any entailed by the existing
system..... The army of Bengal Presidency is quartered
not in the rich districts of the Lower Ganges, but mainly
in the poorer districts of the Punjab. Thus placed, that
army defends virtually the whole Presidency. The Madras
army is not kept within that Presidency, but holds, besides
the Madras country, the Deccan, the Central Provinces,
and British Burma. Similarly the Bombay army holds,
besides its own Presidency, the State of Rajputana and

of Malwa. The Lower Provinces or Bengal proper are in
themselves rich; but besides their own revenues they
receive large customs receipts, which belong partly to
them, but largely also to the other Divisions of the Bengal
Presidency. Even Bengal opium does not entirely belong
to Bengal, a large portion being raised in the North-
Western Provinces. In Bombay the opium revenue does
not, strictly speaking, belong to that Presidency at all,
being raised beyond its limits, in the territories which, if
included in any Presidency at all, would pertain to that
of Bengal. Some of the Salt Duties, both of Madras and
of Bombay, are raised on salt destined for consumption
in Central India, and, in strictness, should be credited to
the Government of India. Instances might be multiplied;
but it becomes instantly evident that, if an adjustment
of these matters with a view to complete localization of
finance were to be attempted, many difficulties, perhaps
even disputes, would arise.....”1
Arguing in the same strain, Lord Lawrence, the then
Viceroy of India, wrote :
“Experience has shown that it is convenient that
the resources of British India should be considered in
the aggregate and not with reference to the particular
province in which it is raised. If the rule were otherwise,
we must enter into the question—what are the revenues
which each province may fairly claim? What are the items
of expenditure which may justly be charged to each ? Is
the Punjab, for instance, to be charged for all the British
troops located in the hills for sanitary considerations ?
Is the whole of the force ranged against the North-
Western border to be similarly debited ? Are the troops
quartered in Rajputana to be charged to the Bombay
Presidency to which they belong, or in what manner is
their cost to be arranged for ? On the other hand, we
may be asked, why should not Bengal in particular—
which, having no foreign neighbours, and a docile and
timid population, requires only a minimum garrison—
have the benefit of her surplus revenues ? Why on the
1
Note by Sir Richard Temple dated November 7, 1868, Papers, etc., on the
extension of Financial Powers to Local Governments, pp. 197-208.
opposite view of the question should not Bengal bear

her share of the cost of the troops located in the North-
Western Provinces, the Punjab and Central India, which
guard her from such invasions as those of the Rohillas,
the Mahrattas and the Pindaries of former times ? These
are all questions which would require solution if each
were to have a financial system of its own.”1
and in his opinion the question was impossible of solution.
But the Imperialists went further than this and argued
that, even if it were possible to distinguish and localize
the charges and the revenues into provincial and central,
it was inexpedient to do so. Under the existing system of
finance, they held that
“the Imperial Government, disposing of financial
resources of the whole of India, can carry those resources
at once where they are most needed. There are objects
which have a truly national importance, though they
may appear chiefly beneficial to a particular district.
There may be evils, necessities and dangers in particular
districts, which it is the duty of the supreme Government
to correct and remedy at the charge of the whole. The
creation or improvement of a part may have a national
importance, though the expenditure on it may seem
unfairly beneficial to a particular locality. A road,
a canal, a railway from a cotton district or a coffee
district, or a tea district, may have a vital significance
to the whole people and commerce of India; and yet the
expenditure on such a work be out of all proportion to
the present revenue of the district which it is destined
to develop..... or the supreme Government may find it
necessary to lay out, for moral and social purposes,
larger sums on recently conquered, savage, or dissatisfied
provinces than the revenues of those provinces seemed
to warrant, in order to remove causes of disturbances or
dangers, and to force those provinces into some degree
of harmony with the long settled, pacified, reclaimed
portions of the Empire..... The old provinces of the
Empire conquer the new provinces. The old are bound in
duty to civilize what they conquer. We have no right to
Minute dated November 22, 1867, op. cit., pp. .104-7.

annex a country and then throw it on its own resources.

Conquest has its own duties as well as its rights.”
“I venture to demur,” wrote Lord Napier of Merchiston,
President of the Council of Madras,” to the policy of those
who would restrict the benefits of the supreme Government
to its receipts, and who would measure out in a parochial
spirit to every province appropriations proportional to
its specific returns. On the contrary, it ought to be a
satisfaction to the rich to help the poor; to the old to
protect the young ; to the good to improve the bad; for
thus all can co-operate in building up the glorious fabric
of a—United India. Such ends can only be attained by a
Central Government disposing of the financial resources
of a whole Empire”1
It is evident that arguments or sermons such as the above
by themselves could never have supported the cause of the
Imperialists. Notwithstanding the emphasis laid upon the
difficulty of separating the revenues and charges into Imperial
and Provincial, it must be conceded that the task was by no
means so insuperable as the Imperialists made it out to be.
The difficulty of apportioning the military charges could have
been easily obviated by centralizing the military and making
it a charge of the Central Government. On the same basis all
those services charged to a particular Presidency or Province,
but which from their nature benefited the whole Empire, could
have been easily incorporated into the budget of the Central
Government. Similarly it was possible in practice to allocate the
existing sources of revenue between the Central and the Local
Governments. The Central Government could have been allowed
to retain for its use such sources of revenue the locale of which
extended beyond the limits of a Presidency or the maximum
yield of which depended upon a uniform administration of the
same throughout the country. While on the other hand the
Provincial Government could have been allowed to appropriate
such sources which were restricted in their locale or the yield
of which depended upon local vigilance. For instance, the
customs duties could have been easily made a central resource,
not only because their incidence was wider, but because they
required a common and uniform policy of legislation and
administration. The opium revenue could have been treated
1
Cf. his Minute dated February 15, 1868, para. 9, op. cit., pp. 186-90.
as a central source of revenue, and the same treatment could

have been granted to the salt revenue. Of course it would
have been difficult to effect a separation of the sources of
revenue in such a way as would have granted to each of the
several Governments concerned resources adequate to meet the
charges devolving upon them. A certain adjustment of funds
by contributions from the provinces to the Central Government
or from the Central Government to the provinces would have
been inevitable; neither could it have been possible to obviate
the adoption of principles more or less arbitrary in the matter
of apportionment of revenues or of charges. But admitting
the difficulties and arbitrariness involved in the problem of
separating the Imperial Budget into a Central and several
Provincial Budgets, it must still be said that it was quite
capable of satisfactory solution. Colonel Chesney in response
to the challenge thrown out by the Imperialists had made a
notable attempt to distinguish the existing heads of charges
into Imperial and Provincial. In his Indian Polity he says :
“The items of Imperial expenditure for which
contributions would be required consist apparently
of—(1) the Home Establishment and charges disbursed
by the Secretary of State ; (2) interest on Indian debt;
(3) Establishments of the Government of India ;
(4) Diplomatic establishment; (5) Army ; (6) Imperial
Services—Post Office and Telegraph Department ;
(7) interest guaranteed on railway capital; to which must
be added (8) grants in aid to some of the poorer provinces
(which do not at present pay their expenses).”
This and other efforts convinced the Imperialists that their
argument from practicability was bound to fail. Consequently
they shifted their emphasis from the argument from
practicability to that from expediency. Expediency furnished
a better ground for attacking the Federal plan. Can a Federal
Government be as efficient as the Imperial Government ? Can
its credit be as high ? Can its prestige be as great as that of
the existing Imperial system ? It must be premised that it was
fresh in the minds of the people that it was the Imperial system
with a strong power of control that had saved the country
to the British from the hands of the mutineers of 1857. The
survival value of the Imperial system had been proved in the
struggle. By a clever manoeuvre the Imperialists turned to e
authorities and asked them to consider what had sustained the
Imperial system throughout the struggle. They did not fail to

emphasize the point that it was because the Imperial system of
finance had given into the hands of the Imperial Government
the control over the management of the revenues and
disbursements of the Empire that the latter, in an emergency
like the Mutiny, could stimulate every source of income, close
every avenue of outlet, and concentrate all its expenditure
on the capital object at stake—the energetic prosecution of
hostilities. They showed that, without the Imperial system
of finance, the Imperial Government would have had to deal
with lukewarm, reluctant, hesitating or even hostile partners,
perhaps not directly concerned in the struggle or convinced of
its necessity, and solicitous for exoneration or delay. Further
they made out that the Imperial management of finance was
vital not only in heightening the efficiency of government, but
also in maintaining the high state of credit. Credit, it was
argued, depended upon the magnitude of the revenue, and
to disintegrate the revenues was tantamount to lowering the
credit. The Federal plan was also accused of abrogating the
European tradition which has given prestige a very high place
in its code for Asian government. It was inconceivable to the
Imperialists that the Central Government could maintain its
prestige without centralization in finance, for it was the system
of Imperial Finance which, having collected the leading strings
in political and administrative matters into the hands of the
Imperial Government, enabled that Government to dictate a
policy and have it executed to its own satisfaction. But who
could uphold the prestige of the Central Government, if it
became a pensioner of the Local Governments subordinate to it?
Looked at from the vantage ground of detachment from
the time of the controversy one may wonder what strength
there was in the argument from expediency which gave the
Imperialists such an easy victory over the Federalists. Federal
Governments such as those existing in America, Germany
or elsewhere do not lend support to the view that in their
working there is bound to be a loss of efficiency, credit, or
prestige. Their history has belied all these gloomy forebodings.
But it should be remembered that at the time the controversy
raged in India, much of the history of Federalism was a
blank page, for Federalism was itself in its infancy. People,
however, sided with the Imperialists, not because they could not
draw upon the history of Federalism for arguments in its

favour, but because the events of the time had inclined them
to support the Imperial system. The Imperial system had saved
India from the hands of the Mutiny of 1857, and when their
fears of its repetition were not yet allayed it was too soon to
expect them to consent to disrupt a machine that had just
then proved its worth in the great contest. Conscious though
they were of its defects, people recoiled from any attempt to
tamper with it. So strong was the partiality of the people for
the Imperial system that, notwithstanding the many defects
which to their knowledge detracted from the efficiency of the
system, they could give a sympathetic hearing to the Hon’ble
Major-General Sir H. M. Durand, who wrote :
“..... I assert confidently that at present there is
absolutely no ground whatever for the allegation that the
financial control of the Government of India goes to undue
lengths in what it attempts, and miscarries miserably..... On
the contrary, any partial miscarriage of control..... is no
proof whatever that the rules are faulty, but that their
relaxation is highly inexpedient, and that more rigid
subordination of them should be enforced both by the
Government of India and the Home Government. To
subvert the financial control of the Central Government
because one out of nine administrations has proved rather
refractory, is about as sensible a procedure, to my mind,
as to annul the articles of. War and the powers of the
Commander-in-Chief because a regiment should somewhat
happen to misbehave. I venture to doubt the statesmanship
of ruling either India or armies in this way.”1
Notwithstanding the victory of the Imperialists, it must be
said the Federalists lost a cause which was bound to succeed.
For the sentiment of the time, however favourable to the
retention of the Imperial system, was powerless to resist the
force of events. The Imperial Government had to be extricated
from the state of chronic penury in which it had fallen, and if
statesmanship did not favour the system of Federal Finance
as a means, financiers soon learnt that the system of Imperial
Finance was doubtful as an end.

1
Minute dated October 7, 1867, vide op. cit., pp. 94-7.
CHAPTER III
THE COMPROMISE
IMPERIAL FINANCE WITHOUT IMPERIAL
MANAGEMENT
If the Federalists failed to carry the day, they at least
led their opponents to improve the system by removing some
of the most radical defects from which it suffered. Attention
was mainly directed towards revising the revenue laws and
improving the machinery of control so that more revenues
be obtained and less wastefully spent. With the primary
object of making the Imperial system strong and prosperous,
serious attempts were made about the close of the rule of the
East India Company to do away with the oppressive taxes
which had so long retarded the prosperity of the people and
consequently of the Government. The internal custom duties
were done away with, and the country was not only freed
from all restrictions which hampered the growth of trade and
industry, but positive encouragement was given to them by
introducing the element of protection in the import tariff and
trade was facilitated by equalizing the duties on English and
foreign shipping. Articles of export were also relieved from the
handicap of export duties and efforts were made to improve
the cultivation and pressing of cotton, tea and other staples
which commanded a great market in Europe and elsewhere.
The administrative machinery was next subjected to
revision. Advantage was taken of the Indian Councils Act of
1861 authorizing the Viceroy “to make from time to time rules
and orders for the more convenient transaction of business
in his Council,” to bring legally to an end the system under
which the whole Council was supposed to take part collectively
in the disposal of all the business of the Government by
assigning to each member of the Council the charge of a
separate department of administration; the Council was thus
virtually converted into a Cabinet of which the Governor-
General became the head. In this manner a place for a
THE COMPROMISE 101
Chancellor of the Exchequer was created to which was appointed

the well-Known financier, Mr. James Wilson. The attention of
Mr. Wilson was directed first of all to the improvements in the
machinery of fiscal administration. The credit of establishing in
India a uniform system of accounts, centralization of civil and
military audit, and the introduction of an appropriation budget,
rightly belongs to him. With the improvement in the revenue
laws and the check on waste through improved and efficient
administration was combined the policy of retrenchment in
expenditure,1 and the budget and audit rules were
“so framed as to leave to the head of each Local
Government or of each branch of administration a much
larger (sic) discretionary power than..... heretofore.....
allowed in rearranging the details of expenditure”2
if that led to retrenchment. So drastic was the economy
practised that, soon after the inauguration of the policy of
spreading education throughout the country initiated by the
dispatch of the Secretary of State in 1854, a stop was put to
any increase of expenditure on education.3
But notwithstanding all these efforts at betterment
howsoever diligently sustained, they did not improve the
finances of India materially; at any rate. Mr. Wilson in his
Financial Statement for 1860-1, by way of summing up the
financial situation, said:
“we have a deficit in the last three years of £
30,547,488; we have a prospective deficit in the next
year of £ 6,500,000; we have already added to our debt
£ 38,410,755.”
To meet this huge deficit Mr. Wilson was obliged to augment
the stamp duties, double the external customs, and impose an
income tax, hitherto unknown to the people. Even the yield of
these “three tremendous taxes” did not help Mr. Samuel Laing,
the successor of Mr. Wilson, to a prosperous condition, for he
too in his Financial Statement for 1861-2 wanted £ 500,000
fairly to weather his deficit and get into smooth waters with a
small surplus. A few years of financial prosperity intervened.
But Mr. Massey, who relieved Mr. Laing in 1866,
1
Cf. Finance Department Resolution No. 126 of November 19, 1860, published
in the Appendix to the Calcutta Gazette dated November 24, 1860, p. 35.
2
Ibid, para. 20.
3
Notifications, Calcutta Gazette, August 14, 1858, p. 1642.
“upon a review of the financial condition of the Empire

and the increasing demands made upon its resources.....
deemed it expedient to make provision for a permanent
addition of a million sterling at the least to the existing
revenue.”1
Why the efforts of these successive Finance Ministers were
not crowned with success is to be explained chiefly by the fact
that the administrative and public needs of the country had
grown beyond measure. After the Mutiny
“thousands of Englishmen, not only soldiers, but
Englishmen of almost every class, poured into India. Ten
thousand things were demanded which India had not got,
but which it was felt must be provided. The country (had
to be) covered with railways and telegraphs, roads and
bridges. Canals (had to be) made to preserve the people
from starvation. Barracks (had to be) built for a great
European army, and every sort of sanitary arrangement
which would benefit the troops (had to be) carried out.
This was not only true in regard to matters of Imperial
concern. Demands for improvements similar to those
which fell upon the Central Government cropped up in
every town and in every district controlled by the Local
Government. The demands for improved administration
also made themselves effective. The police was in a
shameful condition throughout India..... and the inadequacy
of the pay given to native judges and other subordinate
officers employed in the posts of importance in the courts
was declared by Lord Lawrence when he was Viceroy to
be a public scandal. Among more than four thousand of
these officers in the Bengal Presidency, the highest paid
of all, and these were very few, received £180 a year.
The great majority received from £12 to £24 a year sums
less than those earned in many parts of India by common
bricklayers and carpenters. All these had to be put on a
completely new footing.”2
While the needs for expenditure were thus growing, economy in
expenditure became difficult of achievement. Comparatively easy
at first, each successive measure of economy became directly, as
well as relatively, more arduous than its predecessor. The growing
1
Circular letter to the Local Governments dated February 21, 1866.
2
The above is taken with some alterations of a purely literary character from
the “Observations on some Questions of Indian Finance,” by Sir John Strachey.
House of Commons Return 326 of 1874.
THE COMPROMISE 103
needs of improvements, hitherto neglected, and the contracting

scope for economy, combined to demand an ever-increasing
scale of taxation. The dangers of increased taxation by an
alien Government of a people not interested in obtaining
the amenities of life, much less at the cost of a tax, were
uppermost in the minds of the three great financiers who
were sent out from England in succession to rehabilitate the
finances of India on a sound and stable basis. They realized
that unless bounds were set to these demands for improved
administration and improved material and moral conditions,
the immediate benefits of which were enjoyed more by the
European than the native population, taxation howsoever
high would be inadequate for financial solvency, besides
being dangerous to the political stability of the Empire.
Under the existing system of barren uniformity and pedantic
centralization their object was thought to be impossible of
achievement; for the Local Governments, on which alone the
Central Government could depend for economy, rendered at
best to that Government not only a cold and languid support
in financial vigilance and reform, but too often exhibited
a passive resistance, and even countenanced evasions of
regulations intended to be conducive to economy. The only
way to make Local Governments economical in their ways
was to give them the power and responsibility of managing
their own affairs. As a matter of administrative experience
the financiers had found that while some of the branches of
revenue and expenditure were truly imperial, there was a wide
field of both of them which was properly local in character,
and ought to have been entrusted to Local Governments. They
were convinced that there could be no standard of economy
until the requirements of the Local Government were made
absolutely dependent upon known means, and nothing they
thought would serve to make known to the Local Governments
the means available for their outlay than to carve out from
the Imperial purse a separate purse of definite magnitude
for the use of Local Governments and to throw on them the
responsibility of meeting their demands and maintaining an
equilibrium in their finance.
Thus they were led to the same conclusion as the Federalists.
However, to make the plan acceptable to the Imperialists, they
made certain concessions without seriously compromising

the working of the plan. The Federal plan required a
change in the constitution of the system of government
in India. It necessitated a legal partition of the revenues
and charges of India between the Central and the several
Provincial Governments. While all, including the Imperialists,
recognized in the Federal plan a powerful measure for
enforcing financial responsibility and economy, the chief
objection to it arose from the fact that it sought legally
and permanently to divest the Central Government of the
resources of India. The financiers as practical politicians
soon found out a way to obviate this defect in the Federal
plan. By virtue of their experiences of the working of the
British Parliament they found that there was no necessity
to resort to a constitutional change. Convention was deemed
to be as good as law and, once established, can seldom be
altered without disturbance. Separation of charges and
revenues between the Central and Provincial Governments
was therefore proposed to be made a matter of convention
which could be upheld so long as it was profitable for the
parties concerned to do so. This gave all the advantages
of the Federal plan without legally divesting the Central
Government of its control over the resources of India. In
its nature it was a compromise between constitutional
Imperialism and constitutional Federalism. It meant
Imperial finance without Imperial management. Under the
compromise the revenues and charges remained Imperial in
their status, but their management was to be provincialized,
so that each of the Provincial Governments was given to
administer a part of the Imperial charges incurred in its
territory within the limits of a part of the Imperial revenues
collected within its territory. This was the essence of the
new plan. It differed from the Federal plan in retaining to
the Imperial Government the supreme controlling, councilling
and regulating authority in all matters pertaining to Indian
Finance, without its being actually engaged in the details
of the administration of a part thereof.
In the essence of the plan as described above all the three
finance ministers who were called upon to undertake the task of
reconstruction had agreed. They differed, however, in the scale
on which it was to be carried out. Whether Mr. Wilson had ever
THE COMPROMISE 105
elaborated his own skeleton of the plan is doubtful; but that

the idea of it had occurred to him seems pretty certain. The
Income Tax Act XXXII of 1860, imposed by him
“was meant to consist of two parts—first, a variable
tax, originally fixed at 3 per cent on incomes, which
percentage it was intended should be raised or lowered
as the general exigencies of the Empire required, and
which might if the state of the finance should ever permit,
be entirely remitted; and secondly, a permanent tax of
1 per cent., which was to be at the disposal of the local
administration, and to be expended on roads, canals,
and other reproductive public works, within the area
which paid the tax (vide sections 190-4 of the Act). This
portion of the tax was never intended to be remitted. It
was always to be kept up, not only to meet the charges
to which it was applicable, but in order to maintain the
machinery of the tax so that at any moment of exigency,
after a temporary remission the other portion of the tax,
applicable in aid of the general finances, might be re-
imposed without agitation, discussion, or trouble.”1
But, as Mr. Wilson did not live long enough to elaborate
his ideas into a scheme, it is difficult to say to what extent
he intended to work them out in practice.
Mr. Laing, the successor of Mr. Wilson, put it in a
much more definite shape. His budget for 1861-2 was for a
deficit caused chiefly by the pressing demands of the Local
Governments for useful public works, and his sense of financial
safety compelled him
“to curtail roads, canals and other useful works of
this description, to the allotment on which they (had)
been carried on or rather..... starved, since the Mutiny.”
But his anxiety to promote the useful public works, the
urgency of which he fully recognized, led him to propose to
the Provincial Governments a method of supplementing the
scanty Imperial grants made to them. He said to them :
“Take what we are able to give you, and for the residue
take certain powers of taxation and raise it yourself.....
for there are certain subjects which can be dealt with far
better by local than by Imperial taxation...”
1
Minute by Sir B. Frere dated November 25,1866, para. 30. Papers, etc., on
the extension of the Financial Powers of the Local Governments, p. 42.
His object was to enact local budgets “not merely to

meet a temporary difficulty but to inaugurate a permanent
improvement,” to the relief of the Imperial treasury and the
benefit of the Provincial Governments. This scheme involving
the management of the public works charges by the Local
Government with an allotment from the Imperial revenues
supplemented by the power to tax had secured a general
approval. But at the time when the scheme was put forward
the Local Government was without the requisite machinery for
carrying into execution the powers of legislation necessary to
impose the taxes proposed to be given to them. The execution
of the scheme had therefore to be postponed pending the
enactement of local legislative councils then undertaken by
Parliament. But, the ensuing years having been years of
financial prosperity, the interest in the scheme relaxed and
it was consequently dropped sine die.
This spell of prosperity, however, proved to be only a
passing phase and the stress of returning adversity which beset
Mr. Massey compelled him to revive the scheme in a much
more enlarged form.1 He proposed that:
“In considering the ways and means by which
the additional amount (of one million sterling)
should be raised .....the most convenient mode of
proceeding would be by a partial transfer of charges
of a local character from Imperial to local account.”
As the annual produce of local funds applicable to local
purposes in India did not much exceed two million sterling, it
was proposed to make the moderate addition to this amount
of £1,200,000 in round numbers to be raised in rateable
proportions in the several Presidencies and Local Governments,
and applied in relief of a corresponding amount of charge
for local services then borne by the Imperial revenues. The
above-mentioned sum of £1,200,000 was arrived at by an
assessment of 4 per cent on the estimated revenues of the
several Local Governments (except Burma) for the current
year, after excluding customs duties and the income tax.2
The heads of charges to which the proceeds of the new funds
were applicable were (1) education, (2) police, (3) district
jails, (4) public works, (5) repairs and maintenance of roads.
The list of taxes suggested to provide ways and means
1
Demi-official letter dated February 25, 1866, to the Local Governments.
Papers, etc., on the extension of Financial Powers of Local Governments, p. 67.
2
Ibid, para. 8.
THE COMPROMISE 107
included (1) a license tax on trades and professions, (2) a

house tax, (3) an octroi duty in towns, and (4) a succession
duty on lands which did not pay revenue. The Local
Governments were to be left free, subject to the approval of
the Government of India in Council, to select the particular
tax most suited for being levied in their respective territories
so as to yield the full amount required, after deducting the
cost of collection, and spend the proceeds on the services
mentioned above, on all or any of them, according to their
discretion.
The replies of the Local Governments and administrations
addressed in connection with this scheme, indicated a general
agreement as to the practicability of such a transfer of
charges being made and being met by new local taxation,
though there was also a general disposition to object to
the transfer of charges without a simultaneous transfer of
revenue with which to meet the expenditure on them. Under
the circumstances the Government of India agreed to reduce
the expenditure to be transferred to the Local Governments
to £ 800,000 and to transfer to them the proceeds of the
license tax as a means for making adequate provision for
the same.1 The favourable reception accorded to the scheme
and the sympathetic criticism to which it was subjected led
Mr. Massey to extend and modify it. In his exposition2 of
the new and enlarged scheme Mr. Massey wrote :
“my first object has been to select, for the first series of
charges to be transferred to local authorities, those items
of expenditure which being least susceptible of control by
the Government of India, give as a whole, an amount of
such dimensions as will not be difficult to manage, and
yet will be of sufficient importance to indicate that the
measure is intended to be a reality, and a step towards
the more complete transfer of the financial administration
to the local government. Taking the civil estimates.....
it seems to me, plainly, the most convenient method of
proceeding to transfer a few entire grants or section of
grants, in preference to selecting special items from several
1
Circular letter dated September 19, 1867. Op. Cit., p. 67.
2
The new scheme was outlined at the request of Mr. Massey by Col. R. Strachey
in Note on the Transfer to Local Governments of the Control over Certain Portions
of Public Expenditure, ibid, pp. 51-62.
grants..... By adopting the plan..... no change whatever

in the system of accounts will be called for; and the only
alteration will be, that certain sections of the grants for
various purposes, will be provided in a special manner.
The only exception to this rule..... is in dealing with a
head ‘Miscellaneous’ which..... is rather an incongruous
collection of charges. Among these will be retained, for
transfer to local management, all those items which would
reasonably be termed local..... and the residue..... could
easily be classed under some of the other main heads of
charge. The most important of the charges which I should
propose to transfer is that for ‘Jails’ subordinate to ‘Law
and Justice,’ which may... be taken in lump. The charges for
‘ Registration ‘and’ Tulubana’ also under ‘Law and Justice’
follow. These are met from special fees credited under the
head of ‘Law and Justice’. To set off against these charges,
a transfer of the revenue under ‘Law and Justice’ is also
proposed... Under ‘Education’ the ‘Miscellaneous’ charges
are proposed to be transferred to the corresponding transfer
of the revenue credited under ‘Education’. Next follows the
whole of the charges under ‘Medical Services’ except the
fixed ‘Medical Establishments and Chemical Examiners’.
The entire charge under ‘Stationery and Printing’ is also
taken. Under ‘Police’ the charges met by contributions
from local sources are transferred, including the Railway
Police. Against this is set off the receipts under ‘Police’.
‘Besides the above it is proposed to transfer a portion of
the charges, for the collection of the Land Revenue and of
the Income Tax and License Tax, which... I have assumed
as likely to be levied in future. It has been necessary to
assign a sum sufficient to cover the general charges which
would be transferred and the propriety of transferring
a corresponding portion of the cost of collection seems
apparent. Under the designation of charges of collection
of the Land Revenue were not included the cost of the
Revenue Survey or Settlement as they were exceptional
and variable, though the charges under ‘Allowances to
Village Officers’ were included.
* * * *
“The first and principal transfer of revenue will be a portion
of the Land Revenue, which I propose to fix at 1/16th or one anna in
THE COMPROMISE 109
the rupee. The same rate will govern the proportion of

the charges for collection transferred..........
“The next item of revenue which I assume at one-
fourth of the Income Tax and License Tax, which I shall
suppose to be raised.1
“It is next proposed to transfer the whole of the
receipts under the following heads : (1) Law and Justice,
(2) Police, (3) Education, (4) Miscellaneous, except items
of a financial nature, and also (5) all income under
Police Works excepting that derived from Irrigation. The
items of expenditure under Public Works proposed to
be transferred are (1) Roads, (2) Repairs of Civil Buildings,
(3) Miscellaneous works both new and repairs, and
(4) Tools and Plant.”
The scheme thus enlarged was discussed at length from
various points of view. But though it won the approval of
cautious critics2 the scheme was too large for the Imperialists.
And as the two greatest of them, Lord Lawrence, the Viceroy
of India, and Lord Napier of Merchistoun, Governor of Madras,
disapproved of it, it failed to materialize in consequence of
their opposition.
But unfortunately for the Imperialists, throughout this
decade during which they were stubbornly objecting to any
surgical operation on their patient—the Imperial system of
Finance—it did not show any sign of convalescence. On the
other hand, the delay in the operation aggravated its ills.
Notwithstanding the constant enhancement in taxation and
the reduction in expenditure, the three Chancellors of the
Indian Exchequer sent from England could point to only
three years of surplus during the decade between 1860 to
1870. On the other hand, to the embarrassments due to
constant deficits was added the bewildering breakdown of the
budget system created to bring about order and economy in
1
In thus calculating the share Mr. Massey wrote, “The Income Tax I have
taken at 2 per cent, and I have conceived that it will cease below incomes of
2,000 rupees. The Licence Tax I have supposed to be a trade tax beginning at
the existing limit and going upwards to meet the Income Tax.”
2
Sir Stafford Northcote declared—“We must take care that the solidarity of
Indian Finance is not shaken, and we must provide safeguards against reckless
expenditure. We have a system which has raised the credit of India to the highest
pitch, and therefore I should be the last to disturb it, and would be slow and
cautious in introducing any change. Nevertheless, I repeat that in the principles
of Mr. Massey’s suggestions I concur.”—Hansard’s Parliamentary Debates, Vol.
191, April 23, 1868.
the public finances of the country. Not to speak of its efficiency

as an instrument of economy, the budget system under the
strain due to excessive centralization proved useless even
as an instrument of order. The finances fell into a chaos.
Notwithstanding the elaborate circulars and orders issued with
regard to the accuracy in the framing of the budget estimates,
it was an extraordinary phenomenon which confronted the
Finance Ministers when the budgets, which were begun with
large estimated surpluses, strangely enough closed with large
actual deficits. To what extent the actuals erred from the
estimates may be seen from the following table :
DERANGEMENT OF GOVERNMENT FINANCES 1
Estimate Actual
Deficit— Deficit—
Year
Surplus Surplus
£ £
1866-67 ... ... ... —66,700 —2,307,700
1867-68 ... ... ... 1,628,522 — 923,720
1868-69 ... ... ... 1,893,508 — 2,542,861
1869-70 ... ... ... 48,263 — 1,650,000(est.)
From the above table it is clear that the estimates for

1868-9 and for 1869-70, which were based on the revised
estimates of 1868-69, were expected to end with an estimated
surplus of £1,893,508 and £48,263 respectively. But when the
actuals of the year 1868-69 showed that instead of a surplus
there was to be a large deficit, Lord Mayo, who was in the
meantime appointed to the Viceroyalty of India, became
convinced that if his budget was recast on the basis of these
results, it would close with an actual deficit instead of the
estimated surplus. This financial surprise threw his budget
into confusion, and to restore order he was obliged to adopt the
1
Hunter, W.W., Life of Mayo, Vol. II, pp. 7-8.
The figures for actual deficits given in the Table differ from those given by
Mr. Chapman, Offg. Secretary to the Government of India, F.D., in his Circular
letter of 17-8-1870 to the Government of Bombay communicating to the latter
Lord Mayo’s scheme. According to Mr. Chapman the figures for deficit (actual)
are as follows:—
In 1866-67 the actual deficit was ... ... £2,517,491
” 1967-68 ” ” ... ... £1,007,695
” 1968-69 ” ” ... ... £2,774,031
—cf. Papers, etc., on the extension of Financial Powers of the Local Governments,
p. 243, for the Circular letter referred to.
THE COMPROMISE 111
unusual procedure of addition to taxation and the reduction

of expenditure in the midst of the fiscal year.
The following is a synopsis of the measures he adopted :—
£
I. Additional Taxation
(1) Income Tax raised from 1 to 2½ 320,000
per cent
(2) Enhanced Salt Duty (in Madras 180,000
and Bombay)
Total ... 500,000
II. Reduction of Expenditure—
(1) Education ... 350,000
(2) Public Works ... 800,000
Total ... 1,150,000
Estimated Deficit ... 1,650,000
So grave was the crisis that with all these measures he
could do nothing more than close his budget with an estimated
deficit of £1,650,000 which would have been inevitable had it
not been for certain windfalls such as the recovery of the value
of supplies in the Abyssinian War and the adjustment of other
large outstanding accounts which enabled him to convert his
large deficit into a small surplus. Happy as he was over the
immediate results of his efforts, Lord Mayo was convinced that
there was something rotten in the system of Imperial Finance
and, while anxious not to end it, he courageously set forth
to mend it by inaugurating the scheme of Provincial Finance
represented by the compromise the growth of which will be
the subject-matter of Part II of this study.

PART II
PROVINCIAL FINANCE : ITS DEVELOPMENT
CHAPTER IV
BUDGET BY ASSIGNMENTS
1871-72 TO 1876-77
The origins which led to the formulation of the scheme of
Provincial Budget having been presented in the foregoing part
of this study, we may now proceed to examine the constitution
of the scheme as it was introduced and the changes which it
underwent from time to time.
With his sureness of instinct Lord Mayo traced the financial
deficits and surprises to the inefficiency of the Imperial and
the irresponsibility of the Provincial Governments, and was led
to the conclusion that the inauguration of Provincial Budgets
was the only remedy equal to the malady. But it must be
recalled that the situation was yet dominated by Imperialistic
considerations, and while every one in charge of the affairs was
desirous, even anxious, to ease the situation by some means or
other, few were willing to do so at the cost of Imperial control.
Even Lord Mayo was not without his Imperialistic leanings.
But the force of the baffling circumstances compelled him to
break through the hitherto prevailing spirit of hesitation and
indecision, although the steps he took in determining the
constitution of the Provincial Budget were slow and cautious.
The scheme which actually came to be introduced from the
financial year 1871-2 was first adumbrated in a confidential
circular of the Home Department of the Government of
India, dated February 21, 1870. Enlarging upon the policy of
retrenchment by which the road grant for 1869-70 fixed in
the beginning at £ 1,236,000 came to be reduced at the close
of the year to £1,021,178 and that estimated for 1870-1 at
£ 1,000,000 came to be finally settled at £ 784,839 supplemented
by £ 29,110 for Miscellaneous Public Improvements, the circular
gave the Provincial Governments
“to understand that the diminution that has been made in the
Imperial grant for communications and roads is not a temporary
diminution caused by present financial pressure. It is the result
BUDGET BY ASSIGNMENTS 113
of a settled policy, deliberately adopted, independently

of temporary considerations, and it is far more probable
that in future years the special grant for these purposes
will be reduced than that it will be increased. It therefore
becomes a matter of very urgent necessity that no time
should be lost in providing from local sources the funds
necessary for the maintenance of the existing provincial
and district roads, and for the construction of the new
lines of communications which become every day more
necessary.”
That local wants should be met by local resources had
been the ideal of Indian financiers during the entire period of
its reconstruction. But that the view had by that time passed
beyond the stage of academic discussion is obvious, for the
Circular stated that “the Governor-General in Council had fully
resolved that he will insist on full effect being given to this
principle” in future. Many of the Local Governments took the
sentiments of the Government of India conveyed in the Circular
in all the seriousness in which they were meant to be taken
and had begun to develop their local resources. In the Bombay
Presidency a cess of 6¼ per cent. on the Land Revenue was
levied and two-thirds of it was set aside for roads and works
of public utility. The Madras Government under an old Act
of 1866 levied a cess of one-half of an anna on every rupee of
annual rental equal to 3⅛ per cent. on the Land Revenue for
purposes of district roads. The Bengal Government had declared
its intention to follow the Madras Presidency. Encouraged
by the steps taken by these Local Governments the Circular
urged upon other Local Governments and Administrations in
Northern India, namely, North-Western Provinces, Punjab,
Oudh and Central Provinces, to consider the expediency of
increasing their road cesses on the land revenue to 5 per cent.
The object of the move evidently was to relieve the Imperial
treasury of the road grant, once the Provincial Governments
were in possession of adequate local revenues.
In this way the Circular contemplated a very meagre
scheme of Provincial Budget, incorporating only the
charges on local public improvements and the revenues
derived from local resources to meet them. But before it
could be set into operation the financial difficulties of the
Government of India called for a larger measure of relief.
Bad as the position already was, there was little confidence
to be placed in the stability of the opium revenue; and,
while there was practised a retrenchment in expenditure, the

charges for interest on public debt was found to swell enormously.
In the midst of such a percarious situation the Government of India
decided to reduce the hitherto prevailing rate of the income tax in
order to silence the outcry raised against it by the richer classes.
As a possible method of ways and means to meet the additional
deficit of £1,000,000 that was expected to arise from the reduction
in the income tax rate, the Government of India issued another
Confidential Circular, dated August 17, 1870, in which a much
wider scope was given to the contemplated scheme of provincial
Budgets. It was stated in this Circular that
“If the income tax was to be reduced, the ways and means
of government must be otherwise recruited..... preferably.....
through the agency of Local Governments, and by adopting
such methods of taxation as are considered most suitable to
each province and least burdensome to the people.”
The method of throwing the burden on Local Governments
consisted in making over to them charges of certain departments
of the administration more or less local in character with a net
grant on them for 1870-1 reduced by a million sterling.1 It was
proposed to distribute this sum among the various provinces in
the proportion which the net provincial grant of each bore to the
total net grant and leave them free to make up their respective
quota of retrenchment either by redistribution, retrenchment, or
taxation.
After the concurrence of the Provincial Governments had
been obtained to the plan of the Circular, it was announced by
the famous Financial Resolution of December 14, 1870, as being
adopted for execution from the commencement of the Financial
year 1871-2.
We will now proceed to analyse the constitution of the Provincial
Budgets as framed by this Resolution. Taking first the expenditure
side of the Provincial Budget, it may be noted that the charges
for the following Imperial services were incorporated into it:—
*1. Jails.
1
Net grant means total expenditure on a service minus the receipts from the service.
*Appendix B of the Resolution gives a schedule of certain works for which separate
funds were to be provided from the Imperial Revenue. They were Buildings and Offices
of the following Departments :—
Opium (not including the Board of Revenue’s office in Calcutta).
Mint and Currency.
Post Office.
Telegraph.
Offices of the Supreme Government.
Viceregal Residences.
Imperial Museum.
Stamp and Stationery Office Calcutta.
Treasury Buildings
Bhishop’s Palace
Godavery Works Reserved as Imperial for the present.
Karachi Harbour Improvements
Such Military Roads as have been till the current year provided for from the grant for
“Military Works”.
2. Registration.
3. Police.
4. Education.
5. Medical services (except Medical establishments).
6. Printing.
7. Roads.
8. Miscellaneous, Public Improvements.
9. Civil Buildings.
To provide the Provincial Governments with funds to
meet the above charges incorporated into their budgets the
Government of India surrendered to them the receipts which
accrued from services handed over to them with an additional
assignment from the Imperial fisc to bring about an equilibrium.
The receipts surrendered and assignments granted to the Local
Governments were as follows:—
Assignments made to Provincial Governments for services
incorporated into their Budgets by the Financial Resolution
No. 3334 dated December 14, 1870.
Imperial Assignments for Services
Services incorporated
into Prov. Budgets Oudh C.P. BL Bengal N.W.P. Punjab Madras Bombay Total
Burma
£ £ £ £ £ £ £ £ £
Jails ...
26,922 27,881 32,777 218,210 88,394 58,204 91,983 73,440 617,811
Registration ... ... 3,509 ... 36,609 20,129 11,623 22,970 25,372 120,212
Police ... 103,269 130,607 139,253 555,757 348,135 289,950 350,730 388,703 2,306,409
Education ... 26,056 27,864 10,998 234,385 103,528 64,909 90,052 118,271 676,063
Medical services 5,049 11,770 6,460 89,713 27,607 24,935 61,696 74,852 302,532
(except Medical
establishments)
Printing ... 7,609 3,640 3,000 41,732 25,302 14,106 25,840 27,050 148,279
Roads and misc. public 32,900 63,403 63,000 157,800 82,636 84,200 123,880 121,900 729,819
improvements
Civil buildings ... 20,090 14,406 23,959 111,370 63,341 39,710 58,506 107,500 438,882
Public Works 13,777 20,230 22,635 69,984 37,954 32,217 47,421 59,644 303,862
Establishments
Tools and Plant ... 1,060 1,556 1,741 5,383 2,920 2,478 3,648 4,588 23,374
Total ... 237,182 304,866 303,923 1,520,943 799,946 622,332 876,726 1,001,320 5,667,243
Estimated Receipts of the Services

Jails ... 1,575 6,000 9,420 110,385 11,154 ... 7,300 664 146,498
Registration ... ... 5,500 ... 40,000 35,030 20,694 34,000 30,141 165,356
Police ... 10,566 12,520 18,671 70,363 51,730 41,724 32,350 14,000 251,944
Education ... 1,482 ... 500 42,012 11,050 5,000 6,900 10,480 77,424
Printing ... 1,080 ... ... 2,000 2,160 ... 1,260 ... 6,500
Total ... 14,723 24,020 28,591 264,760 111,124 67,418 81,810 55,285 647,731
Grand Total of net 222,459 280,846 275,332 1,256,183 688,822 554,914 794,916 946,040 5,019,512
assignments
Constituted on the basis of figures given in the Resolution of December 14, 1870
These would have been the total assignments to the

Provincial Governments for meeting the charges on the
incorporated services, had it not been for the fact that the
Government of India desired to obtain relief by way of
retrenchment of the provincial resources to make up for the
deficits expected to follow the reduction in the income tax. The
relief originally fixed at £1,000,000 was reduced to £350,000,
distributed rateably among the various provinces. Taking
account of these retrenchments the permanent assignments
made to the provinces were as shown below:—
Provinces Next Proportion of Permanent
Assignments Retrenchment Assignments
£ £ £
Oudh ... 222,459 15,511 206,948
C.P. ... 280,846 19,583 261,263
Burma ... 275,332 19,199 275,332
Bengal ... 1,256,183 87,591 1,168,592
N.W.P. ... 688,822 48,030 640,792
Punjab ... 554,914 38,693 516,221
Madras ... 794,916 55,428 739,488
Bombay ... 946,040 65,965 880,075
Total ... ... 5,019,512 350,000 4,688,711
For conversion into Rupees, £1 equal to Rs. 10.
Before the commencement of the time appointed to carry the
scheme into practice the Government of India incorporated the
following additional services1 into the Provincial Budgets :—The
Charges for Petty Construction and Repair of Buildings in the
Civil Department excepting the Opium Department in Bengal,
the Salt Department outside the Lower Provinces of Bengal
and Medical Services such as (1) Salaries of Medical Officers of
Medical Colleges and Central Jails, and of Lunatic Asylums at
the Presidency towns; (2) Extra allowance to Medical Officers
for the Medical charge of Lunatic Asylums in the mofussil, and
of Colleges, Central Jails, etc., also extra allowances to Medical
Officers for the executive charge of jails, and (3) charges for sub-
assistant Surgeons and Apothecaries employed in other than
civil medical charge of the sudder stations or districts, and for
all other subordinate medical establishments. Side by side with
these transfers the Government of India withdrew the Calcutta
1
Finance Department Resolution No. 1659 of March 20, 1871.
IMPERIAL ASSIGNMENTS FOR 1871—721
Oudh. C.P. Bt. Bengal N.W.P. Punjab Madras Bombay Total
Burma
Assignment as per Resolution of December ... £ £ £ £ £ £ £ £ £
14,1870 1,69,355 205,271 192,488 1,176,406 613,095 463,727 643,271 707,693 4,171,306
Add—
Official Postage ... 1,551 5,093 ... 4,893 10,840 8,031 4,163 4,311 38,882
Transfer from Medical Services ... 2,139 1,767 745 6,649 5,624 2,828 7,597 8,500 35,849
Transfer of petty construction and repairs of 699 1,778 420 6,508 2,555 1,908 1,050 4,050 18,968
Civil Buildings
z:\ ambedkar\vol-06\vol6-03.indd
Other items net ... ... ... ... ... ... 7,866 1,485 ... ... 4,600 13,753
633,599 4,278,758
Deduct—
MK
Transfer of Ajmere charges to Government ... ... ... ... ... 28,714 ... ... ... 28,714
of India
Total ... 173,744 213,909 193,653 1,202,124 604,885 476,494 656,081 729,154 4,250,044
Deduct—
Receipts per budget of 1870-1 ... ... 14,723 24,020 28,591 260,578 109,992 67,418 81,810 55,285 642,417
SJ+YS
Net charge in Civil Department ... ... 159,021 189,889 165,062 941,546 494,893 409,076 574,271 673,869 3,607,627
Add budget grant for P. W. as per Res. of 14-12-1870,
viz—
Roads and miscellaneous public improvements ... 32,900 63,403 63,100 157,800 82,636 84,200 23,880 121,900 729,819
Civil Buildings ... ... ... ... 20,090 14,406 23,959 111,370 63,341 39,710 58,506 107,500 438,882
P.W. Establishments ... ... ... 13,777 20,230 22,635 69,984 37,954 32,217 47,421 49,644 303,862
Tools and Plants ... ... ... ... 1,060 1,556 1,741 5,383 2,920 2,478 3,648 4,588 23,374
BUDGET BY ASSIGNMENTS
Total public works ... 67,827 99,595 111,435 344,537 186,851 158,605 233,455 293,632 1,495,937
Grand total ... 226,848 289,484 276,497 1,286,083 681,744 567,681 807,726 967,501 5,103,564
Deduct—
Proportion of £350,000 ... ... ... 15,557 19,853 ... 88,199 46,753 38,931 55,394 66,351 331,038
25-9-2013/YS-11-11-2013
Revised permanent assignment ... ... ... 211,291 269,631 276,497 1,197,884 634,991 528,750 752,332 901,150 4,772,526
Or in round numbers ... ... ... 211,300 269,600 276,500 1,197,900 635,000 528,800 752,300 901,200 4,772,600
2
Add—India ... ... ... ... ... ... ... ... ... ... ... ... 26,700
Total ... 4,799,300
1
Based on the Fin. Dept. Resolution No. 1660 of March 20,1871.
2
The item opposite to” India” in the above table is for the Calcutta University and for Prov. services (not including Public Works) in
Coorg, Ajmere and other district under immediate administration of the Government of India.—Sir Richard Temple’s Financial Statement
117
117
for 1871-2.
University from the Provincial to the Imperial Budget.1 To take

account of the revision of charges for Official Postage,2 and Bengal
Police,3 and the additions and withdrawals of services referred
to above, the Imperial assignments to Provincial Governments
for the year 1871-2 were further altered so that they stood as
shown in the table on the preceding page.(Page 117)
Besides these assignments for the fiscal year 1871-2, the
Government of India gave the Local Governments a special
donation of £200,000 in the year 1870-1 in order that they
“may be able to inaugurate the plan successfully, and to have
as it were a fair start.” Taking round numbers then, the
several Provincial Governments had the following resources4
at their disposal in the year 1871-2 to meet the expenditure
incorporated in their budgets :—
Resources
Receipts Assignments
Provincial Budget for surrendered from the Total
by the Imperial Imperial Treasury
Government
£ £ £
Oudh 14,700 211,300 226,000

Central Provinces 24,000 269,600 293,000
Burma 28,600 276,500 305,100
Bengal 264,800 1,197,900 1,462,700
N.W. Provinces 110,000 635,000 745,000
Punjab 67,400 528,800 596,200
Madras 81,890 752,300 834,100
Bombay 55,300 901,200 956,500
Having analysed the constitution of the Provincial Budgets

and noted the receipts and charges incorporated into them, we
will proceed to inquire into the peculiarity which marks their
constitution as framed in 1870-1. No method of ascertaining this
peculiarity would be more direct in its approach towards the
question raised above than to ask ourselves what problem the
framers of the Provincial Budgets were presented with and how it
1
Letter from the Secretary to the Government of India, Finance Department,
No. 1683 dated March 21, 1871.
2
3
4
Financial Statement of 1871-2.
was solved. From our knowledge of the history of the controversy

that raged over the creation of Provincial Budgets we can say
that what items of expenditure to incorporate into Provincial
Budgets was no longer a prominent question of the time. Long
since it was settled that there were charges in the Imperial
Budget of a purely local character. By common consent they
were regarded as the most unsatisfactory part of the Imperial
Budget. It was admitted on all hands that, knowing nothing
about these charges, the Government of India was either
obliged to sanction an unnecessary charge which may have
been carelessly endorsed by the head of a department having
no immediate interest in guarding against the waste of public
money, or by a too cautious spirit of a random parsimony, or by
parsimony regulated only by the state of public revenue, refuse
its sanction and check prudent and profitable expenditure. As
either procedure was likely to cause mischief, it was commonly
agreed that such matters over which the Central Government
by its supreme ignorance was powerless to exercise any control,
should be transferred from the direct purview of the Imperial
Government to the immediate control and responsibility of
the Provincial Government. One side of the problem had thus
been solved by sheer force of circumstances. The matter on
which all attention was mainly concentrated was the problem
of providing the Provincial Governments with funds sufficient
to meet the charges incorporated into their budgets. It was
allowed on all hands to be reasonable that the receipts arising
from the incorporated services should be appropriated by the
Provincial Governments. Two good reasons were advanced for
adopting such a procedure. It is laid down as a canon of good
finance that tax administration and tax appropriation should go
as far as possible together. On this principle it was but proper
to have allowed the Provincial Governments to appropriate the
receipts from the services which they administered. But there
was also another weighty reason which influenced this decision.
The main idea in the inauguration of Provincial Budgets
was to interest the Provincial Governments in a judicious
and economical management of the finances, and one way of
sustaining their interest in the same was to have given them
the receipts of the services they managed. The receipts, however,
were so small a portion of the total funds necessary to meet
the provincialized expenditure that the problem of balancing
the Provincial Budgets remained unsolved notwithstanding.
Two possible ways of solution were before the Government
of India at the time : either to transfer for provincial uses
certain sources of Imperial revenue or to give a lump assignment

from the Imperial treasury. It was difficult for a time to decide
which was the more suitable of the two, for they were not
only of unequal merits, but they made different appeals to
the different parties concerned. To the Provincial Government
assignment of revenues was preferable to fixed assignments as
giving greater elasticity to their finances. To the Government
of India, on the other hand, assignment of revenues seemed
to be fraught with grave consequences. The past and the
existing financial condition of India did not warrant the Central
Government to alienate the sources of revenue it then possessed
with equanimity and safety for the future. On the other hand,
its prospective condition looked as precarious as its past, and
it therefore desired to retain its control over the sources the
mobilization of which alone could enable it to stave off any
impending crisis. The second alternative, on the other hand,
was just such a one as to give the provinces sufficient funds
without the Government of India forfeiting its control over its
resources. It must not be forgotten that the Government of India
by reason of its constitutional position had the sole authority
to manage and appropriate the revenues of India. Any solution
for financing the provinces had therefore to be in accord with
its interests as conceived by itself. This being the situation the
method of assignments was adopted in preference to that of
assigned revenues in solving the principal problem that arose
in connection with the constitution of provincial budgets.
It is because assignment of funds from the Imperial
treasury was adopted as a method of supply to balance the
Provincial Budgets that the system instituted in 1871-2 has
been characterized in this study as a system of Budget by
Assignments.
This principle on which the Provincial Budgets were
constructed in 1871-2 endured till 1876-7. The assignment
made to the Provincial Governments for the year 1871 -2 had
been declared to be fixed and recurring. Recurring they were,
but fixed they were not; for, every year, since the start, the
Government of India kept on adding to and withdrawing from
Provincial Budgets items of charge already incorporated in
them. In accordance with these modifications in the incorporated
charges the Imperial assignments had to be either reduced or
augmented as necessity dictated. The progressive changes in the
assignments from 1871-2 to 1876-7 with the specific purposes for
which they were granted are entered in the following tables :—
Statement of Imperial Assignments to the Provinces

for the year 1871-72
Amount Assigned
Purpose of the Assignment
Details Total
Rs. Rs.
Original Assignment ... ... ... 1,19,79,000
Add—
For Cemetery establishments ... ... ... 4,000
„ Compensation for Agra Brick Factory ... ... 28,000 1,14,000
„ Office and House Rent ... ... 82.000
1,20,93,000
Deduct—
For transportation charges for convicts ... ... 15,000

,, fees for licensing cargo-boats 2,600 1,24,690
,, receipts of public Works Departments ... ... 1,07,000
1,19,68,310
Special Grants
Add—
For Calcutta University ... ... ... 60,000
„ Midnapore Civil Court Buildings ... ... 31,680 3,41,680
,, Calcutta Small Causes Court Building ... ... 2,50,000
1,23,09,990
Total Assignments for 1871-72 ... 1,23,09,990

Purpose of the Assignment Amount Assigned
Details Total
Rs. Rs.
Original Assignment ... ... ... 1,19,79,000
Add—
Permanent additions in 1871-2 (as above) ... ... 1,14,000
For Miscellaneous services ... ... ... 2,67,070 3,88,936
,, books and publications ... ... ... 7,600
,, ground-rent of Orphan School at Howrah ... 266
1,23,67,936
Deduct—
Permanent deductions in 1871-2 (as above) ... ... ... 1,24,680 1,30,390
For repairing charges of University ... ... 5,700
1,22,37,546
Special Grants
Add—
For Burdwan Fever Relief ... ... 1,00,000
Compensation for Sudder Court Building ... ... 4,00,000 9,66,670
Capital value of annual, rent of Rs. 21,000 for public
4,66,670
offices
1,32,04,216
Deduct fractions ... ... ... 380
Total Assignments for 1872-3 ... 1,32,03,836

Amount Assigned
Details Total
Rs. Rs.
Permanent Assignment for 1872-3 as above ... 1,22,37,546
Add—
For payment of Medical Officers in charge of Civil stations 3,85,000 4,85,000
For Land Revenue Sub-divisional establishments ... 1,00,000
1,27,22,546
Deduct—
Reduction of rent for public offices ... ... 21,000 21,000
1,27,01,546
Sanctioned for 1873-4 ... ... ... 1,27,01,000
Add for—
Ground rent for Howrah Orphan School ... ... 266
Charges on account of European vagrants ... ... 11,500 18,066
Ground rent charges ... ... ... ... 6,300
Deduct—
For pay of medical pupils withdrawn from provincial 5,400
to Imperial. 3,90,400
For pay of medical officers in charge of civil stations ... ...
3,85,000
withdrawn from provincial to imperial.
Special Grants. 1,23,28,666
Add—
For rent of Small Cause Court ... ... ... 14 400
Total Assignment ... 1,23,43,066
Amount Assigned
Details Total
Rs. Rs.
Add—
Assignment for encouragement of Mohammedan 50,000 50,000
education
Sanctioned assignment ... ... ... 1,23,78,000
Add—
Grant on account of Model Farm ... ... ... 7,000 8,180
Additional grant for ground-rent ... ... ... 1,180
1,23,86,180
Deduct—
Reduction of outlay on account of churches and 14,314
burial grounds
Reduction on account of Assam transferred ... ... 13,30,000 13,44,580
For ground rent Howrah Orphan School 266
Total Assignment sanctioned ... 1,10,41,600

Amount Assigned
Details Total
Rs. Rs.
Add—
Grant for Botanical gardens ... ... ... 52,500 53,680
” ” Ground rents ... ... ... 1,180
1,10,94,680
Deduct—
Public Works charges on account of the Salt Department 13,683
Assignments on account of lighthouses and ships 1,769 33,163
withdrawn
Assignment on account of Town Improvement Fund of 17,711
Assam
Amount Assigned
Details Total
Rs. Rs.
Original Assignment for 1875-6 ... ... ... 1,10,41,000
Add—
For ground rents ... ... ... ... 1,180
” Botanical Gardens ... ... ... 52,500 53,680
1,10,94,680
Deduct—
Public Works charges for Salt Department ... ... 13,683
1,10,80,997
Deduct—
For Form Store Department ... ... ... 8,034
Add— 6,034
For Exhibitions and Fairs ... ... ... 2,000
Total ... 1,10,74,963
Assignment as sanctioned ... ... ... 1,10,75,000
Add—
Grant on account of Bankee and Ungool Estates ... 3,271
Cost of the snake-poison commission, establishments 6,000 58,753
and contingencies.
Grant on account of census registers ... ... 49,482
1,11,33,753
Deduct—
Assignment on account of lighthouses and lightships 1,769
withdrawn.
Assignment of Town Improvement Fund, Assam ... 17,711 22,180
Annual cost of lunatics transferred to Tezpore Lunatic 2,700
Asylum.
This completes the account of the services incorporated

from time to time and the assignments made for them by the
Imperial exchequer during the period in which the system of
budget by assignments remained in force. It now remains to
consider whether the system under the assignment plan was a
success. What constitutes success is a question which is always
open to discussion, for what may seem successful from one point
of view may be the reverse of it from another standpoint. A
discussion, however, of this aspect of the question cannot be
avoided, for it was on the results of one stage that an advance
towards the second was made to depend all throughout the
expansion of Provincial Finance. As the definition of success
varies with the standpoints, we must first ascertain them for
the purpose of our investigation. Let us therefore inquire into
the possible parties whose standpoints counted in the moulding
of Provincial Finance, and without whose satisfactory opinion
about the results achieved, a new step in advance could not
have been taken. The Government of India and the Provincial
Governments were obviously the two principal parties.
Naturally their standpoints were different, if not antagonistic.
The question prominent in the mind of the Government of
India was how big was the gain to the imperial treasury on
the transfer. On the other hand, the Provincial Governments
were concerned to know whether the resources offered by the
Government of India were adequate enough for their safely
accepting the responsibility of managing the incorporated
expenditure. It is obvious the Provincial Governments would
not undertake the responsibility of managing the Imperial
expenditure within a certain assignment unless they were sure
that the assignments were adequate. Similarly, the Imperial
Government would see no advantage in making the transfer
unless the Provincial Governments undertook to manage the
expenditure at a sum less than what it cost under the direct
management of the Imperial Government. Adequacy to the
provinces and gain to the Imperial treasury were therefore the
two chief considerations which prevailed in the determination
of the continuance and expansion of the scheme. The people
of the Provinces may also be conceived of as a third possible
party whose concurrence may have been deemed a necessary
factor in the situation. What their view-point would have
been is not altogether a matter of guess. On the other hand,
anyone sufficiently acquainted with the nature of popular
demands for political advancement could easily imagine that the

most urgent concern of the taxpayers would have been neither the
well-being of the Imperial nor that of the Provincial Governments,
but the distribution of the money they paid along the different
channels of expenditure; and if their approval of the results of
the scheme had been made a necessary condition of advance, it is
probable that the development of Provincial Finance would have
been along different lines.
There was a suggestion even at that time that the people of
the country should have some voice in the financial arrangements
of the country. In paragraph 19 of its Resolution of December
14, 1870, announcing the scheme of Provisional finance, the
Government laid down that
“Each local Government will publish its own Provincial
Service Estimates and Accounts in the local Gazette, together
with a financial exposition (which should, where possible, be
made before the local Legislative Council) analogous to that
annually made in the Legislative Council of the Governor-
General.”
If this suggestion had materialized, the Indian taxpayer would
have obtained a voice in determining the financial arrangements
between the Government of India and the Provincial Governments.
There were, however, certain legal difficulties in the way of giving
effect to this suggestion. If the Budget was introduced in the
Council and debate had followed upon it, such a proceeding would
have offended against Section 38 of the Indian Councils Act (24
and 25 Vic. c. 67) and would have, therefore, been illegal unles
the Budget involved some proposal for tax legislation. For, that
Act had provided that the activity of the legislative Council should
not be called into play except for strictly legislative purposes.
If, on the other hand, there was to be no debate, there was no
advantage in this mode of giving publicity to the Budget which
was not equally secured by its publication in the official Gazette.
As a solution of these difficulties, the Government of Madras
proposed1 to the Government of India.
“that the Provincial Budget should form a schedule to
an Appropriation Bill, the contents of which would, after all
the necessary explanation and discussion, be voted section by
section.”
But the Government of India, which had first broached the
subject, was shocked by this suggestion as being revolutionary.
In reply2 it observed:—
1
Letter to the Government of India, Finance Department, No. 147 of April
18, 1871.
2
Legislative Letter to Madras dated July 11, 1871, No. 765.
“2. His Excellency in Council does not..... consider that

the plan proposed..... for bringing the annual financial
statement within the terms of the Indian Council’s
Act, would be appropriate or possible. The passing of
the Appropriation Bill in the House of Commons is a
proceeding by which authority is given to carry into effect
the Resolutions of the House in Committee of Supply which
till the passing of the Appropriation Bill are not law. The
Bill enumerates every grant that has been made during
the whole session, and authorizes the several sums voted
by the Committee of Supply to be issued and applied to
each separate service. It also contains a provision that the
various aids and supplies shall not be issued or applied
to any other uses than those mentioned.
“3. Such a proceeding would, His Excellency in Council
considers, be out of place in India, and might have the
effect of transferring from the Executive to the Legislative
Council, the power of disposing of all public moneys.
His Excellency, therefore does not consider that the
introduction of an Appropriation Bill would be advisable.”
Against this ruling the Government of Madras appealed to
the Secretary of State1 and pleaded that either the proposal
of an Annual Appropriation Act be approved or
“such an alteration in the Council’s Act be made as
will allow the financial statement to be legally made and
discussed in the Local Legislative Council.”
But the Secretary of State upheld the decision of the
Government of India2 on the ground that
“such mode of procedure is only applicable in a
representative assembly, which has full powers of control
over the Executive, and any such powers Parliament has
advisedly withheld from the Legislative Council of India.”
The suggestion was therefore dropped and was not given effect
to till 1921. As the voice of the people did not prevail3 in the framing
of the financial contracts between the Imperial and Provincial
1
Letter from the Government of Madras, Financial Department, dated September
19, 1871, to the Secretary of State and the whole of the correspondence accompanying it.
2
Legislative Despatch No. 4 to the Government of India, dated January 18, 1872.
3
In fact the point that decentralization should not be extended unless it was followed
by devolution of political and financial power on the representatives of the people
was not specifically raised till 1908, and that too only by the late Hon. Mr. Gokhale
in his evidence before the Royal Commission on decentralization of India, q.v.
Government, it is of no immediate advantage to seek for results

that would have interested them to know, if they had been
allowed their say in the matter. In so far then the results of
the past influenced the policy of the future we have only to lay
ourselves out to seek for results in which the two remaining
parties to the contract were primarily interested, namely,
gain to the Imperial treasury and adequacy to the Provincial
Governments. Applying ourselves first to the test of adequacy
to the provinces the results of the period may be gauged from
the annual surpluses and deficits in the finances of each of
the different provinces brought within the pale of the system
of Provincial Budgets.
PROVINCIAL SURPLUSES AND DEFICITS
Province 1871-2 1872-3 1873-4 1874-5 1875-6 1876-7
£ £ £ £ £ £
C.P. ... 20,988 —8,423 2,268 13,108 8,307 16,800

Bt. Burma ... 27,634 33,832 —9,922 —21,889 —5,471 5,100
Assam ... ... ... ... 5,159 590 9,833
Bengal ... 180,622 74,622 393,955 271,044 27,397 46,978
N.W.P. and Oudh 31,595 64,036 36,358 11,693 20,945 128,501
Punjab ... 109,828 28,008 —33,347 —117,644 —92,724 26,908
Madras ... 40,787 —19,264 —56,381 4,303 —14,210 504
Bombay ... 65,553 128,805 —64,373 9,929 —18,354 —140,718
Compiled from the annual Finance and Revenue Accounts of the Government
of India for the respective years.
It is evident from these figures that the surpluses
outnumber the deficits in frequency and magnitude to such
an extent that the deficit could have been easily met from
the accumulated balances without seriously exhausting
them. Care, however, must be taken in explaining the cause
of this apparent prosperity of Provincial Governments. Did
the province succeed in building up their balances from the
savings from the assignments and receipts made over by the
Imperial Government is what we have to find out. The answer
to this question cannot be given in a categorical form, for the
total resources and changes to which the above figures refer
include more than the receipts and assignments set apart
for provincial management. Besides Imperial assignments
and receipts of incorporated services they include a part
of what hitherto were known as Local Funds. It must be
recalled that long before the separation of provincial from
Imperial Finance there was created since the year 1855 a

separation between the Imperial and Local Finance in British
India. The Local Funds when separated were under the
immediate management of the several Provincial Governments
and comprised of two different classes : (a) those which by law
or custom were required to be spent within the districts in
which they were collected and on the specific objects for which
they were collected; and (b) those collected all throughout
the province and over the disposal of which the Provincial
Government possessed unrestricted discretion. When the
scheme of provincial Finance was inaugurated it was deemed
natural to merge the second class of Local Funds into the
Provincial Funds. The total addition made thereby to the
provincial resources it is difficult to ascertain. But it ‘ was
the opinion of Sir John Strachey, the Finance Minister of the
time,1 that such addition was “ inconsiderable” and could not
therefore have affected materially the financial consequences
of the new system2 .
The question of estimating the gain to the Imperial treasury
need not detain us very long. The indirect gain due to the
economical management of the services by the Provincial
Governments will come for discussion when we come to consider
the influences that played a prominent part in bringing
about the second state in the evolution of Provincial Finance.
The direct gain made by the Imperial treasury was effected
throughout the retrenchment in provincial assignments already
referred to. It may be recalled that the Government of India
had planned to obtain relief to the extent of one million sterling
annually on the services transferred,3 but the Government of
India soon realized that all this retrenchment would necessitate
some taxation by the provincial authorities. The burden had
already grown since the Mutiny, and being anxious not to add
to it directly by Imperial levy or indirectly through provincial
levies, it decided to reduce the relief it sought by lowering the
retrenchment on provincial assignments from £ 1,000,000 to
£350,000, or more accurately to £ 350,801 if we deduct, as we
must, the sum of £ 19,199 restored to Burma, being its quota
of relief owing to the special circumstances of that province.
1
See his Minute, dated March 15, 1877, appended to the Financial Statement
for 1877-8.
2
This amalgamation was, however, abandoned with effect from 1876 to enable
the Government of India to ascertain the financial consequences of the new system
as compared with the old.
Summing up the results of the period, the Government of

India, it must be said, realized full share of the benefits it had
contrived to obtain by the annual relief of £330,801, though
not without causing an insufficiency, however small, in the
Provincial finance. But notwithstanding the burden thrown on
the Provinces their position as disclosed by the results cannot
by any means be called unhappy.
One unwelcome feature marred the inauguration of
Provincial Finance. That feature consisted in the large increase
in the levy of rates and cesses for purposes of local improvement.
Receipts from New Resources of Income and Cesses
enhanced since 1870
1870-1 1871-2 1872-3 1973-4 1874-5 1875-6
£ £ £ £ £ £
Oudh—
Ord. cesses on :
Land Revenue ... 38,813 29,018 34,354 34,259 33,208 33,146
Margin Fund ... 7,363 3,461 ... ... ... ...
Local rate ... ... 36,810 42,535 42,883 41,097 41,461
Total ... 46,176 69,289 76,889 77,142 74,305 74,607
Assam—
Ord. cess on land:
Rev. Old Fund ... 6,506 4,333 711 1,916 17,149 ...
New Fund ... ... ... ... ... 15,267 16,300
Total ... 6,506 4,333 711 1,916 32,416 16,300
Bengal—
Road Cess Fund: ... ... 22,917 59,039 120,128 158,516
N. W. Provinces ... 168,532 201,548 216,818 213,672 215,968 150,619
Punjab ... 58,330 214,441 216,194 208,063 211,862 193,573
Madras—Road Cess ... 212,813 234,567 377,031 368,031 371,311 369,325
Madras—Tolls Cess ... ... ... 12,144 12,234 14,860 26,531
Grand Total ... 492,357 724,178 922,704 940,333 1,040,850 980,545
*Balances recovered from Bengal on account of Road and Government Estates
Improvement Fund.
For the new resources of income and cesses given above, refer to Papers, etc.,
on the extension of the Financial Powers of the Local Governments, p. 494.
This shows an increase in 1875-6 over 1870-1 of £488,188,
chiefly by raising the cesses in the North-West Provinces, the
Punjab and the Madras Presidency to 6¼ per cent. on Land
Revenue in the two last mentioned, to about 5 per cent, in
the North-Western Provinces (after deducting the rural police
charge); by a road cess in Bengal and by granting an assignment
to Assam, at the Imperial charge, of 6¼ per cent. instead of 3 per cent.

on Land Revenue pending the levy of a cess of a corresponding
amount on the ryots. In the Bombay Presidency the 6¼ per cent.
was imposed some years before and hence is not included in the
above table. The only province which did not levy any additional
cess was the Central Province, though a cess of 6¼ per cent, on
the Land Revenue was in 1870 considered practicable but not
opportune.
Of what benefit, a cynic may say, was the institution of
Provincial Finance if it did not obviate the necessity for further
taxation ? If further taxation was unavoidable, why did the
Imperial Government throw the onus of facing it on the Provincial
Government under the garb of Provincial Budgets when it would
have done that itself ? It must be said in reply that the merits of
Provincial Finance are to be looked for in other directions, and it will
be shown in its proper place that they justified its institution, even
though a certain amount of enhanced taxation followed in its wake.
It would indeed be unwise to decry against taxation in general,
for no benefit can be obtained without a charge. But it would be
equally unjust not to protest against the kind of taxation resorted
to, for what really mattered was not the increase of taxation but
the inequity of taxation. The method of taxation resorted to to
make up the deficit in the Provincial Finance was an imposition of
rates and cesses on the already over-burdened class of tax-payers,
namely the landholders. Now the services incorporated into the
Provincial Budgets, for whose support these rates and cesses were
levied, though called local, were not more local in the sense of their
being beneficial to the particular localities than those retained by
the Imperial Government. On the other hand, the former were from
the standpoint of the localities as onerous to them as the latter,
and yet they were financed by rates and cesses levied from the
localities as though they were directly beneficial to them, which
as a matter of fact they were not. This is all the more lamentable
when it is recalled that the necessity for retrenchment which caused
the levy of these rates and cesses was occasioned by the abolition
of the income tax. As a matter of justice we should have expected
the continuance of the income tax to the relief of the State and
the ratepayers. But justice was for a long time absent from the
Financial Secretariat of the Government of India. A few cared for
it in the abstract, but none looked upon it as an element worthy of
consideration in providing for the exigencies of provincial or local
finance; and as it was unrecognized, its violation by the Provincial
Governments was no bar to the development of Provincial Finance.

CHAPTER V
BUDGET BY ASSIGNED REVENUES
1877-78 TO 1881-82
The scheme of Provincial Budgets, the second stage of
which we shall presently study, was launched not without
mixed feelings. Boundless hopes were entertained, though not
unmingled with a sense of misgiving. Just what was expected
of the scheme may be correctly gauged from the remarks of
Sir Richard Temple, who, when introducing the scheme in
1870, said :—
“We hope that this concession (of increased control over
revenues and expenditure) will give the Local Governments
an additional interest in the study and the enforcement of
economy in expenditure; will afford them a just inducement to
supplement their local receipts from time to time by methods
either most acceptable to the people or least fraught with
popular objection; will cause a more complete understanding
to arise between the executive authorities and the tax-paying
classes respecting the development of fiscal resources; will
teach the people to take a practical share in the Provincial
Finance, and lead them up gradually towards a degree of local
self-government; and will thus conduce to administrative as
well as financial improvement.”1
While entertaining these hopes he also took the opportunity
of asking the Council to be prepared for disappointment, for
he went on to remark:
“the hopes which I am expressing, however sanguinely,
or confidently entertained, are after all but hopes, and
like all other hopes may or may not be fairly realized.
But let all this eventuate as it may, sure I am with
certainty free from shade of doubt, that the measure is
advantageous to the Imperial Budget of British India. For
it will have the direct effect of definitely limiting, for the
present, the expenditure from the general Exchequer on
certain important branches of civil expenditure, the very
branches indeed, where, from the progressive state of the
age, the demands for increased outlet have most arisen,
1
Annual financial statement for the official years 1860-1 to 1873-4, with
Appendices : Calcutta, Office of the Superintendent of Government Printing,
1873, p. 348.
and in which from the nature of the case the supreme Central
Authority is least able to check the requirements of the local
authorities.”
The actual results, however, far surpassed these very moderate
hopes and were more than necessary to dispel the misgivings that
still lingered in the minds of those who looked upon the institution
of Provincial Finance as a project of doubtful utility. Confining
ourselves to the issues immediately affecting the Government of
India or the Provincial Governments, it was abundantly proved
that Provincial management was more economical than Imperial
management. If we compare the expenditure incurred upon the
services while they were an Imperial charge with the expenditure
on them after they were provincialized, the superior economy of
provincial management is overwhelmingly proved.
Total excess Expenditure
on all Transferred
Total excess Expenditure
Services except
on all Transferred Services
Registration over
except Registration over Total
Total Receipts from
Year Receipts from them inclusive Year
them inclusive of all
of all Contributions other
Contributions other
than those for Bengal Famine
than those for Bengal
under Imperial management
Famine under Provincial
management
£ £
1863-4 5,111,297 1871-2 4,835,238
1864-5 5,606,248 1872-3 4,964,407
1865-6 5,587,779 1873-4 5,329,180
1867-8 5,821,438 1874-5 5,379,509
1868-9 6,030,214 1875-6Est. 5,135,677
1869-70 5,856,310
1870-1 5,197,250
Complied from an official volume of Notes on Imperial, Provincial and Local
Finance, 1876.
It was therefore with confirmed belief in its utility and even
with a sense of relief that the Government of India proceeded to
incorporate into the Provincial Budgets additional services local in
character or more amenable to local control. But these additions to
the incorporated services made the problem of a supply of funds
to Provincial Governments assume greater proportions. In the
first period the gap between the receipts of incorporated services
and the total charges for them was comparatively smaller than
what it was found to be the case on the present occasion. The
mode of bridging the gap entirely by assignments was deemed
to be ill-fitted for the success of the scheme in its enlarged form.
The most radical defect in the system of budget by assignment
consisted in its rigidity. The provinces did not favour it as a mode
of supply for the reason that while the outlay on the services under
BUDGET BY ASSIGNED REVENUES 133
their management continued to expand the assignments

made to them remained fixed in amount. Sir John Strachey,
to whom belonged the credit of carrying the scheme a stage
further, was particularly alive to this weakness of the system.
In place of fixed assignments he desired to give the provinces
certain sources of revenue, the yield of which largely depended
upon good management. His primary object in doing this, no
doubt, was to make better and more elastic provision for the
growing needs of the provincialized services. But he had also
another, and, as he conceived it, a far more important reason
in the substitution for assignments of assigned revenues. That
economy was the fruit of good management had by that time
become a commonplace, but few were sure as to what good
management consisted in. it was Sir John Strachey who, for
the first time, defined in unmistakable language his notion
of good management, which was since his time applied in an
everincreasing degree in the development of Provincial Finance.
To him good management of finance was to be had
“not by any action which gentlemen of the Financial
Department or by any other department of the supreme
Government can take whilst sitting hundreds or thousands
of miles away in their offices in Calcutta or Simla; not
by examining figures or writing circulars, but by giving
to the Local Governments...... a direct and, so to speak,
a personal interest in efficient management.”1
And in this he had the strong support of recent experience;
for, taking the results of the past stage the provinces not only
managed the services at a lesser cost to the revenue than was
the case under the Imperial regime, but the services yielded
increased revenue under the more immediate and fostering care
of the provinces than they did under the remote, uninformed,
and therefore impotent vigilance of the Imperial Government.
Sir John Strachey had long held to the view that so long
as the Provinces collected the revenues for the Government
of India they did not care to check evasion, which they would
have surely done if they had collected them for their immediate
benefit, or, as he put it,
“when the Local Governments feel that good administration
of branches of revenues will give them, and not to the
Government of India alone, increased income and increased
means of carrying out the improvements which they have at
1
Financial Statement, 1877-8.
RECEIPTS FROM INCORPORATED SERVICES
134
Allocated Services Under Imperial Management Under Provincial Management
1865-6 1867-8 1868-9 1869-70 1870-1 1871-2 1872-3 1873-4 1874-5 1875-6
£ £ £ £ £ £ £ £ £ £
Jails ... 89,260 96,910 141,218 133,806 128,773 149,888 195,755 271,915 297,198 326,023
MK
Police ... 140,166 231,859 277,179 287,529 270,855 203,624 97,735 90,708 80,509 89,895
SJ+YS
Education ... 53,256 66,869 67,207 72,848 60,740 76,789 80,869 101,306 99,537 101,909
Registration ... 86,997 127,070 153,488 165,048 147,152 155,262 171,735 121,470 172,111 184,461
Printing ... 3,333 3,282 2,803 3,718 9,244 10,923 14,383 21,174 18,220 18,066
Medical ... ... ... ... ... 3,273 20,594 30,649 36,370 43,097 26,583
25-9-2013/YS-11-11-2013
Miscellaneous ... 4,070 5,666 4,076 4,489 6,116 20,991 31,345 32,396 39,666 36,234
DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES
Compiled from the same source referred to above.

134
heart, then, and not till then, was to be had the good
administration that every one desired.”
This evidence of the expanding receipts of provincialized
services were therefore a pleasant surprise which went a
great way in confirming the view he had advocated. It was
therefore for a double purpose, of augmenting the revenues
and of introducing elasticity in Provincial Finance, that
Sir John Strachey substituted assigned revenues for
assignments as a mode of supply to the provinces.
The plan adopted by Sir John Strachey was not new,
neither was it brought forward for the first time. It was
present in the minds of the people who took part in the
discussions of Provincial Finance in 1870, and was actually
advocated by Sir John Strachey as early as 1872.1 That the
Government of India did not look upon the plan with favour
in 1870 was due to the fact that it was afraid to permanently
alienate the sources of revenue on the growth of which its
stability depended. By now, however, the financial position
of the Government of India had a bit improved, and the six
years’ trial of provincial management had also engendered a
greater confidence in the scheme in the minds of those who
had never completely accepted the administrative utility of
the project. To this was added the prospect of the plan being
a means of increased productivity in their resources as it had
been of increased economy in expenditure. The force of all
these factors combined to bring a new stage in the evolution
of Provincial Finance which, because of the distinct mode of
supply adopted, may be well designated as a stage of Budget
by Assigned Revenues.
To be sure, assignments still formed a part of the new
system. But that was because of the difficulty of assigning
such revenues the yield of which would have been precisely
equal to the incorporated expenditure. Under any circumstances
there was sure to be some difference. It happened that the
normal estimated yield of the ceded revenues fell short of the
requirements and the margin of difference had to be made up
by some adjusting assignment in the case of each province.
The method of fixing the adjusting assignment for the
different Provinces was on the whole a little too complicated, and
may therefore be conveniently explained before proceeding to
examine the constitution of the Provincial Budgets of the different
Provinces as laid down under the second stage of their growth.
1
See his Minute dated July 27, 1872.
It must be borne in mind that the total resources of the

Provinces were made up under this system of (1) the receipts
accruing from the incorporated services, (2) the yield of the
revenues assigned, and (3) the adjusting assignment. How to fix
upon an adjusting assignment for a particular Province was a
question involving nice calculations. Before arriving at a definite
figure for the adjusting assignments it was obviously necessary
to have settled the normal yield of the receipts of incorporated
services and of the revenues made over. The assessment of the
normal yield was a contentious matter. As a rough and ready
method the Government of India took the average yield of each
over a series of years as the normal yield, and made it the
basis from which to calculate the assignments. Similarly on the
basis of the annual growth of the revenues in the past years
it assumed a certain normal rate of increase for each of the
sources, so that the normal for the succeeding years exceeded
the normal for the preceding year at the normal rate of annual
progression assumed. And as the normal yield of the assigned
revenues increased at their assumed normal rate of growth
the assignments fixed for the subsequent years diminished in
like proportion. This normal rate of growth assumed for the
assigned revenues was sometimes an assumption unjustified
by their past productivity. At all events, as a higher rate of
increase meant lessened assignments, the Provinces questioned
its magnitude. To pacify the Provinces and to make due
allowances for errors of estimating, the Government of India
made a very ingenious concession. It agreed that if the actual
results showed deviations from the estimated normal yield,
either below or above, they should be equally divided between
the provincial and Imperial Governments. If the actual yield
was greater than the normal the adjusting assignment from
the Imperial Government fixed for the year would be reduced
by half the excess, and if it were less than the normal the
assignment would be increased by half the deficit.
All this very delicate mechanism was adopted primarily for
the advantageous manner in which it enabled the Government
of India to adjust the assignments without undue hardship being
inflicted on either party. But there was also another advantage
which, though unperceived at the time, was none the less
effective. The consent secured from the Provinces to bear half the
burden of a possible deficit in the normal estimate directly

put a premium on economical and judicious administration of
the ceded revenues. If the Government of India had agreed to
bear the whole of the deficit below the estimated normal, it is
doubtful whether the Provinces would have exerted themselves
sufficiently to develop their resources to such a degree as to
bring their yield to the level of the normal. But the fear that
their obligation to bear half the deficit might assume a larger
proportion, which would undoubtedly be the case if there was
a great falling off in the revenue, compelled them to bestow
greater vigilance than they would otherwise have done. Whilst
an effectual check on relaxation was thus provided the scheme
was not wanting in a stimulus to exertion. The prospect of
gaining half the excess over the normal gave a more direct
stimulus to the Provinces to develop their resources beyond
the normal than would have been the case if the total excess
had been entirely appropriated by the Imperial Government.
In short, the deterrent effect of a deficit to bear and the
stimulating effect of a gain to reap made the mechanism of
Provincial Finance as perfect as it could be made from the
standpoint of economy in expenditure and productiveness in
resources.
Having noted the factors that led to the conception and
execution of this new step in Provincial Finance and the features
which marked its novelty, we may now proceed to the study
of the constitution of Provincial Budgets and the revenue and
charges that were incorporated into them. Unfortunately it is
impossible to present a conspectus of Provincial Budgets as a
whole, for the charges were not uniformly incorporated in all
the Provincial Budgets. Each Province was treated individually.
This compels us to enter upon the analysis of the Provincial
Budgets as they were reconstituted in 1877-8 separately for
each of the different provinces.
North-Western Provinces and Oudh1
The budget of the Province was recast rather than enlarged
by additions to the already allocated items, as was the case
with regard to some other Provinces. In its new form the
budget of the Province incorporated the following heads of
expenditure and revenue:—
1
Financial Department Notification No. 1807, Gazette of India, Part I, March
31, 1877, p. 172.
HEADS OF CHARGES HEADS OF REVENUE

3. Refunds of all Assigned Revenues.
4. Land Revenue (excepting settlements, I Land Revenue—collections
allowances to district and village officers, from the Terai
and Bahbar estates and
and special temporary compensations to the Dudi estate in Mirzapore
covenanted civil servants in N.W.P.) and from slone quarries.
6. Excise IV Excise.
10. Stamps. IX Stamps.
14. Administration (excepting Account and
and Currency Officers).
16. Law and Justice (excepting special XIII Law and justice.
temporary allowances to covenanted civil
servants in N.W.P.)
17. Police. XIV Police.
19. Education XVI Education.
21. Medical (excepting the pay of Medical
Officers in charge of civil stations).
22. Stationery and Printing.
28. Miscellaneous (excepting remittance of XX Miscellaneous (excepting
treasure and any unenumerated item “Gain by Exchange,”
exceeding Rs. 10,000). “Premium on Bills,”
unclaimed Bills and
unenumerated items
exceeding Rs. 10,000 each).
Public Works Ordinary; Roads and Public Works Receipt such
miscellaneous public improvements, as appertained to the Public
civil buildings (except opium, post office Works charges incorporated
and telegraph buildings) and tools and into the Provincial Budget.
plants; also whole of the Public Works
establishment of the P.W.D. excepting
that in the Military works and irrigation
branches; the imperial government
paying towards their cost 20 per cent
on the outlay from the imperial funds
and works and repairs executed by the
establishment.
In assigning the heads of revenue the Government of India
added the proviso that
“the Governments of North-Western Provinces and Oudh
must surrender to the Imperial treasury half of any sum by
which the net revenue from Excise, Stamps, and Law and
Justice (omitting Jails and Registration), deducting Refunds
under these heads and the charges under 6, Excise and 10,
Stamps, exceeded Rs. 83,75,000”
and agreed to reimburse the province with a sum equal to half
the deficit if the yield fell below the above sum. This adjustment
was effected by operating upon the balances of the Province so
that if the expenditure of the North-Western Provinces and Oudh
upon the incorporated services exceeded the enumerated revenues
plus any Provincial contribution in support of them by less than
Rs. 83,75,000, the difference was to be added to; and if such excess
expenditure was more than Rs. 83,75,000 the difference was to
be deducted from the balances of the Government of

the Northwestern Provinces and Oudh in the Imperial
treasury.
Bengal
Items of Expenditure incorporated Grant as Retrench- Proposed
in the Bengal Budget existing ment Consolidated
in 1877-8 Grant
3. Refunds of Revenue from Excise, 4,91,000 ... 4,91,000
Stamps, Law and Justice, and of
Deposits.
4. Land Revenue (Collectors, Deputy 22,62,000 ... 22,62,000
Commissioners, etc. Establishments
and charges on account of Land
Revenue Collections).
6. Excise on spirits and drugs ... 2,92,000 ... 2,92,000
8. Customs ... 6,93,000 ... 6,93,000
9. Salt ... 39,000 ... 39,000
11. Stamps ... 2,38,000 ... 2,38,000
15. Administration (excepting Account 12,61,000 ... 12,61,000
Office, Allowances to Presidency
Banks, Stationery Office at
Presidency and stationery purchased
in the country).
16. Minor Departments (excepting 1,68,000 ... 1,68,000
meteorological and archaeological
departments, census and gazeteers).
17. Law and Justice (excepting Law 63,97,000 1,00,000 62,97,000
Officers).
18. Marine ... 10,92,000 ... 10,92,000
23. Political (Govt. House Police Guard). 7,000 ... 7,000
26. Miscellaneous (excepting remittance 25,000 ... 25,000
of treasure).
Stationery and Stamps ... 4,98,000 50,000 4,48,000
27. Provincial allotment as now existing 1,10,59,000 4,40,000 1,06,19,000
Maintenance of Bishop’s Palace, etc. 7,000 ... 7,000
Total ... 2,45,29,000 5,90,000 2,39,39,000
The budget of the Province of Bengal was enlarged rather 1
than recast by additions to the already incorporated heads of

revenue and expenditure. For the second stage of the scheme
the Government of Bengal was made responsible for the charges
shown in the above table.
1
Gazette of India, Part I, March 31, 1877, p. 174.
To meet these charges the following revenues were handed

over to Bengal for its use :—
ASSIGNED REVENUES (ooo omitted)
Esti- Estimated Yield at the assumed

mated Rate of Growth
Heads of Revenue Yield
in 1877-8 1878-9 1879-80 1880-1 1881-2
1876-7
Rs. Rs. Rs. Rs. Rs. Rs.
IV Exercise in spirits and 6,300 6,400 6,500 6,600 6,700 6,800

drugs
VI Customs (see, Customs 3,600 3,600 3,600 3,600 3,600 3,600

Misc. and Warehouses and
Wharf rents).
VII Salt (Rents of Warehouses, 220 220 220 220 220 220
fines and forfeitures and
misc.).
IX Stamps 10,300 10,575 10,850 11,125 11,400 11,675
XIII Law and Justice
XIV Marine (pilotage receipts, 1,091 1,084 1,084 1,084 1,084 1,084
registration and other fees
and misc.).
XVI Misc. (all except premium 771 792 792 792 792 792
on bills, unclaimed bills,
and any unenumerated
item exceeding Rs. 10,000).
Total ... ... 22,671 23,076 23,421 23,596 24,171

Complied from statements in the Gazette of India referred to above.
But as the revenues assigned were not sufficient for meeting

the incorporated charges transferred, after taking account of the
excesses over normal to be paid to the Government of India,
the Government agreed to make the following assignments
from the Imperial treasury to the Government of Bengal:—
Year Assignments
Rs.
1877-78 ... ... ... 48,32,000
1878-79 ... ... ... 44,57,000
1879-80 ... ... ... 40,82,000
1880-81 ... ... ... 37,07,000
1881-82 ... ... ... 33,32,000
Central Provinces1
In the case of the Central Provinces the following additional
items were incorporated in its budget:—
Proposed
Grants as
Retrench- Net
Heads of Charge already fixed
ment Consolidated
for 1877-78
Grants
Rs. Rs. Rs.
Refunds of Excise, Stamp, Law and 47,000 ... 47,000
Justice and Miscellaneous.
Excise ... ... ... ... 52,000 ... 52,000
Stamps ... ... ... ... 14,000 ... 14,000
Land Revenue exclusive of settlement 6,66,000
charges
Administration (exclusive of Account 3,39,000
and Currency Office).
Minor Departments (exclusive of 4,000 90,000 17,74,000
Meteorology and Archaeology).
Law and Justice ... ... ... 6,91,000
Stationery and Stamps ... ... 69,000
Miscellaneous (excepting Remittance of 5,000
Treasure and Discount on Supply
Bills.
Add—
Existing allotment for provincial ... 27,73,000 ... 27,73,000
services
Total Grant for Services to be borne 46,60,000 ... 45,70,000
upon the Central Provinces Budget.
To meet these charges the Government of Central Provinces

was authorized to appropriate the yield of the following sources
of revenue :—
Estimated Estimated Yield at the Assumed
Heads of Revenue Assigned Yield in Rate of Growth in
1876-7 1877-8 1878-9 1979-80
Rs. Rs. Rs. Rs.
Excise ... ... ... 13,90,000 14,50,000 15,10,000 15,70,000
Stamps ... ... ... 9,70,000 9,75,000 9,80,000 9,85,000
Law and Justice ... ... 1,67,000 1,75,000 1,83,000 1,91,000
Miscellaneous (excepting 7,000 7,000 7,000 7,000
Premium on Bills, undrawn
Bills of Exchange and
any unenumerated items
Total ... ... 26,07,000 26,80,000 27,53,000

Compiled from the Gazette referred to above.
1
Gazette of India, Part I, dated June 2, 1877, p. 274.
As these revenues were insufficient the Government of India

undertook to supplement them by the following assignments
from the Imperial exchequer:—
Year Assignments
Rs.
1877-78 ... ... ... 19,63,000
1878-79 ... ... ... 18,90,000
1879-80 ... ... ... 18,17,000
These assignments were, however, subject to change

because of the proviso applying to the assigned revenues. By
virtue of that proviso the Government of India was to claim
half the net increase of their combined annual yield over the
estimated normal and was to bear half the deficit if their
actual combined yield failed short of the normal. If there
was an increase above the normal the assignments were to
be reduced by a sum equal to half the increase, and if there
was a decrease the assignments were to be increased by a
sum equal to half the decrease.
Bombay
Coming to the Provincial Budget1 of the Bombay Government
we find the following charges were incorporated in it:—
Grant as
Retrench- Consolidated
Heads of Charge already fixed
ment Grant
for 1877-8
Rs. Rs. Rs.
3. Refunds ... ... ... 1,10,000
4. Land Revenue ... ... ... 65,07,000
6. Excise ... ... ... 80,000
7. Customs ... ... ... 8,09,000
8. Salt ... ... ... 5,69,000
14. Administration ... ... ... 11,43,000
15. Minor Departments ... ... 1,13,000
16. Law and Justice ... ... ... 43,12,000 5,67,000 2,13,96,000
18. Marine ... ... ... 31,000
20. Ecclesiastical ... ... ... 3,25,000
21. Medical ... ... ... 2,68,000
22. Stationery and Stamp ... ... 2,29,000
24. Allowances and Assignments ... 64,81,000
26. Superannuation allowances ... ... 8,00,000
28. Miscellaneous ... ... ... 28,000
Add—
Existing allotment for provincial 1,04,54,000 ... 1,04,54,000
services
Total ... 3,24,17,000 5,67,000 3,18,50,000
1
Gazette of India, Part I, dated August 4, 1877, p. 468
Besides the receipts accruing from the already incorporated

services the Government of India assigned to the Government
of Bombay the following sources of revenue :—
ASSIGNED REVENUES (ooo omitted)
Esti- Estimated Yield at the Assumed
Heads of revenue mated Rate of Growth in
assigned Yield in
1876-77 1877-8 1978-9 1979-80 1880-1 1881-2
Rs. Rs. Rs. Rs. Rs. Rs.
I Land Revenue 5,199 6,624 6,624 6,624 6,624 6,624
(receipts of Inamdari
adjustments and
service commutations).
IV. Excise ... ... ... 3,946 4,000 4,100 4,200 4,300 4,400
Stamps ... ... ... 4,186 4,300 4,350 4,500 4,550 4,600
Law and Justice ... ... 277 270 270 270 270 270
Total ... ... 8,570 8,720 8,970 9,120 9,270
Miscellaneous (excepting 52 70 70 70 70 70
gain by exchange, premium
on Bills, and on Money
Orders, lapsed Money
Orders, Sales, Proceeds
of Durbar Presents and
unenumerated items—
Total ... ... 15,264 15,414 15,664 15,814 15,964
Compiled from the Gazette of India.
The adjusting assignments to cover the difference between

the expenditure and revenue incorporated in the Bombay
Budget were as follows :—
Year Assignments
Rs.
1877-78 ... ... ... 1,53,20,000
1878-79 ... ... ... 1,51,70,000
1879-80 ... ... ... 1,49,20,000
1880-81 ... ... ... 1,47,70,000
1881-82 ... ... ... 1,46,20,000
These assignments, it must be noted, were subject to the
same proviso as obtained in the case of the Central Provinces.
Punjab
The only remaining Provincial Budget that was framed

on the principle of assigned revenues was that of the Punjab.
The heads of charge incorporated in this budget were as

hereinafter specified—
Grant as Proposed
Settled Retrench- Net
Heads of Incorporated Expenditure
for ment Consolidated
1877-8 Grant
Rs. Rs. Rs.
Refunds ... ... ... 65,000
Land Revenue, exclusing settlement 16,21,000
charges ...
Excise ... ... ... ... 58,000
Stamps ... ... ... ... 72,000
Administration (excluding Account and 9,74,000
Currency Offices and settlement
Secretary).
Minor Departments ... ... ... 16,00,000 2,24,000 51,38,000
Law and Justice ... ... ... 20,94,000
Superannuation and Retired 3,38,000
Allowances, Compasionate
Allowances and Gratuities.
Miscellaneous, excluding 41,000
Remittances of Treasure.
Stationery and Stamps ... ... 83,000
Add—
Existing allotments for provincial ... 54,22,000 ... 54,22,000
services
Total ... 1,07,84,300 2,24,000 1,05,60,000
To defray these charges it was proposed to assign the
following revenues to the Government of the Punjab :—
Net
Revenue Estimated Net Yield in
Heads of Revenues Assigned
in
1876-7 1877-8 1878-9 1879-80
Rs. Rs. Rs. Rs.
Assessed Taxes ... ... ... ... 12,00,000 12,00,000
Stamps ... ... ... ... 24,85,000 25,05,000 25,25,000
Law and Justice ... ... ... 4,15,000 4,15,000 4,15,000

Excise ... ... ... ... 10,30,000 10,50,000 10,70,000
... 39,30,000 39,70,000 40,10,000

Miscellaneous (excluding gain ... 60,000 60,000 60,000
by Exchange, premium on
Bills, and unclaimed Bills of
Exchange).
Total ... ... 39,90,000 52,30,000 52,70,000
In making over these revenues the Government of India had
reserved to itself a share of the improvement in the net yield from
Stamps, Law and Justice, and Excise. The estimated net yield
having fallen short of the estimated expenditure the

Government of India agreed to make the following assignments
to the Government of the Punjab in order to restore balance
in its budget:—
Less Share of
Improvement in Net
Revenue from Net
Year Assignment
Excise, Assignment
Stamp, Law and
Justice
Rs. Rs. Rs.
1877-8 ... ... 65,70,000 107,000 64,63,000
1878-9 ... ... 53,40,000 85,000 52,55,000
1879-80 ... ... 53,10,000 ... 53,10,000
It should be noted that the Government of Madras refused to
undertake the responsibility of a provincial Budget based upon
the new principle of assigned revenues. It preferred to remain
on the old basis. Provincial Budgets of Assam and Burma
are not included in this chapter. As the principle involved in
their constitution appertains to the study undertaken in the
following chapter it is deemed expedient not to include them
in the present.
Before closing the study of the second stage in the
development of Provincial Budgets it is advisable to take
stock of the results achieved during its prevalence from the
standpoint of sufficiency to the Provincial Governments and
gain to the Imperial exchequer. The following is illustrative
of the results of this stage from the standpoint of sufficiency
to the provinces :—
Annual Surpluses or deficits
Provinces
1877-8 1878-9 1879-80 1880-1 1881-2
£ £ £ £ £
C.P. ... ... 5,992 7,049 —28,133 2,956 95,221
Bengal ... 173,380 158,932 82,523 —11,313 255,189
N.W.P. and Oudh ... 4,469 237,100 320,729 280,790 667,613
Punjab ... 18,578 48,195 7,017 59,497 135,979
Bombay ... —609,672 61,249 —11,201 37,855 418,783
Compiled from the Finance and Revenue Accounts of the Government of India.
From this it is clear that except in Bombay the funds provided
by the Imperial Government proved not only sufficient for the
purpose of carrying on the services incorporated in the Provincial
Budgets, but were such as to afford a safe margin of revenue over
expenditure. That the provinces had enough and to spare

is clearly proved by the assistance which they gave without
much detriment to their finances to the Imperial Government
in the years 1879-80 and 1880-1. In the year 1879 the
financial position of the Imperial Government had become
rather critical. The fall in the value of the rupee and the
commencement of hostilities with the Afghans were expected
to bring about a deficit estimated in 1879-80 at £ 1,395,000.
As the first line of defence the Government of India urged
on the several Local Governments and Administrations
the necessity of reducing the ordinary expenditure of the
country within the narrowest possible limits and directed
that measures for suspending or postponing all optional
expenditure, whether Imperial, Provincial, or Local, should
be adopted forthwith and that no proposals for increase of
salaries or establishments should be entertained without
real necessity.1 As a second line of defence the Government
of India ordered that until further—
“arrangements could be settled with the Local
Governments... no new work estimated to cost more than
Rs. 2,500 shall be commenced at the cost of the Imperial
or Provincial Funds, even though it may already have
received the sanction of the Government”2
and decided to make large reductions in the expenditure on
productive public works. When it was discovered that these
restraints on expenditure were not enough to bring about
an equilibrium in the Imperial Budget the Government
of India adopted a plan of levying benevolences on the
provincial balances as a better alternative to increased,
taxation. It was, of course, an abrogation of one of the
most fundamental conditions of Provincial Finance that the
Provincial Balances, though in possession of the Imperial
Government, were a sacred trust to be released only when
required by the provinces. But the solvency of India was
deemed to be more sacred than the sanctity of the terms
of Provincial Finance. Accordingly the following sums were
appropriated by the Imperial Government from the balances
of the provincial Governments :—
Resolution of the Financial Department, No. 4063, dated November 9, 1878.
1
2
Finance Department Resolution of May 1, 1879, Gazette of India, Part I,
May 3,1879, p. 329.
Contributions to the Imperial Government

Province
1879-80 1880-1 Total in Lakhs.
Rs. Rs. Rs.
N.W.P. ... ... ... 10 10 20
N.W.P. ... ... ... 7½ 7½ 15
Bombay ... ... ... 4 4 8
Punjab ... ... ... 3 3 6
Burma ... ... ... 3 3 6
Central Provinces ... ... 2½ 2½ 5
Madras ... ... ... 2 2 4
Assam ... ... ... 1½ 1½ 3
Total ... 33½ 33½ 67
These contributions were repaid in 1882-3; but for the

time being they were in effect a gain or at least a relief to
the Imperial treasury. The real gain to the Imperial treasury
consisted in the retrenchments made in assigning allotments
for services transferred to provincial management. The amount
of retrechment secured in the case of each of the provinces
may be summarized as follows :—
Province Retrenchment
Rs.
N.W. Provinces ... 3,54,000 5 per cent. of the total allotment.
Oudh ... ... 73,000 ,, ,, ,,
Bengal ... ... 5,90,000 ,, ,, ,,
Central Provinces ... 90,000 ,, ,, ,,
Bombay ... ... 73,000 ,, ,, ,,
Punjab ... ... 2,41,000 ,, ,, ,,
This does not exhaust the total gain reaped by the

Imperial Government. Two other ways of gain must also be
mentioned along with this. It should be borne in mind that
by taking the standard yield of the assigned revenues at a
level higher than what was justified by their history, the
Government of India was able to assign reduced sums for the
provincial services than what it would have been required
to do if the standard yield had been fixed at a lower level.
This reduction in assignments owing to abnormal estimates
of the ceded revenues was a direct gain. The excesses
above the standard also opened additional possibilities of

gain owing to the clause governing the cessation of revenues,
although it must be recognized that under the same clause
the Government of India stood to lose in the eventuality of
the actual revenue falling below the standard. How much it
gained from, these conditional channels of gain it is difficult
to say. On the whole, it cannot be denied that the gain to the
Imperial treasury was substantial.
Thus the results show that the scheme of Provincial Finance
on the basis of assigned revenues was a success both from
the standpoint of the Provincial and Imperial Governments,
so that they agreed mutually to make a further move in the
development of the scheme which constitutes its third stage.

CHAPTER VI
BUDGET BY SHARED REVENUES
1882-83 TO 1920-21
At every step in the direction of enlarging the Provincial
Budgets the crucial question, as has already been pointed out,
was with regard to the difficulties of balancing the revenues
and charges proposed to be incorporated therein. The two steps
heretofore taken, one in 1871 and another in 1877, in the
direction of the evolution of Provincial Finance, were marked
by two distinct methods of balancing the Provincial Budgets.
On the former occasion the Imperial Government supplied the
Provincial Governments with fixed lump sum assignments from
the Imperial treasury. On the latter occasion this mode of supply
was partly replaced by assigning certain sources of revenue
for the use of provincial Governments. The plan of assigned
revenues, though it went a great way to remove the most serious
defect of the measures of 1871-2, which transferred to the Local
Governments the responsibility of meeting charges which had
an undoubted tendency to increase, with income which, although
not quite fixed, had little room for development, fell short of
the requirements of Provincial Finance from the standpoint
of elasticity. Superior to those of 1871 though they were, the
measures of 1877 were so short of the fullest requirements of
elasticity in finance that the Government of Madras refused
to accept the enlarged scheme and preferred to abide by the
arrangements of 1871. The scheme of 1877 was not offered to
Burma or Assam. But when the Government of India made
such an offer in 1879 it was obliged to turn over a new leaf,
for, though the difficulty of meeting expanding charges with
fixed assignments was overcome in some of the provinces by
economy and good management, it was considerably felt by
the province of Burma. The expenditure of the province in
the seven years preceding the scheme of Provincial Finance
aggregated to Rs. 1,98,45,970, while the assignments for the
following seven years, aggregated apart from special additions,
Rs. 2,20,22,770, showing an excess of Rs. 21,76,800, in all or
about 3 lakhs a year. But the expenditure during the same

period amounted to Rs. 2,40,77,885, being an excess of
Rs. 42,31,915 in all or about 6 lakhs a year. The difference
therefore between the excess assignment of 3 lakhs, and the
excess expenditure of 6 lakhs a year, had to be made good
by the Imperial Government by special grants averaging 23/4
lakhs every year to maintain the solvency of the Province.1
The Government of India while making the supplementary
assignments was not unconscious of the demoralizing effect of
such doles. In fact it was admitted that it would have been
much better to have augmented the provincial assignments
to Burma by 22½ lakhs at the start had it foreseen the
necessity for it, than to have been obliged to grant an equal
amount in the form of supplementary aids so detrimental to
economy and good management. The experience of Burma had
driven home the fatuity of assignments as a mode of supply
and the Government of India had realized that elasticity in
revenues was a vital condition for the success of Provincial
Finance. To assign revenues to Burma was therefore inevitable.
Being overborne by the needs of the Province and by the
fact that the Province yielded a substantial surplus to the
Imperial treasury, the Government of India conceded that
the Province was “entitled to have its real wants supplied
more liberally than heretofore.”2 It is in the method adopted
for the purpose of giving a liberal treatment to the province
of Burma that the new step in the method of supply to the
Provinces was taken. In the settlements made in 1877-8 with
the five Provinces—Central Provinces, N.W.P. and Oudh, the
Punjab, Bombay and Bengal—the Heads of Account under
Revenue and Expenditure comprising the Indian Budget were
grouped under two distinct categories : (1) wholly Imperial and
(2) wholly Provincial. But in the case of Burma the Heads
of Account were grouped under three distinct categories :
(1) wholly Imperial, (2) wholly Provincial, and (3) jointly
Imperial and Provincial.3 In so far as items of revenue and
expenditure were in the exclusive keeping of the Imperial or
the Provincial Government, the settlement did not differ in
spirit from that obtaining in other provinces. The difference
consisted in carving out a third category of Account to be
made of jointly Imperial and Provincial. By it certain revenues
1
Finance Department Resolution No. 1488 dated March 26, 1879, para. 2.
2
Ibid., para. 22.
3
Financial Statement, 1879-80, para. 24.
BUDGET BY SHARED REVENUES 151
and charges were marked off from the rest and were shared
between the Imperial and the Provincial in some definitely
fixed proportion. The object of the arrangement was to replace
rigidity in the Provincial revenues by elasticity. In the finances
of the other Provinces there was elasticity in so far as their
assignments were replaced by assigned sources of revenue. But
to the degree in which their revenues were made up of fixed
assignments their finances inevitably suffered from rigidity. In
the case of Burma, however, the substitution of shares of growing
revenues for fixed assignments gave complete elasticity to the
Provincial revenues without which it had become so difficult
to shoulder the responsibility of meeting expanding charges.
In recasting the framework of the Provincial Budget of Burma
on the principle of shared revenues, all the heads of receipts
and charges were made wholly Provincial, with the exception
of the following, which were treated as wholly Imperial :—
(1) The Army ... ... Receipts and Charges.
(2) Post Office ... ... ” ” ”
(3) Telegraph ... ... ” ” ”
(4) Account Department ... ” ” ”
(5) Meteorological Department ... ” ” ”
(6) Political ... ... ” ” ”
(7) Remittance of Treasure and Premium ” ” ”
on Bills of Exchange and unclaimed
Bills of Exchange.
The third category of revenues and charges, namely, jointly
Imperial and Provincial, covered the following items :—
(1) Land Revenue, including capitation tax, but excluding
Fisheries, with such Land Revenue Refunds, charges
of collection and settlement as cannot be attributed to
Fisheries only.
(2) Forest revenue. Expenditure and Refunds.
(3) Export Duty on rice, and Refunds.
(4) Salt Revenue, Expenditure and Refunds.
Items comprising the third category were divided between the
Imperial and Provincial Governments in the proportion of five-
sixths to the former and one-sixth to the latter. By adopting this
method of supply Burma, unlike other provinces, secured funds
of an elastic character, for, even though the shares remained
fixed the amount they brought in in any one year varied with the
variation in the total yield of the revenues assigned or shared. Of
course everything depended upon how Burma nursed the revenues
delegated to its control. But if it did its duty, unlike the other
provinces, its labours were not to be unrequited.
The same principle of shared revenues was applied to the
province of Assam, which had hitherto continued on the old
basis of 1871. Although the settlement with that Province
had been made after that with Burma had been carried out,
the principle of shared revenues as a mode of balancing the
Provincial Budget was not adopted on any appreciable scale.
The reason for this break in the progressive realization of the
principle is not to be attributed to any spirit of hesitation on
the part of the Government of India, but is to be ascribed
mainly to the necessity of the case. As it was contemplated to
reincorporate the province into Bengal it was deemed expedient
to frame the Provincial Budget of Assam on the same plan as
that of Bengal so that their financial fusion might be as easy as
the administrative. Thus the heads of revenue and expenditure
which were provincial in Bengal since 1877 were also made
provincial in Assam in 1879, including “Law Officers,” which
for temporary reasons were reserved as Imperial in Bengal. The
only point at which the new principle was applied consisted
in making the Land Revenue head in Assam a joint head to
be shared by the Imperial and the Provincial Governments in
the proportion of four-fifths of its net yield to the former and
one-fifth to the latter.1
The beneficial results of the new settlement with these two
Provinces are easily to be seen from the following comparative
table of the estimates of their budgets as prepared on the old
basis and as recast on the new :—
000 omitted
Assam Budget Estimates Bt. Burma Budget Estimates
Old Basis New Basis Old Basis New Basis
1878-9 1879-80 1878-9 1879-80 1878-9 1879-80 1878-9 1879-80
£ £ £ £ £ £ £ £
Revenue ... 2115 2110 3657 3596 4013 4078 9459 9673
Expenditure ... 2253 2261 3480 3566 4169 5111 8926 10119
Surplus ... ... ... 177 30 ... ... 533 ...
Deficit ... 138 151 ... ... 156 1033 ... 526
Closing ... 206 55 521 555 873 161 1562 1436
Balance
From the Resolution of the Government of India in the Department of Finance
and Commerce, No. 1249, dated March 13, 1879.
1
Finance Department Resolution No. 1598, dated April 17, 1879.
Once the new principle of shared revenues was established

in the case of Burma and Assam it was not possible for the
Government of India to withhold its application from the other
Provinces. The settlements made in 1877 with the several
Provinces were not only of short duration but were also of
unequal durations. It was only in the case of Bengal and Bombay
that the settlements were made for five years commencing
from 1877-8. In the case of the Central Provinces and the
Punjab the period fixed was three years, while in the case
of the North-Western Provinces it was as short as two years,
from 1877-8. It is evident from this that the settlements with
some other Provinces were to have expired soon after those
with Burma and Assam had been completed, and would have
required to be reconstituted on the basis of shared revenues.
The Government of India, however, delayed the process, and
in that it did wisely, for it was too soon to make the new
principle of shared revenues and charges a basis for universal
application. It was nothing but prudent to have regarded it as
it were in its experimental stage. Secondly, the disadvantages of
the ex-parte treatment of the Provincial Budget had come to be
realized. It then dawned upon the Government of India that the
several provincial Budgets were only parts of an organic whole,
viz., the Imperial Budget, and it was manifestly inadvisable to
frame the Provincial Budgets each by itself without regard to
the claims, needs and exigencies of all others. But in order that
this comparative and compromising operation of judging the
claims of one in the light of the needs of others be performed
with the desired effect of treating the different provinces in
an equitable manner, it was essential that all the Provincial
Budgets be dealt with simultaneously. The importance of this
consideration and the desire to gain time in order to profit
by the experiences of Burma and Assam led the Government
of India with the consent of the Provincial Governments to
extend or shorten, as the case may be, the duration of their
financial agreements with the Provinces so as to bring about
a synchronous expiry of them all on March 31, 1882.
Financial Settlements of 1882-3
The new settlements made with all the provinces with effect
from 1882-31 were marked by an extension of the principle applied
to Burma since 1878. Certain heads, as few in number as possible,
of revenues and charges were wholly, or with minute local excep-
1
Resolution of the Government of India in the Department of finance and
Commerce, No. 3353, dated September 13, 1881.
tions only, grouped as Imperial. Others were classed as wholly

Provincial. The remaining were placed in an intermediate category
designated as joint and were in most part shared equally between
the Imperial and the Provincial Governments. In those cases,
however, where the provincialized expenditure exceeded the
resources from the provincialized as well as the shared revenues,
the balance instead of being provided as heretofore by fixed
assignments from the Imperial exchequer was rectified for each
Province by a fixed percentage on its land revenue—a wholly
Imperial head of revenue except in the case of Burma, where
the percentage was extended to the Imperial rice export duty
and salt revenue as well.
Along with the enlargement of the scheme of Provincial Finance
in 1882 the Government of India was also anxious to introduce
simplicity and uniformity in the matter of grouping the different
heads of revenue and expenditure under the three catgegories now
established. It will be remembered that the agreements effected in
1877 were marked by diversity and intricacy. The same charges
were not provincialized in all the Provinces. A charge which was
Provincial in one was Imperial in another. Again, in transferring
charges a grant was often broken up so that a part was made
Provincial and a part reserved as Imperial. On the revenue side
the arrangement was not a little intricate. The computations
owing to the proviso in respect of the assigned revenues made
the calculations far from simple. Both these defects were,
however, removed when the settlements were framed in 1882,
and it is to indicate what heads of revenue and expenditure were
provincialized, what were imperialized, and what were divided
and to what extent, that the following attempt is made.
Revenues
Imperial Provincial
1 Land Revenue The whole except as entered In Burma, fisheries; in
in the Provincial Column. the N.W.P. and Oudh
collections from the
Terai, Bhabar and
Dudhi Estates, Rents
of Water-Mills and
Stone Quarries; in
Bombay, Rents of
Resumed Service
Lands and Service
Commutations.
In all Provinces, a fixed
per-
Revenues—Contd.
Imperial Provincial
centage on the Imperial
land revenue to cover
the difference between
Provincial Revenue
and Provincial
Expenditure.
II Tributes The whole. Nil.
III Forest Half. Half.
IV Excise Do. Do.
V Assessed Taxes Do. Do.
VI Provincial Rates Nil. The whole.
VII Customs All except as entered in the All items other than
Provincial Column. Customs Duties; and,
in Burma only, the
same percentage on
Export Duties as on
the Land Revenue.
VIII Salt All except as entered in the All items other than Duty
Provincial Column. on Salt and sale of
Salt; and, in Burma
only, the same per
centage on the salt
Revenue as on the
Land Revenue.
IX Opium The whole. Nil.
X Stamps Half. Half.
XI Registration Do. Do.
XIII Post Office Nil. The whole.
XIV Minor Departments Do. Do.
XVI Law and Justice Do. Do.
XVII Police Do. Do.
XVIII Marine As at present. As at present.
XIX Education Nil. The whole.
XX Medical Do. Do.
XXI Stationery and Nil. The whole.
Printing.
XXII Interest All except as entered in Interest on Government
the Provincial Column. securities (Provincial).
XXIII Pensions Book transfers from the The remainder.
Military and Medical
Funds and subscriptions
to these Funds.
XXIV Miscellaneous Gain by Exchange on The remainder.
Imperial transactions,
Premia on Bills and
unclaimed Bills of
Exchange.
XXV Railway As at present. Whatever is now provincial
in each Province.
XXVI Irrigation and Do. Do.
Navigation.
XXVII Other Public Works Receipts from Military The remainder.
Works.
XXXI Gain by Exchange on The whole. Nil.
Transactions with
London.
Expenditure
Imperial Provincial
1 Interest ... The whole except as Interest on local Debenture Loans.

e n t e r e d i n t h e 4½ per cent. on the capital cost to
Provincial Column. the commencement of the year,
and 2½ per cent. on the capital
cost during the year, of all Public
Works, whether classified as
Productive Public Works or not,
of which Capital and Revenue
Accounts are kept: excepting,
always any portion of their cost
supplied from the Provincial
Revenues or by Local Debenture
Loans. The rate of interest on the
cost of Protective Public Works
will be the subject of a special
agreement.
2. Interest on Service I n t e r e s t o n S e r v i c e The remainder.
Funds and other Funds and deposits
Accounts. in Savings Banks.
3. Refunds and Of the Imperial share of Of the Provincial share of revenues.
Drawbacks revenues.
4. Land Revenues ... The same percentage on The remainder.
charges for collection
of Land Revenue and
on the cost of Surveys
(including expenditure
hitherto charged in
the Accounts of the
Central Government)
and Settlements
elsewhere than in
Bombay and Madras,
as is retained of Land
Revenue.
5. Forest ... Half. Half.
6. Excise ... Do. Do.
7. Assessed Taxes ... Do. Do.
8. Provincial Rates ... Nil. The whole.
9. Customs ... Do. Do.
10. Salt ... In Madras the whole. The remainder.
Elsewhere the
purchase and
manufacture of salt;
and in Bengal the
cost of preventive
lines and operations;
in Bombay charges
connected with the
administration of Salt
Revenue in Portuguese
India.
11. Opium ... The whole. Nil.
12. Stamps ... Half. Half.
13. Registration ... Half. Half.
15. Post Office ... Nil. The whole.
16. Telegraph ... Do. Do.
Expenditure—contd.
Imperial Provincial
17 Administration ... Account and Currency The remainder.
Offices and allowances
to Presidency Banks.
18 Minor Depts ... A r c h a e o l o g i c a l a n d The remainder.
Meteorological Depts.,
Census, Gazetteers
and Statistical
Memoirs.
19. Law and Justice ... Nil. The whole.
20. Police ... Frontier Police and Police The remainder.
employed on Imperial
State Railways on Salt
preventive duties.
21. Marine ... Whatever is now Imperial. Whatever is now Provincial.
22. Education ... Do. Do.
23. Ecclesiastical ... The whole. Nil.
24. Medical ... Nil. The whole.
25. Stationery and Stationery purchased for The remainder, including cost of
Printing Central Stores. stationery obtained from Central
Stores.
26. Political ... The whole. Nil.
27. Allowances and The whole except as in In Bombay, items now Provincial.
Assignment. the Provincial Column.
28. Civil Furlough The whole. Nil.
and Absentee
Allowances.
29. Superannuations ... Items not provided for pensions and gratuities, except
in the A Provincial pensions payable from the
Column. Military and Medical Funds
brought to account in India; each
Government being responsible for
pensions and gratuities which it
now pays, or hereafter grants or
recommends, however earned and
wherever paid.
30. Miscellaneous ... Remittance of treasure, The remainder.
and discount on
Supply Bills.
31. Famine Relief ... Secondary liability. Wholly Provincial.
32. Railways ... As at present. Whatever is now Provincial.
33. Irrigation ... Do. Do.
34. Other Public Works ... Military Public Works, The remainder.
and except in British
Burma, Offices of the
Supreme Government;
Works in the Salt,
Opium, Post Office,
Imperial Telegraph
and Ecclesiastical
Depts. and Mint and
Currency Offices;
and Bengal Surveyor
General’s Offices.
38. Loss by Exchange ... The whole. Nil.
On the transactions of 1881-82 the Government expected

to gain £ 470,000 a year. Of this sum, however, it returned
to the Central Provinces £ 77,900, for improving the position
of the subordinate civil services and other general purposes;
to Madras, £ 20,000, for provincial public works; and to
the N.W.P. and Oudh, £326,000, of which £ 10,000 was for
additional Kanungoes in Oudh, and the remainder, £ 316,000,
for a remission of local taxation. Besides these benefactions
the Government of India gave for a favourable start to Bengal,
£ 285,000; Burma, £20,000; N.W.P., £ 55,000, to be added
to their balances before the close of the year 1881-2. These
benefactions, which amounted to £ 496,000 a year, were
expected to turn the annual gain of £ 470,000 into an annual
loss of £ 26,000 to the Imperial exchequer.1
In this connection it must also be recalled that the
Government of India reimbursed the Provincial Governments
of the amount of the benevolences it had levied on them in the
years 1879-80 and 1880-1. But not long after the revision of
1882 the financial position of the Government of India, which
had permitted of such a liberal treatment, suffered a reverse,
and the necessity for levying benevolences on the balances of
the Provincial governments reappeared in 1886-7. In presenting
the financial Statement for that year the Finance Member of
the Government of India argued :—
“22. Since the estimates for 1885-6 were presented......
Indian administration and finance have entered on a
new phase. The brief period of rest which the country
had enjoyed since 1882 had drawn to a close...... By the
events of the late years in Central Asia, India finds herself
almost in contact with one of the great European Powers,
and she cannot hope to escape the necessity which the
position imposes on her of increasing her military strength.
Events impending have occurred which have changed, as
it was known they must change, the face of our estimates,
and have thrust us violently out of the peaceful path of
internal progress in which we had hoped to have been
left undisturbed.”
Among the other means employed to weather the storm the
Government of India resorted a second time to nibbling at the
provincial resources, and gathered a sum of £400,000 in the year
1886-7 by appropriating from their balances the above amount.
1
Financial Statement for 1882-83, p. 15.
The condition of Provincial Finance during this period may be

summarized in the following table :—
Annual Surpluses and Deficits
Provinces
1882-3 1883-4 1884-5 1885-6 1886-7
£ £ £ £ £
C.P. ... 33,775 76,212 18,047 22,080 115,656
Burma ... 171,207 —90,030 —89,725* † 71,743‡
Assam ... 13,887 —5,216 —40,577 25,299 28,576
Bengal ... 539,611 146,027 48,910 26,777 52,911
N.W.P. & Oudh ... 281,222 357,630 —69,276 —180,060 —12,408
Punjab ... —110,966 —15,765 —41,545 42,447 3,106
Madras ... 108,421 10,820 —87,284 146,692 —78,689
Bombay ... —149,894 —2,585 6,006 291,976 —161,369
* No balance left at the close of the year.
† Equilibrium.
‡ Balance obtained by excess of current revenue over current expenditure of
the year.
of India.
The settlements entered into with the Provincial
Governments in the year 1882-3 not only differed from the
preceding settlements in the replacement of fixed assignments
by shares in the Imperial revenues, but they also differed in
another important respect, namely, their duration. Though
the results of the scheme of provincial Finance have been
presented in one Table covering the period 1871-7, it must not
be supposed that the settlements with the various Provinces
were made for the period of six years. On the other hand, the
settlements were only annual and lasted up to 1877 by the
process of constant renewals. The results have been presented
together for a continuous period not because the setttlements
were made for that period, but because the principle on
which they were based endured for that period. After 1877
the settlements no doubt were made for a longer period. In
two cases they were for five years and for the rest the period
ranged between two and three years. The short duration system,
like the fixed assignment system, was of immense advantage
to the Imperial treasury. The object of these settlements,
it will be recalled, was firstly to put a definite limit on the
demands of the Provincial Governments on the already too
scanty resources of the Imperial Government. Evidently this
object would have been better served had the duration of the
settlements been longer than it was. But a longer duration
would have deprived the Imperial treasury of its right to
profit by an early revision of the revenue side of the contract.
It was this consideration of not remaining too long out of
pocket, that had hitherto prevailed upon the Government of

India to shorten the duration of contracts as much as possible.
But what was an advantage to the Imperial treasury was
from the standpoint of the Provincial Government a serious
drawback. Owing to the short durations of the settlements the
Provincial Governments were not in a position to distribute
the funds at their disposal on the incorporated services so as
to open a new page in their financial history. They could not
adopt a definite financial policy, for they feared that the new
terms on renewal might compel them either to give up the
policy or modify it so seriously as to prejudice its results. A
single budget may seem nothing more than the conspectus
of financial happennings of the year to which it pertains,
yet to the financier who frames them year after year they
embody a definite policy running towards its consummation.
But a policy, however wisely adopted, may be thwarted by an
unwise disturbance of the uniformity of conditions on which its
fulfilment depends. This was just the flaw that deteriorated
the sound working of Provincial Finance. Constant renewals
had a general disturbing effect, and the duration between any
two of them was indeed too short to give a stable state of
conditions. Being impressed by the fact that the advantages
of a short-duration-contract to the Imperial treasury were
enormously counterbalanced by its disadvantages to Provincial
Finance, the Government of India, on the occasion of revising
the settlements in 1882-3, made it a definite rule that they
shall be quinquennial in duration; that is, they shall not be
subject to revision before the end of the fifth year from their
commencement.
Revision of 1887-8
By virtue of this rule the settlements made in 1882-3
expired in 1887. The revision then undertaken, as well as the
subsequent ones, left as a rule undisturbed the two categories
of revenue and expenditure, namely, those wholly Provincial
and wholly Imperial. It became almost a convention to leave
them as they were since the separation in 1882, when the
constitution of Provincial Budgets was thoroughly overhauled
and consolidated. The only heads of revenue and expenditure
that were revised, as revision fell due, were those that were
grouped under the third category, namely, jointly Imperial and
Provincial, otherwise known as “Divided Heads.”
In the revision of 1887-8 the decisive factor was the

unsatisfactory position of the Imperial Finances already referred
to. To improve its financial position the shares in the joint
heads were altered so that each Local Government was allowed
to appropriate three-fourths of the stamps and one-fourth
of the excise revenue, and required to bear the expenditure
under those heads in like proportion. The proportions of land
revenue were also altered so that three-fourths of it was made
Imperial, and one-fourth Provincial. But the needs of the
Imperial treasury were so great that the Government of India
even revised some of the heads of the other two categories,
namely, Salt, Customs, Interest, Irrigation and Railways, to
its own advantage. The details of the gain to the Imperial
treasury are as given below :—
Imperial Share
Net
Revenue Increased
Gain
—Decreased
Land Revenue ... ... 437,500
Stamps (share reduced from ½ to ¼ ... ... —810,000
Excise (share increased from ½ to /4) 3
... ... 947,500
Salt revenue of Burma imperialized ... ... 5,000

Customs revenue of Burma imperialized ... ... 155,000
Assessed taxes—divided in moieties ... ... —290,000 215,000
State Railways gross earnings—
Nagpur Chhattisgarh
Patna-Gaya ... ... —310,000
Cawnpore-Achneyra
Eastern Bengal, provincialized ... ...
—540,000
Expenditure Increased Net
—decreased Gain
Land Revenue, entire provincialization of survey 145,000
and settlement
Salt in Bombay imperialized ... ... —90,000
Customs in Bombay imperialized ... ... —50,000
State Railways—
Working expenses:—
Provincialized ... ... 305,000 395,000
Imperialized ... ... —215,000
Interest—Provincialized ... ... —70,000
Imperialized ... ... —65,000
Irrigation—Provincialised. Bengal ... ... 65,000
” ” Madras ... ... 230,000
Add—Small items of accounts unenumerated ... ... ... ... 20,000
This gain to the Imperial treasury was distributed in the

following proportion among the various Provinces :—
Increase of annual resources under the Amount by
principal Provincial Heads of Revenue which Annual
as estimated on comparison of 1882 and Provincial
1887 Resources
Provinces
were reduced
Stamps and by the
Land Revenue Total
Excise Revision of
1887
£ £ £ £
C.P. ... 2,200 45,500 47,700 15,600
Burma ... 4,700 9,200 13,000 ...
Assam ... 22,300 21,300 43,600 24,600
Bengal ... 19,200 171,550 190,750 103,600
N.W.P. ... 8,000 130,150 138,150 100,000
Punjab ... 32,800 23,100 55,900 ...
Madras ... 27,750 142,550 150,300 174,400
Bombay ... 99,000 198,550 297,550 221,900
Total ... 195,950 741,900 937,850 640,100
This would have been the net gain to the Imperial treasury
had it not been for the fact that it conceded to Burma the
sum of £ 10,000. The net gain was thus reduced to £ 530,100
per annum.
The condition of Provincial Finance during the period of
1887-92 may be judged from the following table presenting the
annual surplus and deficit of each of the different Provinces :—
Annual Surpluses and Deficits
Province
1887-8 1888-9 1889-90 1890-1 1891-2
Rs. Rs. Rs. Rs. Rs.
C.P. ... 13,148 22,583 —12,322 —31,573 17,540
Burma ... 77,028 11,560 64,072 106,216 50,598
Assam ... 7,751 26,343 20,090 —17,871 31,185
Bengal ... 131,007 —65,792 102,547 —120,377 —11,934
N.W.P. & Oudh ... —53,900 45,949 102,710 —12,544 —4,399
Punjab ... 12,446 32,142 29,264 31,367 —1,719
Madras ... 105,371 113,932 144,571 —136,739 —241,770
Bombay ... —24,574 18,322 41,361 —123,887 —53,189
of India.
Revision of 1892-3
The next revision of provincial settlements under the rule of
quinquennial revisions occurred in 1892-3. The new settlements
to commence from that year did not differ in principle from those
of 1887-8. The shares in the Joint Revenue were so readjusted as

to give to the Imperial treasury a larger gain from the growing
yield of the provincialized sources. The amount resumed by the
Imperial Government at this revision through readjustments of
shares was estimated as follows:—
Increase of Revenue in 1891-2 (Revised Amount
resumed by the
Province Est.) as compared wih the Estimate Government
for the Contract of 1887-8 to 1891-2 of India
Rs. Rs.
C.P. ... 119,200 22,700
Lower Burma ... 334,900 58,900
Bengal ... 517,700 51,900
N.W.P. & Oudh ... 53,300 56,900
Punjab ... 195,400 41,000
Madras ... 313,200 103,800
Bombay ... 399,200 131,100
Assam ... 99,800 ......
Total ... 2,042,700 466,300
But this gain to the Imperial treasury seriously disturbed the
equilibrium between the expenditure of the Provinces estimated
as normal for the ensuing period and the normal estimated yield
of revenues left to them. To restore equilibrium between their
normal expenditure and normal revenue the Government of India
reverted to the discarded method of fixed adjusting assignments,
so that while the actual revenues and charges deviated from
what was estimated as normal for the period of the settlement,
the adjusting entry allowed by the Imperial Government to each
of the provinces remained fixed throughout the whole period.
The following is a statement of estimated normal expenditure
and revenues of the different Provinces with their respective
adjusting assignments as fixed for the new period :—
Provincial Revenues
Ordinary
Revenue
being a Adjusting Provincial
Provinces Total
share of Assignments Expenditure
certain
Receipts
Rs. Rs. Rs. Rs.
C.P. ... 567,600 220,500 788,100 788,100
Lower Burma ... 1,427,500 414,300 1,841.800 1,841,800
Assam ... 657,700 —112,700 545,000 545,000
Bengal ... 4,249,300 —143,900 4,105,500 4,105,900
N.W.P. & Oudh ... 3,403,500 —250,000 3,152,900 3,152,900
Punjab ... 1,370,400 348,500 1,718,900 1,718,900
Madras ... 2,479,300 325,400 2,804,700 2,804,700
Bombay ... 3,123,900 771,400 3,895,300 3,895,300
The evil effect of large resumptions and fixed assignments

will be clearly seen in the condition of Provincial Finance as
indicated by the annual surpluses and deficits over the period of
the settlement:—
Province Annual Surpluses or Deficits
1892-3 1893-4 1894-5 18S5-6 1896-7
Rs. Rs. Rs. Rs. Rs.
C.P. ... —21,798 —60,772 —105,108 19,653 —37,408*
Burma ... 66,642 —90,653 —272,319 226,505 780
Assam ... 9,336 28,532 —27,422 30,507 —25,421
N.W.P. & ... —16,752 —25,155 —165,987 —139,798 —164,740
Oudh
Bengal ... —9,826 36,887 169,796 149,808 —186,558
Punjab ... —106,050 —22,699 —24,811 —7,156 —64,073
Madras ... —159,081 33,636 92,328 44,118 —200,579
Bombay ... —23,883 19,443 —102,472 100,690 —221,119
* No closing balance left.
Complied from the Annual Finance and Revenue Accounts of the Government of India.
It must, however, be admitted that the financial arrangements
of the Provinces during this period were considerably disturbed
by the outbreak of plague and famine towards the close of the
settlements. The expenditure which the Provinces were obliged to
incur to meet these two calamities depleted the resources of all
and brought the Central Provinces and the North-West Provinces
to the verge of bankruptcy, from which they were rescued by the
following contributions made by the Government of India in aid
of their balances in the year 1896-7 :—
To Central Provinces ... Rs. 526 lakhs.
To N.W.P. and Oudh ... Rs. 1,609 lakhs.
Revision of 1896-97
This depression in Provincial Finance was alleviated to some
extent at least in the revised settlements of 1896-7 by allowing a
higher standard of expenditure and of revenue to the Provinces
than was granted to them in 1892. The following table presents
the old and the new standard of expenditure with the percentage
difference between them :—
Provinces Standard Net Expenditure Increase
1892 1897 per cent.
Rs. Rs.
Central provinces ... 653,300 710,700 8.8
Lower Burma ... 1,064,600 1,206,100 13.3
Assam ... 467,600 564,900 20.8
Bengal ... 2,816,700 3,125,500 10.9
N.W.P. ... 2,215,400 2,428,700 9.6
Punjab ... 1,384,600 1,537,300 11.0
Madras ... 2,054,800 2,238,600 8.9
Bombay ... 2,049,500 2,544,100 5.6
Total ... 13,066,500 14,355,900 9.9
This new and enhanced standard of expenditure called

for a revision of the shares of the Imperial and Provincial
Governments in the joint revenues. But the revision had to be
so devised that while it gave larger resources to the Provinces it
obviated the necessity of making fixed assignments as much as
possible; for the Government of India had learnt to its cost that
fixed assignments on a large scale tended to make the resource
side of the Provincial Finance rigid to such an uncomfortable
degree that, if the variability of expenditure surpassed the
expansibility of the revenue incorporated in the Provincial
Budgets, it was perforce obliged to distribute benefactions to
ease what would otherwise be a difficult situation. Secondly,
these fixed assignments also created a certain degree of
inequality as between the backward and the more advanced
Provinces. In the advanced Provinces the fixed assignments
formed a comparatively smaller part of their resources than
they did in the case of the relatively backward Provinces, and,
as larger expenditure could be undertaken by the Provinces
only when their revenues expanded, the advanced Provinces,
a larger part of whose resources were of an expanding nature,
obtained a more favourable treatment than the relatively
backward Provinces, a large part of whose resources were of a
frozen character. This was rightly conceived by the Government
of India as the reverse of what ought to have been, having
regard to the fact that the needs of the backward Provinces
were relatively more imperious than those of the advanced
Provinces. To obviate this injustice the Government of India
enhanced the shares of the backward provinces in the joint
revenues by reducing per contra the fixed assignments made at
the last revision. To the Punjab it gave .4 and to the Central
Provinces .5 of the Land Revenue instead of .25 only. The
share of Burma in the Land Revenue was raised to .66, and
to make provision for the enhanced expenditure due to the
addition of Upper Burma, and in lieu of the railway revenue
withdrawn from it, Burma was allowed to appropriate .5 of
the Excise instead of .25 only. The financial condition of the
North-Western Provinces was not very happy. Its revenue had
proved so very unprogressive that it advanced only 2 per cent.
between 1892 and 1897. The treatment of the North-Western
Provinces at the revision of 1892 was also a little unjust. The
revision had left its revenues short by 5 lakhs of its standard
expenditure, to be made up by reduction of its balances. To make
amends for this the Government of India re-distributed the

shares in the Land Revenue to the advantage of the North-
Western Provinces. In addition to this the Government of India
gave to that Province a grant of 4 lakhs for the year 1897-8, to
enable it to establish district funds on a financially independent
footing, a result accomplished long ago in every other Province
in British India. To give an equitable treatment to the backward
as well as to the advanced Provinces, it realized that an unequal
treatment was the only properway. It therefore adopted a less
liberal attitude in revising the terms of the settlements with
the more advanced Provinces of Bengal, Madras and Bombay. It
allowed them a proportionately smaller increase of expenditure
than the backward Provinces, as may be seen from the figures
given above, and reduced slightly their shares in the revenues.
On the occasion of this revision the gain to the Imperial
exchequer was practically negligible. In 1877 its total gain
by retrenchment amounted to 40 lakhs a year; in 1882 the
Imperial Government was so very prosperous that instead
of contriving for a gain it surrendered to the Provinces 26
lakhs of the annual imperial revenue. But in 1887 it resumed
63 lakhs and in 1892,46 lakhs. On this occasion however its
gain was nil, for what it got from the advanced Provinces it
gave to the backward ones.
Just and liberal as the terms of the settlement were, the
abnormal circumstances which disturbed the entire period of
the settlement made such heavy demands on the Provincial
resources that, ample though they were, they fell far short of
the requirements of the Provinces. The famine of 1896 and
1897 affected all the Provinces, although in unequal degree.
In the North-Western Provinces and Oudh, the Central
provinces, and Burma the effect was most severely felt. In
Madras, Bengal and the Punjab it was serious, and in Burma
it was slight. On the other hand, the famine of 1899 and 1900
affected Bombay and the Central Provinces most severely,
the Punjab very seriously and the rest of the Provinces
slightly. And Assam, though unaffected by either of the two
famines, suffered very severely from the great earthquake of
June, 1897. Besides famine the plague was also making its
ravages and taking its toll. As a result of these unforeseen
calamities all the Provinces were forced to incur extraordinary
expenditure on preventive measures, for which no provision
was made in the standard of revenue fixed for the period of
settlement. The expenditure on these unforeseen calamities
being of an extraordinary nature was treated as imperial and
defrayed from the Imperial exchequer, but even this much succour
did not prove equal to the necessity and the Government of India
was obliged to make special grants-in-aid of the Provincial Revenues
as shown on page 168.
Thus the Government of India was not only obliged to pay for
the cost of the famine, but to grant funds to restore equilibrium
and to provide for useful public services held up or curtailed by the
Provincial Governments owing to the extraordinary circumstances
of the time.. All this aid from the Imperial Government was
made available because of the very prosperous condition of the
Imperial finances throughout this period. While it is better that
governments in general should always be in penury, the surpluses
in the Imperial Finance proved a timely resource, the utility of
which was doubled by the commendable way in which they were
spent. Besides giving them grants for useful public works the
superfluous funds of the Imperial Government were utilized in
carrying out the following additional measures to the relief of
the Provinces :
(1) Remission of Imperial Land Revenue Rs. 50,94,000 and
reimbursement to the Provinces for their share remitted
Rs. 59,81,000; in all Rs. 1,10,75,000.
(2) The abolition of the pandhari tax in the Central Provinces,
costing Rs. 7,000 a year.
(3) The reduction of the patwari rate in Ajmere, from 10 per
cent. on land revenue to 6¼ per cent.; the amount of the
local revenue remitted was—Rs. 13,000, but the contribution
paid to the local fund was Rs. 23,000.1
Taking into account these various contributions in aid of
Provincial Revenues, the following table is presented as indicative
of the condition of the Provincial Finances during this period of
settlement :—
Provincial Surpluses or Deficits
Provinces
1897-8 1898-9 1899-1900 1900-1 1901-2 1902-3 1903-4
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
C.P. ... (a) 12,288 —1,22,883 (a) 22,42,408 —705 —7,40,742
Burma ... 1,69.435 4,11,494 26,14.312 15,16,220 7,55,285 ... ...
Assam ... —45,580 86,742 —8,15,488 —86,829 1,47,353 10,08,393 11,40,517
Bengal ... —3,03,250 2,19.449 7,01,899 4,43,224 6,44,170 6,23,640 87,23,496
N.W.P. ... (a) 3,28.562 7,53,815 8,04,789 ... ... ...
Punjab ... —2,278 1,15,379 —16,53,794 (a) 14,96,350 10,28,770 6,74,880
Madras ... —1,57,707 1,60,706 —17,58,029 —3,21,013 40,41,297 —15,810 52,40,809
Bombay ... —1,29,663 1,00,427 —15,04,271 (a) 58,23,235 —24,23,235 —1,23,000
U.P. of ... ... ... ... —9,63,788 —64,372 37,11,281
Agra and Oudh
(a) No closing balance left because of Budget equilibrium.
Compiled from the Annual Finance and Revenue Accounts of the Government of India.
1
Financial Statement of the Government of India, 1902-3, para. 146.
IMPERIAL SPECIAL GRANTS-IN-AID TO PROVINCES*
168
N.W.P.
Year India C.P. Assam Bengal and Punjab Madras Bombay Burma
Oudh
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
1897-98 ... ... ... ... 7,72,000 8,00,000 10,27,000 ... ... 12,18,000 ...
1898-99 ... ... ... ... 5,00,000 18,00,000 17,00,000 10,00,000 5,00,000 16,96,000 48,75,000 ...
1899-1900 ... ... ... 19,32,000 ... ... ... 95,000 3,49,000 34,37,000 ...
1900-01 ... ... ... ... 34,15,000 ... ... ... 5,98,000 ... 64,79,000 ...
MK
1901-02 ... ... ... 26,89,000 2,00,000 ... ... 12,40,000 32,14,000 91,00,000 ...
6,50,000 ... ... ... 4,00,000 10,00,000 19,50,000 ...
1 2,00,000 1,00,000 10,00,000 5,00,000 4,00,000 8,00,000 6,00,000 4,00,000
SJ+YS
1902-03 ... ... 2 A 70,000 2,00,000 2,80,000 6,00,000 4,50,000 5,00,000 5,50,000 5,50,000 ...
3 B 1,00,000 2,00,000 1,50,000 ... 3,50,000 3,00,000 3,50,000 3,50,000 ...
1 ... 2,00,000 1,00,000 10,00,000 5,00,000 4,00,000 8,00,000 6,00,000 4,00,000
1903-04 2 ... 5,00,000 5,00,000 2,00,000 3,00,000 10,00,000 5,00,000 10,00,000 ...
3 ... 1,90,000 1,11,000 ... 2,26,000 2,76,000 3,50,000 3,50,000 ...
1. For education (recurring).
2. For use Public Works.
25-9-2013/YS-11-11-2013
3. For improving district and other establishments.

A. Allotment for Public Works in Baluchistan, Rajputana and Central India.
B. Amount taken the “India” estimates for subsequent distribution to the provinces.
* Complied from the annual Financial Statements of the Government of India.

168
Revision of 1902-3
Settlements made with the Provinces in 1897 should have
ended in the ordinary course of time in 1902-3. The central
operation in the periodic revision of the settlements was to
arrive at the standard provincial expenditure for the ensuing
quinquennium and as a rough and ready method of decision
the average expenditure during the expiring quinquennium was
taken as a standard expenditure for the opening quinquennium.
There is nothing grossly erroneous in such a procedure,
provided the preceding and succeeding quinquenniums are
equally normal with respect to the course of their events. But
as we have seen, the events of the past quinquennium were
entirely abnormal and could not have been made the basis of
any calculations worthy of trust. To be on the safe side the
Government of India thought it desirable to await the return
of normal times before undertaking wholesale revisions of
provincial settlements. The occasion of 1902-3 for revision was
therefore postponed save in the case of Burma. For, the last
settlement had become unduly favourable to that Province
in comparison with the other Provinces, notwithstanding the
very nice and equitable calculations on which the settlements
of 1896-7 were based. The extent to which the revenues had
exceeded its expenditure is indicated in the following table :—
Estimated
Standard for
Estimates
Burma the Settlement Difference
for 1902-3
of 1897-8 to
1901-2
Rs. Rs. Rs.
Revenues ... ... ... 2,93,81,000 3,73,86,000 80,05,000
Expenditure ... ... ... 2,93,81,000 3,31,86,000 38,05,000
Surplus ... ... ... ... 42,00,000 ...
The continuance of such an outcome was deemed

unfair to the Imperial and unjust to the other Provincial
Governments. The financial settlement of the Province
of Burma was accordingly revised notwithstanding the
established canon of simultaneous revision, when the occasion
presented itself in 1902-3. The revision resulted in the
resumption by the Government of India of this surplus by
readjusting the shares of the Province in the joint revenues.
The share in the Land Revenue was reduced from two-
thirds to one-half and that in the Excise from one-half to

one-third, and a few minor heads were added to the already
provincialized heads of expenditure. By these changes the
standard revenue and expenditure of Burma for the new
settlement of 1903 to 1906 assumed the following totals :—
Adjusting Total Total
Revenues Assignment Revenues Expenditure
Rs. Rs. Rs. Rs.
2,78,31,000 53,02,000 3,31,33,000 3,31,33,000
Another province whose settlement was revised was the
Punjab; but the reason of it was different. The territory
covered by the North-Western Provinces was divided into the
North-Western Frontier Provinces and the United Provinces
of Agra and Oudh, usually styled U.P. Along with this some
of the districts of the Punjab were separated from it and
joined to the newly created North-Western Frontier Province.
This caused a readjustment of the provincial revenues and
expenditure, but not any wholesale revision of the settlement.
The changes were confined to the necessary alterations in the
adjusting assignment.
Quasi-Permanent Revision 1904-5
With the exceptions noted above the settlements of 1897
were extended up to the end of the year 1904. The primary
cause of the postponement of the revision as explained above
was the abnormality of the conditions prevailing in the year
1901-2. But there was also another reason why the Government
of India was so very anxious for the return of normal conditions
before taking any steps towards revision. It was about this
time that the Government of India contemplated to introduce
permanency in Provincial Finance. The five-year budget system
which in 1881 replaced the annual budget system as the basis
of Provincial Finance, though a marked improvement in the
direction of continuity and stability, was not deemed to be
quite sufficient. Under it the Provincial Governments were left
free to enjoy the fruits of their economy in expenditure and of
the successful nursing of their resources for the period of five
years. Beneficial as far as it went, this time-bar was found
to exercise a most pernicious influence on Provincial Finance.
Under the quinquennial budget system it so happened that the
provincial Governments as the result of feeling their way under
the new conditions were parsimonious in the first few years
lest their expenditure should prove too much for their revenues,
and extravagant in the last few years lest their expenditure

should shrink below the standard and leave large margins to
be cancelled by the Government of India on revision of their
settlements. No Local Government could be expected to put into
execution any carefully matured and well-thought-out scheme
of improvement within the short span of a quinquennium.
All that it could do was to spend the first two or three years
in working out a scheme and utilize the last two or three
years in rushing it through, as was done by most of the
Provinces. This tendency to undertake such schemes, the
only merit of which was that they could be carried through
before the revision, and mainly in order to reach the standard
expenditure, was a direct consequence of the quinquennial
budget system. This is by no means an a priori conclusion.
A glance at the annual surplus of the provinces will indicate
how they tend to rise in the beginning of the quinquennium
and fall at the end of it. To obviate these evils of parsimony
and extavagance the only remedy was to do away with the
principle of quinquennial revision, and this the Government
of India courageously undertook to effect. The right to revise
was a much cherished right, and the Government of India
had not failed to exercise it in the teeth of all opposition from
the Provinces. It was abandoned only because its exercise was
deemed to be mischievous.
Taking the year 1903-4 as the normal one, the Government
of India decided to revise the provincial settlements of all
the different Provinces. The idea was to adjust the revenues
between the Imperial and the Provincial Governments on the
basis of the total expenditure they respectively controlled. It was
found that the aggregate provincial expenditure represented less
than one-fourth of the whole, while the Imperial expenditure,
which included Army and Home Charges, aggregated in excess
of three-fourths. These proportions of expenditure were taken as
the basis of the division of revenue between the Imperial and
the Provincial, and the following standard shares of revenue
and expenditure under the joint heads were agreed upon :—
Imperial Provincial
Bengal, U.P., Bombay, Madras 3

/4 ¼
Punjab, Burma 5
/8 3
/8
C.P., Assam ½ ½
The reasons for adopting different standard rates of division

in the case of the Punjab, Burma, C.P. and Assam was to give
the backward provinces opportunities of development in the same
proportion as lay within the reach of the advanced provinces.
Of the settlements made in 1904-5 the Government of India
declared that those made with the Provinces of Bengal, Madras,
Assam and U.P. were to be permanent and not subject to revision
in future, except when it was found that the financial results
were unfair to a Province or to others by comparison, or to the
Government of India when it was confronted by an extraordinary
calamity. Owing to this proviso their settlements were termed
quasi-permanent. To obviate the recrudescence of unfairness
during the currency of the settlements the Government of India
felt it necessary to enter certain modifications in the standard
ratio of division of the joint-heads of revenue and expenditure
with regard to the Provinces brought under the quasi-permanent
settlement. They were as follows :—
Provincial Share Provincial Share
Revenue Bengal Madras U.P. Expenditure Bengal Madras U.P.
Excise ... 7
/16 ... ... Excise ... 7
/16 ... ...
Stamps ... ½ ½ ½ Stamps ... ½ ½ ½
Registration ... Wholly Wholly ... Registration ... Wholly ... ...
Irrigation ... ... ... Wholly Land Wholly Wholly Wholly
Revenue ...
Compiled from the Financial Statement of the Government

of India for 1904-5, p. 57.
Besides these modifications the Government of india gave
them the following grants :—
Bengal Madras United Provinces
1. Addition of 4 lakhs to the 1. Grant of 20 1. Irrigation revenue
assessment to improve the pay lakhs for Survey guaranteed up to
of Ministerial establishments. and settlements. 40 lakhs.
2. Further addition not exceeding 2. Grant of 2. Grant of 2½ lakhs
2½ lakhs for for strengthening Rs. 75,000 a a year in relief of
the staff of Deputy Collector. year recurring local bodies.
for relief of
certain local
bodies.
3. Rs. 50,000 3. Half a lakh a year
a year for to reform District
agricultural Board Finance.
experiment.
4. Undertaking to
bear charges
for reorganizing
district
administration.
Compiled from the same Financial Statement of the Government of India, p. 67.
The standard revenues and expenditure of the quasi-

permanently settled provinces, after taking into consideration
the alterations in their respective shares in the joint revenues,
were as follows :—
STANDARD REVENUES AND EXPENDITURE
(in thousands of rupees).
Revenue
Province Expenditure
Revenues Assignments Total
Madras 3,50,48 2,90,82 5,966 3,50,48
Bengal 4,98,87 4,49,84 4,903 4,98,87
U.P. 3,66,64 3,62,64 400 3,66,64
Assam 72,07 60,07 1,200 72,07
The gain to the Imperial treasury on the revenue side

brought about by the revision of the quasi-permanently settled
Provinces was Rs. 2,06,000. But the revision also over-burdened
the Imperial Government with a total charge of Rs. 36,000
hitherto borne by the Provincial Budget. Thus its net gain
was only Rs. 1,70,000 a year on the normal.
As in the beginning of the scheme of Provincial Budgets,
the government of India thought it advisable to make to the
quasi-permanently settled Provinces the following initial grants
so as to give them a fair start:—
To Bengal, Rs. 50 lakhs. (Exclusive of 50 lakhs for Calcutta Universsity.)
To Madras, Rs. 50 lakhs. (Inclusive of 20 lakhs for survey settlement.)
To U.P., Rs. 30 lakhs. (Exclusive of 1¼ lakhs to compensate

forexpenditure on the purchase of encumbered estates.)
To Assam, Rs. 20 lakhs.
Of the remaining Provinces, Bombay and the Punjab were

the next to obtain quasi-permanent settlements with effect
from 1905-6.
In recasting their settlements the Government of
India departed a little from the standard rate of
division as applied to the Provinces quasi-permanently
settled in 1904-5. With certain exceptions mentioned
below the joint heads of revenue and expenditure were
divided half and half, including Irrigation in Bombay, instead

of three-fourths and one-fourth between the Imperial and the
Provincial. The exceptions to this rule were the following :—
Revenue Provincial Share Expenditure Provincial Share
Heads of Heads of
Account Bombay Punjab Account Bombay Punjab
Land Revenue Guaranteed 3
/8 Land Revenue Wholly Wholly
Up to
189¼
lakhs
Registration Wholly Wholly ... ... ...
Irrigation ½ /8 3
Guaranteed
up to 28
lakhs
Compiled from the Financial Statement of the Government of India
The standard revenue and expenditure of these two provinces
under the quasi-permanent settlement was as follows :—
Revenue
Province Expenditure Fixed
Revenues Total
Assignments
Rs. Rs. Rs, Rs.
Bombay ... ... ... 4,91,75,000 4,48,98,000 42,77,000 4,91,75,000
Punjab ... ... ... 2,49,50,000 2,46,50,000 3,00,000 2,49,50,000
The raising of the shares and the fixing of assignments

on a liberal scale with respect to these famine and plague-
stricken Provinces left the Imperial Government a loser on the
transaction. On the basis of the new standard of revenues the
Government of India lost Rs. 5,95,000 on the two Provinces
together. The corresponding increase in the provincial shares of
the joint heads of expenditure, however, lessened the Imperial
expenditure by Rs. 2,21,000 a year. On the whole, therefore, the
Imperial Government sacrificed a normal gain of Rs. 3,74,000
to give permanency and stability to the finances of these
two Provinces. This was over and above the initial grant of
Rs. 50,00,000 to each of them in order to enable them to set
their sails in smooth waters.
A year after, the settlement of the Central Provinces
was made quasi-permanent with effect from April 1,
1906. The shares in the joint heads of revenue and
expenditure were raised, as they were in the case of
Bombay and the Punjab, and particularly because of the
addition of Berar, which was hitherto administered directly
by the Imperial Government, from three-fourths and one-

fourth to one-half between the Imperial and the Provincial,
the share in the land revenue being guaranteed up to 82½
lakhs. The only exception to this rule of even division was
the Registration revenue, which was made wholly provincial.
To balance the revenue with the expenditure an assignment
of Rs. 27,07,007 a year was fixed and an initial grant of
Rs. 30,00,000 was given for a fair start.
Along with the settlement of the Central Provinces it
became necessary to reorganize the budgets of the quasi-
permanently settled Provinces of Bengal and Assam owing
to certain administrative changes. The two Provinces were
reconstituted into (1) Bengal and (2) Eastern Bengal and Assam.
In the revision of its financial settlement the new Province
of Bengal was accorded the same proportionate share in the
joint revenues as were granted to Bombay and the Punjab—
namely, a share of a half in all the joint heads. Registration
and that portion of the Land Revenue which was derived
from Government Estates under the direct management of the
Imperial Government were, however, made wholly provincial.
In lieu of this favoured treatment the fixed assignment of the
Province was reduced from 49.03 lakhs to 5.72 lakhs.
In the new Province of Eastern Bengal and Assam the
principle of even distribution was applied to all joint heads of
revenue and expenditure with the exception of Registration,
which was made wholly provincial. This enhancement of shares
so greatly augmented the resource side of the Provincial Budget
that the balance had to be restored by a negative operation of a
fixed adjusting assignment from the Provincial to the Imperial
funds. The following figures show the standard expenditure
and the standard revenue for the three provinces brought
under the quasi-permanent settlements :—
Province Expenditure Revenue
Revenues Assignments Total
Rs. Rs. Rs. Rs.
C.P. ... ... ... 1,76,43,000 1,49,36,000 27,07,000 1,76,43,000
Eastern Bengal and ... 2,12,19,000 2,18,42,000 6,23,000 2,12,19,000
Assam
Bengal ... ... ... 4,72,73,000 4,67,01,000 5,72,000 4,72,73,000
Some modifications were later on introduced in the
settlement of the Province, so that a positive adjustment
had to be made by an assignment from the Imperial to the
Provincial of Rs. 60,000 a year.
The only Province which was outside the pale of the

quasi permanent system was Burma. The last quinquennial
settlement made with it in 1902-3 having expired, the
Government of India decided to bring it in uniformity with
the other Provinces by giving it a quasi-permanent settlement
from April 1, 1907. In a spirit of perfect impartiality it was
also given an even share in the principal joint heads of revenue
and expenditure, salt being imperialized as in other provinces.
It was given an adjusting assignment of Rs. 90,68,000 a year
to cover the deficits in its standard expenditure and an initial
grant of Rs. 50,00,000.
By the year 1907 all the Provinces were brought within
the pale of the quasi-permanent settlement, and we would
have expected the scheme of Provincial Finance to run its
course undisturbed by any further changes. But it so turned
out, as must have been noticed, that the quasi-permanent
settlements made with Madras and U.P. in 1904 had become
a little unfair to them in comparison with the terms offered to
the Provinces subsequently dealt with. To remove this ground
of injustice, which was one of those recognized for subjecting
the quasi-permanent settlements to revision, the shares of the
two Provinces in the joint heads were raised with effect from
April 1, 1907, to one-half, with the following exceptions :—
Madras United Provinces
Revenue Revenue
1. Registration. Wholly Provincial, 1. Land Revenue. 3/8 Provincial.
Minimum of 240 lakhs
guaranteed.
2. Land revenue. Minimum receipt 2. Irrigation. Minimum receipt of
of 308 lakhs guaranteed if the 60 lakhs from major irrigation
provincial share fell below that works guaranteed, if the
amount. provincial share fell below that
amount.
Expenditure
1. Registration. Wholly provincial.
2. Land Revenue. Wholly provincial.
The fixed assignments to cover the difference between the
excess of standard expenditure over standard revenue were :—
To Madras ... ... Rs. 22,57,000
To U.P. ... ... Rs. 13,89,000
Thus the scheme of Provincial Finance in British India had
advanced by gradual but distinct steps of assignment budgets,
assigned revenue budgets and shared revenue budgets to a stage
the terms of which were regarded by the parties concerned as
sufficiently final. How far their expectations were fulfilled may

be judged from the annual surpluses and deficits in Provincial
Finance and from the range in their deviations as indicated
in the following table :—
PROVINCIAL SURPLUSES AND DEFICITS
Province 1904-5 1905-6 1906-7 1907-8 1908-9 1909-10 1910-11 1911-12
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
C.P.* ... —701000 3235000 1750607 —930617—3097865 721755 280556 1214573
Burma ... —1591796 —2613890 1890516 —3129590—2060678 2515371 1900297—1260040
Assam† ... —269316 —3720027 —200140 —2596682—2357687 549270 5539698 5218802
Bengal ... —1252818 —1952312—1877455 —2256994—1330371 3274065 3960612 6296233
U.P. ... —869099 —2879192 795600 —3587066 1007260 2045221 3635904 144240
Punjab ... 4794387 —2796052 —661214 —2408818—1576981 1300559 4199121 3398055
Madras ... —1402344 220328 1217745 —44992 2025109 1266326 2316383 2938502
Bombay... 4396000 —42892 1752202 —308925—2618926 7137996 7585460 —541411
* Includes Berar since 1906.
† Eastern Bengal and Assam since 1906.
Compiled from the Annual Finance and Revenue Accounts of the Government
of India.
In judging of these results account must also be taken of
the various benefactions made by the Government of India to
the Provinces by way of grants-in-aid during the same period.
These grants were as follows :—
IMPERIAL GRANTS-IN-AID TO THE PROVINCES
Province 1904-5 1905-6 1906-7 1907-8 1908-9 1909-10 1910-11 1911-12
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
C.P.* ... 2853710 6957793 110500 2752010 2903668 3588270 3465500 2080845
Burma ... 567500 1845000 7219000 682000 215253 1820952 4232742 3605164
Assam ... ... 3362916 327294 280030 2358947 4464435 4608965 6100732
Bengal ... 24794 4806984 475548 1362634 4157393 5753692 6137013 11131276
U.P. ... 136600 4036307 7641697 9879667 8770345 1624329 4513729 3136107
Punjab ... 7526436 2467579 4209531 5541529 6037990 5839014 9592844 3101681
Madras ... 700946 4430714 9980400 9473304 704885 612941 3691426 5008889
Bombay ... 10312928 3427325 4024512 4574284 5726162 5797603 12009360 4935159
Total ... 22122914 31334618 34982982 34543458 30874643 29502286 15475360 39099853
* Includes Berar since 1906.
of India.
But in taking account of these benefactions it must not
be supposed that, barring a solitary case or two, they were
necessary in order to preserve the solvency of Provincial finance
as it was defined by the terms of the settlement made with the
different provinces. Far from being insufficient, the revenues
settled upon the different Provinces proved quite ample for
their needs if we take the last years, and they are the most
typical years, into consideration.
Permanent Settlements of 1912
Soon after the series of quasi-permanent settlements were
concluded with the different provinces, the subject of Provincial and
Central Finance in British India among others of a like nature

was investigated by the Royal Commission on Decentralization.
In its Report issued in 1909 the existing method of allocating
revenue and charges between the Imperial and Provincial
Governments was upheld in principle. Of the many-adverse
criticisms passed by witnesses who appeared before the
Commission only two were regarded by it as worthy of
consideration : (1) The adjusting assignment and (2) Grants-in-
aid, or doles as they were cynically termed. It was urged, and
with some truth, that the adjusting assignments impaired the
elasticity in provincial revenues by reason of the fact that while
charges grew, that part of the provincial resource, which was
made up by assignments, and in some cases it formed quite an
appreciable part, remained unaltered. Secondly, it was argued
that doles were demoralizing and that it would be better to
replace them by shares in growing revenue. The Commission
seems to have been completely impressed by the disadvantages
of large adjusting assignments, but it demurred, and rightly so,
to the criticisms with regard to the doles. Every one extolled the
benefits of decentralization to the Provinces, but few realized
the anxieties that it involved to the Government of India. It
must have been clear that by the process of decentralization
the Government of India had given the Provinces more or
less complete freedom in distributing their funds in any way
they liked upon the services delegated to their management,
while it had remained responsible for their efficient upkeep by
the provisions of the law which governed its constitution. But
the freedom which the provinces had obtained in carrying on
the financial management of the services made over to their
particular control, involved the possibility of their fostering
certain services deemed to be of immediate utility to the people
of the Provinces, and neglecting others the utility of which,
though remote to the Provinces, was nevertheless real to the
country as a whole. Neglect of nationally important services such
as Education, Sanitation, Police, was especially to be avoided
during periods of plague and famine. But the Government of
India could not enforce distribution of provincial funds on such
services; for one of the vital conditions of Provincial Finance
was freedom of appropriation on provincialized services,
which were not distinguished into obligatory and optional
as is the case in the continental system of local finance.
The Government of India was indeed not as powerless as the

Central Government in England which, as is well known, cannot
rectify cases of neglect by local authorities without resort to a
writ of mandamus. But the way to bring a recalcitrant province
to order, if easier, was not pleasant. For, the only way to mend
such a situation was to end it by suspending the operation of
Provincial finance. Rather than resort to such a grave measure
the Government of India happily hit upon grants-in-aid of
particular services as a powerful and well-tried1 corrective
to the negligence of the Province, and require it to maintain
a “national minimum” in those services which it regarded
as onerous rather than beneficial.2 Convinced of the virtue
of grants-in-aid as a brake on decentralization degenerating
into disintegration, the Commission only recommended that
measures be taken to give Provincial Finance the greatest
elasticity possible by diminishing the assignments to the
smallest magnitude possible.
Following the recommendations of the Commission the
Government of India decided to make certain modifications in
the existing allocation of revenue and charges and to make
the quasi-permanent settlements permanent settlements from
the year 1912. The permanent settlements did not differ from
the quasi-permanent settlements which they superseded in
any material point so far as the principle of allocation was
concerned. The only point of difference between them in
that respect was a partial replacement of the fixed adjusting
assignments by increased shares in the following joint heads
of revenue and expenditure :—
Modifications in Shares
Revenues Expenditure
Heads of Provincial Heads of Provincial
Account Share Account Share
1. Land Revenue including 5/8 to Burma 1. Land 5
/8 Burma
the portion credited to ½ Punjab Revenue ½ Punjab
Irrigation.
2. Excise Wholly in Eastern Bengal 2. Excise Same as in
and Assam, Bombay. In C.P., revenue
Bengal and U.P.,3/4 column.
Assessed Taxes
3. (P.W.D.) ½ ... ...
4. Forest Wholly. 4. Forest Wholly
5. Major Irrigation ½ in Punjab, minimum of 4 5. Major ½
works (excluding lakhs guaranteed. Irrigation
portion of Land
Revenue credited to it).
6. Major and Minor ½ in Bengal 6. Major and ½ in Bengal
Irrigation. Minor
Irrigation.
1
It is possible that the system was borrowed from England.
2
S. Webb, Grants-in-Aid, 1911, p. 25.
The effect of these modifications in the shares in the joint

heads of revenue and expenditure was to reduce the adjusting
assignments to the following figures :—
Assignments in
From
Lakhs of Rupees
Province Provincial
from Imperial
to Imperial
to Provincial
Central Provinces ... ... ... ... 21.40 ...
Burma ... ... ... ... ... 13.12 ...
Eastern Bengal a n d ... ... ... ... 13.55 ...
Assam
Bengal ... ... ... ... ... ... 18.40
U.P. ... ... ... ... ... ... 19.26
Punjab ... ... ... ... ... 6.77 ...
Madras ... ... ... ... ... ... 21.43
Bombay ... ... ... ... ... ... 9.38
During the permanent as during the quinquennial and
quasi-permanent settlements the grants-in-aid of specific
services, unobjected to as they were by the Decentralization
Commission, were continued to be given to the different
Provinces throughout the period although, as may be seen from
the following figures, in a continually diminishing magnitude :—
Special Grants-in-Aid (in rupees)
Provinces 1912-13 1913-14 1914-15 1915-16 1916-17 1917-18 1918-19
CP. ... 4790480 2643264 5138256 4407802 3795784 3817540 2726008
Burma ... 8538948 2263939 3849763 3869472 216979 —2478482 2490
Assam ... 5530991 3283011 7533878 6577619 2497861 1922252 2444730
Bengal ... 15401885 6480800 7594894 7186436 6538732 7074773 9889717
Bihar & 6379420 4761028 3526567 4278854 3262214 4235205 4179425
Orissa
U.P. ... 11470603 8542279 3842624 3229924 2453969 2706164 3590530
Punjab ... 6700924 2424404 3988117 5908923 4925830 4862616 5563665
Madras ... 12277591 5066343 1697803 1220785 1099165 1483708 1577446
Bombay ... 11192723 3996729 1468837 1200254 1065964 1154725 2479510
Total ... 82283565 39461797 38640739 37880069 25856498 24778501 35453521
of India.
It was natural that the results of the permanent settlement
should have been more anxiously awaited for with great
interest by the Provinces, for the permanent settlement had
the potentiality of a permanent gain or a permanent loss. That
their anxiety on that score could not out have been completely
allayed is amply supported by the repeated surpluses that
meet the eye as it passes over the following figures of annual
additions to and deductions from their balances during the
period of its currency :—

PROVINCIAL SURPLUSES OR DEFICITS (IN RUPEES)
Provinces 1912-13 1913-14 1914-15 1915-16 1916-17 1917-18 1918-19
C.P. ... 5085246 1881245 —6544416 —13836 4235704 1870517 920121

Burma ... 8874174 914026 —3729808 1896621 9427702 12067708 4873587
Assam ... 3610494 —2217691 —4550789 658812 6044904 2800634 435872
Bengal ... 14705270 480842 —3967607 1028156 3708638 5280082 732237
Bihar & Orissa 7022199 —920062 —1870264 1133562 5919907 7176786 3643564
UP. ... 9588749 50704 —4611080 —973090 3427808 —2268311 3686945
Punjab ... 7411069 —692512 —3730641 —1133541 500995 —695216 1185930
Madras ... 4330275 —5298411 —1207754 318508 2571241 1042303 —972354
Bombay ... 7083281 1558566 —2639924 —951099 122434 611321 1681066
Compiled from the Annual Finance and Revenge Accounts of the Government of India.
While the condition of Provincial Finance was thus undoubtedly
prosperous, the erratic movements in the provincial balances do not
quite bear out the hope of orderly progress that was entertained
of the permanent settlement. It should be noted, however, that
the period during which the permanent settlement was current
was not wholly a normal period. Part of the permanent settlement
was no doubt a peace period, but it was not even as long as a
quinquennium, and it should not on that account detract from
the merits of a permanent settlement if it disclosed the faults
of the quinquennial settlements. Most of the period covered by
the permanent settlement was, however, a period of the Great
War, the abnormal events of which could not have had any but
disturbing effects on Provincial Finance.
Whether the permanent settlements would have been adequate
for the purpose in view if sufficient length of time had been
allowed for conditions to have become settled it is not given to
us to say. For, from April 1, 1921, provincial Finance in British
India entered on an entirely new phase. That phase of it will
be dealt with in another part. Here the study of the growth of
Provincial Finance as it developed stage by stage under the old
phase comes to an end. But this study will not be complete until
we deal with the mechanism which inter-related the finances of
the Central and Provincial Governments under the old phase.
But before we proceed to do so it might be of interest as well as
of value that the study of the final stage in the development of
Provincial Finance were to close with the following retrospect of
provincial revenue and expenditure which shows, as nothing else
can, the small beginnings, the large strides and the vast proportions
that Provincial Finance had reached during the half century over
which it had been allowed to run its course.

GROWTH OF PROVINCIAL FINANCE
182
Provincial Revenues Provincial Expenditure

As a percentage of the total Revenues of India As a percentage of the total Expenditure of India
Provinces
1871-2 1882-3 1892-3 1904-5 1912-3 1918-9 1871-2 1882-3 1892-3 1904-5 1912-3 1918-9
C.P. ... ... ... .655 1.055 .863 .905 2.52 1.715 .652 1.008 .87 .984 2.19 1.685
Burma ... ... ... .572 1.66 2.256 3.023 4.73 3.57 .592 1.914 2.16 3.31 4.14 3.15
MK
Bengal ... ... ... 2.8 5.9 4.72 4.12 5.56 4.00 2.7 6.68 4.52 4.26 4.56 3.84
N.W.P. and Oudh ... ... 1.99 4.16 3.6 ... ... ... 2.04 4.4 3.32 ... ... ...
Punjab ... ... ... 1.66 1.59 1.888 2.08 3.96 3.11 1.55 2.165 2.03 1.83 3.47 2.81
SJ+YS
Madras ... ... ... 1.595 3.32 3.3 2.88 6.27 4.75 1.61 3.24 3.4 3.09 6.1 4.53
Bombay ... ... ... 1.8 4.9 4.49 4.05 6.17 5.45 1.836 5.08 4.4 3.77 5.7 5.00
Assam ... ... ... ... .61 .738 .597 1.38 1.00 ... .505 .617 .618 1.13 .857
U.P. ... ... ... ... ... ... 2.99 5.5 4.15 ... ... ... 3.01 4.87 3.94
25-9-2013/YS-11-11-2013
Bihar and Orissa ... ... ... ... ... 2.6 1.9 ... ... ... ... 2.11 1.775
Total Provincial ... 11.11 22.8 21.75 20.4 38.6 29.2 10.8 25.00 21.3 20.8 34.3 27.6
Complied from the Annual Finance and Revenue Accounts of the Government of India.
182
PART III
PROVINCIAL FINANCE : ITS
MECHANISM
CHAPTER VII
THE LIMITATIONS OF PROVINCIAL FINANCE
To those who might be expected to have a knowledge of
the anomaly—unparalleled in the annals of administration—
involving the existence of provincial Government without
there being the necessary complement of Provincial Finance,
the study could not but have been of profound interest as
disclosing the manner in which the anomaly created in 1833
was rectified or seemed to be rectified in 1870.1
1
There, however, prevails the idea that Provincial Finance existed long before 1870,
But this is undoubtedly an error which may as well be corrected in this place by briefly
recalling the history of financial decentralization prior to 1870. The year 1855 will always
stand preeminent in the history of decentralization of Indian Finance. It is from that year
that Local Finance dated its origin. It must not, however, be supposed that prior to 1855
there were no local revenues. On the contrary, there were very small funds such as Ferry
Funds, Toll Funds, Cesses, etc., in existence and were spent on improvements of local utility,
but the important point to note is that the balances from such funds were not carried
to a separate account but as a rule merged in the general balances of the country, with
the exception probably of Bengal and North-Western Provinces, where it seems that such
balances were carried to separate Local Fund Accounts (cf. Calcutta Review, 1851, Vol. 16,
pp. 464 and 466). It was by the Financial Resolution of May 11, 1855, that Local Funds were
completely separated from Imperial Funds and were treated as “Deposits”—a sub-division of
the Account Head “Debt” (cf. Accountant’s Manual, by Y. Venkatramaiah, Part I, Madras,
1866, p. 79) and by the Resolution of September, 1863, Local Finance was established on
a separate footing by the institution for each of the different provinces of a distinct Local
Fund Budget as separate from the Imperial Budget. It so happened that in the absence
of local authorities the Government of India entrusted the task of the preparation and
execution of the Local Funds Budget to the respective Provincial Governments as being more
in touch with local wants. It is this accident that has betrayed many into the supposition
that this was essentially Provincial Finance. But nothing can be a greater blunder. What
existed before 1870 was Local Finance, pure and simple, although under the supervision
of the Provincial Government, in whose hands the Local Funds were essentially a kind
of trust. The mere bringing together by the Provincial Governments of the receipts and
charges pertaining to the Local Funds into a Local Fund Account for the whole Province
can hardly be interpreted to mean the amount to be at their disposal—and that is the only
sense in which Provincial Finance can be a reality—any more than the bringing together
of the Local Rates levied in the United Kingdom in the budget of the Chancellor of the
Exchequer can give an indication of its financial position. The Local Funds were not at the
disposal of the Provincial Governments, for they could not be disposed of on purposes other
than those which attached to them. In this sense they constituted Local Finance and not
Provincial Finance. Some people mistake it for Provincial Finance probably because the term
“Local Government” is used as a synonym for Provincial Government. But, while Local and
Provincial Governments are often used as interchangeable terms, it must be remembered
Local and Provincial Finance cannot be so used. As a matter of fact, there was a period
in the history of Financial organization in India during which there was Local Finance
without Local Government to be precise, and there was no Provincial Finance, even though
there were Provincial Governments. It is probable that, as long as the habit of speaking
of Provincial Government as Local Government continues, this confusion of ideas will not
entirely vanish. While some have insisted that Provincial Finance had its being long before
1870, the Resolution of December 14, 1870, which instituted the scheme of Provincial Finance,
is called “Resolution on Local Finance” as though it gave rise to Local and not Provincial
Finance. Such absurdities can be avoided only by insisting upon precision of terminology.
On a purely a priori consideration of the matter, nothing

could have been more natural than to suppose that the
system of Provincial Finance thus established in British India
was independent in its organization. Indeed it is difficult to
imagine how one could emerge from the study of its origin
and development without such a faith having silently grown
upon him. But if Provincial Finance was independent in its
organization, we should find the Provinces in possession of
financial powers which are commonly associated with the
functioning of independent States. For the immediate purpose
of finding out whether or not Provincial Finance was an
independent system of finance, we may take the freedom of
budgeting and everything that is involved in it as an evidence
of the existence of these powers. Independent budget powers
would involve the power to determine the services which,
according to the needs of the country, a good government
should undertake, and to decide upon the mode of raising either
by taxation or loan sufficient money to meet the expenditure
upon those services. Alongside these powers the budget: system
entails the obligation of keeping accounts and submitting them
to independent audit.
Applying these tests to the Provincial Budget, the origin
and growth of which have been treated in the foregoing parts
of this study, we cannot predicate a tithe of the independence
which characterizes the budgets of sovereign States. On the
contrary, the budget system introuced into India with regard
to the different Provinces was accompanied by the most
stringent limitations. They were given a budget without its
powers, and they bore the obligations of accounts and audit
just because they were left free within the limits of their
budgets. Why these limitations were imposed will be explained
when we come to scrutinize the ways of enlarging the scope
of Provincial Finance. it must, however, be emphasized that
these limitations formed an integral part of the scheme, and
the stringency of the former had grown pari passu with the
scope and proportions of the latter. In fact they defined the
law of the Constitution of Provincial Budgets. A complete
comprehension of the operation of Provincial Finance in British
India is therefore not possible without a thorough knowledge
of its rules of government. Such being the importance of these
rules it cannot but be to our advantage to analyse them at
this stage.
LIMITATIONS OF PROVINCIAL FINANCE 185
These rules were laid down on various occasions during the

interval between 1870, when the scheme of Provincial Finance
came into being, and 1912, when the scheme reached through an
evolutionary process its final and permanent stage, in the form
of Resolutions of the Government of India in the Department
of Finance. The rules framed in 18701 were few and simple.
Nor was there any necessity for a complex code to govern
the operation of the very meagre budgets which were then
constituted. Many supplementary rules were issued afterwards
to dispose of unforeseen cases of order and procedure; but it
was not till 18772 that we come across a most elaborate set of
rules and regulations governing the financial transactions of
the provincial Government. The Rules of 1877 were the basis
of all those that were subsequently issued. With very small
addenda or corrigenda they remained in force for a period of
fifteen years, when they were superseded by a new series of
Rules promulgated in 1892.3 But only within a short span of
a quinquennium this series was replaced by another issued in
1897,4 and the latter formed the governing body of Rules till the
year 1912, when a new series was brought out to regulate the
working of the permanent settlement made in that year.5 The
same was reissued in the Financial Department Resolution No.
361 -E-A. dated July 24, 1916. But as the alterations therein
were not in any sense consequential, the series of 1912 may be
taken as laying down the final regulations of Provincial Finance.
Recognize as we must the necessity for analysing the rules,
we must determine beforehand the point or points of view
from which to conduct the analysis. It must be premised at
the outset that the object of entering upon the examination of
the Rules is twofold : (1) to know what limitations there were
and (2) why they were placed. Our immediate interest, it is
true, is to state what limitations there were, but this is only
a preliminary, if not a minor, object. The second is really the
more important of the two. It is only as an aid to the proper
understanding of the causes of the necessity for these limitations
that a knowledge of them is to be sought. While keeping in our
mind the immediate object of stating the limitations, it will
be unimaginative not to foresee that in the following chapter,
1
Financial Department Resolution No. 3334 dated December 14, 1870.
2
Financial Department Resolution No. 1709 dated March 22, 1877.
3
Financial Department Resolution No. 1142 of March 17, 1892.
4
Financial Department Resolution No. 3551 dated August 11, 1897.
5
Financial Department Resolution No. 249-E.A. dated July 15, 1912.
in which we shall be presently engaged, we will learn that

the necessity for these limitations arose from the very peculiar
nature of Provincial Finance itself. On the other hand, it is
important to anticipate this conclusion, and instead of producing
the Rules seriatim as they occur, arrange them in such a way
that they shall be an external register of the internal conception
of Provincial Finance which particularly pervaded the minds of
its promotors. For the consummation of this end, the labours
of the officials in charge of Provincial Finance who have laid
down these rules are of no avail. To them these rules were
only instruments of financial control, and it did not therefore
matter in what order they were grouped. On the other hand,
to get at the conception behind these rules it is necessary to
classify and group them according to the purposes they were
calculated to subserve. But the cardinal point in the matter
of classification lies in defining the likely purposes which the
originators of such an interrelated scheme of Provincial Finance
as obtained in India must have had in view. Without being at
all dogmatic, it may be said that for a successful working of such
a scheme rules would have to be laid down for the purposes
of defining (1) the Administrative and (2) Financial Powers of
the Provincial Government. Each of the two categories may be
further subdivided for a clearer understanding of the nature of
Provincial Finance. Thus the Rules relating to Administrative
Powers may be further subdivided into those pertaining to
(i) Services and (ii) Staff. Similarly the Rules defining the
Financial Powers may be conveniently grouped under the
following subsidiary categories : Those (i) of a general nature
and those pertaining to (ii) Provincial revenues; (iii) Provincial
Expenditure, (iv) Budget Sanction and (v) Audit and Account.
Taking purpose as the fundamentum divisionis, the above
categories may be supposed to exhaust the possible purposes
that the framers of the scheme may be said to have had
in mind. On the basis of these categories we may therefore
proceed to reduce the amorphous mass of Rules into a digest
which, it may be hoped, will be convenient and instructive at
the same time.
I. LIMITATIONS ON ADMINISTRATIVE POWERS
(1) Rules of Inter-Provincial Services
For regulating the inter-provincial or inter-departmental
relations affected by the creation of separate budgets for the different
Provinces, it was ordained that—

(i) No inter-provincial adjustments were to be allowed.
(ii) No service previously rendered to other Departments at
the charge of the Department made over to the control
of the Provincial Governments was to be abolished, and
no service previously rendered to these departments at
the charge of other departments was to be increased.
(iii) No line of through communication was to be abandoned
or allowed to fall out of repair.
(2) Rules pertaining to Staff
As to the staff engaged in the execution of the provincialized
services the Provincial Governments were enjoined not to—
(i) Create a permanent appointment or augment the pay
and allowance of any appointment.
Prior to 1912 this applied to appointments with a pay of
Rs. 250 a month and above.1 But after 1912 it applied
only to appointments ordinarily held by a Gazetted
Officer or by an officer of the Imperial Service as defined
in Article 29-B of the Civil Service Regulations.2
(ii) Create a temporary appointments or deputation for an
Officer.
Prior to 1912 this applied to appointments with a pay of
Rs. 250 a month and above.3 But after 1912 it applied
to such of the appointments the remuneration of which
exceeded Rs. 2,500 a month, or Rs. 800 a month, if the
temporary appointment or deputation was expected to
last for more than two years.4
(iii) Abolish a permanent appointment or reduce the pay
and allowances of such an appointment.
This rule was in the beginning applied to such
appointments the remuneration of which exceeded
Rs. 250 a month.5 After 1912 it was confined to such
appointments as were held by Gazetted Civil Officers
recruited in England or as were defined by Article 29-B
of the Civil Service Regulations.6
(iv) Grant to a Civil officer in Government employ or in
receipt of a service pension.
1
Rule 4 (3) (a) of 1897. 4
Rule 10 (4) (a) of 1912.
2
Rule 10(1) of 1912. 5
Rule 4 (4) of 1897.
3
Rule 4 (3) (b) of 1897. 6
Rule 10 (3) of 1912.
(a) Land, except where the grant was made under the
ordinary revenue rules of the Province concerned
without involving any special concession in money
or its equivalent beyond the fact that the grantee
received the grant in preference to others.1
or (b) An assignment of Land Revenue when the amount
exceeded Rs. 600 a year, or the assignment, though
within that amount was not limited to three lives
and reduced by one-half on each succession. All
grants as assignments of Land Revenue made by
Provincial Governments to civil officers were to be
confined to cases in which the services were of a
very distinguished and exceptional character.2
(v) Revise (a) permanent establishments which involved
additional expenditure exceeding Rs. 50,000 a year; or
(b) rates of substantive pay of any one branch of the
service at a cost to that service alone of more than
Rs. 25,000 a year, or (c) the average pay of a service
of which the maximum pay exceeded Rs. 500 a month
and raise it above the average rate approved at the
last revision of the service by the Secretary of State or
the Government of India, or (d) the local allowances as
compensation for dearness of living or for increase of
rents in any localty.3
II. LIMITATIONS ON FINANCIAL POWERS
(1) General
Before actually detailing with the limitations on the
financial powers of the Provincial Governments it is necessary
to recall that the financial settlements made with the Provinces
consisted in handing over to them certain heads of revenue and
expenditure. From this accidental feature it is not to be supposed
that the settlements were a collection of separate settlements
for each head of revenue and expenditure incorporated into
the Provincial Budget. To obviate such a construction by the
Provincial Governments and the consequences thereof, it was
ruled that—
(1) The Provincial Governments were to understand that the
funds assigned to them formed a consolidated grant for all the
services en masse entrusted to their respective administration
and that no claim could therefore lie against the Imperial
1
Rule 10 (9) (a) of 1912. 3
Rule 10 (6) of 1912.
2
Rule 10 (9) (b) of 1912.
treasury on the ground that the actual cost of any

service exceeded the amount at which it was estimated
in the calculations of the consolidated grant.1
(2) And they were not to make any extra demands on the
Imperial treasury, but were bound to maintain from the
funds given to them all the services entrusted to their
management in a state of administrative efficiency.2
With regard to the powers of the Provincial Governments
concerning the custody of their funds it was ruled :—
(3) That the funds allotted for their use were to be lodged
in the Imperial treasury, and were not to be removed for
investment or deposit elsewhere; nor were the provincial
Governments competent to withdraw such money except
for expenditure upon the public services.3
(2) Revenue Rules
Turning from the general limitations to those pertaining
to the revenues of the provinces, it should be noted that they
were required to maintain themselves within the funds allotted
to them by the Central Government at each settlement.
The provinces could not augment their resources beyond
the yield due to their natural growth by any possible means,
for it was provided that Provincial Governments were—
(i) Not to impose any additional taxation or make any
change in the existing system of revenue management.4
(ii) Not to alter or augment within its area the rates of
discount upon the retail of Stamps, Court Fee labels,
and duties on spirits and drugs.5
(iii) Not to raise for its own finances any loans in the open
market.6
Powerless in the matter of augmenting their resources,
the Provincial Governments were not free to will them
away to any other authority subordinate to them. To
guard against such eventualities it was ruled that
Provincial Government were—
1
Rule 7 of 1877 and 14 of 1897.
2
Rule7 of 1877 and 14 of 1897.
3
Rule 1 (8) of 1877, 4 (11) of 1897, and 5 (6) of 1912.
4
Rule 1 (1) of 1877 and subsequent Resolutions.
5
Rule 1 (6) of 1877, also embodied in subsequent Resolutions.
6
Rule 5 (13) of 1912. It is surprising that the various resolutions on the subject of
provincial Finance prior to 1912 do not contain this ruling, though it cannot be doubted
that it has been in operation since the commencement of provincial Finance. In the absence
of a specific ruling prior to 1912, attention may be invited to the Resolution reviewing the
Financial Statement for 1879-80, where it is said “so long, therefore, as a Local Government
does not incur debt (which is absolutely forbidden), there is etc., etc.” F. S. 1878, Calcutta, p. 5.
(iv) Not to alienate any item credited to the general revenues,

Imperial or Provincial, so as to form an asset of a Local
or Special Fund.
This provision as regards the non-alienation of
the resources of revenue made over to the provinces
was a little relaxed by the Rules of 1912 so that it
was permissible for them to assign to a local body or
special fund, as defined in Article 33 of Civil Service
Regulations, constituted by law, petty items of Wholly
Provincial Revenue of a recurring character, not derived
from the proceeds of general taxation and not yielding
on an average more than Rs. 25,000 a year.1
(v) Not to make grants, subventions or assignments from
the funds at their disposal to Local or Municipal bodies
so as to create a permanent charge on the revenues of
India.
This by no means prevented grants, subventions
or assignments from being made to local or municipal
bodies by the Provincial Governments from their funds
although the Government of India had sounded to them
a note of warning by declining to bind itself to continue
the grants after the expiration of the settlements or to
provide for them in the succeeding settlements.2 By the
Rules of 1912, however, the power of making such grants
was more clearly circumscribed so that a Provincial
Government could not make (1) recurring grants to
local bodies from provincial revenues exceeding Rs.
1,00,000 a year in any one case,3 or (2) non-recurring
grants to local bodies exceeding Rs. 10,00,000 in any
one case,4 or (3) a grant to a charitable or religious
institution other than educational, not being outside
India, in excess of Rs. 10,000 , a year if recurring, and
Rs. 50,000 if non-recurring.5
(vi) Not to make any grants to non-official (1) on political
considerations of (a) land, either free of revenue, or on
favourable terms, or (b) of assignment of land revenue, if
the value of the land or land revenue exceeded Rs. 1,000 a
year;6 (2) on the consideration of injury to himself or to his
family in the event of his death during or in consequence
of service rendered to Government, or (3) on the
1
Rule 5 (5) of l912. 4
Rule 10 (12) (b) of 1912.
2
Rule 4 (10) of 1897. 5
Rule 10 (10) of 1912.
3
Rule 10 (12) (a) of 1912. 6
Rule 10 (7) of 1912.
consideration of exceptional services to the Government

of a pension exceeding Rs. 1,000 a year or a gratuity
exceeding Rs. 3,000 in any one case.1
(3) Rules of Expenditure
The powers of sanctioning expenditure granted to the
Provincial Government were as limited as their revenue
powers. While they were free to spend their funds on the
services entrusted to them, certain limitations were laid down
for the purposes of expressly ruling out certain objects and
subjects of expenditure from the provincial domain.
With regard to the objects of their expenditure Provincial
Governments were required—
(i) Not to sanction any expenditure from public money on
anything outside the category of objects of expenditure
recognised by the Government of India.2
(ii) To confine themselves to the carrying on of the services
particularly entrusted to them by the terms of the
settlement.
Prior to 1912 they could undertake a “new
general service or duty” only if they satisfied the
Government of India that they could provide the
necessary funds temporarily if it was temporary, and
permanently if it was permanent.3 This provision
was altered in 1912 so that a Provincial Government
could undertake a new general service or duty
provided it was not (a) of an unusual nature, or
(b) devoted to objects outside the ordinary work of
administration, or (c) likely to involve at a later
date expenditure beyond its powers of sanction.4
(iii) Not to spend—
(a) On State ceremonies and assemblies, and
on the entertainment at the public charge
of distinguished visitors to India more than
Rs. 1,00,000.5
1
Rule 10 (8) of 1912.
2
Rule 11 of 1897, also embodied in subsequent Resolutions.
3
Rule 4 (2) of 1897.
4
Rule 5 (11) of 1912.
5
Rule 10(11) of 1912.
(b) On Railway Carriages especially reserved for the

use of high officials otherwise than in connection
with the maintenance of the carriage.1
(c) On the purchase of a Motor-car or Motor-cycle for
the use of an official, or on the maintenance of it
otherwise than from the “Contract Grant” with the
Head of the province.2
(d) On the increase of the “Contract Grant” to the
Head of the province.3
(e) On the construction or purchase of a vessel required
for inland navigation and for use at ports, the cost
of which exceeded Rs. 1,00,000.4
(f) On an Irrigation or other Public Works projects
of which the estimated cost chargeable to the
general revenues exceeded Rs. 20,00,000 inclusive
of establishments, tools and plants. It was however
competent for a Provincial Government to spend up
to an amount 10 per cent. in excess of the original
sanctioned estimate provided such excess was not
more than Rs. 12 ½ lakhs inclusive of establishment,
tools and plants.5
As to the limitations respecting the subjects of provincial
expenditure, it was ruled that in virtue of the application
of the general condition precedent to the delegation of all
authority to disburse public money, that it shall be bona fide
for a public purpose, Provincial Governments could not spend
from their funds for benefiting—
(i) Any individual or body of private persons unless in
accordance with some declared or established rule or
principle recognized by the Government of India.6
(ii) Native States, directly beyond Rs. 10,000 a year on any
one project or Rs. 50,000 if non-recurring.7
1
Rule 10 (4) of 1912.
2
Rule 10 (6) of 1912.
3
Rule 10 (15) of 1912.
4
Rule 10 (17) of 1912.
5
Rule 10 (18)of 1912.
6
Rule 10 of 1877, also embodied in subsequent Resolutions.
7
Rule 10 (13) of 1912.
(4) Budgetary Rules

Besides being subject to the ordinary rules of the Budget
System introduced into India for the first time by Mr. Wilson
in 1860,1 by which they were required to submit their budget
estimates for sanction to the Government of India, and to
observe the rules of appropriation in the execution of the grants,
Provincial Governments were further given to understand that
without the previous consent of the Government of India they—
(i) Could not exhaust their balances in the Imperial
Treasury.
Prior to 1887 a Provincial Government could propose
in its budget estimates to draw upon the whole of its
balance. But by the Rules then framed the Provincial
Government was required to maintain at all time a
certain minimum balance in the Imperial treasury, the
amount of which varied with each successive settlement.
(ii) Could not budget for a deficit, that is for provincial
expenditure in excess of the provincial revenues of the
year.
The stringency of this rule2 was a little softened, so
that a Province could after 1912 budget for a deficit, if
it satisfied the Government of India that the cause was
exceptional and non-recurring,3 but it was at the same
time provided that, if this drawing upon the balances to
make up the deficits resulted in reducing the balance
below the prescribed minimum, the budget for a deficit
would be sanctioned only if the Government of India was
able to allow the Provincial Government in question an
overdraft to the extent necessary to restore the balance
to the required minimum from the general balances to
be repaid in such rates of interest and instalments as
may be prescribed.4
(iii) Could not exceed during the currency of the year the
expenditure on any head of account as finally sanctioned
for it, for that year, by the Government of India.
1
Rule 11 of 1892, 13 of 1897, and 19 of 1912.
2
Rule 8 of 1892.
3
Rule 21 of 1912.
4
Rule 21 and 22 of 1912.
It could increase the expenditure only if the

increase was counterbalanced by re-appropriation,
that is, reduction by the amount of the excess of the
sanctioned grant under some other head of account
under its control.1 The powers of reappropriation of
Provincial Governments were very extensive, for it
could sanction re-appropriation between the grants for
provincial expenditure included in its budget, whether
under a Wholly Provincial or a Divided Major or Minor
Head provided that the aggregate grant of provincial
expenditure was not exceeded.2
(5) Rules of Audit and Account
Though the Provinces were allowed considerable powers
of re-appropriation within their budgets there was imposed
upon them the obligation of audit and accounts of the money
they spent. The important point to note in this connection
is the fact that this obligation of the keeping of accounts
and submitting them to audit was an obligation which the
Provinces did not owe to their legislatures, but was an
obligation which they owed to the Government of india,
who had conferred upon them the financial power they
exercised. Moreover, the Government of India did not leave
the Provinces to discharge this obligation according to their
own sweet will by employing their own audit and account
staff. On the contrary the responsibility of realizing this
obligation was entrusted to the imperial officers of audit and
account stationed in the different Provinces, who acted as the
critics and guides of Provincial Governments in the matter
of administration and interpretation of the Rules discussed
above. To facilitate their task Provincial Governments were
instructed—
(i) Not to make any alterations in the form of procedure
of public accounts,3 or direct the division of a charge
between two or more heads of account. In all such
matters they were to abide by the decision of the
Comptroller General—an officer of the Imperial
Government.4
1
Rule 24 of 1912.
2
Rule 25(1) of 1912
3
Rule 1 (a) of 1897 also embodied in subsequent Resolutions.
4
Rule 4 (2) of 1897.
(ii) To transmit the objection of the Imperial audit officer

against its appropriation or sanction with regard to
expenditure with the explanation of the Provincial
Government concerned to the Government of India for
final disposal.1
Such were the limitations on the Financial Powers of the
Provincial Governments. Apart from these specific limitations
the Provincial Governments were not altogether the free
architects of their own destiny within the sphere allotted to
them; for it was provided that the power of supervision and
control in any Department still rested in the Governor-General
in Council, and that the Provincial Governments should keep
him fully informed of their executive and financial proceedings
so as to enable the former to discharge its obligations for peace,
order and good government.2 Their general effect on the finaicial
freedom of the Provinces could hardly have been concealed.
It must therefore have been a most impervious mind which
in face of these paralysing limitations had not lost its faith
in the independence of the system of Provincial Finance and
had not asked what was after all the nature and advantage
of this illusive institution ?

1
Rule 30 and 31 of 1912.
2
Rule 5 of 1877; Rule 15 of 1897 ; and Rule 6 and 7 of 1912.
CHAPTER VIII
THE NATURE OF PROVINCIAL FINANCE
The study of Provincial Finance cannot be said to be
complete unless it furnishes a true answer to the question
which is bound to be asked in the end. What was the resulting
financial relationship under the old scheme between the Central
and Provincial Governments in British India? The question
is an important one, for the validity of the criticisms and
proposals with regards to Provincial Finance, or any subject
for that matter, depends entirely upon a correct understanding
of its nature. Unfortunately it had not received the attention
that its importance demanded, and consequently we find the
rather distressing fact that no subject was so confidently
discussed, and yet none was so grossly misunderstood, as that
of the nature of the old system of Provincial Finance in British
India. It therefore becomes necessary to explain what was the
exact nature of the system of Provincial Finance established
in British India.
In an inter-related system of polities, such as is composed
of Central and Provincial Governments in British India, it is
always difficult to grasp the exact nature of their financial
relationship; for, what may appear on the surface may be very
different from what it may really be. None the less, the view
was commonly held that the Indian system was based on a
separation of sources between the Provincial and the Central
Governments, and contributions from the yield by the former to
the latter, much the same as was found in the federal system
of finance which obtained in the German Empire. Whether such
a view was wrong or right there were various incidents of the
relationship between the Central and Provincial Governments
in India, which, there can be no doubt, went a long way to
strengthen that view. Among such incidents must be mentioned
the division of functions between the Central and Provincial
Governments. An onlooker could not fail to observe that in
this distribution of functions the former controlled matters
pertaining to Military Affairs, Foreign Affairs, General Taxation,
THE NATURE OF PROVINCIAL FINANCE 197
Currency, Debt, Tariffs, Posts and Telegraph, Railways and

Adult and Accounts; while the latter administered matters of
ordinary internal administration, such as Police, Education,
Sanitation, Irrigation, Roads and Buildings, Forests, and the
control over Local Bodies. If this incident encouraged the view
that there was a separation of services, there was another
incident of the relationship which encouraged the view there
was also a separation of revenues between the Central and
Provincial Governments in British India. That incident was
the collection of most of the taxes in India by the agency of
Provincial Governments. As observed by the Royal Commission
on Indian Expenditure1
“in the United Kingdom the Revenue Administration
is centralized..... under the Chancellor of the Exchequer
in London. In India the administration of some branches
of revenue is centralized, though not always under the
Finance Minister (of the Government of India). That of other
branches is decentralized. The Land Revenue is under the
control of the Central Department at Calcutta, but that
department is subject not to the Finance Minister but to the
Minister in charge of the Home and Revenue Departments.
The Telegraph Department is under the Minister of Public
Works. The Central Government controls the collection of
part of the Salt duty and of part of the opium revenue, of
Post Office revenue and of other revenues..... The remainder
of the revenue is collected by the Provincial Governments....
As regards..... a large portion of the revenue, the Provincial
Governments are units of administration and are efficiently
equipped for their duties.”
As a third incident supporting the same view, reference must
be made to the peculiar mode of presenting Indian Accounts
adopted in official Blue Books. As might have been noticed, to
the General Accounts of the Government of India is attached
a supplementary account professing to show the distribution
of the different heads of receipts and expenditure among the
various Provinces into which British India has been divided.
This mode of showing the accounts is beyond doubt misleading.
It appears as if the aim was to show the financial position
of the Provinces. But as a matter of fact the figures given in
the columns in which the revenues and charges are shown in
their provincial distribution do not represent the respective
claims and responsibilities of the different Provinces. Far from
showing the financial position of the Provinces, the figures
in the columns merely represent the geographical distribu-
1
Para 25 of the Final Report.
tion of the different agencies through which the financial

business of the Government of India is conducted, and through
which the revenues are collected and the expenditure is
defrayed. The revenue and expenditure, for instance, shown
under “Bombay” represent the income and outgo which pass
through the books of the Accountant General of the Government
of India stationed at Bombay, and the same is true of entries
under the heads of other Provincial Governments. The figures
really represent the transactions of the Government of India
distributed geographically, and there is nothing provincial
about them in the least. However, such a system of account
bears the impression that the system of finance in India is
primarily Federal.
With these three incidents before one’s mind it was easy to
fall into a federal line of thinking in reasoning about the financial
relationship between the Central and Provincial Governments
in British India. So deep seated was the view that the Indian
system was one of separation of sources and contributions
from the yield, that many witnesses giving evidence before
the Royal Commissions on Indian Expenditure (1892) and on
Decentralization in British India (1909) sallied forth to assail
the Commissioners with the criticisms on the inequity of the
system and proposals for amending it according to what they
considered to be the requirements of justice. Nowhere have they
stated the reasons for their assumptions in explicit terms.1 Yet
their proposals are an unmistakable proof that they held that
view. Unless they had taken for granted that the Provinces
had separate revenues and separate services, they could not be
expected to have wasted their energies in directing as they did
their efforts to getting redressed what appeared to them as a
piece of injustice embodied in the unequal contributions made
by the different Provinces form their revenues to the support
of the Central Government.
If their view of the financial relationship between the Central
and Provincial Governments was acceptable, then a good deal
could not but have been conceded in favour of their criticisms
and their proposals. Contributions, if the Imperial share could
have been conceived of in such a light, as between the different
Provinces whether in ratio to their revenues or population, were
certainly unequal if calculated on the somewhat questionable
but generally accepted hypothesis that all the revenues collected
within a Province belonged to the Province.
1
Cf., however, Indian Expenditure Commission Minutes of Evidence, Vol. 3,
Q. 18094, and Decentralization Commission Evidence, Vol. 2, Q. 9497.
PROVINCIAL CONTRIBUTIONS TO THE IMPERIAL GOVERNMENT

Ratio of Amount Surrendered Ratio of Amount Surrendered
to the Government of India to to the Government of India per
the Total Revenues raised in Head to the Population of the
Province the Province. Province.
1871- 1882- 1892- 1904- 1912- 1871- 1882- 1892- 1904- 1912-
2. 3. 3. 5. 13. 2. 3. 3. 5. 13
C.P. ... .655 .464 .615 .297 .204 .9 .69 1.3 .55 .59
Burma ... .728 .575 .598 .497 .38 3.4 .39 .7 4.37 3.08
Assam ... ... .438 .390 .376 ... ... .75 .75 .87 ...
Bengal ... .903 .746 .761 .742 .596 2.4 1.99 2.9 2.29 2.39
N.W.P. and ... .785 .617 .435 ... ... 1.5 1.24 1.4 ... ...
Oudh
Punjab ... .768 .648 .726 .512 .391 1.7 1.5 1.4 1.57 1.64
Madras ... .828 .664 .667 .638 .479 2.3 2.0 2.3 2.34 1.79
Bombay ... .845 .648 .66 .614 .58 5.0 4.1 5.4 4.75 5.6
U.P. ... ... ... ... .567 .381 ... ... ... 1.48 .93
Bihar and ... ... ... ... ... .220 ... ... ... ... .17
Orissa
Compiled from the Finance and Revenue Accounts of the Government of India
and the Decennial Census Reports.
Similarly, whatever may be said of the relative merits
of the proposals1 of changning the system of divided heads
of revenue into one of complete separation supplemented in
favour of the Central Government by contributions from the
Provinces in the form of (1) a fixed sum revisable every few
years, or (2) a lump percentage on provincial revenues, or (3) a
fluctuating contribution from the provinces on their population,
revenues or wealth, there can be no doubt that they were all
aimed at reaching some such intelligible basis of distributing
the burden of the Imperial exchequer as equality of payment
or ability to pay. No one who had cared to scrutinize the
true nature of Provincial Finance could have been expected
to take these proposals with the same seriousness with which
they were offered by their authors. However, strange as it
may seem, none of the two Commissions questioned their
propriety. The Royal Commission on Decentralization did make
it clear, though not quite forcibly, that equal contributions
were not necessarily equitable contributions, but neither it
nor the Royal Commission on Indian Expenditure challenged
the language which spoke of the Provinces as surrendering
their revenues to make contributions to the Imperial treasury
after paying for their services. It therefore becomes all the
more necessary to examine at some length the grounds which
1
See Report of the Royal Commission on Decentralization (hereafter abbreviated
into R.C.D.)
supported that view which argued that the system was based
on the principle of separation of sources and contributions from
the yield. Indeed the question of equity of contributions would
hardly be worth discussion until it is settled that the Provinces
had revenues which they could call their own and services for
the efficient discharge of which they were primarily liable.
What is the criterion by which to judge whether the
provinces had revenues and services which they could call
their own? There is, of course, the administrative criterion
by which it would be possible to say that anything which a
Province administered was provincial. But that criterion cannot
be a final criterion. For, whatever may be the view regarding
the origin of administrative polities or regarding what their
position should be in an ideal organization, yet all regional
rights of an administrative polity are in modern times exercised
in the main, not in virtue of any social compact or the mere
discharge of certain functions, but in virtue of a general law.
The question must therefore be decided with reference to the
law which defined the status of the Provincial Governments
in British India.
Did the Provinces have a legal title to the revenues?
Although it is uncertain whether or not those who spoke of
Provincial revenues invested the term provincial with a legal
status there is no doubt that it had acquired such a connotation
in ordinary parlance. Even the Provincial Governments, who
ought to have known better, thought and argued that by the
provincialization of revenue what the Government of India
passed on to them was not the mere usufruct but a title to
the revenue. But the Government of India had always been
prompt in suppressing such pretences. The facts are patent
that provincial settlements were revisable every five years,
that the usufruct was not perpetual and that the Government
of India could resume it at the end of five years if it wanted.
This is made quite clear in answer to the pretensions advanced
by the Government of Bengal in a letter No. 284 of January
14, 1882, from which the following is extracted :—
“For the sake of diminution of friction and other well-
known objects which need not be specified, the Imperial
Government delegated a share in its administration
to Local Governments. It makes a rough calculation
that a certain portion of the general income, together
with the increment thereon, will suffice to meet
the expenditure which it retains under its own control,

and it hands the rest over to Local Governments, with the
obligation to meet out of it certain necessary expenditure....
But it cannot bind itself to this proportion for ever,
because the calculation must necessarily be a rough
one, and is liable to be vitiated by unforeseen failure of
resources, or growths of charges, whether in the share of
financial administration which it retains or in that which
it delegates. An examination of the appropriation and a
readjustment of it in any particular found necessary are
indispensable. A surrender of the right to this would be
analogous in its nature and effects to the Permanent
Settlement of Bengal.”
Although anxiety was expressed for the provinces the
revisions were primarily conducted in the interests of the
Imperial Government as the resumptions incontrovertibly
proved, and the Permanent Settlement was delayed because
the Government of India did not desire to relinquish its control
over its revenues. Under the quinquennial settlement the
usufruct was permitted to be undisturbed for five years only.
But how tentative was this surrender, which, even for five
years, was looked upon as highly impolitic by the Secretary
of State,1 was proved by the Government of India, which did
not take back to exercise its inherent right to resume the
usufruct of its revenues at any time it liked as is indicated
by the not too uncommon levies or benevolences, as they were
called, which it forced upon the provincial balances. Not even
the Permanent Settlement can be interpreted to mean that
the revenues settled upon the different Provinces became
their revenues in anything like a legal sense, for in the eye
of the law all revenues including those provincialized still
remained the constitutional possession of the Government of
India. Whether the Government could have effected a legal
separation by ivesting itself of the revenues of India in favour
of the Provinces is doubtful. The Parliamentary enactment
which vests the revenues of India in the Government of India
had limited the legislative powers of the Government of India
by a clause which prevented it from
“making any laws or Regulations which shall in any
way repeal, vary, suspend or affect any of the provisions
of this Act (of 1833).... or the Prerogative of the Crown
or the Authority of Parliament.”
1
Cf. Despatches to the Government of India No. 51, dated February 16, 1882,
and No. 208, dated July 6, 1882.
At least it is significant that it has required an Act of

Parliament to do so. But the Government of India had not made
any legal separation of the title to the revenues, and if it could
have done that by its own law it could have undone it as well.
Nor can it be said that the separation of Provincial revenues
involved separate possession. If the Provincial Governments had
been allowed to establish their own treasuries to receive the
collections from Provincialized revenues, then Provincial revenues
in the sense of separate possession could have had a meaning. But
by the rules, Provincial Governments were not to deposit their
funds elsewhere than in the treasury of the Imperial Government.
Consequently the possession of the revenues remained in the
hands of the Government of India and the disbursement from the
provincial revenues was carried out from the Imperial Treasury
by the officers of the Imperial Government. None the less, the
view was hard to die. But such an erroneous view was never
more confidently stated than by the Honourable Mr. Sayani, and
never more forcibly controverted than by Sir James Westland in
a passage-at-arms between the two on the occasion of a Budget
debate in the Council Hall of the Government of India from which
the following is reproduced :—
The Honourable Mr. Sayani said :—
“The whole theory underlying the system (of Provincial
Finance) is that the revenues of the country, far from belonging
to the Provinces which raise them or being available for their
own requirements.... constitute a common fund to be absolutely
at the disposal of the Central Government, out of which it is
to dole out what amount it pleases for provincial services.”
Catching the condemnatory tone of these comments, the Finance
Minister, Sir James Westland, rose to say :—
“The Honourable Mr. Sayani, if I correctly followed him,
stated that the arrangements of the Government of India
were made upon the theory that the revenues were not the
revenues of the separate Provinces and were not applicable
to the expenditure of the several Provinces, but were the
revenues of a common fund, the Local Governments being
merely the agents of the Government of India for their
realization. I think he mentioned the theory in some words
like these, only for the purpose of condemning it. Well,
I wish to assert that theory in the most positive manner
I can. The revenues are the revenues of the Government
of India—its Constitutional Possession. The Government
of India is a body created by Act of Parliament, and
if reference be made to that Act of Parliament it will be

seen that the revenues of India are the revenues of the
Government of India and of that Government alone. Every
action that the Local Government takes in respect of them
must be justified by a specific order of the Government of
India; the Local Governments derive their powers entirely
from the Government of India, and apart from that
Government they exercise no financial powers whatsoever.”1
Again, if the financial relationship between the Central
and Provincial Governments in India were based upon the
principle of separation of sources and contributions from the
yield, what ought to have been shown was the existence of legal
responsibility of the Provinces for the services they administered.
It is true there was a certain division of functions between the
Central and Provincial Governments in India analogous to what
existed between the Central and State Governments in most of
the federal countries. But it must, however, be remembered that
this division of functions had no sanction in law and no legal
responsibility attached to the provinces for any of the services,
not even for those provincialized. The entire responsibility by
law rested on the shoulders of the Imperial Government and
it could not absolve itself of that responsibility by transferring
it on to any of the Provinces. That the Provinces accepted the
financial responsibility for some of the Imperial services was
their choice. That they could not be compelled to undertake
them was proved in a singular manner by Madras refusing
to accept such responsibility in 1877. By law it was thus the
Government of India which was responsible for peace, order
and good government in the country. All services were therefore
necessarily Imperial in status undertaken by the Government
of India in discharge of its constitutional obligations.
It is therefore obvious that the view which posited that the
relationship between the Central and Provincial Governments in
British India was one of separation of sources and contributions
from the yield was an untenable view. The Government
of almost every country in these days is carried on by an
inter-related group of polities operating in specific areas and
discharging specific public functions ; and it may well be that
in any two given countries the number of polities engaged
in carrying on the work of government is the same. But it
is quite erroneous to argue from that fact that the nature of
their inter-relationship must have been alike. It is therefore
as well to invite attention to the point that the ordered
1
Financial Statement, 1897-8, p. 110, etc.
relationship between such inter-related polities depends upon

which of them is the law-giving polity. It will be granted that
in such group of polities there is one that is supreme in the
sense that from a variety of reasons mostly historical it is
competent to give law to the other polities. In federal countries
it is the State Governments which are the law-giving polities.
They occupy a pivotal position. They are the depositories of
sovereign powers original as well as residuary. They can
claim independent existence, have their own resources and
discharge their own functions. The Federal Government, on
the other hand, is the creature of the State Governments. It
can have no powers and no functions other than those which
the States have been pleased to transfer to it by an act of
self-abnegation. It is therefore truthful as well as becoming
to speak of the financial relationship between the State and
Federal governments as one of separation of sources and
contributions from the yield.1 For there the States have
their separate resources which they lawfully own and can
therefore be spoken of as surrendering their revenues to make
contributions to the Central Government after paying for their
own services. But the same was inconsistent with the position
of the Provincial Governments. Far from pivotal, the Provincial
Governments formed the weakest entities in the group of
administrative polities functioning in India. Up to 1833 the
Provinces had separate rights to surrender in a foedus and
had the government of India been then organized on a federal
basis the position of the Provinces would have been very much
the same as those of the States in federal countries. But with
the establishment of the Imperial system by the Act of 1833
the last chance of creating a federation in India vanished.
By that Act the sovereignty of the Provinces was so entirely
crushed that no trace was left of it to permit of a truly federal
element ever to enter into their relationship with the Central
Government. Since that Act the government of the country
has been entrusted to a single authority charged with the
sole responsibility for the good government of the country. As
no single administration could support the Atlantean load of
governing such a vast country with the help of central bureaux,
great powers were delegated to the Provincial Governments.
But this must not obscure the fact that they were literally the
1
Of course, it is not necessary that there should be a federal system. A legalized
system of decentralization will be equally compatible with separation of sources
and contributions from the yield.
“agents of the Government of India.” Common usage had

elevated the term “Provincial” to a proud position. Along with
Provincial Revenues it had been usual to speak of Provincial
Services, Provincial Civil Servants, Provincial Courts, etc.,
as if all these and other things constitutionally belonged to
the Provincial Governments. But the usage was full of irony.
For, when one recalls the provisions of the constitutional
law of the land, so far from thinking of them as Sovereign
authorities one felt inclined to say that notwithstanding their
high-sounding apparatus of Governors and Councils it was
not appropriate to call them Governments. In any case the
Provincial Governments had no legal powers or functions
which polities designated as Governments have been known to
possess. The fact is the Indian system of polity was diametrically
opposed to the federal system of polity. It was a centralized
system in which there was nothing Provincial; what appeared
to be Provincial was but the regional aspect of the Imperial.
It was therefore untruthful and overbecoming to speak of
the financial relationship between the Provincial and Central
Governments in India as being one of separation of sources
and contributions from the yield. For here the Provinces had
no separate resources which they lawfully owned, and could
not therefore be spoken of as surrendering their revenues to
make contributions to the Central Government after paying
for what may be supposed to have been their own services—a
supposition rigorously excluded by the law of the constitution.
If the complex code of limitations discussed in the last
chapter had the effect, which it was not unreasonable to expect,
of revealing the true nature of Provincial Finance, such a
view as the one herein criticized could never have prevailed.
That notwithstanding the existence of these limitations there
should have been men who instead of wondering as to what
remained of Provincial Finance when it was regulated by
such limitations, argued with the confidence of the ignorant
that the system was independent in its organization, is itself
a proof that in their study of Provincial Finance the study of
its limitations formed no part. Otherwise a reference to that
code would have shown that if the Provinces had separate
revenues and separate services they would have had powers
of alienating whatever revenues they liked, of spending on any
service they desired, of framing their Budget Estimates with
a view to any particular policy they decided to adopt, and of

arranging for supplementary grants in any manner they chose.
But such powers they never had. Indeed no greater proof could
be furnished in support of the view that everything had remained
imperial in status after 1870, as it was before 1870, than is
afforded by these limitations on the working of Provincial Finance.
If separation of sources and contributions from the yield
as a theory of the financial relationship between the Central
and Provincial Government in India was incompatible with the
facts of the case, what theory was there which could be said to
have been compatible with the position as defined by law? We
may at once proceed to state that the only theory of financial
relationship between the two governments which accorded with
facts and agreed with law was that of aggregation of the sources
and distribution of the yield.
It may seem fallacious to speak of aggregation of sources
when what the Government of India gave to the Provinces was
assignment of revenues and shares of revenues. To this the reply
is not difficult. It has already been made clear that Provincial
Finance did not involve a de jure, separation of sources. Nor was
there a de facto separation either. For as has been remarked before,
all revenues whether assigned or reserved were collected into
the Imperial treasury and were thence paid out on all approved
Government transactions. Obviously, when all the revenues are
thrown into a common pool, it cannot be said without unduly
straining the imagination that what the Provinces were given
were revenues.1 The collections from all sources of revenue being
inextricably mixed up, the only proper view is to say that what
was given to the Provinces were funds. The expressions Budget
by Assignments, Budget by Assigned or Shared Revenues are in a
certain sense all fictitious phrases. In all the stages of Provincial
Finance what the Provinces were supplied with were funds.
Under the assignment stage the supply granted was a definitely
fixed sum and the only difference made as a consequence of the
replacement of Assignments by Assigned or Shared Revenues
was that the supply, instead of being a fixed sum, was a sum
1
The remarks made by Captain Pretyman, M.P., in his evidence before the Royal
Commission on local taxation in England with regard to the revenues assigned to
Local Governments may be cited in this connection. He said: “I absolutely hold that
it is imposible to say that you give a contribution from Imperial Taxation from a
particular source. A man might just as well pour a bucket of water into a pond and
then go and hook it out again and say that he had hooked out the same bucket of
water. The taxes are paid into the Imperial Exchequer and the contribution is made
from the Imperial Exchequer, and to say that you select a particular sum of money
as the produce of a particular tax and that you hand that over is, I think a fallacious
statement altogether.” Vol. 1 of Min. of Evid. C. 8763 of 1898, Q. 9873.
which varied in amount with variations in the yield of the

Assigned or Shared Revenues. But all the same it was a
supply of funds and nothing more. It is even incorrect to say
that the Government of India gave funds to the Provincial
Governments for meeting the expenditure on the services the
responsibility for which was undertaken by them. As a matter
of fact, the receiving as well as the disbursing of all public
money, including the provincial portion of it, remained in the
hands of the Government of India. The only proper expression,
if it is to be true to facts, would be to say that Provincial
Finances simply meant that the Government of India opened
a Provincial Services Account in its Treasury books which
varied with the yield of the Assigned or Shared Revenues and
on which and to its extent only the Provincial Governments
were permitted to draw.
Thus there was a complete aggregation of the sources of
revenue in the hands of the Government of India. From this fact
it follows that instead of the Provinces contributing from their
funds it was the Government of India which distributed the
yield of its taxes among the Provinces. The situation could not
be otherwise. For it should be recalled that in virtue of the Act
of 1833 the financial responsibility for the services undertaken
to subserve the ends of peace, order and good government rested
upon the Government of India. While some of the services were
administered directly by the Government of India, owing to
the well-nigh impossibility of managing directly from a central
bureau the affairs of a country as vast as the continent of
Europe minus Russia, many of the services attaching to the
Imperial Government were left to be administered under its
supervision by the Provincial Government. The weak point
of the situation, as has been remarked, consisted in the fact
that the administrative and financial responsibility did not
rest on one and the same authority as should have been the
case. On the other hand at the end of every financial year all
Provincial Governments sent in their estimates of the charges
for the services they administered to the Government of India
in the Financial Department, leaving the obligation of refusing,
curtailing or granting the supply asked for to the Government of
India to discharge as best it could. Not having the obligation to
find the money, the Provinces tended to make extravagant

demands. And the Government of India, not being in
possession of the details, was unable to judge of the true
requirements of each service. Being afraid of failure of its
responsibility as much by too little trust as by too much
trust in the estimates sent to it, it was often obliged to
submit to extravagance of the Provinces, which as we saw
brought on the crisis of 1859. To avoid this fatality there
was instituted the system of Provincial Finance under which
the Government of India distributed its funds among the
Provinces, and the Provinces in their turn undertook to
manage some of the services which they administered for
the Government of India within the sum which came to
them severally out of this distribution.
This being the nature of the financial relationship, the
criticisms of the system of Provincial Finance on the ground
of inequity were quite inapplicable. Contributions must be
according to ability, but distribution must be according to
needs in order to make it equitable. If the system of Provincial
Finance was to be impeached on the ground of inequity,
then it was necessary to have shown that the distribution
was unfair. Even here it may perhaps be shown that the
different Provinces got different amounts if measured by
their population or their area. But it must be remembered
that the distribution was not primarily among the Provinces,
but among the various departments, whether controlled by
the Government of India or by the Provincial Governments.
This could make a considerable difference in the equity
of the distribution; for, the needs of the areas within the
jurisdiction of the different administrative polities must be
very different and cannot certainly be held to be coterminous
with the needs of the departments maintained under them.
The distribution of funds by the Government of India was
not based upon the principle of each Province according to its
needs but upon the principle of each department according
to its needs. It was therefore futile to criticize the equity
of the system on any other principle.
Thus interpreted, the system of Provincial Finance must strike
as of the nature of what may be called Departmental Finance,
something quite different from Decentralized Finance or Federal
Finance. This view cannot be far wrong from the true

view as supported by the facts of the case. As in the case
of Departmental Finance every Department of the State
has a certain grant fixed for it in the Budget and it then
draws upon the Treasury to the extent of the grant. In the
same manner Provincial Governments were given a certain
consolidated grant for the departments they managed and for
the expense of which they were to draw upon the Imperial
Treasury to the extent of the grant. Notwithstanding
Provincial Finance, nothing was provincial in its status. The
revenues, the services, the Civil Service, were as strictly
Imperial in status after 1870, when Provincial Finance came
into being, as they were before 1870, when there was no
such thing as Provincial Finance in existence. It is therefore
no exaggeration to say that Provincial Finance, instead of
being an independent system of Finance involving freedom
to tax and freedom to spend, was only a matter of accounts,
the operations on the debit and credit side of which were
subject to stringent control on the part of the Government
of India.
This means that there was no change in the nature of
the financial relationship between the Central and Provincial
Governments as a result of the introduction of the scheme
of Provincial Finance. The relationship of aggregation of
sources and distribution of the yield was not a new one but
was as old as 1833. It was a financial counterpart of the
Imperial system then established. It was because there was
no alteration in the relationship that Provincial Governments,
even with Provincial Finance, far from becoming separate
clocks, each with its own mainsprings in itself, remained
as before the departments of the Government of India.
Such a conclusion is bound to be regarded as somewhat
of a startling character. There can, however, be no doubt
that it is true and that no other conclusion is possible,
given the legal relationship of the Provincial and Central
Governments in British India. But if Provincial Finance
is only a matter of accounts then, were there no changes
that followed in its wake, in the financial organization of
the Imperial system? It would be idle to deny that any
change took place in the financial organization of Imperial
system owing to the introduction of the scheme of Provincial
Finance, and equally idle to assert that some fundamental

change had taken place in consequence thereof. To be just, only
two changes worth speaking of may be said to have resulted
from the introduction of Provincial Finance :—
(1) Before 1870 balances on all services lapsed to the
Government of India at the close of the financial year.
After 1870 all unspent balances on the services delegated
to the management of Provincial Governments remained
at their disposal and formed a part of their resources
for the ensuing year.
(2) Before 1870 Budget estimates on all services had to
be sanctioned by the Government of India and the
Provinces could not undertake any reappropriations
between the different grants for the year, even if it was
found necessary, without the previous sanction of the
Government of India. After 1870 the Provinces were left
to a greater extent free to distribute their expenditure
in any way they thought proper among the various
services delegated to their management, provided their
total expenditure did not exceed the funds lying in the
Imperial treasury to their credit respectively.1 But by
the rules they were required to maintain all the services
under thier management in a state of administrative
efficiency. Similarly after 1870 the Provincial Government
had complete freedom which they never enjoyed before to
carry on reappropriations between the grants under their
management without the sanction of the Government of
India, provided their total expenditure did not exceed
the amount budgeted for the year.
1
Whether they could materially alter the distribution of the grants on the
different services delegated to them is doubtful. In his despatch No. 30, dated
December 10, 1874, in the Revenue Department, on a proposal by the late Lord
Hobart, Governor of Madras, to discontinue the grant made from provincial funds
for Roads and to devote the money to education, the Secretary of State wrote ; “I
am unable to reconcile it with the principles which govern the so-called provincial
administration of the revenue. I am not, indeed, of opinion that the same relative
proportion which existed, on the introduction of the system, between the services
made over and the expenditure upon them, should always be maintained. But
I agree with Mr. Sim, that there was an implied engagement to maintain all
these departments in full efficiency and integrity and an implied understanding
that no one of them should be wholly sacrificed to the others, or to any other.
The new financial arrangements in question were most fully discussed, both by
the various Indian Governments as constituted at the time, and by the Home
Government. During this discussion it was certainly never suggested that an
effect of the change might be to put a stop to the construction of new roads in
some parts of India; if such an eventuality had been considered probable, I doubt
whether the change would have been made.”
For the purposes of visualization the financial relationship

between the Provinces and the Government of India may be
likened to the Hindu Joint Family System with the Patria
Potestas vested in the latter. Before 1870 the similarity
between the two was more or less exact. Like the family
property of the Hindus the revenues of India were jointly
enjoyed by all the departments whether under Central or
Provincial management without metes and bounds being fixed
to the shares of any one of them. After 1870 the only change
that took place consisted in the cesser of commensality and
the fixing of metes and bounds to the shares of each in the
common property according to their respective needs. The
system remained a joint family system, although separate
accounts were opened by the head of the family, namely
the Government of India, to guard against any member
overdrawing the amount placed to his credit.
Were these results worth striving for? On the results
achieved in consequence of Provincial Finance a variety of
opinion has been expressed. But if we judge of the results as
we ought to in the light of the antecedents that gave rise to the
system in 1870, it cannot be said that the hopes entertained
were in any way belied. It is only when critics, solely because
of their misunderstanding of the nature of Provincial Finance,
sought for results which were never intended by its promotors
that an adverse pronouncement came to be made. But if
we keep clear of these misunderstandings and never lose
sight of the fact that in 1870 what the Provinces wanted
was freedom and the Government of India stability, none
can assert that this compromise between Imperialism and
Federalism was tried in vain. How great was the freedom
gained by the-provinces can be appreciated only when it is
realized that before 1870 the Governor of Bengal could make
“no alteration in the allowances of the public servants....
establish a new school or augment the pay of a daroga
(watchman) to the extent of a Rupee,”1
nor could the Governor of Bombay have a lock made2 without a
vote of the Council of India. Nor can the importance of the large
1
Calcutta Review, Vol. 3, p. 169.
1
Report of the Committee on the Affairs of the East India Co., 1852, Vol. 10.
measure of stability derived from it be fully realized unless

it is borne in mind how before 1870 the Government of India
was left between the devil and the deep sea by having to
refuse or to accept the bewildering demands ranging from
dustbins for a Department to education for the people made
by the Provinces on its not too large resources. The Provincial
Governments had been saved the delay and the indignity in
having to depend upon the Government of India for sanction
of the meanest of their wants. The Imperial Government on
the other hand was saved the fumbling task of scrutinizing
the most trivial of demands and grant or reject it, but always
under the apprehension of having done wrong by acting either
way. The system not only gave freedom to the Provinces and
stability to the Government of India, but had replaced the
irresponsibility and extravagance which had proved the bane
of the Imperial System by economy and responsibility, for by
setting bounds to the funds of the Provincial Governments the
Government of India had ended in setting bounds to itself.
These results, it is true, did not satisfy the critics of Provincial
Finance. More in other directions was expected of it, but that
could have been possible only if Provincial Finance was a
system independent in its organization. So long as Provincial
Finance was a part of Imperial Finance, inseparably linked to
it, it could have yielded no greater results than have followed
from it, and those that have followed are by no means slight.
There, however, remains the question that, although it was
not possible to alter the nature of Provincial Finance, whether
it would not have been feasible to enlarge its scope by relaxing
the limitations imposed upon it by the Government of India
without in any way interfering with the due discharge by it
of its own responsibilities. That aspect of the question will be
examined in the next chapter.

CHAPTER IX
THE ENLARGEMENT OF THE SCOPE OF
PROVINCIAL FINANCE
It used to be made a matter of complaint that the system of
Provincial Finance was unjust in that under it the Government
of India conscripted, at every revision of the financial settlement,
the increases in the revenues given over to the management
of the Provinces, either for its own benefit on the pretext of
meeting the requirements of the Central Exchequer or for the
benefit of such of the Provinces as had by inertia not cared
to improve their resources on the pretext of tempering the
wind to the shorn lamb. There was a good deal of truth in
this complaint in the early period of Provincial Finance. Being
the custodian of the funds, the Government of india did often
put the consideration of Imperial Services above that for the
Provincialized Services. In the early period of Provincial Finance
the prevailing idea1 in the distribution of funds was not how
much of the revenues assigned under the expiring settlement
could be continued to be usefully spent on heads of expenditure
controlled by Provincial Governments, but how much of the
general revenues consistently with its obligations, and having
regard to the growth of demands upon its resources during
the currency of the settlement, could the Government of India
surrender for a further period to the Provincial Governments
in order to enable them to meet whatever expenditure was
essential to the conduct of their administration. This attitude of
the Government of India, justifiable as it was by the financial
stringency of the period, changed as the financial condition
became easy, so that in the latter period
“the distribution of revenues between the Provincial and
Central Governments was made, except on occasions of grave
emergency, with direct reference not to the needs of the
Central Government but to the outlay which each Province
might reasonably claim to incur upon the services which it
1
Finance Department Resolution No. 458 of January 28, 1881.
administered. The first step taken in concluding a

settlement was to ascertain the needs of the Province and
assign revenue to meet them; the residue only of the income
of the Province coming into the Imperial Exchequer.”1
With the shifting of emphasis on the competing needs of
the Central and Provincial Governments the complaints on
the score of unfair distribution of funds ceased, and no fear
of an adverse revision remained when the settlements were
declared permanent. There, however, remained the other main
objection to the system of Provincial Finance, namely, that the
limitations imposed upon it tended to reduce the Provincial
Government to a nonentity by restricting the scope of their
activity within the field allotted to it.
It was said that if the system of Provincial Finance was
inaugurated on the understanding by which the Government
of India said to the Provinces
“Take what we are able to give you, and for the residue
take certain powers of taxation and raise it yourself.... for
there are subjects which can be dealt with far better by
local than by imperial taxation,”
there was no reason why the Provinces should not have been
allowed the freedom to tax. Again, if certain resources had
been made over to the Provinces, what justification was there
in not allowing them to raise loans for promoting purposes of
local utility? This restriction was particularly resented; for, it
was pointed out that even the humblest Local Authority in
India enjoyed the power to raise loans to effect improvements
in its respective jurisdiction, while such an important
polity as a Provincial Government was deemed unworthy of
shouldering such a responsibility. Indeed it was felt as a most
galling restriction, for under it it happened that a Provincial
Government which was deemed to have enough credit to be
accepted as security by the Government of India against loans
to other local bodies subordinate to it, was ruled to have no
credit to pledge in its own behalf !
What, again, was the justification for limitations on the
spending powers of the Provincial Governments in the matter
of staff and establishments? If the administration of certain
services had been entrusted to the Provincial Governments,
why should they have been circumscribed in the matter of
1
Finance Department Resolution No. 27 dated May 18,1912.
THE ENLARGEMENT OF ITS SCOPE 215
creating new or abolishing old appointments or revising the

establishments of their departments? If under the system of
Provincial Finance the Provinces were responsible for the
services they managed, why should they not have been trusted
with powers to make needful changes in the agencies which
carried out those services?
Further, it was asked, what justification was there for the
limitations on the preparation and execution of the Provincial
Budgets ? If separate Budgets had been carved for each of
the Provinces out of what once formed an Imperial Budget
for the whole of India, why should the Provinces have been
required to submit their Budgets to the Government of India?
Merely as a matter of conveying information the requirement
was comparatively of a trifling character. But why should the
Government of India have claimed to alter their estimates and
compel them to abide by the grants as fixed by it? Was such
a scrutiny of Provincial Budgets a cover for dictating a policy
to the Provincial Governments? If this was so, what was the
scope for initiative and freedom left to the Provinces which it
was the primary object of Provincial Finance to promote and
of the permanent settlements to ensure? Again, why should
a Provincial Government have been required to come to the
Government of India for a supplementary grant as it had
to do where the excess over estimates could not be met by
reappropriations, even when it had balances to its credit so
sufficient as not to be reduced below the required minimum
by a draft to meet the excess?
For each of these limitations which fettered the Provincial
Governments and contracted the scope of Provincial Finance,
the Government of India was of course ready with abundant
excuses.1 In the matter of revenue restrictions it urged that
the revenues of India were its constitutional possession for the
proper disposal of which it was responsible to the Secretary of
State and Parliament. That being the case it was fair that the
Government of India should require that the sources assigned to
the Provinces should not be alienated nor spent on unauthorized
grants or unapproved services. Again, being responsible for all
services it followed that the Government of India could not have
afforded to weaken its position as to managing the resources of
1
In this connection, cf. Evidence of Mr. J. S. Meston before the Royal Commission
on Decentralization. Mit. of Evid., Vol. X, Q. 44807—45336.
the country by partitioning the taxing or borrowing powers.

The field for taxation in India being considerably limited, an
indiscriminate levy of taxes by a competing authority, it was
feared, would have led either to discontent by additions1 to the
Imperial imposts or to a retrenchment of the field for Imperial
taxation. The concentration of borrowing powers in its hands,
the Government of India urged, was a natural corollary of the
statutory hypothecation of all India revenues to all-India needs.
The Government of India could not allow its revenues to be
mortgaged by a Provincial Government for its own needs. Besides
it was afraid2 that if this freedom to borrow were granted
“the temptation to hypothecate revenues in advance might
become inconveniently strong, and the future administration
of a Province might be starved because a former Government
had been in a hurry to proceed with some costly ambitions
and non-productive project.”
Moreover, the loan market in India, it was said, was as
limited as the taxable capacity of the country. Therefore
“if many buckets are dipping into one well and drought cuts
short the supply of water, obviously the chief proprietor of
the well must take it upon himself to regulate the drawings.”3
In the matter of specific restrictions on spending powers
with respect to staff and establishments, the defence of the
Government of India was that such restrictions were necessary in
the interest of uniformity and economy. It was urged that if each
province was allowed the freedom to regulate the remuneration
of the Public Service which carried on the actual work of
administration the result would probably have been unequal
pay for equal work. Such a consequence would have engendered
discontent in the servants of the State which it was desirable
to prevent in the interest of good administration. Again, if the
Provinces had been given full freedom to revise establishments
it might have resulted in considerable additions to the recurring
expenditure of the Provinces, thereby jeopardizing the stability of
the Provincial as well as of the Imperial finance, for in the last
resort the Government of India was responsible for maintaining
the Provincial Governments.
1
Between 1870 and 18.79, when the Provinces had a freer hand h the matter of local
taxation, all of them selected the already overburdened basis of taxation, viz. land for
their levy.
2
R.C.D. Mit. of Evid., Vol. X, Q. 45310.
3
Report on Indian Constitutional Reforms, Cd. 9109 of 1918, p. 94, hereafter
called Joint Report.
In the matter of control over the preparation and execution

of Provincial Budgets the Government of India urged that the
scrutiny was not motivated by a desire to control an unwelcome
policy,1 but was inevitable because of the three important ties
by which the Provincial Budgets were bound up with the Budget
of the Government of India. These were (1) the incorporation
of the income and expenditure of the Provincial Governments
into the Budget and the Annual Accounts of the Government
of India as an integral part thereof; (2) the system of divided
heads of revenue and expenditure, and (3) a common treasury
involving a combined “ways and means” for the transaction of
the Central and Provincial Governments. The first two points
of inter-relation required that the Government of India should
examine the Budget Estimates of the Provincial Governments.
It was urged2 that the power to make such alterations was
rendered specially necessary by the inveterate tendency of
Local Governments to over-estimate their expenditure and
under-estimate their revenue. Estimates which departed
widely from actuals meant bad finance and also a provision
of larger ways and means for the working of the Treasury.
But even if this tendency was absent it was incumbent on the
Government of India to scrutinize the Provincial Estimates in
order to preserve accuracy in the combined accounts. Besides
the interests of accuracy, the Government of India had to
ascertain by a scrutiny of their estimates that a Province did
not impair the stability of its finances by (1) including in its
budget expenditure on schemes which had not received due
administrative sanction, or was not likely to receive such
sanction in time to be incurred during the year; or (2) by
entering on an enhanced scale of expenditure a Province was
not unduly depleting its balances. But by far the strongest
reason why the Government of India needed to scrutinize the
Provincial Estimates consisted in the fact that in so far as some
of the Heads of Accounts were shared, the ultimate result of the
Central Budget, whether there was to be a surplus or deficit,
depended upon the accuracy of the estimates. The Government
of India, it was urged, was thus directly interested in the
Provincial Budgets, and could not have abandoned its right to
scrutinize them without exposing its budgetary system to serious
1
R.C.D., Mit. of Evid., Vol, X, Q. 44981.
2
R.C.D., Mit. of Evid., Vol. X, Q. 44863.
derangement. The third point of inter-relationship necessitated

that the Provincial Governments should work within the grants
as fixed finally by the Government of India. To have allowed
the Provincial Governments the liberty to exceed the grants
because they had ample balances to their credit would have been
incompatible1 with the responsibility of the Imperial Government
to provide the ways and means for the whole administration of
the country. A provincial balance, it was pointed out, was not
a separate balance locked up in a separate provincial chest. It
was a part of the general balances on which the Government
of India operated daily. If a sudden demand uncontemplated
in the Budget were to be made upon these balances, as
would have been the case if the Provincial Governments had
exceeded their budget grants, it would have disturbed the
ways and means transaction and would have involved the
Government into insolvency by causing insufficiency of cash.
All these defences of the restrictions on Provincial
Governments were plausible defences and could have been
decisive if the centralized system of administration in favour of
which they were urged could be deemed to have satisfied the ends
of good government. But it was not unreasonable to argue as was
done by the Provincial Governments2 that modern tendencies
were all moving in the direction of forms of government which
placed fullest powers as low down in the administrative scale
(i.e. as near the section of population immediately affected) as
could be safely arranged. It is reasonable to centralize such
powers as could not be efficiently exercised otherwise. But it is
equally unreasonable to centralize powers where central control
or uniformity is not clearly essential or is impracticable. By
centralization all progress tends to be retarded, all initiative
liable to be checked and the sense of responsibility of Local
Authorities greatly impaired. Besides, centralization involves
and must involve a serious sacrifice of elasticity, for it is
naturally disagreeable to a central department to have to deal
with half a dozen different ways of managing the same branch of
administration, and which therefore aims at reducing all types to
one. Further centralization conflicts with what may be regarded
as a cardinal principle of good government, namely, that when
administrative business reached an authority fully competent to
deal with it, that authority should deal with it finally. Even when
1
R.C.D., Mit. of Evid, Vol. X, Q. 44865.
2
In this connection see the very trenchant memorandum by the Government
of Bombay on Decentralization, R. C. D., Mit. of Evid., Vol. VIII, Appendix II.
there is a higher authority equally competent, to pass the

business on to it would at best help to transfer power to the hands
of the lower ranks of the official hierarchy, by causing congestion
of business in the Central Department. Thus centralization,
unless greatly circumscribed, must lead to inefficiency. This was
sure to occur even in homogeneous states, and above all in a
country like India where there are to be found more diversities
of race, language, religion, customs and economic conditions than
in the whole continent of Europe. In such circumstances there
must come a point at which the higher authority must be less
competent than the lower, because it cannot by any possibility
possess the requisite knowledge of all local conditions. It was
therefore obvious that a Central Government for the whole of
India could not be said to possess knowledge and experience
of all various conditions prevailing in the different Provinces
under it. It, therefore, necessarily became an authority less
competent1 to deal with matters of provincial administration
than the Provincial Governments, the members of which could
not be said to be markedly inferior, and must generally be equal
in ability to those of the Central Government, while necessarily
superior as a body in point of knowledge.
To these arguments the only reply the Government of India
could make was that it concentrated all power in its hands,
not from principle but from necessity. That necessarily arose
out of its constitutional obligations. The law had invested it
with the superintendence, direction, and control of the civil
and military government and the ordering and management
of the revenues of the country. It could not therefore relax
its control over the powers it had delegated to the Provincial
Governments. It was, of course, impossible to deny the
force of this argument. So long as the Government of India
remained the authority solely responsible to Parliament
it was reasonable to hold that it should be the controlling
authority in all matters pertaining to the administration of
the country. But it was equally reasonable to ask whether
it would not have been possible in the interests of cordiality
1
In this connection it may be of interest to draw attention to the semi-serious
suggestion made by Mr. A. C. Logan, in which he argued that if decentralization
“cannot be effected then there is an alternative method of so remodelling the
constitution of the Government of India as to replace the present departments
by departments of various local areas each with its own Secretary and Member;
thus there should be a department of Bombay with Secretary and Member
appointed from that Province dealing with all Bombay questions and the like
for other (six) provinces. Thus each Province could govern itself from Calcutta
under the supervision of the Governor General,”—Vide R.C.D., Mit of Evid., Vol.
VIII, Q. 35531.
between the Central and Provincial Governments to have

relaxed such of the restrictions on the financial powers of the
Provinces as would not have been incompatible with the due
discharge by the former of its own responsibilities. That it
was possible so to enlarge the scope of Provincial Finance by
a relaxation of the limitations without injury to the position of
the Government of India must be said to be evident from the
following analysis of the suggestions made by the Provincial
Governments. These suggestions were
(i) Power of taxation and borrowing on the security of
Provincial Revenues.
(ii) Power of sanctioning expenditure on Staff and
Establishments up to a limit higher than that allowed
by the Government of India.
(iii) Separation of Provincial Estimates from the Imperial
Budget and Accounts.
(iv) Abolition of the system of divided heads of revenue and
expenditure and the replacement of it by a system of
separation of sources and contributions from the yield.
(v) Power to spend part of their balances up to a defined
amount, without the previous sanction of the Government
of India in meeting an excess of expenditure over Budget
Estimates.
What objections were there, from the standpoint of the
constitutional responsibilities of the Government of India, to
the grant of these demands? Clearly it was possible for the
Government of India to have marked off certain sources of
taxation best suited for provincial levy and unconnected with
the imperial imposts. Similarly it was possible to have permitted
the Provincial Governments to borrow to a limited extent on
the security of the revenues assigned to them. To suggest as
did the Government of India, that the Provincial Governments
would abuse these powers to the extent of causing discontent
or jeopardizing the stability of their financial system, was to
believe that such legally recognized polities as the Provincial
Governments were run by incompetent administrators
unmindful of their obligations. The second demand could have
been granted with greater ease. It is to be noted that the Civil
Service of the country which deals with revenue and general
administration has been divided into
(i) The “Indian Civil service” recruited in England by
competitive examination, at which natives of India, like

other subjects of His Majesty, can compete; and
(ii) The “Provincial” and “Subordinate” Civil Services,
recruited in India, and, as a rule, only open to persons
who are natives of the country or domiciled therein.
Each Province has had its own separate “Provincial” and “Sub-
ordinate” Services, but while it has a free hand in recruiting
for the latter, appointments to the former have been regulated
by rules laid down by the Government of India. That being
the case it would have been only logical that the Government
which had the power of recruiting for an appointment should
also have the power of regulating the salary. There can be no
reason why the salaries of posts of similar grades should be
equal in all Provinces; nor can they be equal having regard to
the differences in the economic conditions of the Provinces. A
Local Government knows better the economic value of a local
man, and should therefore have been trusted with powers up
to a limit covered by the Provincial and Subordinate Services.
The suggestion of the Government of India that the grant of
such powers would have resulted in heavy additions to the
recurring expenditure of a Province must be said to be too
ungracious to be taken seriously.
The acceptance of the third recommendation could not
have in any conceivable way affected the responsibility
of the Government of India. The only objection which the
Government of India urged was that such a separation would
have been unwise. To have published accounts or estimates
of the Imperial Government which excluded the accounts of
the Provincial Governments, when the items excluded covered
such a large magnitude, would have misled the public and
rendered a wholly incomplete idea of the financial position
of the Government of India.1 Now it must be granted that
if such a separation of accounts could have avoided the
scrutiny and the consequent restraint on budget-making
by the Provinces, not to have done so was to have put the
supposed convenience of the student of Accounts above the
administrative convenience of the Provincial Governments.
Besides, it is to be pointed out that the sugestion was not
a novel one. It was only a revival of the old practice which
obtained between 1871 and 1877. During that period of financial
decentralization Provincial figures did not apear in the Imperial
1
R.C.D., Mit. of Evid., Vol. X, Q. 44866, 45179-180.
Budget. The Provincial Budget as framed by the Accountant

General was passed by the Provincial Government and no more
reference was required to the Government of India except to
inform it that the estimate was a probable one and that it
was within the limits of the revenues assigned to the Province.
It is therefore obvious that there could not have been any
constitutional objection to the granting of the demand for a
separation of accounts.
The fourth recommendation was of the same class as
the third, in that it too could not be said to have involved
any infringement of the constitutional responsibilities of the
Government of India. The abolition of the divided heads of
revenue would have clearly eliminated the interference of the
Government of India in the preparation of the Budget Estimates
by the Provinces. Similarly the abolition of the divided heads of
expenditure would have given the Provinces greater1 freedom
in the matter of spending the revenues assigned to them.
Under that system a Provincial Government could not spend
more on a particular service if it was a divided head unless
the Government of India consented to increase its figure for
expenditure under that service. If the Government of India
reduced its figure the Provincial Government was perforce
obliged to reduce its own. The substitution of a system of
separation of sources and contributions from the yield for
the system of divided heads would have clearly resulted in a
greater freedom to the Provincial Governments, without any
evil consequence to the Government of India. The objections
which the Government of India was able to oppose to this
demand was far from convincing. It was urged2 that the
Provincial Governments under complete separation may
cease to take such interest as it took in respect of revenues
which were divided. But it is evidently a mistaken view
that a Provincial Government could not have been trusted
to administer a tax efficiently unless it had a financial
interest in the result. This view supposed that the people
engaged in the collection of revenue really knew whether it
went to the Imperial or the Provincial credit. As a matter
of fact the ultimate credit could in no way have affected the
collection of the revenue. And even if that view were true the
1
R.C.D., Mit of Evid., Vol. VIII, Q. 35225-28.
2
Ibid., Vol. IV. Q. 15100, 16791.
difficulty could easily have been met by each government having

its own staff to collect its own revenues. The employing by one
Government to execute its functions the agencies of another,
as has been the case in India, is obviously a complicated and
awkward system. If separation of agencies had resulted from
the separation of sources it would have been a reform all to the
good. Besides it was overlooked that the fact that the divided
heads gave a personal interest to the Provincial Governments
was indeed a point against the system rather than in favour
of it. A system which created a vested interest in a revenue
apart from the interest of the public was a bad system, for
such an interest was sure to lead to harshness and rigidity in
collection.1 As an instance of this may be cited the notorious
unwillingness of Provincial Governments in the matters of
remitting taxation.2 If humanizing the Provincial Governments
was a desirable end, then the abolition of divided heads was
a good means. The other objection which the Government of
India was able to oppose was that such a change would have
given the share of the Government of India from the revenues
raised in the provinces the character of a tribute, and the
Government of India would have appeared to be the pensioner
of the Provincial Governments, depending upon them rather
than controlling them. This objection must be ruled out as
being sentimental.
The fifth and the last suggesion for the enlargement of
the scope of Provincial Finance was least obnoxious to the
responsibility of the Government of India. There is no reason
why there should have been a single-treasury system for
both the Governments, Provincial and Central. It is true that
a common treasury permits a high state of economy in the
cash balances of the country, which it is the duty of every
Government to effect, just as any business firm looks upon
it as its duty to economize its till money or floating cash.
But if a common treasury hindered the use of the balances
the gain in freedom would have more than compensated
the loss involved by the increase in the cash balances that
would have followed the institution of separate treasuries and
separate ways and means. But the demand of the Provincial
Governments did not ask for a complete separation of
Provincial balances from the balances of the Central Govern-
1
Cf. in this connection The Fee System, by Prof. Urdhal.
2 R.C.D., Mit of Evid., Vol. X, Q. 44866.
ment involving separate treasury system and separate ways

and means, probably because they anticipated that as such a
proposal meant separate possession of provincial revenues the
Government of India would raise a constitutional objection to
such a demand. All they asked for was a power to spend part
of their balances up to a defined amount without reference
to the Government of India. The suggestion was accepted1 as
“reasonable,” for its consequences, provided it was not a big
amount, would have been not a deprivation of the Government
of India’s power of control over nor a disturbance in the ways
and means, but only a slight increase in the cash balances
of the country.
Thus it is clear that the scope of Provincial Finance
was unduly restricted by a too narrow and too legalistic
an interpretation of the constitutional obligations of the
Government of India. From the above analysis of the suggestions
made by the Provincial Governments it is clear that without
making any breach in the constitutional position of the
Government of India it would have been possible, with a
more charitable view of their sense of responsibility, to effect
the changes they desired. Such concessions would have made
Provincial Finance as self-sufficient and as autonomous as it
was capable of being made. The system would no doubt have
rested on pure convention: none the less its benefits would
have been as real as though it was based on law.
But the time had arrived when the financial arrangements
could no longer be looked upon as a matter which concerned
the Central and Provincial Governments. There arose a third
party whose counsels were rejected in 1870 but which now
insisted on having a voice in the disposition of the financial
resources of the country. It was the Indian taxpayer, and his
clamour had grown so strong that it compelled the powers
that be to alter the system so as to permit him to take the
part he claimed to play.
The changes that followed upon this event will form the
subject-matter of Part IV.

1
R.C.D., Mit of Evid., Vol. X, Q. 44900.
PART IV
PROVINCIAL FINANCE UNDER
THE GOVERNMENT OF INDIA ACT OF 1919
CHAPTER X
THE NECESSITY FOR A CHANGE
As two types of governmental systems, the Presidential
and Parliamentary are often contrasted1 to the advantage of
the latter. For the Parliamentary type of government it has
been claimed2 that no other arrangement seems able quite so
effectively to place the centre of authority under the control of
those who are supposed to represent the popular will : that it
means government by consent: that it ensures the exercise of the
functions of government by a body of persons who are amenable
to and whose views are in accord with those of the majority
of the Legislature : that it is the only form of government
which provides for a powerful Executive so very necessary for
a stable government without rendering it so irresponsible as to
endanger the essentials of a good government: that it throws
upon the holders of high office the onus of vindicating their
acts or, failing, suffer dismissal: it renders the Legislature
supreme both in legislation and administration so that it
forms a government not only to make life possible but also
to make life good. No other form of government, it is urged,
can so effectively prevent order degenerating into tyranny
or progress blocked in the name of peace. So eminently has
Parliamentary Government demonstrated its supreme virtue in
securing orderly progress that, though originally developed as
an accident in the evolution of the British Constitution, it has
been most eagerly adopted as the most fundamental institution
by many countries whose political convulsions have required
them to prepare anew or alter the existing framework of their
governmental systems.
If the fact of the Executive being a part of the Legislature be
a sufficient indication of the Parliamentary type of government,
then the system of government in India since 1853 may be said
to be analogous to the Parliamentary system. Indeed it would
1
Cf. James Bryce, The American Commonwealth, 1910, Vol. I, Chap. XX.
2
Cf. Sir Sidney Low, The Goveranance of England, 1914, Ch. III, passim.
hardly be possible to deny this characteristic to the Indian

constitution, for the provision of the constitutional law has
since then been that the additional (i.e. the Legislative)
members and the ordinary (i.e. the Executive) members shall
together form the Legislature for the making of the laws and
regulation for the peace, order and good government of British
India.1 But judged in the light of its de facto consequences the
Indian system falls lamentably below the de jure connotation
of the class of governmental systems to which it belonged. If
in other countries the record of Parliamentary government is
one of submission of the Executive to the Legislature, in India
it had been one of the Executive thwarting, often of flouting,
the legislature. In vain may one search the proceedings of the
Legislature to find the Executive ever paying deference to the
wishes of the people.2 Reforms have been incessantly, asked
for by the legislature only to be denied with equal tenacity
by the Executive.
The reason why the Indian parliamentary system was
but an empty form is to be found in the fact that it was a
Parliamentary system without a Parliamentary Executive.
In other words, the Executive under the system was not
responsible to the legislature and was not removable by it.
The Indian Legislature could neither make nor unmake the
Indian Executive. The Indian Executive made peace or war as
it liked without being afraid of dismissal by the Legislature.
It taxed as it pleased and spent as it liked, without the
slightest compunction as to the wishes of the Legislature,
it undertook acts or refused to undertake them according
to its own sweet will, but had no fear of a vote of censure
from the legislature. The nearest approach to the Indian
1
Cf. the important note by that eminent lawyer Sir Bhashyam Iyengar on
the Reform proposals of Lord Minto in 1908.
2.
The following table from N. C. Kelkar’s The Case for Indian Home Rule, p.
81, is illustrative of the fact:—
No. of No. of No. of No. of
Legislative
Resolutions Resolutions Resolutions Resolutions
Council
moved withdrawn rejected accepted
Supreme … 3 2 1 0
Madras … 32 26 6 0
Bengal … 38 26 12 0
U. P. … 22 10 12 0
Bihar and Orissa … 5 5 0 0
C.P. … 4 2 2 0
THE NECESSITY FOR A CHANGE 227
system of parliamentary Government is to be found in the

position of the Irish Parliament which existed from 1782 to
1800. The peculiarity of the case lay mainly in the fact that
while this Irish Parliament, commonly known as Grattan’s
Parliament, was during the period it lasted admittedly a
sovereign Legislature, the Irish Executive of the time was
as regards the Irish Parliament in no sense a Parliamentary
Executive. The Irish Executive, instead of being appointed and
dismissed by the Irish Legislature, was in reality appointed and
dismissed by the Crown on the advice of the English Ministry.
In the same manner the Indian Executive was appointed and
dismissed by the Crown on the advice of the Secretary of State
for India who is a member of the English Ministry and was
in no way responsible to the Indian Legislature.
It is true that the Executive in India was ultimately
responsible to the Secretary of State for India and through
him to the British Parliament. But it must not be forgotten,
said Mr. Fisher,1 that
“the affairs of India are in the hands of the Government
of India.... Proposals may come from the Indian
Government to London and be vetoed by the Imperial
Government. The large lines of Indian policy may be
shaped by a Secretary of State in the India Office, and a
powerful Secretary of State may make his influence felt
strongly on the direction of Indian affairs if he encounters
no serious opposition from the Government of India. But
in reality the last word lies with the Indian official opinion
(i.e. the Executive in India), that a measure would not
be forced upon India against the united opposition of the
Indian bureaucracy.”
As a matter of fact neither was the Secretary, though
all-powerful in Indian affairs, inclined to restrain the
Executive in India from doing what the people regarded
as evil nor to constrain it to do what he thought to
be for the good of the people.2 Hardly can it be said
that the British Parliament, wherein every member
1
Fisher, H. A. L., on Imperial Administration in his The Empire and the
Future, 1916, p. 58.
2
The only two cases in which the Secretary of State is known to have run
counter to the wishes of the Executive in India were those concerning the Punjab
Drainage and Canal Act and the Indian Tariff Act of 1875. The latter was obviously
detrimental to the interests of India.
has been supposed to be a member for India, has made the acts of
the Indian Executive a matter of anxious scrutiny.1 On the other
hand, its interference in Indian affairs has on some occasion been
positively harmful to the interests of the Indian people.2 Indeed,
there can be no doubt that the interest of Parliament in Indian
affairs since the assumption of the Government of the country
by the Crown instead of increasing has considerably diminished
as compared with the interest it took when the affairs of the
country were in charge of the Company.3 Nay, the influence of
the British Parliament over Indian affairs, it may be said, has
undergone a decided change for the worse,4 inasmuch as all its
influence is exerted to strengthen the Executive in India against
popular clamour rather than restraining it from flying in the face
of public opinion.
It is therefore evident that the control of the Secretary of State
and of Parliament over the Executive in India was only a nominal
control, and the Indian Executive was in reality an uncontrolled
body of bureaucrats in the exclusive charge of Indian affairs. How
was this trust discharged by this irresponsible Executive ?
The answer to this question may be summed up in the
statement that the Indian Executive has sacrificed progress to
order. Whether we examine its actions in the field of legislation
or finance, the truth of this statement becomes painfully evident.
1
The salary of the Secretary of State for India being paid out of the revenues of India,
Parliament, had no occasion, as it had in the case of the Colonial Secretary, to annually
review his actions in the full activity of the parliamentary Session. At the end, generally
after the Appropriation Bill had been read a second time, the Indian Budget used to be
submitted to Parliament which, after a somewhat desultory discussion, used to pass a
Resolution proclaiming in solemn terms that the Indian Accounts show certain totals of
income and expenditure ! Many attempts were made to improve the control of Parliament
on Indian affairs. But Parliament never cared to increase its control. In 1873 Mr. R. N.
Fowler moved “that in the opinion of this House it is desirable that the Statement of the
financial affairs of India should be made at a period of the Sessions when it can be fully
discussed.” Again in 1883 the same motion was brought forward by Mr. Fowler. Both of these
attempts to furnish the House with a better opportunity to review Indian affairs fell to the
ground. In 1899 the same Resolution was moved by Mr. Cladwell, M.P., with the addition
that the Salary of the Secretary of State for India be placed on the British Estimates. It
was opposed by Mr. Fowler, who was then the Secretary of State for India, and was in
consequence lost. By the provision of the Government of India Act of 1919 the House has
a better opportunity to criticize Indian affairs owing to the salary of the Secretary of State
having been placed on the British Estimates.
2
Cf. the Resolutions of the House of Commons in 1877 and 1879 condemning the Indian
Tariff policy in the interest of Lancashire.
3
In support of this may be cited the fact that Parliament never granted a lease of power
without making harassing inquiries into the affairs of the East India Company.
4
Compare the Parliament which subjected the Indian Executive to the Judicature
with the Parliament that has freed that Executive from Judicial and Legislative control.
Compare the Parliament which laid stringent regulations on the Europeans in India with
the Parliament which not only allowed them free ingress but kept them above the control
of the Magistracy. Compare the Parliament which impeached Hastings with the Parliament
which supported General Dyer.
There are very few countries in the world where there may
be said to prevail so many social evils as has been the case
in India. Law is a means by which society from time to time
repairs its ills in order to effect its conservation. But with very
few exceptions1 the rule of personal law of a most pernicious
character has been allowed to govern the social relations of
the citizens, notwithstanding the fact that enlightened public
opinion has long since raised its voice of protest against its
perpetuation.2 So religious has been the regard of the Executive
for the preservation of the personal law, notwithstanding the
fact that it has disabled millions of its subjects from enjoying
the most elementary rights of citizenship, that it has been
careful not to allow in cases of conflict the rational provisions
of the civil law to override or chasten the irrational rulings
of that archaic code.3 Judged by the modern standard of
legislation the Executive must be pronounced to be extremely
conservative. In the matter of securing economic rights its
response was of a very halting character, and the legislation
it has been persuaded to undertake for giving security or
fixity of tenure to the agricultural4 or ease and comfort to the
industrial5 population sank in comparison to what it refused to
undertake for liberating the rest from a species of industrial
slavery notwithstanding incessant demands for its abolition.6
Its financial system was similarly characterized by the desire
to preserve peace and order by taxing the masses and exempting
the classes. It has been urged that the revenue system be so
altered as to give relief to the poorer classes. Indirect taxes are
justified as a method of making the poorer classes pay their
1
Bengal Regulation of 1829 prohibiting Sati; Act V of 1843 (prohibiting slavery); XXI
of 1850 (re enacting Sec. of Reg. VII of 1832) prohibiting forfeiture of rights or property
as a result of loss of caste or religion ; XV of 1856 authorizing the remarriage of Hindu
widows ; XXI of 1866 enabling native Converts to Christianity to obtain divorce ; XXVII of
1871 restricting unnatural practices ; III of 1872 providing a form of marriage for all persons
who are neither Christians, Jews, Hindus, Mahomedans, Jains, nor Sikhs.
2.
It was first accepted by Warren Hastings in 1772 and was embodied in the East
India Company’s Act of 1780 (21 Geo. III, c. 70, ss. 17 and 18); the provisions have been
incorporated in later Statutes.
3
Cf. the provisions in favour of the personal law in the Indian Succession Act X of 1865;
the Transfer of Property Act IV of 1882, and the Indian Trust Act II of 1882.
4
Cf. The Tenancy Acts of 1859, 1868, 1881 and 1885 in Bengal; Oudh Rent Act of 1868
in U.P.; the Deccan Agriculturists Relief Act of 1879 in Bombay, and the Central Provinces
Tenancy Act of 1883.
5
The Factory Acts did not begin in India till 1881. The Act of 1881 was amended in
1891 and replaced by another in 1911 which lays down the conditions governing factory
labour in India.
6
Students of Indian economic problems will perceive that the reference is to the scandalous
system of indentured labour.
share of the burden of the State without their being sensible

of the fact. But there is a limiting principle which forbids the
imposition of certain kinds of indirect taxes. It may be said
to be agreed by students of public finance that indirect taxes
be such that the poor on whom they impinge rather heavily
relatively speaking, must be able to adjust the burden of such
taxes to their means. When such indirect taxes fall on luxuries
it is possible for them to apportion for themselves the burden
they need must bear by regulating their purchases. But in
those cases where they fall on necessaries of life this elasticity
is not possible. The pernicious character of the salt tax in
India was urged as a sufficient ground for its elimination from
the revenue system of India. But not only did the Executive
refuse to accept the demand, it actually increased the salt
tax whenever a deficit has occurred instead of tapping some
other source of revenue, which it could have done with equal
ease and greater justice. In 1886, to cite one example, it was
admitted1 that
“ There can, after all is said and done, be no manner
of doubt, but that one great fact remains established,
one great blot not only unremoved but aggravated by
the course of events in recent years ..… It is that .....
the classes in (India) which derive the greatest security
and benefit from the British Government are those who
contribute the least towards it.”
But in the Budget of 1887-8 the Executive eschewed its
own conviction and inceased the salt duty to make up for the
deficit caused not by any extraordinary measure of internal
improvement but by an enormous act of external aggression,
namely the conquest of Burma, as though the income tax of
1886 which left untouched the incomes of the Bengal zamindars,
the Assam Tea planters and the Talukdars of Oudh, in making
the richer classes pay, made them pay, at the very moderate
rates it levied, all they could be made to pay.
But the salt tax is not the only instance of inequity under which
the masses paid for the classes. The land revenue as it has been
levied in India may be cited as another example of inequity in the
Indian Tax System. The sources of inequity are various. There is
first of all the glaring fact that in some cases the amount of the tax
1
Cf. the speech by Sir A. Colvin on the License Tax Amendment Bill in the
Supreme Legislative Council on January 4, 1886.
is permanently fixed, while in other cases the amount of the

tax payable in respect of land revenue is periodically revised.
Now there is no justifying circumstance why some citizens
should be exempted from contributing their quota to the growing
needs of the State when the same is rigorously exacted from
their fellows. This is, however, only one point of injustice to
those whose taxable capacity in respect of land revenue is
subject to periodical revisions. There is another which consists
in the adoption of a wrong measure of capacity to pay. The
cardinal feature of this revisable part of the land tax in India
is to be found in the basis of the tax which, as is well known
to every student of Indian Finance, is a certain unit of land.
Now nobody has ever suspected the pernicious effect of the
system which bases the tax on a unit of land held ; but surely
there can hardly be a system more mistaken in thought or
more mischievous in practice. It ignores the commonplace of
economists which asserts that taxes are paid not by things but
by persons,1 and if it is persons who ultimately pay the taxes
then it is manifest that they must be required to contribute not
according to the land they hold but in proportion to the total
income derived. On the contrary the system, in undertaking
to tax per unit of land, taxes the poor peasant with only one
acre to cultivate and the landlord owing hundreds of acres at
a uniform rate without realizing that as the total incomes of
the two must be vastly different this uniformity of taxation
must produce a glaring inequity of treatment as between the
rich and the poor.
If the revenue thus raised by sacrificing equity to the
dictates of order had been spent on services promoting progress
there would have been some compensation. But such was not
the case.
All the revenue that was collected was spent on Services
such as Police, Military and Administration which are calculated
to maintain order. Such services as Education, State aid to
industries, hardly found any place in the scheme of public
expenditure as managed by this irresponsible Executive. But
it may be asked as to why the Executive, sovereign as it was,
should have stood for order and against progress ? The answer
1
Cf. the criticism by Prof. Cannan on the Terms of Reference to the Royal
Commission on Local Taxation in the Memoranda chiefly relating to the
classification and incidence of Imperial and Local Taxation, C. 9528 of 1899, p. 160.
PERCENTAGE OF EXPENDITURE
232
(Excluding expenditure on commercial services, i.e., Post Office and Telegraph Dept., Railways and Irrigation).
In thousands of rupees.
Army (Includeing
District Other Heads, Famine
Debt Civil Civil Civil Military Works and
Periods Adminis- Forest including Relief and Total
Sources Depts. Changes Works Special Defence
tration Opium Insurance
Works)
1877-78 5.2 .8 5.6 8.9 18.7 6.8 5.8 39.2 2.6 93.6
to
1881-82
MK
1882-83 6.0 1.2 6.6 8.2 21.4 7.5 7.6 35.6 2.3 96.4
to
1886-87
1887-88 6.0 1.3 5.4 7.6 22.1 7.5 7.3 37.7 2.8 95.7
to
SJ+YS
1891-92
1892-93 6.1 1.3 4.9 6.4 22.5 8.4 6.9 38.5 1.6 96.6
to
1896-97
1897-98 5.8 1.4 5.5 4.3 22.6 7.8 6.8 35.2 4.8 94.2
to
1901-02
1902-03 5.9 1.6 8.2 3.1 23.2 7.3 9 37.1 1.8 97.2
to
1906-07
25-9-2013/YS-11-11-2013
1907-08 6.3 1.8 7.1 3.5 25.7 7.7 8.5 35.6 2.1 98.3
to
1911-12
1912-13 6.0 1.9 6.2 2.1 28.2 7.3 9.3 35.1 1.5 97.6
to
1916-17
From the statistics of British India, Vol. II, Financial Statistics, 1920, p. 7.
232
is that an irresponsible government, however sovereign, is

incapable of progress, for in the exercise of its sovereign powers
it is hampered by two very serious limitations.1 There is first
of all the internal limitation which arises from the character,
motives and interests of those who are in power. If the Sultan
does not abolish Mahomedanism, Pope ban Catholicism, the
Brahmin condemn caste, or the British Parliament declare
the preservation of blue-eyed babies illegal, it is not because
they cannot do things, but it is because they will not do these
things. In the same way if the Executive in India did not
do certain things most conducive to progress it was because
by reason of its being impersonal2 and also by reason of its
character, motives and interests it could not sympathize with
the living forces operating in the Indian Society, was not
charged with its wants, its pains, its cravings and its desires,
was inimical to its aspirations, did not advance Education,
disfavoured Swadeshi or snapped at anything that smacked of
nationalism, it was because all these things went against its
grain. But an irresponsible government is powerless to do even
such things as it may like to do. For its authority is limited
by the possibility of external resistance. There are things
which it would do but dare not do for the fear of provoking
thereby resistance to its authority. Caesar dare not subvert
the worship of the Roman people, a modern parliament dare
not tax the Colonies, however much they would. For the same
reason the Government of India dared not abolish the caste
system, prescribe monogamy, alter the laws of succession,
legalize intermarriage or venture to tax the tea planters.
Progress involves interference with the existing code of social
life and interference is likely to cause resistance. None the less
1
For an illuminating discussion of this, cf. A. V. Dicey, Law of the Constitution, 1915,
pp. 74-82.
2
Impersonal because the higher and controlling grades of public services are devoid of
Indian element. Although the eligibility of the natives of India for employment in public
services was proclaimed as far back as 1833, the regulations made by the Secretary of State
for admission to the Public Services in India has had the tendency to exclude them from
the employment of the right granted to them by statute. Under the regulations made by
the Secretary of State for War, candidates for Commission in the Army were to be of pure
European descent and a similar regulation was adopted by the Admiralty for cadetship in the
Navy, thereby excluding Indians. As to the Civil Service the Statute (Government of India
Act, 1858, s. 32) laid down that all “natural-born subjects” of the Crown be admitted for
examination, thereby including the natives of India. But the ruling of the Secretary of State
that that examination should be held only in London had indirectly debarred many natives
of the country from benefiting themselves under the statute. Regulations for admission to
other public services varied. For the Indian Medical Service, candidates were to be natural-
born subjects of European or East Indian descent; for the Indian Police Service they were to
be British subjects of European descent; for the Forest Service they were to be natural-born
British subjects ; for Public Works Department one-tenth might be natives of India who
are British subjects.—Cf. in this connection Halsbury, Laws of England, Vol. X, pp. 588-9.
a government which is of the people and is not detached from

them can venture on the path of progress, because it is in a
position to know where obedience will end and resistance will
begin. But the Indian Executive not being of the people could
not feel the pulse of the people. The gist of the matter is that
the irresponsible Executive which had been in power in India
was paralysed between these two limitations on its authority
and much of what went to make life good was held up. Part
of the programme it would not undertake and the other part
it could not undertake. As a result of this, so far as the moral
and social life of the people was concerned, the change of
government by the Moghuls to a government by the British
was only a change of rulers rather than a change of system.
Owing to the adoption of the principle of non-interference
partly by preference and partly by necessity by the British
“the natives of India found themselves under a
government distinguished in no vital respect from those
under which they had toiled and worshipped, lived and
died through all their weary and forgotten history. From
a political standpoint, the change was but the replacement
of one despotism by another. It accepted the arrangements
as it found them1 and preserved them faithfully in the
manner of the Chinese tailor who, when given an old coat
as a pattern, produced with pride an exact replica, rents,
patches and all.”2
That there was some advancement in material progress
is not to be denied. But no people in the world can long
remain contented with the benefits of peace and order, for
they are not dumb brutes. It is foolish to suppose that a
people will indefinitely favour a bureaucracy because it has
improved their roads, constructed canals on more scientific
principles, effected their transportation by rail, carried their
letters by penny post, flashed their messages by lightning,
improved their currency, regulated their weights and
measures, corrected their notions of geography, astronomy
and medicine and stopped their internal quarrels. Any people,
however patient, will sooner or later demand a government
that will be more than a mere engine of efficiency. Under
the influence of Western ideas of representative govern-
1
The poll tax has been continued in Burma simply because it was found to
exist there on the day of conquest.
2
Benard Houghton, Bureaucratic Government.
ment the Indian people had for some time been demanding a
change in the form of the government. A Parliamentary form
of government with a Parliamentary Executive was the goal
they had laid before themselves.
The popular agitation for achieving this end assumed such
proportions that, in the course of time, there was presented a
serious issue for the consideration of the Executive in India.
How was the government of the country to be carried on ? By
force or by consent, Power seldom commits suicide of its own
accord. Rather, when it fails to secure the willing compliance
of the people, it resorts to force. That was the resource
adopted by the Executive in India. Not satisfied with the
aid of the power with which the Executive was endowed by
the provisions of the Criminal and Penal Codes to anticipate
offences by preventive acts, it besmeared the Indian Statute
Book with a set of repressive laws hardly paralleled in any
other part of the world. The Criminal Law Amendment Act
XIV of 1908 empowered a magistrate with special sanction
of the Government to hold an ex-parte inquiry without the
presence of the accused or of his legal representative and
commit him for trial to be conducted without a jury. Under
another provision of the same Act the Executive could declare
unlawful any association which in its view interfered with the
maintenance of law and order. The State Prisoners Regulations1
and Acts2 authorizing the Executive to place under restraint
any person whom it suspected but against whom it had no
proof, constituted by themselves a perpetual suspension of the
Habeas Corpus Act :3 while under another Act4 the Executive
was empowered to proclaim “a State of Siege” or martial law
in any area and suspend therein the jurisdiction of the civil
courts in favour of the military courts. The Indian Press Act
of 1910 put a complete muzzle on the Press. So wide were its
provisions that in the opinion of a learned judge5 of one of the
Indian High Courts it was “difficult to see to what length its
operation might not be plausibly extended by an ingenious mind”
1
Bengal Regulation III of 1818 ; Bombay Regulation XXV of 1827 ; Madras
Regulation II of 1819.
2
Act XXIV of 1850 and Act III of 1858.
3
N. Ghose, Comparative Administrative Law, 1918, p. 480.
4
Act IX of 1857.
5
Sir Lawrence Jenkins, C. J., in re Mahomedali, I.L.R. 40, Cal. 466 (1913),
quoted by N. Ghose, op. cit., p. 567.
and “that they would certainly apply to writings that might

even command approval” and “much that is regarded as
standard literature might undoubtedly be caught.” The right
of public meeting was suppressed in the same manner and
with the same sterness as was the right to personal freedom
and the right to freedom of discussion ; for, over and above the
restrictive provisions contained in the ordinary law of the land,1
the executive armed itself with discretionary powers under a
special enactment to prohibit any public meeting on the excuse
of what it regarded as the interest of the public.
The rigour of this regime of lettre de cachet and the Bastille was
quite untempered by any fear of responsibility on the part of the
Executive for any excesses committed in putting these repressive
laws into operation. For it is to be noted that the Executive had,
coupled with the large grants of these discretionary powers to
suppress the liberties of the people in order to preserve law and
order, the gift of an equally generous measure of immunity to
its agents in carrying out those powers.2 The Police Acts and
the Press Act all contained provisions which barred all action
in a civil court against these agents for damages to be done in
pursuance of these Acts. Officers, and soldiers taking part in
the suppression of riots were not criminally responsible for acts
done in good faith and were not to be prosecuted for other acts
without the sanction of the government.3 In like manner superior
Executive officers could not be prosecuted for crimes committed
in discharge of public functions except with the permission of
the government and then only in the manner prescribed by
government.4 There is no wonder then if such discretionary
powers, exercised extra-judicially, substituted a reign of terror
in place of a regime of peace.
But it was soon found out that force was not a sure means of
carrying on the government of a country. The verdict of history
was well summed up by Burke5 when he said :
“The use of force alone is but temporary. It may subdue
for a moment, but it does not remove the necessity of subduing
again : a nation is not governed which is perpetually to be
conquered. (The) next objection to force is its uncertainty.
Terror is not always the effect of force, and an armament is not
1
Sections 108 and 144 of the Criminal Procedure Code and Sections 120A
and B, 124A and 153A of the Indian Penal Code.
2
N. Ghose, op. cit., p. 601.
3
Code of Criminal Procedure Act V of 1898, Ch. IX, Sections 128, 130 and 132.
4
Ibid., sect. 197.
5
Speech on conciliation with America.
a victory. If you do not succeed, you are without resource ;

for conciliation failing, force remains, but force failing, no
further hope of reconciliation is left. Power and authority
are sometimes bought by kindness, but they can never be
begged as alms by ah impoverished and defeated violence.
A further objection to force is, that you impair the object
by your very endeavours to preserve it. The thing you
fought for (to wit the loyalty of the people) is not the
thing which you recover, but depreciated, sunk, wasted
and consumed in the contest ……”
Government by consent was indeed long ago accepted by
the Indian Executive as a principle of political wisdom, and the
changes introduced from time to time in the constitution of the
Indian Legislature were avowedly for the purpose of making it
reflect the popular will. The result for a time was an astonishing
degree of accord between the Indian Executive and the Indian
Legislature ; so much so that the regime of lettre de cachet
and the Bastille had the sanction of the majority of the Indian
legislature. But all this government by consent or conciliation
was a camouflage. On the other hand, an analysis of the changes
introduced from time to time into the constitution of the Indian
Legislature clearly shows that the motive behind these changes
was to make it an impotent body or a willing tool in the hands
of the Executive. A Legislature as distinct from the Executive
was first’ inaugurated in 1853.2 But in 18613 the constitution of
the Legislature then established was altered. The ground urged
was that that Legislature was not a body representative of the
Indian people.4 Its members were drawn from the official class
representing the several Provincial Governments. In order to
make the Legislature representative of the people, the Act of
1861 directed that it should be composed of nominated members
chosen by the Governor-General from among the public, of course
on the advice of the Executive. Again, by the Act of 1892 the
Governor-General was directed to nominate such persons to the
Legislature as were selected by public bodies in the country.
1
Up to 1833 the Executive was also the Legislature. In 1833 a law member
was added to the Executive Council, whose duties were confined to merely giving
assistance to the Executive Council in the matter of making laws. By the Act of
1853 he was merged into the Executive Council.
2
16 and 17 Victoria, c. 95.
3
24 and 25 Victoria, c. 67.
4
By the Act of 1853 the Supreme Legislature was composed of nominated
members comprising two Judges of the High Court of Bengal and four nominated
officials representative of the Bengal, Madras, Bombay and N.W.P. governments
in addition to the members of the Executive Council of the Government of India.
These changes in the constitution of the Legislature appear

to be aimed at liberalizing it. But was this tendency
towards making the Legislature representative accompanied
with a tendency to make it more powerful as regards the
Executive ? Quite the reverse. As the legislature gained
in its representative character it lost in its controlling
power. The powers exercised by the Legislature under the
Act of 1853 were far vaster than anything possessed by
the Legislature under the Act of 1861. Under the former
the Indian Legislature modelled itself on the procedure
of the House of Commons in England, and not only dealt
with matters of legislation, pure and simple, but also with
matters of administration. In the words of Sir C. Ilbert, it
showed an inconvenient degree of independence by asking
questions as to and discussing the propriety of the measures
of the Executive Government—deeming itself competent
to inquire into abuses and grievances, calling for reports
and returns from local administrations, debating long on
questions of public interest and introducing motions and
resolutions independent of the Executive Government. In
a despatch of Lord Canning at the time, he pointed out
that the Legislature had become invested with forms and
modes of procedure closely imitating those of the House of
Commons, that there were 136 standing orders to regulate
the procedure of a dozen gentlemen assembled in council,
that in short, in the words of Sir Lawrence Peel, they had
assumed jurisdiction in the nature of that of a grand inquest
of the nation. This was deemed to be a very grave defect (!!)
in the Legislature as constituted by the Act of 1853. Its
reform was therefore looked upon as very necessary for
maintaining the supremacy of the Executive, and its non-
popular character was made the ostensible excuse for its
reconstruction. Under the pseudo-representative system
introduced in 1861 the Legislature was a meek body entirely
in the hands of the Executive. Being composed of nominated
members, division in the Legislature was directly influenced
by that fact. In every legislative body a man must sit, unless
he has a hereditary right, by what in modern parlance is
called a mandate. That mandate usually proceeds from
the authority to whom he owes his seat. The nominated
members, official as well as non-official, owed their elevation to

the legislature to the pleasure of the Executive, and as such
were bound to support the Executive on any measure on which
a division was taken. The Executive had always at its command
the official block of nominated members, who gave implicit
obedience to its mandates either because of its convictions
or by reason of its being a part of the same. The nominated
non-officials, who may be said to be opposed by conviction to
the Executive, were not men of independent character and
were largely concerned to make themselves agreeable to the
Executive rather than make themselves reckoned with. But
had they been men of independent character they could not
have made themselves masters of the Executive, for by the
provisions of the Constitutional law and the rules of procedure
made under it, the Legislature was rendered entirely powerless
to compel the Executive to do anything against its wishes. From
1853 to 1861 the Legislature dealt with both legislative and
administrative questions. From 1861 the legislature met only
for legislative purposes. As a consequence of this limitation
the Legislature was debarred from asking a question, moving
a resolution or dividing on the Budget. During the first thirty
years of its existence the legislature did not even discuss the
annual budget on more than sixteen occasions, and that too
because some new tax legislation had been called for, and
which the Executive could always carry through with the help
of the nominated official block as it did every other kind of
legislation it deemed necessary. The right of discussing the
annual financial statement and the right of asking questions
in regard to matters were first conceded to the legislature
by the Rules of Procedure framed under the Indian Councils
Act of 1892. But it may be doubted whether these concessions
of powers to the Legislature amount to a restoration of the
position which it occupied and dominance it exercised under
the Act of 1853.
Even the reforms of Lord Morley fell short in the matter
of according a real measure of independence and power to
the Legislature over the Executive. In the reforms which he
introduced in 1909 nomination, directly or after selection, was in
principle replaced by election as a basis for the constitution of
the legislature. At the same time the procedure of the legislature
was liberalized so as to give power to the members to put
supplementary questions along with interpellations, to move

resolutions on the Financial Statement and on matters of general
public interest. But a little analysis is enough to show that even
this attempt was of a piece with the old endeavour of liberalizing
the Legislature without impairing the supremacy of the
Executive.1 This supremacy of the Executive was maintained (1)
by means of a permanent majority of officials of the government
nominated to the legislature, and (2) by controlling the rules of
procedure. Although election2 was admitted by the Act of 1892
as a basis of the composition of the Legislature, the elected
members were in a minority, so that they could not give effect
to the wishes of the people whom they represented. They were
entitled to move resolutions if permitted by the Executive3 but
the Executive was not bound to carry them out. They served only
as recommendations, and were not binding upon the Executive.
This direct thwarting produced irritation between the Executive
and the elected members of the Legislature. In a certain sense
the reforms of 1909 were a bad piece of engineering. Before
1909 whatever conflict there was was manifested outside the
Legislature. For by the rules of election and procedure the
Legislature was entirely muzzled : it could do no mischief. By
the reforms of 1909, however, an attempt was made to make
the Legislature independent and at the same time to muzzle it.
This attempt, ingenious as it was, only served to bring to the
surface the deep-seated conflict between the Executive and the
forces agitating the minds of the people. Election procedure or
business procedure governing a legislature is, in the words of
Prof. Redlich, as it were a political pressure gauge, indicating the
tension in the parliamentary machine and thence in the whole
organism of the State.4 It is possible that this pressure gauge in
the first instance may either be badly constructed or may become
1
It was Lord Morley, of world-wide fame as a champion of Liberalism by supporting
the cause of Irish Home Rule, who said in introducing the political reforms in India :
“If I knew that my days, either official or corporeal, were twenty times longer than
they are likely to be, I should be sorry to set out for the goal of a Parliamentary
system in India. The Parliamentary system in India is not the goal to which I for
one moment aspire.”
2
It was, however, a system of selection. The only difference between the Act of
1861 and the Act of 1892 was that under the former Act the Executive Government
was to nominate anyone it liked to the Legislature. Under the latter the Executive
Government was to nominate “upon the advice of such sections of the community as
are likely to be capable of assisting in that matter.” But as the Government was not
bound to appoint the person selected, the second, howsoever concealed, must really be
regarded a case of nomination by the Executive as much as the first.
3
Legally the President of the Council, i.e. the Viceroy ; but he is supposed to be
invariably acting on the advice of the executive Council.
4
Cf. J. Redlich, Parliamentary Procedure, Vol. III, p. 198.
worn out so as to give a false reading of the actual tension.

But there can be no doubt that in the case of India the
Executive, in the alterations which it introduced from time
to time and particularly in 1909 in the election and business
procedure of the legislature, had all along constructed it badly
of purpose and had attempted to conceal thereby dangerous
pressure of the steam in the political machine, so as to cause
it to give a false reading of the situation. So long as the
members of the legislature derived their mandates from the
Executive, owing to the fact that all of them were nominated
members, such an artifice worked well, with the entry of the
elected members holding their mandates from the people, the
weakness of the artifice became evident. The mortification of
the elected members led them to obstruct and challenge the
great fundamental principles recognized as the theoretical basis
of procedure. Now if a party complained of inequality among
members, of the rules of conducting proceedings, of freedom
of speech or of the majority principle, it is a danger signal
indicative of the existence of some serious defects in the life
of the State. When such a conflict arises it is for a political
statesman to judge whether he has to face a reform of the
procedure of the representative assembly or a reform in the
constitution of the State.
While inside the Legislative Assembly there were signs
of hardening opposition and weariness which comes from
sterile efforts, outside the Legislature the tide of feeling was
rising more quickly, for, all the time the sense of national
consciousness and the desire for political power were growing
rapidly in the minds of educated Indians, no doubt, because
the Legislature with its limited powers was found to be an
insufficient safety valve. As a result of the realization of
this fact those who had given their thoughts to the political
reconstruction of the country agreed that a mere reform of the
procedure will not do. Only a reform of the constitution will
save the state from anarchy.
There was, however, a considerable diversity in the reforms
suggested for effecting an alteration in the constitution of
India. One scheme may here be noted in passing and that was
the scheme propounded by the Indian National Congress and
the Moslem League, shortly known as the Congress-League-
Scheme.1 The scheme demanded a four-fifths majority of elected
1
This will be found in East India Constitutional Reforms, pp. Cd. 9178 of
1918, p. 98.
members in the Central Legislature. As to the Executive,

it demanded that one-half of the total number of the
Executive members should be Indians and that they should
be elected by the elected members of the Legislature. The
Legislature was to have complete financial and legislative
powers. Nay, its recommendations, passed in the form of
resolutions, were to be binding on the Executive. Such
“was the latest, most complete and most authoritative
presentation of the claims of the leading Indian political
organizations” on behalf of the Indian people. But when
we come to analyse the scheme it speaks poorly of the
political genius of the Indian politicians. The scheme
was formulated as a fulfilment of responsible government
in British India. But in practice it was not only not a
measure of responsible government, but it was deficient
even to subserve the ends of good government. The scheme
did not ask that the legislature should have the power
to make or unmake an Executive as it pleased. If it had
asked that, then the scheme would have been a scheme
for responsible government. But what it asked for was to
compel an Executive, which was irremovable, to conduct
the administration of the country according to the orders
of the Legislature. The Scheme was of a piece with that
of Lord Morley in an enlarged form. He had introduced
an Indian element into the Government so that Indian
opinion and Indian advice might have some weight with
the Executive in addition to what it exercised through the
legislative organ of the Government. Those who framed
the Congress-League-Scheme merely increased the Indian
element in the Executive and the Legislature, and added
provisions aimed at converting advice into control without
realizing what was to happen if the Executive refused to
be bound by the wishes of the Legislature. The essence
of the project was an Executive with a divided mandate
legally responsible to Parliament, and practically to
an elected Legislature. Such a separation of mandates,
it was obvious, would have enabled the Legislature to
paralyse the Executive without having power to remove
it. Being without any constitutional means to change
the Legislature in cases of conflict by an appeal to
the Electorate it would have been obliged to carry on
the Government even where it did not respect the wishes of

the Legislature. The scheme was unsound, like all previous
attempts at the reform of the Indian Constitution, because in
it the Executive and the legislature derived their mandates
from and were responsible to different powers. It was unsound
because it overlooked the possibility that two mandates may
not agree, in which case there would be a conflict. That
conflict is inherent in a non-parliamentary executive. Some
form of a Parliamentary government with a Parliamentary
executive was the only way of avoiding it.
It is from this standpoint that the announcement of August
20, 1917, forms a landmark in the annals of the development
of the Indian Constitution. On that date the Secretary of
State for India announced in the House of Commons that—
“The policy of His Majesty’s Government, with which
the Government of India are in complete accord, is that
of the increasing association of Indians in every branch
of the administration and the gradual development of
self-governing institutions, with a view to the progressive
realization of responsible government in India as an
integral part of the British Empire. They have decided
that substantial steps in this direction should be taken
as soon as possible ……”
“ I would add that progress in this policy can only be
achieved by successive stages. The British Government
and the Government of India, on whom the responsibility
lies for the welfare and advancement of the Indian
peoples, must be judges of the time and measure of each
advance, and they must be guided by the co-operation
received from those upon whom new opportunities of
service will thus be conferred and by the extent to which
it is found that confidence can be reposed in their sense
of responsibility.”
This momentous announcement marks the end
of one epoch and the beginning of a new one. It
definitely abandoned the old conception under which
the Executive might, as it saw fit, consult the wishes
of the legislature, which were only given an increasing
share in the administration of the country and increasing
opportunities for influencing and criticizing, but never for
controlling, the Government. Under the new conception the

aim was to endow the Legislature with the power to make
or unmake the government, so that it would be not only
a government of the people and for the people, but by the
people. The adoption of such a change of policy in the basis of
the political institutions of the country involved far-reaching
changes in their relations with one another, administrative,
legisltive and financial. The changes in the system of Provincial
Finance introduced in consequence of the Reforms Act of
1919 were not caused by any inherent defects in the system
as it stood at that date. On the other hand, the system was
eminently workable. They were effected because the system
as a whole was inconsistent with the great revolution which
that Act had sought to effect in the governmental system of
that country.
The nature of the changes, their extent and their adequacy
will form the subject-matter of the two following chapters.

CHAPTER XI
THE NATURE OF A CHANGE
The announcement of August 20, 1917, spoke of progressive
realization of responsible government as the goal of the future
British policy in India, and the Montague-Chelmsford Report
on Constitutional Reforms surveyed the ways of giving effect to
that announcement. One of the merits of that Report consisted
in showing that the Congress-League-Scheme of political
reforms did not embody the principle for the recognition of
which they were agitating so long. Instead of inaugurating
a responsible government in India, the scheme would have
saddled the country with a non-parliamentary executive under
a parliamentary system of government. Being convinced of their
error the Congress-League politicians, be it said to their credit,
abandoned their scheme in favour of the proposals contained
in the Joint Report. But in their turn they demanded the
introduction of a more or less complete responsible government
in most of the political institutions at one stroke. But the
framers of the new constitution pointed out that the emphasis
on the word progressive in the announcement was as great if
not greater than the emphasis laid on the word responsible.1
In consonance with this view it was decided to introduce, as
a substantial step in the progress towards the realization of the
goal laid down in the announcement, a responsible government
of a limited character in the Provincial Governments. The
Provincial Governments in India, like the Central Government,
were irresponsible governments. The changes made in the
constitution of Provincial Legislatures were of the same nature
as the changes in the Central Legislature, in that both were
calculated to enable the Executive to consult the Legislature
without being amenable to its control. Only on one occasion
were the frame-works of the two machines of governments, the
1
Report of the Joint Select Committee on the Government of India Bill,
p. 203 of 1919, p.s. para. 7.
Provincial and the Central, constructed on a slightly different

basis, and that was in the Morley-Minto Reforms of 1909.
Under those reforms the Central Legislature was dominated
by official members who with the members of the Executive
formed a standing majority in the chamber. In the Provincial
Legislatures this principle of a standing majority of official
members was dispensed with. The second point of departure
in the constitution of the Provincial Legislatures as compared
with that of the Central Legislature consisted in the Budget
procedures in the two governments. In the Central legislature
the Finance Member early in each calendar year presented to
the Legislature his preliminary estimates accompanied by an
explanatory memorandum. On a subsequent day he made such
further explanations as he thought necessary. Members of the
Legislature could thereupon move resolutions regarding (a) any
proposed alteration in taxation, (b) any proposed loan, or (c) any
additional grant to a Local Government. The first stage in the
discussion of the Budget of the Government of India was over
when once these resolutions were voted upon. The second stage
commenced when the estimates were taken into consideration
by groups. At this stage also it was open for members to move
resolutions on any heads of revenue and expenditure, except
those that were declared by rules of procedure to be not open
for discussion to the legislature. After the resolutions had been
moved and voted upon the Finance Member took the whole
discussion into consideration and made such changes as were
agreeable to him and then presented his final Budget. At this,
the third stage, the Finance Member explained his reasons
for the acceptance of some and the non-acceptance of other
suggestions made during the course of the Budget debate. A
general discussion of the Budget then followed, but no resolution
was allowed to be moved upon the final Budget or a vote
taken. The Budget procedure in the Provincial Legislatures
was a little different. There the first stage commenced with
the preparation of a rough draft of the provincial estimates,
accompanied by a schedule including in it all projects
involving an expenditure of over 5,000 rupees, divided into
two parts, the first containing all allotted, i.e. obligatory,
items of expenditure and the second containing unallotted,
i.e. non-obligatory, items of expenditure. The Government
of India to whom this draft Budget was submitted corrected
THE NATURE OF THE CHANGE 247
the estimate of the revenue and determined in consultation

with the Provincial government the aggregate expenditure for
which the latter should provide, and if need be, altered or
added to the items in the first part of the schedule. When the
figures of the altered revenue and the aggregate expenditure
as fixed by the Government of India were communicated to
the Provincial Government it marked the close of the first
stage of a Provincial Budget. The second stage commenced
when this draft Budget was submitted by the Provincial
Government to a committee of the Provincial Legislature.
The Committee was composed of officials and non-officials in
equal number, the former nominated by Government and the
latter elected by their fellows. It was presided over by the
member of the Executive in charge of Provincial Finance ; the
proceedings of the committee were informal and private and
decisions were by majority votes. The Committee concerned
itself only with the second part of the Schedule containing
non-obligatory items of expenditure and, provided it did not
exceed the aggregate expenditure fixed by the Government
of India, it was free to make variations and even to insert
new items occasionally. On the conclusion of its labours the
Committee reported the changes it made to its Government.
With this ended the second stage in the Provincial Budget.
The third stage began when the Provincial Estimates as a
whole were presented to the Provincial Legislature by the
member in charge of finance. The Budget was then considered
in a committee of the whole House and resolutions moved
on each group of estimates discussed. When all resolutions
were debated and voted upon the result of the discussions
was communicated to the Provincial Government. But the
resolutions were not binding. The fourth stage commenced
when the Provincial government introduced the final budget
and explained its reasons for the acceptance of some and the
non-acceptance of the rest of the suggestions made by the
Legislature. A debate followed, but no resolutions were in
order at this stage ; nor did the Legislature divide upon the
Budget. It was adopted as passed by the Executive.
From these differences in the constitution and procedure of
the Central and Provincial Governments, it must not be supposed
that the provincial Governments were less irresponsible with
regard to their Legislatures than the Central Government was
with regard to its own Legislature. The fact that since 1909
there was no majority of official members in the Provincial
Legislature as there was in the Central Legislature was a
matter of no moment so far as its practical consequences to
the Executive were concerned ; for it is to be remembered that
in practice the difference between nominated members from
among the non-officials and the official members was only
superficial. Both had their mandate from the government who
gave them their seats in the Legislature, and as nominees of the
Government they voted for the Government, so that, though not
in theory, in practice the Provincial Government had as much
a standing majority in Legislatures as the Central Government
had in theory as well as in practice. Nor did the budget
procedure of the Provincial Government mark any decided
improvement over that adopted in the Central Government
in the matter of giving greater control to the Legislature over
the Executive. In both cases the aim was to give the members
of the Legislature the privilege of discussing beforehand the
question of such alteration with reference to the necessities
of the Budget, only in the case of the Provincial Budget this
privilege was allowed to be exercised at an earlier stage than
in the case of the Imperial Budget. But in view of the fact that
the Resolutions of the Legislature on the Provincial Budget, as
those of the Central Ledgislature on the Imperial, were only
recommendations to their respective Executives, this difference
between the Budget procedure of the two Governments did
not impose any greater control over the one Executive than
it did on the other. Again, the provision that a committee of
the Provincial Legislature had been allowed the privilege of
framing the non-obligatory portion of the Provincial Budget
did not give the Legislature any appreciable control over the
Executive. First of all, the Provincial Government could always
restrict the scope of this Budget Committee by transferring any
head from the class of non-obligatory expenditure to the class
of obligatory expenditure. Besides this, the operation of certain
other rules of Budget procedure based upon general principles
of public finance tended directly to restrict the powers of the
committee to put forth schemes of alternative or additional
expenditure. It was rightly provided that schemes involving
recurring expenditure could only be proposed with due regard
to the rate of growth of recurring revenues and recurring
expenditure. Owing to this rule, the committee had to drop

proposals which involved recurring expenditure, but which
were desirable from its standpoint. On the other hand, similar
proposals made by the Executive could be easily carried through
by the device freely adopted of obtaining previous sanction of
the Government of India. The consequence was that in all the
Provincial Budgets presented under the new rules the amount
of this “unallotted” fund left to the discretion of the committee
bore too insignificant a proportion to the total expenditure
in the budget to make the Provincial Executive in any real
degree amenable to the Provincial legislature.
No really responsible government could, however, be
introduced in the provinces without first of all making a
complete change in the mutual relations between the Central
Government and the different Provincial Governments in
India. The relation between the two which existed before the
passing of the Act of 1919 was one of complete subordination
of provincial Governments to the Central Government.1 In this
bond of subordination we can discern three strands—legislative,
financial, and administrative. Of these three we have seen
how tight was the financial strand. The Government of India’s
control over revenues and expenditure was derived from
Parliamentary Statutes which treated the revenues of India
as one and applied them to the purposes of the Government
of India as a whole. It is true that this provision was not so
strictly construed as absolutely to prevent the appropriation
of particular sources of income to specific purposes all-India or
provincial. Or else the development of the provincial system of
finance would have been impossible. But it certainly had the
effect of denying to Provincial Governments any inherent legal
right to the revenues which they raised. The Government of
India completely controlled taxation imposed in British India,
apart from the local taxes which were raised by local bodies.
Taxation could only be levied by law,2 but the law had forbidden
a Provincial Legislature, without the previous sanction of the
Government of India, to consider
“any law affecting the public debt of India or the customs
duties or any other tax or duty for the time being in force
and imposed by the authority of the Governor-General in
Council for the general purposes of the Government of India.”
1
Report on Indian Constitutional Reforms, Cd. 9109 of 1918, Ch. V.
2
There is, however, a glaring exception. The land revenue in India has been
raised without any legislative sanction. The exclusion of land revenue from the
province of the legislature practically removed between 40 and 50 per cent. of
the net public revenue from any sort of control.
This is the natural corollary of the statutory hypothecation

of all-India revenues to all-India needs. The law would not
inhibit a provincial legislature from exploiting for provincial
purposes any new source of taxation which it had the ingenuity
to discover. But even in that case the project would, before
being translated into action, have to secure the assent of the
Finance Department of the Government of India, which would
not give its sanction without considering closely if it trespassed
on the Central Government’s sources of taxation. Again, the
provision of the law which required that
“ no governor or governor in council (of a province) shall
have the power of creating any new office or granting any
salary, gratuity or allowance without the previous sanction
of the Governor General of India in Council”
had given the Government of India a right of control over
expenditure in the Provinces which was exercised through the
instrumentality of a series of codes of instructions, such as the
Civil Service Regulations, the Civil Account Code, the Public
Works Code and the like. These codes partly dealt with the
mechanism of finance such as the maintenance of a uniform
system of audit and accounts, the custody of public money,
remittances, economy, and such matters ; but they also imposed
definite restraints upon the powers of Provincial Governments,
to create new appointments or raise emoluments and other
matter such as recruitment, promotions, leave, foreign service
and pensions upon which the codes really constitute a digest of
the case-law laid down from time to time by the Government of
India which the Provincial Governments must strictly obey. If
their powers of taxation and expenditure were strictly controlled
the power of borrowing was never conceded to the provinces.
It will be recalled that Port Trusts and Municipalities might
raise loans within defined limits, but because the revenues of
India were legally one and indivisible and were liable for all
debts incurred for the purposes of the Government of India,
Provincial Governments possessed no separate resources on
the security of which they could borrow.
Even within the prescribed limits of Provincial Finance
the Provincial Governments were not free from the control of
the Central Government. Because the provincial settlements
were based not on provincial revenues but on provincial needs,
a central control was inevitable. The Government of India could

not allow a Province to go bankrupt. But if the Government
of India were responsible for provincial solvency they must
be in a position to control provincial expenditure. Again, as
regards revenues, so long as the Government of India took a
share in the proceeds they had a strong motive not only in
interfering in the Budget estimates of the provinces, but also in
interfering in details of administration. Their interest in land
revenue, for example, inevitably led them to close supervision
over revenue settlements, and the control tended to become
tighter in cases where expansion and development of a source
of revenue, such as irrigation, depended on capital outlay.
The legislative powers of the Provincial Governments had in
the same manner been made subject to statutory restrictions.
There was no doubt an extensive field in which, so far as
the substantive provisions of the Statute were concerned,
the legislative competence of the provincial Legislatures was
legally unfettered. Actually, however, the power of the local
legislatures was curtailed in two ways. In the first place, owing
to the fact that in their existence all the Provincial Legislatures
were younger, and most of them much younger, institutions
than the Central Legislature of the Governor-General, a great
part of the field that would have otherwise been open to them
was covered by acts of that body, which had always retained
a concurrent power of legislation for the country at large.
But the field yet remaining open for Provincial Governments
in the matter of legislation was further restricted by the fact
that the power of the Secretary of State and Parliament to
control all-Indian legislation was made operative by means
of executive directions, which had made it incumbent on
Provincial Governments to submit for the previous sanction
of the Government of India and the Secretary of State all
their projects for legislation before introduction. It is true that
these directions did not apply to private members’ Bills ; but
inasmuch as a Bill could only be introduced with the leave
of the Legislature, and the Provincial Government was in
most cases in a position if it chose to do so to oppose such
a motion successfully, the Government of India by directions
to the Provincial Governments were in a position to control
all private provincial legislation almost as effectively as the
Provincial Government’s Bills.
In carrying on the actual work of administration every

Provincial Government was by law required to obey the
orders of the Government of India and keep that Government
constantly and diligently informed of its proceedings and of
all matters which ought, in its opinion, to be reported to
that Government, or as to which that Government required
information. That was because in law every Provincial
Government was placed under the superintendence, direction
and control in all matters relating to the Government of its
Province. This administrative control of the Government of
India was exercised by that Government in the interest of
uniformity. It is obvious that in many respects India is one
single and undivided country, in which much work had to be
carried on on uniform lines. The Civil servants who executed
the orders of Provincial governments having been recruited
from England on terms guaranteed by the Secretary of State,
many questions affecting them could not be determined by
any Provincial Government. Again, the development of trade,
industry and science throughout India similarly favoured the
formulation and pursuit of uniform policies by the Government
of India. Even with one law for the whole of India business and
industry might have been left to their discretion to administer
such matters as statistics, patents, copyright, insurance, income
tax, explosives and mining, etc. Not only were the provincial
Governments subordinated to the Central Government to
follow established lines in the matters of administration,
but they were not free to initiate any new policy. It was the
Government of india which regarded itself as distinctly charged
with the duty of framing policy and inspiring reforms for the
whole of India by issuing new orders. To make them effective
these orders were often accompanied by handsome grants to
Provincial Governments strictly earmarked for the purpose
of pushing on some particular feature of the new policy. Not
seldom did the Government of India appoint new advising
or inspecting officers whose task it was to see that the new
energy suddently infused into the system was well maintained
and well directed to the chosen ends.
So long as the provincial Governments continued to be bound
by such strands to the Government of India there could be no
responsible government in the Provinces. No government can
be made to serve two masters at one and the same time. To
keep the Provincial Governments subordinate to 1 the

Government of India and also to make them responsible to
popular Legislature would have been inconsistent in theory
and vicious in practice. It is quite conceivable that under
such a double government the wishes of the Provincial
Legislature on certain matters may not coincide with those
of the Government of India. On such occasions a Provincial
Government may not know whom to obey. If it deferred to
the wishes of the Legislature it would be failing in its duty
towards the Government of India. Indeed there is on record
a case of such a conflict.2 There was an occasion during the
currency of the Morley-Minto Reforms when the Government
of Bombay were unsuccessful in their endeavours to persuade
the Government of India to sanction certain charges affecting
the educational staff. The proposals were locally popular and
were again put forward for adoption in a resolution moved in
the Bombay Legislature by an elected member. The Bombay
Government thereupon accepted the resolution which was
carried unanimously, and once more put forward their proposals
to the Government of India on the ground that they had the
Legislature’s entire support. But the Government of India
and the Secretary of State held that these tactics were out of
order and that it was
“the duty of the Local Government in dealing with the
resolutions to uphold with all their authority the decision
of the Government of India,”
i.e. to have opposed the resolution even if it agreed with the
Legislature in the principle thereof.
The strong ties of subordination which bound the Provinces
to the Central Government were therefore the chief obstacles in
the path of Provincial autonomy. In order that the Provincial
Government be made subject to Provincial Legislatures, the first
thing to do was to curtail the powers which the Government of
India possessed of interference in provincial finance, provincial
legislation, and provincial administration. As was well observed
by the authors of the Report3 on Constitutional Reforms :
“We have to demolish the existing structure, at least
in part, before we can build the new. Our business is
one of devolution, of drawing lines of demarcation, of
1
The degree of subordination it should be noted varied with the status of the
Provinces, for which see Joint Report, pp. 37-45.
2
Joint Report, pp. 75-6.
3
Joint Report, p. 101.
cutting long-standing ties. The Government of India must

give and the Provinces must receive ; for only so can the
growing organism of self-government in the Provinces
draw air into its lungs and live.”
The path to provincial independence therefore lay through
a satisfactory division of functions and finances between the
Provincial and Central Governments. Of the two, the task of
dividing the functions was comparatively an easier one. For
facilitating the necessary division of functions the following
principles were laid down by the Government of India.1
“7. There are certain subjects which are at present
under the direct administration of the Government of India.
The Government of India maintain separate staffs for their
administration and the Provincial Governments have no
share in it. The category is easily recognizable, and for
the most part there will not be much room for doubt as
to the subjects to be included in it. At the other end of
the line are matters of predominantly local interest which,
however much conditions must vary between Provinces,
will, generally speaking be recognized as proper subjects
for provincialization.
“8. Between these extreme categories, however, lies
a large indeterminable field which requires further
examination before the principles determining its
classification can be settled. It comprises all the matters in
which the Government of India at present retain ultimate
control, legislative and administrative, but in practice
share the actual administration in varying degrees with
the Provincial Governments. In many cases the extent of
delegation practised is already very wide. The criterion
which the Government of India apply to these is whether
in any given case the Provincial Governments are to be
strictly the agents of the Government of India, or are to
have (subject to what is said below as to the reservation
of powers of intervention) acknowledged authority of their
own. In applying this criterion the main determining factor
will be not the degree of delegation already practised, which
may depend on mere convenience, but the consideration
whether the interests of India as a whole (or at all events
interests larger than those of one Province), or on the other
hand the interests of the Province essentially preponderate.
1
Memorandum for the Functions Committee by the Government of India,
Annexture II to the Report of the Committee Cmd. 103 of 1919.
“ The point is that delegation to an agent may be

already extensive, but that circumstance should not
obscure the fact of agency or lead to the agent being
regarded as having inherent powers of his own.”
These principles, in which it was stated that “where
extra-provincial interests predominate the subject should
be treated as central,” while
“all subjects in which the interests of the provinces
essentially predominate should be provincial, and in
respect of (which) the Provincial governments (to) have
acknowledged authority of their own,”
were accepted by the Functions Committee appointed to
make a division between all-India and Provincial subjects.
The recommendations made by the Committee were with
minor amendments embodied in what are called Devolution
Rules under section 45A of the Government of India Act
of 1919, which gave effect to the policy of responsible
government and are made a part of the constitutional
law of the land, so that the subjects thereby devolving
upon the Provinces became the services over which the
Provinces gained an acknowledged authority of their own
such as they never had before 1833. According to these
Devolution Rules the following were declared to be
PROVINCIAL SUBJECTS
1. Local Self-government, that is to say, matters
relating to the constitution and powers of municipal
corporations, improvement trusts, district boards, mining
boards of health and other local authorities established
in a Province for the purpose of local self-government,
exclusive of matters arising under the Cantonments Act,
1910 ; subject to legislation by the Indian Legislature as
regards—
(a) The powers of such authorities to borrow otherwise
than from a Provincial Government, and
(b) the levying by such authorities of taxation not
included in schedule II to the scheduled Taxes Rules.
2. Medical administration, including hospitals,
dispensaries and asylums, and provision for medical
education.
3. Public Health and Sanitation and Vital Statistics ;

subject to legislation by the Indian Legislature in respect of
infectious and contagious diseases to such extent as may be
declared by any Act of the Indian Legislature.
4. Pilgrims within British India.
5. Education, provided that—
(a) The following subjects shall be excluded, viz.:
(i) The Benares Hindu University, and Aligarh Muslim
University, and such other universities constituted
after the commencement of these rules, as may be
declared by the Governor-General in Council to be
Central subjects, and
(ii) Chiefs’ Colleges and any institution maintained by
the Governor-General in Council for the benefit of
members of His Majesty’s Forces or of other public
servants or of the children of such members of
servants; and
(b) the following subjects shall be subject to legislation by
the Indian Legislature, namely:
(i) The control of the establishment, and the regulation
of the constitutions and functions, of universities
constituted after the commencement of these rules ;
and
(ii) The definition of the jurisdiction of any university
outside the Province in which it is situated, and
(iii) For a period of five years from the date of the
commencement of these rules, the Calcutta
University, and the control and organization of
secondary education in the presidency of Bengal.
6. Public Works included under the following heads,
namely :
(a) Construction and maintenance of provincial buildings
used or intended for any purpose in connection with the
administration of the Province ; and care of historical
monuments, with the exception of ancient monuments
as defined in Section 2(i) of the Ancient Monuments
Preservation Act, 1904, which are for the time being
declared to be protected monuments under Section 3(i) of
that Act; provided that the Governor-General in Council
may by notification in the Gazette of India, remove any
such monuments from the operation of this exception ;
(b) roads, bridges, ferries, tunnels, ropeways, and

causeways, and other means of communication, subject
to such conditions as regards control over construction
and maintenance of means of communication declared
by the Governor-General in Council to be of military
importance, and as regards incidence of special
expenditure connected therewith, as the Governor-
General in Council may prescribe ;
(c) tramways within municipal areas ; and
(d) light and feeder railways and extra-municipal tram-
ways in so far as provision for their construction and
management is made by provincial legislation ; subject
to legislation by the Indian Legislature in the case
of any such railway or tramway which is in physical
connection with a main line or is built on the same
gauge as an adjacent main line.
7. Water Supplies, irrigation and canals, drainage and
embankments, water storage and water power; subject to
legislation by. the Indian Legislature with regard to matters of
inter-provincial concern or affecting the relations of a Province
with any other territory.
8. Land Revenue administration, as described under
the following heads, namely:
(a) Assessment and collection of land revenue ;
(b) Maintenance of land records, survey for revenue
purposes, records of right;
(c) Laws regarding land tenures, relations of landlords and
tenants, collection of rents ;
(d) Courts of wards, incumbered and attached estates ;
(e) Land improvement and agricultural loans ;
(f) Colonization and disposal of Crown lands and alienation
of land revenue ; and
(g) Management of Government estates.
9. Famine relief
10. Agriculture, including research institutes, experimental
and demonstration farms, introduction of improved methods,
provision for agricultural education, protection against
destructive insects and pests and prevention of plant diseases ;
subject to legislation by the Indian Legislature in respect of
destructive insects and pests and plant diseases, to such extent
as may be declared by any Act of the Indian Legislature.
11. Civil Veterinary Department, including provision for

veterinary training, improvement of stock, and prevention of
animal diseases ; subject to legislation by the Indian Legislature
in respect to animal diseases to such extent as may be declared
by any Act of the Indian Legislature.
12. Fisheries.
13. Co-operative Societies.
14. Forests, including preservation of game therein ;
subject to legislation by the Indian Legislature as regards
disforestation of reserved forests.
15. Land acquisition ; subject to legislation by the Indian
Legislature.
16. Excise, that is to say, the control of production,
manufacture, possession, transport, purchase and sale of
alcoholic liquor and intoxicating drugs, and the levying of
Excise duties and licence fees on or in relation to such articles,
but excluding in the case of opium, control of cultivation,
manufacture and sale for export.
17. Administration of Justice, including constitution,
powers, maintenance and organization of courts of civil and
criminal jurisdiction within the Province ; subject to legislation
by the Indian Legislature as regards High Courts, Chief
Courts, and Courts of Judicial Commissioners, and any courts
of criminal jurisdiction.
18. Provincial Law Reports.
19. Administrators-General and Official Trustees ;
subject to legislation by the Indian Legislature.
20. Non-Judicial Stamps, subject to legislation by the
Indian Legislature, and Judicial Stamps, subject to legislation
by the Indian Legislature as regards amount of court fees
levied in relation to suits and proceedings in the High Courts
under their original jurisdiction.
21. Registration of deeds and documents; subject to
legislation by the Indian Legislature.
22. Registration of births, deaths, and marriages ;
subject to legislation by the Indian Legislature for such classes
as the Indian Legislature may determine.
23. Religious and Charitable endowments.
24. Development of Mineral resources which are

Government property ; subject to rules made or sanctioned
by the Secretary of State, but not including the regulation of
mines.
25. Development of industries, including industrial
research and technical education.
26. Industrial matters included under the following
heads, namely:—
(a) Factories;
(b) Settlement of labour disputes ;
(c) Electricity;
(d) Boilers;
(e) Gas;
(f) Smoke nuisance ; and
(g) Welfare of labour, including provident funds, industrial
insurance (general health and accident) and housing :
subject as to heads (a), (b), (c), (d), and (g) to legislation
by the Indian Legislature.
27. Stores and Stationery ; subject in the case of imported
stores and stationery to such rules as may be prescribed by
the Secretary of State in Council.
28. Adulteration of food-stuffs and other articles ;
subject to legislation by the Indian Legislature as regards
import and export trade.
29. Weights and Measures ; subject to legislation by the
Indian Legislature as regards standard.
30. Ports, except such ports as may be declared by rule
made by the Governor-General in Council or by or under
Indian legislation to be major ports.
31. Inland Waterways; including shipping and navigation
thereon so far as not declared by the Governor-General in
Council to be Central subjects, but subject as regards inland
steam-vessels to legislation by the Indian Legislature.
32. Police; including railway police ; subject in the case
of railway police to such conditions as regards limits of
jurisdiction and railway contributions to cost of maintenance
as the Governor-General in Council may determine :
(a) Regulation of betting and gambling ;
(b) prevention of cruelty to animals ;
(c) protection of wild birds and animals ;

(d) control of poisons, subject to legislation by the Indian
Legislature ;
(e) control of motor vehicles, subject to legislation by the
Indian Legislature as regards licences valid throughout
British India; and
(f) control of dramatic performances and cinematographs,
subject to legislation by the Indian Legislature in regard
to sanction of films for exhibition.
34. Control of Newspapers, Books, and Printing
Presses ; subject to legislation by the Indian Legislature.
35. Coroners.
36. Excluded Areas.
37. Criminal tribes ; subject to legislation by the Indian
Legislature.
38. European vagrancy ; subject to legislation by the
Indian Legislature.
39. Prisons ; prisoners (except State prisoners) and
reformatories ; subject to legislation by the Indian Legislature.
40. Pounds and prevention of cattle trespass.
41. Treasure Trove.
42. Libraries (except the Imperial Library) and Museums
(except the Indian Museum, the Imperial War Museum and
the Victoria Memorial, Calcutta) and Zoological Gardens.
43. Provincial Government Presses.
44. Elections for Indian and provincial legislature, subject
to rules framed under section 64 (i) and 72A (4) of the Act.
45. Regulations of medical and other professional
qualifications and standards; subject to legislation by the
Indian Legislature.
46. Local Fund audit, that is to say, the audit by
Government agency of income and expenditure controlled by
local bodies.
47. Control as defined by rule 10, of members of all-
India and Provincial Services serving within the Province,
and control, subject to legislation by the Indian Legislature, of
public services within the province, other than all-India services.
48. Sources of Provincial revenue, not included under
previous heads, whether—
(a) Taxes included in the schedules to the scheduled taxes

Rules, or
(b) Taxes, not included in those schedules, which are
imposed by or under provincial legislation which has
received the previous sanction of the Governor-General.
49. Borrowing of money on the sole credit of the Province,
subject to the provisions of the Local Government (Borrowing)
Rules.
50. Imposition by legislation of punishment by fine,
penalty, or imprisonment, for enforcing any law of the
Province relating to any provincial subject; subject to legislation
by the Indian Legislature in the case of any subject in respect
of which such a limitation is imposed under these rules.
51. Any matter which, though falling within a Central
subject, is declared by the Governor-General in Council
to be of a merely local or private nature within the
province.
52. Matters pertaining to a Central subject in respect
of which powers have been conferred by or under any
law upon a Local Government.
The second task that of allocating the revenue resources
between the Central and provincial Governments was a
comparatively difficult one. As the problem was conceived in
the main as one of making the Provinces independent of the
Government of India in matters in which it was proposed that
they should acquire an authority of their own acknowledged by
law it was natural for the authors of the Report on constitutional
Reforms to hold that
“Our first aim……has been to find some means
of entirely separating the resources of the Central
Government from those of the Provinces.”
The first step in that direction was therefore to abolish the
system of “divided heads” or budget by shared revenues, for
there was a concensus of opinion that this coparcenary system,
in so far as it gave a handle to the Central Government to
interfere in the domestic affairs of the Provinces, was a source of
friction and was incompatible with provincial independence. But
such a system of complete separation was fraught with two main
difficulties. The first difficulty was in connection with the disposal
of dividend heads. To whom should they be handed over ? At

the time the scheme of complete separation was contemplated
the heads of revenue which were divided in all or some of the
Provinces were land revenue, stamps, excise, income tax and
irrigation. The authors of the Report on Constitutional Reforms
proposed1
“……that the revenue from stamp duty should be
discriminated under the already well-marked sub-heads
General and Judicial; and that the former should be made an
Indian and the latter a provincial receipt. This arrangement
will preserve uniformity in the case of commercial stamps
where it is obviously desirable to avoid discrepancies of
rates ; and it will also give the provinces a free hand in
dealing with court-fee stamps and thus provide them with an
additional means of augmenting their resources. Excise is at
present entirely a provincial head in Bombay, Bengal, and
Assam, and we see no valid reason why it should not now be
made provincial throughout India…… Land revenue, which
is far the biggest head of all, is at present equally shared
between the Indian and all the provincial Governments,
except that Burma gets rather more than one-half and the
United Provinces get rather less…… Now land revenue
assessment and collection is so intimately concerned with
the whole administration in rural areas that the advantages
of making it a provincial receipt are obvious…… Moreover,
famine expenditure and expenditure on major irrigation
works are for obvious reasons closely connected with land
revenue, and if the receipts from that head are made
provincial it logically follows that the Provinces should take
over the very heavy liability for famine relief and protective
works……We were told that in the days of dawning popular
government in the Provinces it would be well that the
provincial government should be able to fall back on the
support of the Government of India (as, if the head were still
divided, it would be able to do) when its land revenue policy
was atttacked.2 But it is just because divided heads are not
1
Report, pp. 165-7.
2
The land revenue policy of the Government has always been looked upon by
the popular leaders, rightly or wrongly, with a certain degree of suspicion, and
is always in danger of being attacked. For fear that the policy may be subverted
under a popular Provincial Legislature to whose control land revenue as a
provincial subject was subjected it provided by the Reservation of Bills Rules under
Section 12 (1) of the Government of India Act, 1919, that—The Governor of any
Governor’s province shall reserve for the consideration of the Governor-General
any Bill, not having been previously sanctioned by the Governor-General, which
has been passed by the legislative Council of the Province and
regarded as merely a financial expedient but are, and so

long as they survive will be, viewed as a means of going
behind the provincial government to the Government of
India, that we feel sure that they should be abolished.
We propose therefore to make land revenue together with
irrigation wholly provincial receipts. It follows that the
Provinces will become entirely liable for expenditure on
famine relief and protective irrigation works……The one
remaining head is income tax. We see two very strong
reasons for making this an Indian receipt. First, there is
the necessity of maintaining a uniform rate throughout
the country. The inconveniences, particularly to the
commercial world, of having different rates in different
Provinces are manifest. Secondly, in the case of ramifying
enterprises with their business centre in some big city,
the Province in which the tax is paid is not necessarily
the Province in which income is earned. We have indeed
been told that income tax is merely the industrial or
professional complement of the land revenue ; and that
to provincialize the latter, while Indianizing the former,
means giving those provinces whose wealth is more
prominently agricultural, such as the United Provinces
and Madras, an initial advantage over a Province like
Bombay, which has very large commercial and industrial
interests. Another very practical argument is that the tax
is collected by provincial agency and that if Provincial
Governments are given no inducement, such as a share
of the receipts or a commission on the collections which
is only such a share in disguise, there will be a tendency
to slackness in collection and a consequent falling off in
receipts. We admit that these arguments have force; but
we are not prepared to let them stand in the way of a
complete separation of revenues. Equality of treatment as
between one Province and another must be reached so far
as it is possible in the settlements as a whole, and it is
is presented to the Governor for his assent, if the Bill appears to the Governor
to contain provisions—
(e) affecting the land revenue of a Province either so as to
(i) prescribe a period or periods within which any temporary settled
estate or estates may not be re-assessed to land revenue, or
(ii) limit the extent to which the assessment to land revenue of such
an estate or estates may be made or enhanced, or
(iii) modify materialy the general principles upon which land revenue
has hitherto been assessed, if such prescription, limitation or
modification appears to the Governor to be likely seriously to affect
the public revenues of the province.
not possible to extend the principle of equality to

individual heads of revenue. If it should be found that
receipts ‘fall off, it may be necessary to create an all-
India agency for the collection of the tax, but this we
should clearly prefer to retaining it as a divided head. To
sum up : we propose to retain the Indian and Provincial
heads as at present, but to add to the former income
tax and general stamps, and to the latter land revenue,
irrigation, excise and judicial stamps. No head will then
remain divided.”
However, when all the existing sources of revenue were
completely distributed between the Central and Provincial
Governments as proposed, it was inevitable that there should
be a deficit in the Budget of the Government of India. How
to make up this deficit was therefore the second difficulty
that was involved in replacing the system of divided heads
by a system of separate heads of revenue. The authors of the
Report on Constitutional Reforms were presented with many
a plan for the solution of this knotty problem, lathe course
of their survey they observed :1
“One way of meeting it would be to maintain the
basis of the present settlements, but to allot to the
Government of India a certain proportion of growing
revenue instead of its share of the divided heads. But
this device would stereotype all the existing inequalities
between the Provinces which by reason of the permanent
settlement in some of them are considerable ; while it
would also introduce an element of great uncertainty
into the Indian Government’s finance. A second was that
we should take an all-round contribution on a per capita
basis. But this expedient also would not obviate very
undesirable variations between Provinces in the rate of
levy owing to the inequality of provincial resources and
of provincial needs. A third plan was to take an all-
round percentage contribution based on gross provincial
revenue. This is open, inter alia, to the objection that it
would leave several of the Provinces with large deficits.
Fourthly, we considered but rejected the proposal that
Provinces which had a surplus should temporarily help
others as being cumbrous and impracticable.”
1
Report, p. 168.
The plan recommended by the authors of the Report was1

“to assess the contribution from each Province to the
Government of India as a percentage of the difference
between the gross provincial revenue and the gross provincial
expenditure”;
in other words, a levy on the surplus of the estimated gross revenue
of the Province when all divided heads are separately allotted over
its estimated normal expenditure, including expenditure on famine
relief and protective irrigation. On the basis of the Budget figures
for 1917-18 it was found that it would require a levy of 87 per
cent.2 on the provincial surpluses to make up the deficit of Rs.
1363 lakhs in the Budget of the Government of India found likely
to be caused by the abolition of the system of divided heads.3
1
Report, p. 169.
2
The suggested imposition of an equal rate of levy is somewhat strange, for
the authors of the Report had in para. 206 protested that “equality of contribution
was impracticable,” etc. Para. 206 of the Joint Report makes a confusion. It
protests against equality of contributions, which is what it adopts in the plan
it recommends.
3
The way in which the proposed plan would have worked out in practice can
be gathered from the following figures given in the Report, Cal. Ed. (p. 134), and
based on the Budget figures for 1917-18:—
(In Lakhs of Rupees)
Gross Contribu-
Gross Gross Net
Prov. tion (87
Province Prov. Prov. Prov.
Expen- per cent.
Revenue Surplus Surplus
diture of Col. 4)
1 2 3 4 5 6
Madras … 13,31 8,40 4,91 4,28 63
Bombay … 10,01 9,00 1,01 88 13
Bengal … 7,54 6,75 79 69 10
United … 11,22 7,47 3,75 3,27 48
Provinces
Punjab … 8,64 6,14 2,50 2,18 32
Burma … 7,69 6,08 1,61 1,40 21
Bihar and … 4,04 3,59 45 39 6
Orissa
Central … 4,12 3,71 41 36 5
Provinces
Assam … 1,71 1,50 21 18 3
Total … 68,28 52,64 15,64 13,63 2,01
N.B.—The Punjab figures in column 5 should be reduced and those in column
6 raised by 31/2, lakhs in each case to allow for the continued compensation which
the province is entitled to receive for the cession of a crore of its balances to the
Government of India in 1914.
In making these recommendations the authors of the Report

were careful to observe :1
“One caveat we are bound to make. Emergencies may
arise which cannot be provided for by immediate raising
Government of India taxation ; and in that case it must
be open to the Central Government to make a special
supplementary levy upon the provisions. We must add
that inasmuch as our proposals are based on war figures
they should be open to revision hereafter, but not subject
to change for a period of say six years, and to avoid
intermediate discussion the scheme should in the meantime
be regarded as part of the constitutional agreement with
the Provinces. It should also be one of the duties of the
periodic commission which we propose should be appointed
to examine the development of constitutional changes after
ten years’ experience of their working or of some similar
body at that time, to re-investigate the question of the
provincial contributions to the Government of India.”
These proposals were put before the Provincial Governments,
for their opinion. The objections to a plan which appeared to
make some Provinces bear a greater burden of the cost of the
Central Government than others readily suggested themselves.
Madras and the United Provinces seemed to pay 47.4
per cent. and 41.1 per cent, of their surpluses to the Government
of India, while Bombay and Bengal appeared to escape with
a sacrifice of no more than 9.6 per cent, and 10.1 per cent,
of their respective surpluses. The inequity of this treatment
seemed to be so very apparent that the Provinces against
which a greater burden was set down raised loud protests.
So impressed was the Government of India with the justice
of this clamour that in its letter2 to the Secretary of State it
observed :
“We recommended that the initial contributions
should be recognized as temporary and provisional,
and that steps should be taken as soon as
possible to fix a standard and equitable scale of
contributions……The whole question…… requires
skilled investigation ; (the difficulty of the position was
1 Report, p. 170.
2
Dated March 5, 1919 (para. 61), on the questions raised in the Report on
Indian Constitutional Reforms, pp. Cmd. 123 of 1919.
foreseen in the Report and investigation by the first

statutory commission was promised, but) we propose that
a Committee on Financial Relations be appointed, either
by you or by us, to advise fully upon the subject, so that
each province may know exactly how it stands before the
new regime starts.”
And this recommendation was endorsed1 by the Joint
Select Committee of Parliament which sat on the Reform Bill.
Accordingly the Secretary of State appointed a Committee
under the chairmanship of Lord Meston to advise on :
(a) The contributions to be paid by the various provinces to
the Central Government for the financial year 1921 -22;
(b) The modifications to be made in the provincial
contributions thereafter with a view to their equitable
distribution until there ceases to be an all-India deficit;
(c) The future financing of the provincial loan accounts ;
and
(d) Whether the Government of Bombay should retain any
share of the revenue derived from income tax.
After about seven weeks of investigation the Committee
produced its Report.2 In advisinng on clause (a) of its terms
of reference the Committee expressed its dissatisfaction of the
plan set forth in the Joint Report of taking from the Provinces
a fixed uniform proportion of their respective surpluses as
their contributions to the Central Exchequer. The principal
objection urged against the plan was that in some Provinces
it left no surplus and in others no adequate surplus after
the payment of their respective quotas of contributions. The
Committee held, and rightly too, that
“in no case may a contribution be such as would
force the province to embark on new taxation ad hoc,
which to our minds would be an unthinkable sequel to a
purely administrative rearrangement of abundant general
resources.”
The Committee felt itself bound by a limiting consideration in
providing the contribution, as a result of which it felt itself obliged
1
Report of the Joint Select Committee on the Government of India Bill (part
V, clause 41, para. 9)—House of Commons Return 203 of 1919, p. 12.
2
Report of the Committee appointed by the Secretary of State for India
to advise on the question of the Financial Relations between the Central and
Provincial Governments in India, pp. Cmd. 724 of 1919, Ch. III.
“to leave each Province with a reasonable working

surplus”— a surplus which it preferred “to calculate, so
far as possible, with some relation to the general financial
position of the Province and the more imminent claims
upon its resources.”
“ To be able to comply with the requirements of leaving
each Province with a surplus, and of inaugurating the new
Councils without the necessity of resort to fresh taxation,”
the Committee deemed that the most equitable plan to be to
take, not equal contributions as the Joint Report advised,1
but unequal contributions from the surpluses of the Provinces
liable to make them.
For the consummation of its plan the Committee held that
the augmentation of Provincial Surpluses was an essential
step. Without it, it deemed its task to be futile. The only
way to augment the provincial surplus was to allocate some
other source of Imperial revenue in addition to those already
provincialized. To the provincialization of the income tax,
a matter which was included in clause (d) of its terms of
reference so far as Bombay was concerned, the Committee
being impressed by the reasonings of the Joint Report,
felt bound to oppose. As an alternative it recommended
that General Stamps should be provincialized, as means of
augmenting provincial surpluses, along with Judicial Stamps.
The effect of this transfer of General Stamps from the all-
India list to the provincial list was to increase the provincial
resources and diminish those of the Central Government.
That deficit the Committee accepted as amounting in the
year 1921-2 to ten crore, composed of six crores previously
1
The Report of the Financial Relations Committee seems to argue that the
difference between its plan of levying contributions and that suggested in the
Joint Report is a difference in the basis of the contributions ; its basis being that
of “increased spending power”, while that of the Joint Report was “gross provincial
surplus.” The Financial Repations Committee pointedly criticized the method
proposed in the Joint Report to assess the contribution from each province “ as
a percentage of difference between the gross provincial revenue and the gross
provincial expenditure.” There does not seem to be much difference between that
scheme and the scheme of the Committee consisting of a percentage levy on what
is called increased spending power of the provinces under the new distribution of
the revenues between the Central and Provincial Governments. That these two are
different bases of assessment seems to be the general impression (cf. the speech of the
Hon. Rai Bahadur Bakshi Sohan Lal on the Resolution re Provincial Contributions to
the Central Exchequer, Legislative Assembly Debates, Vol. III, No. 8, p. 508). This
of course is an error; for spending power is simply another name for gross surplus.
The change made by the Committee was in proposing unequal contribution in place
of equal contribution. It kept unchanged the basis of the assessment.
estimated by the Government of India1 plus four crores for

the loss of General Stamps, the revenue from which the
Committee gave to the Provinces. This amount subject to
certain adjustments,2 which when made resulted in a clear
deficit of 9,83.06 lakhs net. In strict adherence to the limiting
consideration which it felt bound to respect, the Committee
proceeded to fix the following ratios in which each of the nine
Provinces were to contribute to make up this amount of 9,83
lakhs in the year 1921-2 :—
INITIAL CONTRIBUTIONS (IN LAKHS OF RUPEES)
Increased
Increased spending
Contributions as spending
power under new
Provinces recommended by power left after
distribution of
the Committee Contributions
Revenue
are paid
Madras … 5,76 3,48 2,28
Bombay … 93 56 37
Bengal … 1,04 63 41
United Provinces … 3,97 2,40 1,57
Punjab … 2,89 1,75 1,14
Burma … 2,46 64 1,82
Bihar and Orissa … 51 nil 51
Central Provinces … 52 22 30
Assam … 42 15 27
Total … 18,50 9,83 8,67
This ratio of initial contributions was not intended in any

manner by the Committee “to represent the ideal scale on
which the Provinces should have in equity to be called upon
to contribute.” Indeed in making its recommendations as to
initial contributions the Committee paid less attention to equity
of contributions and more to
“established programmes of taxation and expenditure and
legislative and administrative expectations and habits, that
cannot without serious mischief be suddenly adjusted to a new
1
Recommendations of the Government of India regarding the Demarcation
between Central and Provincial Revenues, Cmd. 334 of 1919, Statement III.
2
These adjustments were, with regard to the Military Police Force in Burma,
the payment of pensions and leave allowances. Cf. Report of the Financial Relations
Committee, para. 10.
and more equitable ratio of contributions widely different

(as an equitable ratio must admittedly be) from that of
the past. It is accordingly inevitable, if such mischief
is to be avoided, that the ratio for initial contributions
should bear little relation to that which would be ideally
equitable.” But the Committee also recognized that
“an initial ratio of this nature can only be defended
as a measure of transition. It is necessary, but it is
necessary only in order to give time to the provinces to
adjust their budgets to a new state of affairs; and we
are clearly of opinion that no scheme of contribution
can be satisfactory that does not provide for a more
equitable distribution of the burden of the deficit within
a reasonable time.”
The Committee therefore proceeded next to consider
the question of standard contributions as distinguished
from initial contributions, which were only transitional.
As to what should be the ideal basis for such an equitable
distribution of the burden the Committee felt quite certain ;
for it stated that
“to do equity between the provinces it is necessary
that the total contribution of each to the purse of the
Government of India should be proportionate to its
capacity to contribute.”
Two questions were involved in translating this principle
into practice. What is the total contribution of a province
to the purse of the Government of India ? Secondly, what
is the measure of the capacity of a Province to contribute ?
With regard to the first the Committee observed that
“the total contribution of a Province to the purse
of the Government of India will consist in future of its
direct contributions towards the deficit, together with
its indirect contribution (as at present) through the
channels of customs, income tax, duties on salt, etc.”;
in other words, the pressure of the taxes from within its
jurisdiction for the benefit of the Central Government. With
regard to the second the Committee held that
“the capacity of a Province to contribute is its
taxable capacity, which is the sum of the incomes of
its taxpayers, or the average income of its taxpayers
multiplied by their number.”
The Committee was frank in its avowal of the fact that

the data available was not sufficient for a direct quantitative
evaluation either of the total net contribution which a
Province made to the Government of India or of its capacity
to contribute, and held that it was
“useless to attempt to state a formula, to serve as
a basis for a standard ratio of contributions, capable of
automatic application from year to year by reference to
ascertained statistics.”
None the less the Committee did not abandon the ideal
basis it had selected for fixing the standard contributions.
For it observed:
“We are able, after surveying such figures as are
available and after close inquiry into the circumstances of
each Province, to recommend a fixed ratio of contributions
which in our opinion represents a standard and equitable
distribution of the burden of any deficit. In arriving at
this ratio we have taken into consideration the indirect
contributions of the Provinces to the purse of the
Government of India, and in particular the incidence of
customs duties and of income tax. We have inquired into
the relative taxable capacities of the Provinces, in the
light of their agricultural and industrial wealth and of
all other relevant incidents of their economic positions,
including particularly their liability to famine. It should be
observed that we have considered their taxable capacities
not only as they are at the present time, or as they will
be in the immediate future, but from the point of view
also of the capacity of each Province for expansion and
development agriculturally and industrially, and in respect
of imperfectly developed assets such as minerals and
forests. We have also given consideration to the elasticity
of the existing heads of revenue which will be secured to
each Province, and to the availability of its wealth for
taxation.”
After estimating, to the best of its ability, the weight which
should be given to each of these circumstances, the Committee
recommended the following fixed ratio as representing an

equitable basis for the relative contributions of the Provinces to
meet the deficit in the Budget of the Government of India :—
STANDARD CONTRIBUTIONS
Per cent. Contribution
Province …
to Deficit.
Madras … … 17
Bombay … … 13
Bengal … … 19
United Provinces … … 18
Punjab … … 9
Burma … … 6½
Bihar and Orissa … … 10
Central Provinces … … 5
Assam … … 2½
Total … 100
The Committee agreed that there should be an interval of

time sufficient to enable the Provinces to adjust their budgets
to the new conditions before they should in equity be called
upon to contribute according to this standard ratio.1 But the
Committee thought that the interval allowed for adjustment
should not be unduly prolonged.
“ The initial ratio which,” the Committee said, “we
have proposed is a practical necessity, but the Provinces
which will be called upon to pay thereunder more than
they should pay in equity, ought not to be required to
bear that burden for a longer period or to a greater extent
than is required to prevent dislocation of the provincial
budgets.”
The Committee therefore proposed
“that contributions should be made on the standard
ratio to any deficit that there may be in the seventh year of
1
For a good piece of criticism of the basis adopted by the Financial Relations
Committee in arriving at the standard ratio, see para. 12 of a rather splenetic
letter from Rai Bahadur K. V. Raddi to the Reforms Commissioner, Simla, pp.
Cmd. 974 of 1920, p. 58.
contribution, and that the process of transition from the

initial to the standard ratio should be continuous beginning
in the second year of contribution, and proceeding in six
equal annual steps.”
The following table shows the initial, intermediate, and
ultimate ratios of contributions for the seven years in accordance
with the recommendations of the Committee :—
PER CENT. CONTRIBUTIONS TO DEFICIT IN SEVEN CONSECUTIVE

YEARS BEGINNING WITH THE FLRST YEAR OF CONTRIBUTION
(rounded off to even halves)
1st 2nd 3rd 4th 5th 6th 7th

Province
Year Year Year Year Year Year Year
Madras 35½ 32½ 29½ 26½ 23 20 17
Bombay 5½ 7 8 9½ 10½ 12 13
Bengal 6½ 8½ 10½ 12½ 15 17 19
United
24½ 23½ 22½ 21 20 19 18
Provinces
Punjab 18 16½ 15 13½ 12 10½ 9
Burma 6½ 6½ 6½ 6½ 6½ 6½ 6½
Bihar and
nil 1½ 3 5 7 8½ 10
Orissa
Central
2 2½ 3 3½ 4 4½ 5
Provinces
Assam 1½ 1½ 2 2 2 2 2½
Total 100% 100% 100% 100% 100% 100% 100%
These recommendations were accepted by the Government of

India and the Secretary of State. But when the rules in which
they were embodied came before the Joint Select Committee
of Parliament appointed to revise the draft rules made under
the Government of India Act, for consideration, the Committee
made some important alterations in the allocation of revenues
and contributions from the Provinces. In its Report1 the Joint
Committee recognized
“ the intricacy of the problem with which the Financial
Relations Committee had to deal, and the difficulty, amounting
1
Second Report of the Joint Committee appointed to revise the draft rules
made under the Government of India Act, pp. 172 of 1920, pp. 2-3.
almost to impossibility, of arriving at any solution which

was likely to be acceptable to all Local Governments……
They believe that such dissatisfaction as the proposals
have aroused is inevitable in distributing resources
between a Central and Provincial Governments, and
that the impossibility of removing by a stroke of the pen
inequalities which are the result of long-standing and
historical causes have been overlooked.” “None the less,”
the Committee desired, “ on grounds of policy, to alleviate
the disappointment caused by the restraints which the
system of contribution laid on the employment by the
provinces of their revenues. As a means of alleviating the
burden the Committee suggested :
“(1) That there should be granted to all provinces some share
in the growth of revenue from taxation on incomes so
far as that growth is attributable to an increase in the
amount of income assessed.
“(2) That in no case should the initial contribution payable by
any province be increased, but that the gradual reduction
of the aggregate contribution should be the sole means
of attaining the theoretical standards recommended by
the Financial Relations Committee.”
Accordingly it is provided in the Devolution Rules that:
(15) There shall be allocated to each Local Government a
share in the income tax collected under the Indian
Income Tax Act, 1918, within its jurisdiction. The share
so allocated shall be three pies on each rupee brought
under assessment under the said Act, in respect of which
the income tax assessed has been collected. The number
of pies to be specified shall be so calculated as to yield
at the outset to the Local Governments collectively a
sum amounting as near as may be to 400 lakhs.1
1
This arrangement was subject to the following provision attached to Devolution
Rule 15:—
(2) In consideration of this allocation, each Local Government shall make
to the Governor-General in Council a fixed annual assignment of a sum to be
determined by the Governor-General in Council as the equivalent of the amount
which would have accrued to the Local Government in the year 1920-21 (after
deducting the provincial share of the cost of special income tax establishments
in that year) had the pie-rate fixed under sub-rule (1) been applied in that year,
due allowance being made for any abnormal delays in the collection of tax.
(3) The cost of special income tax establishments employed within a province
shall be borne by the Local Government and the Governor-General in Council in
the proportions of 25 per cent, and 75 per cent, respectively.
[contd overleaf]
and that
(17) In the financial year 1921-2 contributions shall be
paid to the Governor-General in Council by the Local
Governments mentioned below according to the following
scale :—
Name Contributions (in
of the Province lakhs of rupees)
Madras … … … 3,48
Bombay … … … 56
Bengal … … … 63
United Provinces … … … 2,40
Punjab … … … 1,75
Burma … … … 64
Central Provinces and Berar … … … 22
Assam … … 15
(18) From the financial year 1922-3 onwards a total

contribution of 9,83 lakhs, or such smaller sum as may
be determined by the Governor-General in Council, shall
be paid to the Governor-General in Council by the Local
governments mentioned in the preceding rule. When for
any year the Governor-General in Council determines as
the total amount of the contribution a smaller sum than
that payable for the preceding year, a reduction shall be
made in the contributions of those Local Governments
only whose last previous annual contribution exceeds
the proportion specified below of the smaller sum so
determined as the total contribution ; and any reduction
so made shall be proportionate to such excess :
17
Madras … … ths
90
13
Bombay … … ths
90
(4) If in any financial year the total amount payable by a Local Government
under sub-rules (2) and (3) in respect of the fixed assignment and the cost of
special income tax establishments exceeds the amount of the share of income
tax allocated to it under sub-rule (1), the fixed assignment for that year shall be
deemed to have been reduced by the amount of such excess.
19
Bengal … … ths
90
18
United Provinces … … ths
90
9
Punjab … … ths
90
6½
Burma … … ths
90
5
Central Provinces and Berar ths
90
2½
Assam … … ths
90
(19) In cases of emergency the Local Government of any

Province may be required by the Governor-General in
Council, with the sanction of the Secretary of State, to
pay to the Governor-General in Council a contribution
for any financial year in excess of the amount required
by the preceding rules in the case of that year.
Two more matters had to be settled in order to make
the separation between Provincial and Central Finance
as complete as possible. Both were connected with capital
transactions. One was the question of the Provincial Loan
Account. This Account represented the fund from which a
Provincial Government advanced agricultural loans, loans to
indebted landholders, to municipalities and other local bodies,
etc. The capital was provided by the Government of India as
required and was returned to it as it was repaid. The province
paid the Government of India interest on the average capital
outstanding in each year, recouping itself by higher rates of
interest which were supposed to compensate it for bad debts.
It was commonly agreed that it was the natural result of
the Reforms Scheme that the Provinces should for the future
finance their own loan transactions, and that joint accounts of
this nature between them and the Government of India should
be wound up as quickly as possible. The matter was referred
to the Financial Relations Committee and on the basis of its
recommendations in that behalf it was provided by Rule 23
of the Devolution Rules that:
“ Any moneys which, on the 1st day of April 1921, are owed
to the Governor-General in Council on account of advances
made from the provincial loan account of any Province

shall be treated as an advance to the Local Government
from the revenues of India, and shall carry interest at a
rate calculated on the average rate carried by the total
amount owed to the Governor-General in Council on
this account on the 31st March 1921. The interest shall
be payable upon such dates as the Governor-General in
Council may fix. In addition, the Local Government shall
pay to the Governor-General in Council in each year an
instalment in repayment of the principal amount of the
advance, and this instalment shall be so fixed that the
total advance shall except where for special reasons the
Governor-General in Council may otherwise direct, be
repaid before the expiry of twelve years. It shall be open
to any Local Government to repay in any year an amount
in excess to the fixed instalment.”
The other was the question of responsibility for capital
expenditure on irrigation works. In this as in the matter
of Provincial Loan Account it was agreed that it would be
incompatible with the scheme of complete separation of
Provincial Finance to hand over to the former the control of
irrigation works and to make the latter responsible for the
capital transaction incurred thereon. Hence the rule1 that:
(1) The capital sums spent by the Governor-General in
Council upon the construction in the various Provinces
of productive and protective irrigation works and of such
other works financed from loan funds as may from time
to time be handed over to the management of Local
Governments shall be treated as advances made to the
Local Governments from the revenues of India. Such
advances shall carry interest at the following rates,
namely :
(a) In the case of outlay up to the end of the financial
year 1916-17, at the rate of 3.3252 per centum.
(b) In the case of outlay incurred after the financial
year 1916-17, at the average rate of interest paid
by the Governor-General in Council on loans raised
in the open market since the end of that year.
(2) The interest shall be payable upon such dates as the
Governor-General in Council may fix.
1
Devolution Rule 24.
Thus was broken the financial and administrative

strand which tied the Provincial Governments to the
Central Government and prevented the introduction into
them of responsible government. As the Provinces thereby
acquired “an acknowledged authority of their own” over
the services and sources allocated to them it followed
that they should have the freedom to borrow in their own
name, which was denied to them heretofore. Consequently
the Local Government Borrowing Rules’ made under the
Reforms Act provided that subject to certain conditions :2
“A Local Government may raise loans on the security
of the revenues allocated to it for any of the following
purposes, namely:
(a) To meet capital expenditure on the construction
or acquisition (including the acquisition of land,
maintenance during construction and equipment) of
any work or permanent asset of a material character
in connection with a project of lasting public utility,
provided that:
(i) the proposed expenditure is so large that it cannot
reasonably be met from current revenues, and
(ii) if the project appears to the Governal-General in
Council unlikely to yield a return of not less
than such percentage as he may from time to
time by order prescribe, arrangements are made
for the amortization of the debt;
(b) to meet any classes of expenditure on irrigation which
have under rules in force before the passing of the
Act been met from loan funds ;
(c) for the giving of relief and the establishment and
maintenance of relief works in times of famine or
scarcity ;
1
Rules under Section 2 (2) of the Government of India Act, 1919.
2
The rules required that:
(1) No loan shall be raised by a Local Government without the sanction (in
the case of loans to be raised in India) of the Governor-General in Council, or (in
the case of loans to be raised outside India) of the Secretary of State in Council,
and in sanctioning the raising of a loan the Governor-General in Council or the
Secretary of State in Council, as the case may be, may specify the amount of
the issue and any or all of the conditions under which the loan shall be raised.
(2) Every application for the sanction of Secretary of State shall be transmitted
through the Governor-General in Council.
(d) for the financing of the Provincial Loan Account; and

(e) for the repayment or consolidation of loans raised in
accordance with these rules or the repayment of advance
made by the Governor-General in Council.”
With the cutting off of the financial and administrative
strand there remained only the legislative strand which had
so far debarred the growth of provincial autonomy. This
legislative strand, as was pointed out before, operated through
the principle of requiring previous sanction and subsequent
assent of the Government of India. By the rules made under
the Reforms Act a field has been marked off for the free
exercise of the Legislative powers of the Provinces in which
that principle has been dispensed with. So far as the field of
tax legislation was concerned it was provided1 that:
“The Legislative Council of a Province may, without
the previous sanction of the Governor-General, make
and take into consideration any law for imposing for the
purposes of the Local Government any tax included in
Schedule I.”
This schedule comprises the following heads of taxation :—
1. A tax on land put to uses other than agricultural.
2. A tax on succession or acquisition by survivorship in
a joint family.
3. A tax on any form of betting or gambling permitted
by law.
4. A tax on advertisements.
5. A tax on amusements.
6. A tax on any specified luxury.
7. A registration fee.
8. A stamp-duty other than duties of which the amount
is fixed by Indian legislation.
In the matter of non-tax legislation the procedure adopted
by the rules has been slightly different. In tax legislation the
rules stated in what cases previous sanction was not necessary.
In non-tax legislation the rules required in what cases previous
sanction was necessary. The effect of this difference in the
1
Rules under Section 10 (3) (a) of the Government of India Act, 1919, Scheduled
Taxes Rules.
requirements of the rules of previous sanction’ was that

while in matters of tax legislation a Provincial Government
could only levy certain named taxes, in the matter of non-tax
legislation it could do anything provided it did not infringe
certain laws. The reasons for this difference are obvious. A
widening of the basis of provincial taxation means a narrowing
field for imperial taxation. Such a detrimental effect could not
flow to the Government in the matter of non-tax legislation,
be the non-tax legislative powers of the Provinces howsoever
large. The taxing power to be granted to the Provinces had
therefore to be more strictly circumscribed than the grant
of legislative power. None the less it cannot be denied that
the rules regarding previous sanction sufficiently loosened
the legislative strand as to permit of the Provinces being
autonomous in theory as well as in practice.
This autonomy is well reflected in the new Budget
Procedure in the Provinces. Under the old regime the Provincial
Budgets had to be passed by the Finance Department
of the Government of India, the Provincial Accounts to
be supervised by the Accountant-General and audited by
the Controller and Auditor-General of the Government of
India and appropriation reports submitted to the Finance
Department of the Government of India. All this is changed
under the new regime. The Provincial Budget, instead of
being passed by the Finance Department of the Government
of India, is framed by the Finance Department constituted
in each Province under the Reforms Act2 and is voted item
by item by the Provincial Legislature.3 The accounts of the
Provinces still continue4 to be supervised and audited by the
1
Rules under section 10 (3) (L) of the Government of India Act, 1919, Local
Legislature Previous Sanction rules. It should, however, be noted that if a Provincial
Bill is such that it does not require previous sanction it does not follow that it
can become law under the above rules because it has been assented to by the
Provincial Legislation. For, by virtue of another set of Rules made under section
12 (1) of the Government of India Act, 1919, called Reservation of Bills Rules, it
is provided that the Governor of a Province must reserve some and may reserve
other Bills for the subsequent assent of the Governor-General before declaring
them law even if the Bills be such as to require no previous sanction.
2
For the constitution and functions of the Finance Department of the Provinces,
see Part III of Devolution rules made under Section I of the Government of India
Act, 1919.
3
See Rules 25 to 32 of the Rules of Business for Provincial Legislative Councils
made under Section 11 (5) of the Government of India Act, 1919.
4
Rules framed under Section 96D (1) of the Government of India Act.
officers of the Government of India, but the important point

under the new regime which is the hall-mark of provincial
independence is that the appropriation reports, instead of
being sent to the Government of India for action, are now
sent to the Committee of Public Accounts constituted from
amongst the members of the Provincial Legislature which
sanctioned the Budget for report that the money voted by the
Legislature was spent within the scope of the grants made
by the Legislature. Thus is effected the demarcation of the
field for the governance of. India into Central and Provincial.
Such a demarcation of administrative and financial matters
was the dream of many an Indian politician and statesman.
It was urged before the Royal Commission on Decentralization
and was also urged by the late Mr. Gokhale in his political
testament which he left before he died. But all these projects
were ill timed and could not be given effect to until the law
of the Indian constitution had been altered. Now that such
an alteration has been made the ideal of Provincial autonomy
bids fair to become real. But before closing this study it may
be useful to evaluate the changes of its successful working.

CHAPTER XII
A CRITIQUE OF THE CHANGE
It is obvious that good administration depends upon good
finance; for finance is “the fuel of the whole administrative
machine.” No aspect of the scheme of Reforms therefore
demands a closer and more anxious study than the financial
arrangements with which the new system of administration
starts. The necessity for such an examination is all the greater
because this aspect of the Reforms Scheme has received
comparatively little intelligent criticism at the hands either
of the public or the expert.
The first question to consider is, can the new financial
arrangements be said to be administratively workable ? To
make administrative polities independent by requiring them
to finance themselves entirely out of their own respective
resources without having to depend upon one another must
always be regarded as a very important end to be kept in view
in devising a new financial arrangement. It is true that it is not
always possible to realize this end, and it may in some cases
be actually helpful to their working that the polities should
be made mutually dependent; for interdependence, at least in
matters of public finance, instead of being an impediment might
conceivably furnish a basis for co-operation and strength. None
the less independence in finance for each administrative policy
is to be sought for wherever possible. There can be no doubt
that from this standpoint the system of contributions is better
than the system of divided heads. This is not to condemn the
system of divided heads. The existence of several concurrent
or overlapping tax jurisdictions must always be a source of
difficulty whenever an attempt is to be made to distribute
the different sources of revenue among the competing tax
jurisdictions so as to allow each a sufficiency of funds. The
reason is that this distribution of the sources of revenue must
not only be governed by considerations of adequacy, but must
also be governed by considerations of suitability. “ The problem
of efficiency of taxation,” as Prof. Seligman observes,1
1
Essays in Taxation (8th edition, 1913), Chapter XII, “The Relations of State
and Federal Finance.”
A CRITIQUE OF THE CHANGE 283
“is naturally of vital importance. No matter how well

intentioned a scheme may be, or how completely it may
harmonize with the abstract principles of justice, if the tax
does not work administratively it is doomed to failure.”
Whether among the sources of revenue to be partitioned
there are any which are naturally more suitable for utilization
by one tax jurisdiction rather than by another depends upon
what is the basis of the tax. If the basis of the tax is narrow
then the argument in favour of its utilization by a narrower tax
jurisdiction will be correspondingly stronger. If its basis is wide
then the scales would weigh in favour of its utilization by the
broader tax jurisdiction. But as a result of following the dictates
of suitability it is not always possible to make a partition such
as to give each administrative polity revenues adequate for its
purposes. For it may happen that a particular tax is suitable
for one jurisdiction while its yield, instead of being necessary
for that jurisdiction, may be required for another jurisdiction
which is unfit to levy it, or may be partially necessary for both.
In such a case, how are the ends of adequacy to be subserved ?
Two remedies suggest themselves. One is the adoption of the
system of divided heads, and the second is to apportion the
deficiency among the several component states and require
them to make a definite contribution towards meeting it.1
The system of divided heads was by no means peculiar to
the Indian fiscal system. It has been adopted in some form or
other by many other countries. In England, for instance, the
inheritance tax is assessed by the Central Government, but a
part of the proceeds is allotted to the Local Government. The
same is true of some other taxes in England. In Germany,
under the Empire, the proceeds of certain indirect taxes were
divided between the federal and state governments. In Canada
it is well known that a large part of the provincial revenues is
derived from proceeds of taxes that are levied by the federal
government.
The prejudice in India against the system of divided heads of
revenue is particularly regrettable because it is founded on the
view that it is opposed to the principle of separation of revenues.
People who opposed it said2 that it involved divided heads of
expenditure which fettered the spending powers of the Provinces
and enabled the Government of India directly to interfere in their
1
1t will be noted that although the new Indian system is largely a system of
contributions it is not without an admixture of the system of divided heads so
far as the Income tax is concerned.
2
R.C.D., Mit of Evid., Vol. VI, Q. 25017-25020; Vol. VIII, Q.35531, 35225-29.
Budget estimates and “to have its finger in every pie” of theirs.
The system of divided heads was no doubt characterized by
these objectionable features. But division of expenditure is
not a necessary accompaniment of division of revenue. Nor
is it a necessary incident of it that a polity which shared in
the yield of a tax but did not administer it should interfere
in calculating the estimates of the yield. Chipped of its evil
features, the system of divided heads of revenue is simply
another name for what Prof. Seligman calls1 the system of
segregation of source and the division of the yield. The essence
of the system consists in the exclusive assessment of a particular
source of revenue by one tax jurisdiction, coupled, however,
with an apportionment of a part of the proceeds to another tax
jurisdiction. The system of divided heads of revenue does not
cease to be a system of separation of sources merely because
there is the division of the yield. In such a system of divided
heads there is a separation because the assessment of the tax
is segregated—which is the essence of separation—exclusively
in the hands of one tax jurisdiction, and the division of the
yield can be so regulated that it need not be incompatible
with real separation.
The system of contributions does what the system of
divided heads aims to do. Like the system of divided heads
it answers the tests of suitability as well as of adequacy by
allowing the tax to be administered by the jurisdiction most
competent to do it, and also of adequacy by making the taxing
jurisdiction hand over a sum to the non-taxing jurisdiction.
Essentially the system of divided heads and the system of
contributions are alike. The only difference between the two
is that so far as the apportionment of proceeds are concerned
the one is an itemized arrangement while the other is a lump-
sum arrangement. There is therefore really nothing much
to choose between them. But this is not altogether a case
of merely giving a different name to a discredited system in
the hope that it might smell more sweet. For the system of
contributions has one real point of superiority as compared
with the system of divided heads. It does not merely permit
of separation of assessment, but it also makes for a greater
separation than does the system of divided heads. Under
the system of divided heads the receiving party has still
1
Op. cit., Chapter XI, “Separation of State and Local Revenues,” particularly
pp. 365-6.
an anxious concern in the assessment and collection of the

tax for any laxity in the administration of a divided head of
revenues is bound to affect its interests adversely, and may
therefore claim a hand in the administration of the tax. But
under the system of contributions there is no room for such
a possibility. Its quota being assured it is out of the business
of assessing and collecting the tax. There is thus a greater
separation under the system of contributions than there can
be under the system of divided heads.
When we come to analyse the equity of the new financial
arrangements we find that great objections are raised to the
system of contributions. But many of these objections are
misconceived. It will be recalled that the contributions from the
Provinces to the Central Government in India are regulated
according to their spending powers. In other words, it is the
apportionment by expenditure method of dealing with the
deficit. That the method subserves the ends of adequacy is
of course obvious. But what does not seem to be so obvious,
but which all the same is a great virtue of the system of
contributions, is that it promotes economy in the giving as
well as in the receiving tax jurisdiction; for extravagence in the
contributing tax jurisdiction immediately increases its burden,
while extravagance in the receiving tax jurisdiction is directly
reflected in enhancing the contributions. None the less, the
contributions, it is protested, are inequitous, for they are held
to be based not on population, nor on area, nor on wealth, nor
on the capacity of the Provinces. It is also complained that
the system of contributions according to spending powers is
unwise, for it tends to check desirable expenditures in the more
progressive Provinces. The latter is, of course, a real objection
to the apportionment by expenditure method of contributions
in its general form. But it may be said, on the other hand,
that in the first place if a jurisdiction is willing to undertake
the burdens of a larger expenditure for desirable aims, it will
scarcely be deterred by the slight additional burden which
might result from the increase in the contribution. Secondly, if
it were found that the contribution did produce such a result it
would be posible to obviate it by adopting the simple expedient
of exempting certain kinds of expenditure which might be
deemed to be necessary. What these expenditures should
be would be a matter of adjustment, which might differ in
different provinces. The virtues of the system of apportionment
by expenditure method of levying contributions would still be
conserved intact, and its automatic features would work equally

well if certain expenditures only, instead of all expenditures,
were selected as the basis of calculations.
This objection cannot, however, be urged against the Indian
system of contributions. In the first place, the contribution is
not a varying sum as is the case in the financial systems of
other countries. Because the Provinces are made contributory
towards the deficit of the Central Government it is to be
remembered that they are not liable to the whole of the
central deficit whatsoever it may be from year to year. On
the other hand, in ordinary years the Provinces are only
liable to make contributions towards meeting what is called
the Standard Central Deficit of Rs. 9.83 lakhs. That being the
case the contributions do not form an element of uncertainty
in the Provincial Budgets. Secondly, the contributions are not
a permanent feature of the financial arrangements between
the Central and Provincial Governments. The levy of the
contributions is contemplated to be only transitional, to allow
the Government of India to work out its financial salvation,
and the Government of India has promised that they will
adopt such a policy as to bring about the extinction of the
contributions in as short a time as possible. Lastly, the ratio
of the contributions to the standard revenues or expenditure of
any of the Provinces is not so great as to place a heavy incubus
on their financial system, and not being a varying quantity
cannot be said to check useful expenditures by Provinces which
propose to incur them.
As a matter of fact whatever may be said against the
flaws in the apportionment by expenditure method of levying
contributions it would be difficult to deny that the system
eminently answers the requirements of equity. It certainly
brings about a more equitable1 distribution of the burden than is
possible under other systems. For it may fairly be assumed that
expenditures very nearly correspond to the actual abilities of the
communities concerned more than do population2 or area. Not
only is the principle equitable in itself, but care has been taken
to do equity in its application as between the different Provinces.
For we know that the contributions are so regulated as to leave
to the Provinces, rich as well as poor, a reserve of spending
power in order to enable them to meet such of their pressing
needs as may not have been covered by the figure for standard
1
Cf. Seligman, op. cit., p. 360.
2
In Germany under the Empire the contributions from the states were
apportioned according to population. The same is the case in Switzerland.
expenditure. The main purpose of rejecting equal in favour

of unequal contributions was to see that the burden of the
contributions did not prevent any of the Provinces from meeting
such extra expenditure as may be absolutely necessary. Indeed,
no system of contributions can be said to be calculated to
produce greater equity than the Indian system.
So far we have examined whether the new financial
arrangement is administratively workable and equitable. What
we have now to see is : Has the arrangement proved itself to
be financially adequate? It will be recalled that the Financial
Relations Committee held that the general resources of the
country were abundant, and that it required only a wise
(In Thousands of Rupees)
Standard Revised Budget
Province
Figures 1921-2 1922-3
Revenue 14,98,02 15,58,59 16,76,50
Madras ... Expenditure 14,07,20 17.15.93 17,18,55
Surplus and 90,82 —1,57,34 —42,05
Deficit
Revenue 12,09,70 13,67,13 14,93,06
Bombay ... Expenditure 11,55,03 16,52,80 15,42,17
Surplus and 54,67 —2,85,67 —50,11
Deficit
Revenue 8,55,28 8,86,53 10,55,86
Bengal ... Expenditure 8,61,13 11,10,60 10,36,90
Surplus and —5,85 —2,24,07 18,96
Deficit
Revenue 12,29,88 13,34,31 13,58,67
United Provinces ... Expenditure 12,06,56 14,59,87 13,85,65
Surplus and 1,23,32 —1,25,56 —26,98
Deficit
Revenue 9,73,51 10,73,76 11,38,26
Punjab ... Expenditure 9,10,69 12,23,24 12,68,44
Surplus and 62,82 —1,49,48 —1,30,18
Deficit
Revenue 8,24,28 9,99,33 10,00,57
Burma ... Expenditure 7,84,78 10,27,51 11,90,70
Surplus and 39,50 —28,18 —1,90,13
Deficit
Revenue 4,30,39 4,46,15 4,62,65
Bihar and Orissa ... Expenditure 4,20,70 4,85,97 5,13,80
Surplus and 90,69 —39,82 —51,15
Deficit
Revenue 4,35,37 5,14,80 5,35,23
Central Provinces ... Expenditure 4,38,80 5,41,76 5,72,17
Surplus and —3,43 —26,96 —36,94
Deficit
Revenue 1,81,46 2,01,12 2,08,06
Assam ... Expenditure 1,78,25 2,19,45 2,22,58
Surplus and 3,21 —18,33 —14,52
Deficit
plan of distribution in order to leave each Province with a

sufficiently large “spending power” or surplus. That the plan
recommended by the Committee was calculated to bring about
such a result must of course be taken for granted. But when
we analyse the Budgets of the different Provinces since the
introduction of the Reforms the result appears to be entirely
disappointing (see Table, p. 287).
Thus, taking the estimated revenue and expenditure of
the nine Provinces for 1922-3, equilibrium between current
revenue and expenditure is only to be found in two of them,
Burma and Bengal, and in the latter this result could not
have been attained but for the temporary remission1 of
its annual contribution to the Central Government, and a
programme of taxation calculated to bring in Rs. 140 lakhs.
In the rest of the Provinces the deficits of the year aggregated
to the large figure of Rs. 7,74 lakhs. This huge deficit was
financed by new2 taxation to the extent of Rs. 3,52 lakhs,
and for the rest by drawing on balances and by raising loans
from the public and from the Central Government. But as
the Secretary of State in his despatch3 pointed out, this
“process of financing provincial deficits in part from
the accumulated revenue balances of the past will now
practically come to an end, as such balances will be
generally exhausted by the end of the current financial
year ............ If the financial stability of the Provinces
is not to be undermined, with ultimate jeopardy to the
Government of India itself, it is impossible to contemplate
the continuance of a series of Provincial deficits financed
by borrowing either direct from the public or from the
Central Government.”
What is to be the remedy ? At the Conference held in Simla
in April, 1922, “to consider various matters connected with the
financial arrangements between the Central Government and
the Provinces,” it was disclosed4 that the Government of India
and the Provinces were divided as to the proper solution for
the rehabilitation of Provincial Finance on a stable and secure
1
Legislative Assembly Debates, Vol. Ill, No. 8.
2
Cf. the letter of the Government of India, Finance Department, No. 13 of
July 13, 1922, to the Secretary of State.
3
Cf. the despatch in reply to the above by the Secretary of State (Financial),
No. 17 of November 9, 1922.
4
For a summary of the result of this Conference, see Letter of the Government
of India, supra, p. 257.
footing. The Provinces proposed an increase in their resources

by revising the financial arrangements made by the Reforms
Act. On the other hand, the Secretary of State as a mouthpiece
of the Government of India urged that
“Equilibrium can only be achieved by reduction of
expenditure and the adoption of measures which will
lead to an increase of revenue.”1
The Provinces were not, however, unanimous in the
suggestions they made for the revison of the arrangements
effected by the Act. Some like the Government of Bombay
suggested a return to the system of “divided heads” while
others were opposed to it. But the majority was for securing
relief through the abolition of contributions. This attitude
of the Provinces towards the new financial arrangements
is on the face of it a very unreasonable attitude. They are
opposed both to the system of divided heads and the system
of contributions as well. This is to have things both ways,
and they could certainly have had it if the existing resources
of the country had been properly husbanded. Inadequacy
of finance is not always the result of a paucity of revenue
resources. National prosperity may be great and growing and
the increase of national wealth may be proceeding unchecked.
If under such circumstances enough revenue is not obtained
the fault does not lie with the social income. Rather it is a
fault of the government which must be said to have failed
to organize and marshal the national resources for fiscal
purposes. The same is to some extent true of the Indian
Government.
Surveying the national resources of the country, it
becomes evident that there are two sources which the
Government has not been able to marshal properly. One
is the land revenue. It is notorious that land revenue has
been the biggest resource to the Government of India. In the
collection of the land revenue every landholder is laid under
contribution, but the rate of assessment is not periodically
enhanced for every one of them. On the other hand, in
Bengal and in other parts of India the rate of assessment
is permanently settled. Consequently in such parts of india
which by the long period of settled government enjoyed
by them, and by the consequent influx of capital, have
1
The despatch of the Secretary of State, supra, p. 257.
attained to a greater advance in prosperity than any others,

the land revenue yields practically no increase; the land-owners,
with enormously increased incomes, contribute nothing to the
increase in the financial burdens of the State. Permanent
Settlement has ever since the days of Lord Canning been
suggested as a panacea for improving the financial condition
of the people. After the severe famine of 1860, Lord Canning,
then Viceroy and Governor-General of India, recommended
the extension of the Permanent Settlement to all parts of
india. Sir John (afterwards Lord) Lawrence supported the
recommendation, and the two Secretaries of State for india,
Sir Charles Wood and Sir Stafford Northcote, approved of the
proposal. Fortunately for the country the proposal for making
the Permanent Settlement universal was finally rejected in
1883. Some no doubt regarded the decision as unfortunate, and
continued the agitation in favour of the permanent Settlement
long after. But the real force, if there was any in the agitation,
was derived from the motive of putting a limit on the financial
resources of an alien and an irresponsible bureaucracy. Those
who then agitated in favour of the Permanent Settlement
probably did not realize that some day this irresponsible
bureaucracy would give place to a responsible government of
the people and the Permanent Settlement which it was desired
to be instituted as a curb on the unchartered licence of a
bureaucracy would result in placing a fetter on the freedom
of a popular government to enter upon the path of orderly
progress. A bad government may abuse its financial powers,
but a government cannot be a good government if there is a
serious limitation on its financial powers. It was therefore a
good thing that this evil of a permanent settlement was not
allowed to spread to the whole of India. But it would have
been better if the new financial arrangements had contrived to
replace the permanent settlement system of land revenue by a
periodical settlement system. That was one important way of
augmenting the general resources of the country and thereby
giving adequacy to all the governments concerned. Instead of
this the financial arrangements were so conceived as not to
“subject the permanently settled provinces to financial
pressure which would have the practical result of forcing
them to reconsider the permanent settlement.”1
If this had been done it would have augmented the general
resources to the benefit of all. As it was, not only provision was
1
made favouring the retention of the Permanent Settlement,

but the Bengal Government, which has the largest number of
permanently settled holders of land, was later on exempted
from contributing to the Government of India which was
compelled to meet its deficit in other ways.
Land Revenue therefore is one source which the Government
could have marshalled in the interest of giving adequacy to
the new financial arrangements. The other source which the
Government refuses to tap is the customs revenue. The kind
of fiscal policy that was adopted during the pre-Mutiny days,
was, as we know it to be, of a suicidal character. The same is
true of the post-Mutiny fiscal policy. From the Mutiny up to
the present time, the Government of India has never looked
upon the customs revenue as a resource to be used to meet
the exigencies of the State, and when it has used it, it is only
very reluctantly, and never to the fullest, not to mention the
circumstances when it has actually reduced its revenue from
this source in spite of the crying needs of the exchequer.1 While
the ostensible reason given in favour of such a fiscal policy
is that the customs revenue is wrong in principle, everybody
knows that the customs revenue is not raised in India because
it is feared that under it Indian industries would be protected
against English industries. That the whole policy of India
has been dictated by the interests of English manufactures is
beyond dispute, and the reason for it is not far to seek. The
Secretary of State for India, the supreme executive for India,
is directly amenable to the English voters, whose primary
concern has been to see that their markets are not closed
against them. Whether a protectionist policy is good or bad is
another question. For the present it is sufficient to note that
the Government of India has been subjected to a pernicious
kind of limitation on its fiscal powers which prevents it from
using a source of revenue which has everywhere else proved
to be most elastic and abundant of financial resources. If these
limitations were not there the present financial inadequacy
in all probability might not have ensued at all, and there
would have been no necessity either for adopting the system
of divided heads or for imposing contributions. As it is,
owing to these limitations on the taxable resources of the
country, a deficit in the Budget of the Central Government
is inevitable. Given this fact, the adoption of some method of
meeting that deficit was imperative, and there is no doubt that
1
Financial Statement for 1880-81, para. 74.
the system adopted is better than the system it replaced.

In the present circumstances of the finances of the Central
Government, contributions must be taken as a settled issue.
Nor can it be said that the abolition of contributions would
restore stability to Provincial Finance. Such no doubt is the
prevalent view of the Provincial Governments and also of
non-official politicians. The Resolution moved in the Indian
Legislative Assembly on the 14th September, 1922, rested on
the same view that if the Government of India were only to
dispense with the contributions it would immediately restore
equilibrium in the financial position of the Provinces. This
belief was strengthened by the assumption that the aggregate
estimated deficit of all the Provinces disclosed itself to be 352
lakhs of rupees for the financial year 1922-3; and as the total
contribution to the Imperial Government by the Provinces
aggregated to the sum of 983 lakhs, a remission of this amount
would more than wipe off the deficit in the Provincial Budgets.
It must, however, be said that the deficit of 352 lakhs of rupees
does not disclose the true position of the Provinces as derived
from the financial arrangements made by the Act. If we are
to deduce the true position of the Provinces as following from
the new arrangement we must take note of the new taxation
imposed and of the gain to Bengal through the remission of its
contribution to the Imperial exchequer. Making adjustments
for these, the position of the Provinces as it would have been
without contributions may be seen from the following :—
FINANCIAL POSITION OF THE PROVINCES 1922-3

(In thousands of rupees)
Surplus or
Provinces Revenue Expenditure
Deficit
Rs. Rs. Rs.
Madras ... ... ... ... 15,99,00 17,18,55 —1,19,55
Bombay ... ... ... ... 14,32,06 15,42,17 —1,10,11
Bengal ... ... ... ... 9,15,86 10,99,90 —1,84,04
U.P. ... ... ... ... 13,58,67 13,85,65 —26,98
Punjab ... ... ... ... 11,38,26 12,68,44 —1,30,18
Burma ... ... ... ... 10,00,57 11,90,70 —1,90,13
Bihar and Orissa ... ... ... 4,62,65 5,13,80 —51,15
Central Provinces ... ... ... 5,35,23 5,72,17 —36,94
Assam ... ... ... ... 2,05,06 2,22,58 —17,52
Total dificit ... ... ... —8,66,60
According to this calculation the aggregate deficit of the

Provinces would have been about 867 lakhs. But we must
make some further adjustments to this account. It has not been
possible to deduct from the revenues of the Central Provinces
the sum derived from the enhancement of the Excise duty in
the Provinces. Secondly, the revenues of the Central Provinces
for the year 1922-3 include collections of suspended revenue of
previous years. If these adjustments were made the aggregate
deficit of the Provinces would give rise to a figure which would
be barely covered by the remission of contributions. We must
therefore conclude that remission of contributions would have
at best been a very inadequate measure for removing the
financial stringency of the Provinces, even if the problem of
financing the extra deficit caused by such remission in the
budget of the Central Government were to be ignored.
But if, remission of contributions cannot improve the difficult
situation that has arisen with regard to Provincial Finance,
we must go to the root of the matter and inquire what are the
causes which have brought on that situation. Is it due to the
normal expenditure of the Provinces being under-rated ? Or
is it due to the normal revenues of the Provinces being over-
estimated ? For this purpose we must first ascertain whether the
resources allocated to the Provinces were really inadequate to
their normal needs. The following table compares the standard
receipts and expenditure and shows the margin left between
them for covering a probable advance in expenditure.
STANDARD REVENUE AND STANDARD EXPENDITURE
Excess or Defect
of Standard
Standard Standard
Provinces Revenue over
Revenue Expenditure
Standard
Expenditure
Rs. Rs. Rs.
Madras ... ... ... 14,98,02 14,07,20 90,82
Bombay ... ... ... 12,09,70 11,55,03 54,67
Bengal ... ... ... 8,55,28 8,61,13 —5,85
U.P. ... ... ... 12,29,88 11,06,56 1,23,32
Punjab ... ... ... 9,73,51 9,10,69 62,82
Burma ... ... ... 8,24,28 7,84,78 39,50
Bihar and Orissa ... ... 4,30,39 4,20,70 9,69
C. P. ... ... ... 4,35,37 4,38,80 —3,43
Assam ... ... ... 1,81,46 1,78,25 3,21
From this it is obvious that except in the case of two

Provinces the standard revenue has left a sufficient margin
over standard expenditure. Only in Bengal and Central
Provinces there was no margin, owing to the fact that the
standard expenditure was slightly in excess of the standard
revenue. But this defect was more than remedied in the
case of Bengal by the remission of the contributions to the
Central Government, and the excess of standard expenditure
over standard revenue in the case of Central Provinces was
indeed very small. Barring this, in the rest of the Provinces
the margin allowed was substantial. Let us now turn to the
actual figures and compare them, with the standard figures.
First of all, let us take the revenue side of the Provincial
Budgets. Has the realized revenue fallen short of the standard
revenue ? The following table compares the realized receipts
of the Provinces with the standard figure assumed to be the
normal in the financial allocation made under the new Act:—
Provincial Revenues1
+ Increase over Standard :
— Decrease from
Standard Standard.
Provinces
Revenues
For 1921-2 For 1922-3
Rs. Rs. Rs.

Madras ... ... ... ... 14,98,02 60,57 40,41
Bombay ... ... ... ... 12,09,70 1,57,47 2,22,36
Bengal ... ... ... ... 8,55,28 31,25 60,58
U.P. ... ... ... ... 12,29,88 1,04,43 1,28,79
Punjab ... ... ... ... 9,73,51 1,00,15 1,64,75
Burma ... ... ... ... 8,24,28 1,75,05 1,76,29
Bihar and Orissa ... ... ... 4,30,39 15,76 32,26
C.P. ... ... ... ... 4,35,37 79,43 99,86
Assam ... ... ... ... 1,81,46 22,60 23,60
The above table brings out very clearly the fact, not readily
admitted, namely that the realized revenue has in no case fallen
short of the standard revenue. It may, however, be asked : Has
the increase in the realized revenue been equal to the margin
allowed under the allocation between the standard revenue and
1
Exclusive of new taxation.
the standard expenditure of the Provinces ? As throwing some

light on that aspect of the question the following table is
interesting :—
EXPANSION OF PROVINCIAL REVENUES
Excess or Defect of Realized
Standard Margin over Standard
Provinces Margin
Margin
For 1921-2 For 1922-3
Madras ... ... ... ... 90,82 —30,25 —50,41
Bombay ... ... ... ... 54,67 1,02,80 1,68,19
Bengal ... ... ... ... —5,85 25,40 54,73
U.P. ... ... ... ... 1,23,32 —18,89 5,47
Punjab ... ... ... ... 62,82 37,33 1,01,93
Burma ... ... ... ... 39,50 1,35,55 1,36,79
Bihar and Orissa ... ... ... 9,69 6,07 22,57
C. P. ... ... ... ... 3,43 76,00 96,43
Assam ... ... ... ... 3,21 19,39 20,39
From these figures it is obvious that except in the case
of Madras the realized margin has in no case fallen below
the standard margin. The excess of the realized over the
standard margin is enormous. It cannot, therefore, be said
that the financial deficit in the Provinces is due to provincial
revenue having failed to reach the assumed normal. On the
other hand, the revenues were more than necessary to cover
the normal expenditure of the Provinces. The only conclusion
that can fairly be drawn from the facts of the case is that the
provincial deficits are due to an extraordinary increase1 in the
expenditure of the Provinces. The following figures furnish
enough evidence in support of this view:—
+ Increase over Standard :
Standard — Decrease from Standard.
Provinces
Expenditure
For 1921-2 For 1922-3
Madras ... ... ... ... 14,07,20 3,08,73 3,11,35
Bombay ... ... ... ... 11,55,03 2,97,77 3,87,14
Bengal ... ... ... ... 8,61,13 2,49,47 1,75,77
U.P. ... ... ... ... 11,06,56 3,43,31 2,79,09
Punjab ... ... ... ... 9,10,69 3,12,55 3,57,75
Burma ... ... ... ... 7,81,78 2,42,73 4,05,92
Bihar and Orissa ... ... ... 4,20,70 65,27 93,10
C. P. ... ... ... ... 4,38,80 1,02,96 1,23,37
Assam ... ... ... ... 1,78,25 41,20 44,33
1
For a brief review of this fact see the summary of it in the letter of the
Government of India, op. cit.
We are, therefore, led to the view held by the Secretary

of State that reduction of expenditure and increase of
taxation is the only remedy for placing provincial finance
on a sound footing. What chances are there that the
Provinces will undertake the reduction of expenditure and
increase of taxation so very necessary for their safety ? In
this connection it is well to recall the dictum of that great
financier, Mr. James Wilson, who once said :
“Finance is not mere arithmetic; finance is a great
policy. Without sound finance no sound government is
possible : without sound government no sound finance
is possible.”
If there is any truth in this, then whether or not the
Provincial Governments will undertake economy or face
increase of taxation depends upon whether or not the
system of government established in the Provinces by the
Reforms Act is a sound system. Now, what is the nature
of the government that is established in the Provinces
under the Reforms Act ? In common parlance the system is
known as dyarchy. Under it the Executive of the Province,
instead of being composed of the Governor in Council as
before, is now divided into the Governor in Council and
the Governor in Ministry. Under it the subjects marked
off as Provincial from the Central are further divided into
“Reserved” and “ Transferred” subjects. The former are in
charge of the Governor in Council, and the latter in that of
the Governor in Ministry. Of these parts of the Provincial
Executive the Council in charge of the “reserved” subjects
still remains as before irresponsible to the Provincial
Legislature, is unremovable by it, and in that sense is
a non-parliamentary executive. The other part of the
Provincial Executive, namely the Ministry in charge of the
“transferred” subjects, is recruited from the elected members
of the Provincial Legislature, which is made responsible
to the Provincial Legislature which is based on a more or
less popular franchise, and is removable by it, and in that
sense is a Parliamentary Executive.
The Provincial Legislature is supreme with regard to both
the parts of the Provincial Executive. It has not only full
powers of legislation, but has also full and unfettered powers of
interpellation. Its powers of sanctioning and voting upon the

Provincial Budget are complete, although provision is made
in the Reforms Act,1 which allows that
“the Local Government shall have power in relation
to any such demand (for a money grant) to act as if it
had been assented to, notwithstanding the withholding
of such assent or the reduction of the amount therein
referred to (by the Provincial Legislature), if the demand
relates to a reserved subject (which is assigned to the
charge of the Governor in Council) and the Governor
certified that the Expenditure provided for by the demand
is essential to the discharge of his responsibility for the
subject.”
Can such a government tackle the problems of sound
finance? It is obvious that of the two parts of this dyarchical
Executive, one, i.e. the Governor in Council, need have very
little anxiety for reduction of expenditure or for the increase
of taxation. It derives its mandate from Parliament, and
as such is free to adopt any policy—backed up as it is by
the certification power of the Governor without any regard
for the best interests of the taxpayer. The authors of the
Joint Report had seen that this certifying power to override
the wishes of the Legislature might lead to irresponsible
extravagance on the part of the Governor in Council, and
had proposed to endow the Governor in Ministry with a
countervailing power which was to act as a curb on the
former. That power was to have consisted in the Proviso
which laid down that no taxation even in the interests of
the “reserved” subjects should be imposed in any Province
without the consent of the ministry.2 The Extremists—a
class of politicians in India who were bent upon minimizing
the reforms as being inadequate—disliked the proviso as
calculated to make scapegoats of ministers and to bring
them into discredit with the people. But their rivals, the
“Moderates,” now calling themselves “Liberals”—one does
not know why—saw clearly what the proviso meant. If this
had materialized, there can be no doubt that the ministry
would not have been a mere outsider tendering advice to the
Council which might be accepted or rejected, but would have
obtained a powerful voice in the settlement of the budget.
1
Government of India Act, 1919, sect. II (2) (a).
2
Joint Report, para. 256.
Having regard to the fact that no minister unless he was

in a position to justify the budget proposals, including even
those which pertained to the reserved subjects, would have
hoped to persuade the Legislature to agree to a proposal of
new taxation, the influence of the ministry on the “reserved”
subjects, i.e. on the Council, would have inevitably been in
the direction of thrift and retrenchment. The moderates
were entirely right in their interpretation of the proviso
and also in their insistence upon acquiring power, even at
the cost of burdening the country with new taxation1. But
in the heat of the controversy and their desire to convince
the public of the substantiality of the Reforms, they drew
some very amusing pictures of how the ministers working
under the aegis of the proviso would be able to hold the
Council at bay. This alarmed the bureaucracy, which raised
the cry that it was dangerous to leave the provision for
the “reserved” subjects to the tender mercy of ministers
who bore no responsibility for the consequences of refusing
adequate Budget provision for those subjects. The authors
of the Joint Report2 had realized the force of this argument,
and had confessed that the success of the arrangements
depended upon their being worked by reasonable men who
would conduct themselves in a reasonable manner. They
were probably right in refusing to assume that the ministers
would not co-operate, either by reducing their own claims or
by imposing taxation, in order to meet expenditure which the
Council considered essential for the proper administration
of the “reserved” subjects. But the bureaucracy, which had
been frightened by the tactless jubilations of the Moderates,
insisted that even reasonable men would at times, in all
good faith, differ vitally from other reasonable men when it
was a question of providing supply for work which one party
was responsible for safeguarding and developing, while the
other was only concerned in getting a share of the money.
In its opinion circumstances could well be imagined in which
reasonableness might not prevail. Let us suppose, it was
argued, that the Governor in Council finds new and heavy
expenditure imperative on some reserved subject, but that
he cannot induce ministers to consent to accept less for their
1
Vineberg, Separation of State and Local Revenues in Canada, p. 13, for an
instance where military power was bought in Canada by volunteering to pay for
the cost of it.
2
Joint Report, para. 257.
subjects or impose taxation for it. The Governor then, under his
exceptional powers, insists on the expenditure being provided
for in the next budget, and the result is to leave ministers
with inadequate funds for their transferred subjects. What is
to happen ? Are ministers to be compelled to raise a tax which
is apparently for their own need, but a need which has been
created against their will by the Council refusing to curtail
their demands ? Such a procedure, it was pointed out, would be
tortuous, provocative, and indefensible. Again, let us suppose
that ministers consented to raise the necessary money, but
the legislature refused to pass their revenue measures. Are
the ministers to resign as having lost its confidence? The
bureaucracy placed another dilemma before the authors of
the Joint Report. Ministers have raised a new tax for some
purpose of their own. In the next budget the Governor finds
himself compelled to add substantially to the reserved provision
for some new necessity, and thus to curtail the provision for
“transferred” subjects. Ministers virtually see their new taxation
receipts going to finance some development for which they are
not responsible, and of which indeed they may disapprove.
What are they to do? To avoid these difficulties the proviso
was dropped and in its place the following changes were made
in the Devolution Rules :—
TAXATION AND BORROWING

30. All proposals for raising taxation or for the borrowing
of money on the revenues of a Province shall in the case of
a Governor’s Province be considered by the Governor with
his Executive Council and ministers sitting together, but the
decision shall thereafter be arrived at by the Governor in
Council, or by the Governor and Minister or Ministers, according
as the proposal originates with the Governor in Council or the
Governor and Ministers.
ALLOCATION OF REVENUES FOR THE ADMINISTRATION OF

TRANSFERRED SUBJECTS
31. Expenditure for the purpose of the administration of both
reserved and transferred subjects shall, in the first instance,
be a charge on the general revenues and balances of each
Province, and the framing of proposals for expenditure in regard
to transferred and reserved subjects will be a matter for agreement

between that part of the government which is responsible for
the administration of transferred subjects and that part of the
government which is responsible for the administration of reserved
subjects.
PROCEDURE IN EVENT OF FAILURE TO AGREE

32. (1) If at the time of the preparation of the budget the
Governor is satisfied that there is no hope of agreement within a
reasonable time between the members of his Executive Council on
the one hand and Ministers on the other as to the apportionment of
funds between reserved and transferred departments respectively,
he may, by order in writing, allocate the revenue and balances
of the Province between reserved and transferred subjects, by
specifying the fractional proportions of the revenues and balances
which shall be assigned to each class of subjects.
(2) An order of allocation under this rule may be made by
the Governor either in accordance with his own discretion or in
accordance with the report of an authority to be appointed by the
Governor-General in this behalf on the application of the Governor.
PERIOD OF ORDER OF ALLOCATION

33. Every such order shall (unless it is sooner revoked) remain
in force for a period to be specified in the order, which shall be
not less than the duration of the then existing Legislative Council,
and shall not exceed by more than one year the duration thereof:
Provided that the Governor may at any time, if his Executive
Council and Ministers so desire, revoke an order of allocation or
make such other allocation as has been agreed upon by them :
Provided, further, that if the order which it is proposed to
revoke was passed in accordance with the report of an authority
appointed by the Governor-General, the Governor shall obtain the
consent of the Governor-General before revoking the same.
CONDITION OF ORDER OF ALLOCATION

34. Every order of allocation made under these rules shall
provide that, if any increase of revenue accrues during the period
of the order on account of the imposition of fresh taxation that
increase, unless the legislature otherwise directs, shall be allocated
in aid of that part of the Government by which the taxation is
initiated.
PREPARATION OF BUDGET IN DEFAULT OF AGREEMENT OF

ORDER OF ALLOCATION
35. If at the time of the preparation of any budget no
agreement or allocation such as is contemplated by these
rules has been arrived at, the budget shall be prepared on
the basis of the aggregate grants respectively provided for the
reserved and transferred subjects in the budget of the year
about to expire.
Thus rather than depend too implicitly on reasonableness
when circumstances must often be provocative effective
precaution is taken by these rules against the ministry
disapproving the allocation of funds to the “reserved” subjects
by allowing the Governor to make such an allocation which is
to be binding on both parts of the executive and also by arming
him with the power of veto over the Provincial Legislature by
allowing the Governor, should he deem it necessary, to restore
a Budget grant on a reserved subject if it were refused or
reduced by the Provincial Legislature which has the right to
determine the Provincial Budget, and thirdly by allowing the
Governor in Council equally with the Governor in Ministry to
raise new taxation or new loans for the development of the
subjects in its own charge. The result is that one part of this
dyarchical Executive, namely the Governor in Council, can have
little reason to be interested in economy or be over-weighed by
considerations of taxation. Its supply being assured its concern
in the stability of provincial finance must be deemed to be
somewhat remote. The whole burden of meeting the problem
of restoring sound finance, therefore, falls upon the Governor
in Ministry in charge of the “transferred” subjects. For, under
the distribution and certification powers it is the “transferred”
subjects which must go without the funds they need, and it
is those in charge of them, namely the Ministers, who must
bear the brunt of economy or resort to new taxation to bring
about an equilibrium in the finances of the Provinces. For it is
doubtful that the Governor in Council will choose the onerous
task of raising new taxes or practise economy when there are
open to them other ways of amply providing themselves for
the subjects they have under their control. Will the other half
of the Government, namely the Governor in Ministry, consent
to practise economy, or if need be undertake the burden of
new taxation ? That obviously depends upon the temper of
the Legislature.
At the outset it is to be noted that the Legislature will

not readily favour projects of increased taxation. It is true,
as Burke remarks,1 that
“To tell the people that they are relieved by the
dilapidation of their public estate, is a cruel and insolent
imposition. Statesmen, before they valued themselves
on the relief given to the people by the destruction of
their revenue, ought first to have carefully attended
to the solution of the problem : Whether it be more
advantageous to the people to pay considerably, and to
gain in proportion ; or to gain little or nothing, and to
be disburdened of all contribution ?”
Whatever may be the philosophers’ answer to this
question, there can be no doubt that in a poor country like
India with a very low capacity for bearing the burden of
taxation, it is always very unpleasant, if not cruel, to propose
an augmentation of that burden. Besides, any proposals for
extra taxation would be shunned as likely to prejudice the
chances of the legislators at the polls. So long as nomination
was the general mode of obtaining a seat in the Legislature
it was unnecessary to mind the prejudices of the electors.
But when a seat is in the gift of the elector a candidate
to the Legislature who proposes to touch his pocket has
a small chance of success, even though the new taxes are
to result in more than proportionate benefit. Besides, a
political party which has won power from a bureaucracy by
accusing it of heavy taxation cannot easily consent to disgrace
itself by continuing the same policy. This innate aversion
to taxation on the part of the Legislature is strengthened
by the peculiar attitude of the Legislature towards the
“reserved” and “ transferred” subjects. The reserved subjects
are those which mostly pertain to peace and order, while
the transferred subjects are those which largely pertain to
progress. But as has already been pointed out, the policy
of the bureaucracy before the Reforms was calculated to
sacrifice progress to order. It is therefore obvious that under
the revised constitution the popular Legislatures should aim
at turning the scales in favour of subjects tending towards
progress. Their aversion to increase of taxation and their
partiality for the transferred subjects will favour them
1
Reflections on the Revolution in France.
to welcome proposals on the part of ministers making drastic

reduction in the funds allotted to the reserved subjects. Their
attitude towards the ministers will be largely governed by the
amount of economy they will be able to effect in the reserved
subjects for the benefit of the transferred subjects. Thus in the
absence of any very large chances of increase of revenue the
two halves of the Executive, the Governor in Council backed
by the distribution and certification power and the Governor
in Ministry backed by the general Budget powers of a popular
Legislature, will compete in the matter of developing their
subjects by forcing economy on each other. The Legislature
being unwilling to tax, the Governor in Council being in a
position to resist retrenchment and the Governor in Ministry
anxious to expand, the chances of an early equilibrium in
Provincial finance are very small.
It is, therefore, evident that if there is no sound finance
in the Provinces it is because dyarchy is not a good form
of government. Now, why is dyarchy not a good form of
government ? The answer to this question is very simple.
Dyarchy is a bad form of government because it is opposed
to the principle of collective responsibility. An administrative
machine must work smoothly and harmoniously. But in order
that it may do so it must recognize the principle of impartibility
of governmental work and a collective responsibility of the
administrators in the execution thereof. That the work of
government is by its nature impartible may not seem to accord
with facts : for, in practice the functions of government can
be and commonly are partitioned, as they are between local
bodies and between departments. Nevertheless it is true that
a common thread runs through them all: that no function of
government acts in vacuo ; that each reacts on some other
function, and that the various functions cannot act at all to
produce orderly progress unless there is some force to harmonize
them. Otherwise a policy enunciated in one department may
fail to fructify for want of helpful action on behalf of other
departments. That harmonizing force can only be found in the
principle of collective responsibility. This is so because under
it, as Hearn points out:1
“Each minister acts in his own department as the
recognized agent of his colleagues in that particular
1
The Government of England, p. 204
department, subject, however, to inquiry and control by

the whole body. But in all cases on which any difficulty is
likely to arise each minister, from motives not merely of
prudence but of honour, takes the opinion of the Cabinet.
When the precaution is taken the measure becomes the
common act of the Ministry.”
Right or wrong there is a common co-ordinated policy which
guides a unified government based on collective responsibility.
But having made a partition of governmental work, dyarchy
must be said to have introduced an element of divided
responsibility in the Executive. It is true that the partition is
not horizontal but vertical. It is also true that in setting the
two parts to work it has not been provided that there should
be two separate Legislatures for two separate executives ; or
that each should make its own laws, control its own finance,
frame its own budget, impose its own taxation, and raise its
own loans ; or that each should have its separate staff for
the administration of subjects allotted to it and have its own
methods of recruitment, pay and pension for its services ; so
that the two authorities might in fact have clearly defined
spheres of their own exclusively within them. The Government
of India had indeed suggested that some, if not all, of these
concomitants of a typically dual executive should also be
made a part of the dyarchical system adopted to carry on the
government of the Provinces. Fortunately for the country the
framers of the new constitution held1
“that wisdom lies not in equipping each of the different
elements with a complete paraphernalia of its own, and
trusting to their orbits lying sufficiently apart for collision
to be avoided; but in taking every opportunity of bringing
the two elements into contact sc as to induce the habits
of joint action.” “It is our intention,” wrote the authors of
the Joint Report,2 “that the Government thus composed and
with this distinction of functions shall discharge them as
one Government,” and that “the Provincial budget should
be framed by the Executive Government as a whole.”3
It was no doubt well to have modified the working of dyarchy
by subjecting it to the interplay of two principles, one of division
in order to give as clear a definition as possible of the several
1
Joint Report, p. 199. 2
Ibid, p. 180. 3
Ibid, p. 207.
responsibilities of the two parts of the government and of

union, in order to get association in aims and policy between
those parts. For to have equipped each part of the Executive
with a separate paraphernalia would have been nothing short
of a calamity. But because there is an understanding that
when ministers will act in matters of transferred subjects the
councillors will advise them, and that when councillors will
act in matters of reserved subjects the ministers will advise
them, it does not alter the fact that dyarchy is a system
of divided responsibility. It is not a system which ensures
the work of government being conducted in harmony and
in accordance with a common policy. On the other hand, it
is a system fraught with organized quarrel. The dividing
line between dyarchy and anarchy is very narrow. If such a
system is not rent in practice it is because of two transient
circumstances. One such circumstance consists in the
Provincial Legislature being a weakling sapped of its vitality
by political dissensions. The other consists in the tenure of
the Ministers not being at the will of the Legislature, but for
the duration of the Legislature’s existence, and are to hold
office during the pleasure of the governor. To allow a governor
to choose ministers from among the elected members of the
Legislature instead of requiring him to accept ministers who
are elected by the Legislature is a grave derogation from the
principle of responsible government which was avowedly the
object of the Reforms Act. A minister who has the confidence
of the governor, and a minister who has the confidence of the
Legislature, are two entirely different things. How great is
the difference between the two in so far as good government
is concerned is writ large in the pages of English political
history of the eighteenth and the nineteenth centuries. That
such a system should have been adopted against which the
whole English constitutional history is a grand protest cannot
of course be without some reason. The ostensible reason
advanced1 is that the Legislature
“had had no experience of the power of dismissing
Ministers, or the results attending the exercise of such power.
Nobody in India is yet familiar with the obligations imposed
by tenure of office at the will of a representative assembly.
It is only by actual experience that these lessons can be
1
learned ....... By the device of appointing the ministers

from the elected members of the (Legislature) and making
their tenure of office conditional on the retention of
their seats (there is) established at once some measure
of responsibility, in the form of responsibility to their
constituents and thus (is) put an end to the condition of
affairs in which those entrusted with the administration
are wholly irresponsible to the constituents who elect the
(Legislature).”
It is difficult to believe in the cogency of this piece of
reasoning. To argue that nothing can be learned without
experience is simply absurd. What is necessary for a proper
conduct on the part of an individual or a group is to understand
the meanings and values of things. For that it is unnecessary
to undergo actual trial. A Legislature composed of responsible
persons may be trusted to know the consequences of dismissing
a Minister at the start without having to wait to learn it
by experience. Again, to argue that the system is not the
less responsible because ministers are responsible to their
constituents is a shallow piece of pedantry. It was no doubt
argued by Austin, in connection with the English Constitution,
that the House of Commons was “ merely trustee for the body
by which they are elected and appointed.” It is true that in a
political sense the electors are the most important part of, we
may even say, are actually, the Sovereign power, since their
will is under every representative system of government sure
to obtain ultimate obedience. But as Prof. Dicey points out,2
“any expressions which attribute to Parliamentary
electors a legal part in the process of law-making are
quite inconsistent with the view taken by the law of the
position of an elector The sole legal right of electors under
the English constitution (and the same is true under the
Indian constitution) is to elect members of Parliament.
Electors have no legal means of initiating, of sanctioning,
or of repealing the legislation of parliament. No court will
consider for a moment the argument that a law is invalid
as being opposed to the opinion of the electorate”:
and this exactly defines the status of the Indian electors. To
make the minister responsible to such a nonentity is to make him
1
Jurisprudence, Vol. I, 4th Ed., p. 253.
2
Law of the Constitution, 8th Ed., 1915, p. 57.
virtually irresponsible. That the framers of the constitution were

not alive to these considerations in suggesting this particular
mode of appointing Ministers it is hard to believe. What is
more probable is that this particular mode of appointing
ministers was adopted because it permitted to select a man
who was more likely to co-operate with those in charge of the
reserved subjects and who being irremovable by the Legislature
would be less swayed by its wishes. But the Ministers cannot
remain altogether immune from the axe of the Legislature.
The dangers of the position of a minister who has cultivated
friendship with the councillor and has failed to ingratiate
himself into the favour of the Legislature, cannot fail to come
home to him on budget occasions. The proposals of the minister
as embodied in the budget will be liable to be reversed by a
vote of the majority of the Legislature, but neither he himself
nor the governor will be able to intervene. The minister’s only
remedy will be to resign.
Anyhow these circumstances which have, so to say,
saved dyarchy from failure are only transitory. The political
dissensions may be no more than a passing phase, and the
ministers from the second term of the reformed Legislature will
become amenable to it: so that before long the forces may be
organized better than they are, when dyarchy is sure to fail.
Hybrid executives, divided responsibility, division of
functions, reservation of powers, cannnot make for a good
system of government, and where there is no good system
of government there can be little hope for a sound system
of finance. The primary solution is that there should be an
undivided government with a collective responsibility. That,
however, can be achieved only when the whole of government
derives its mandate from a common source. That such a
consummation should take place as early as possible is devoutly
to be wished. In that behalf it is encouraging to know that
dyarchy is but a transitional system. The only question is
how long and protracted will the period of transition be. The
justification for introducing a dyarchical form of government
rests on the supposition that India is at present ill-prepared
to sustain a system of responsible government in . anything
like completeness, for owing to the lack of education and
political experience, the Indian electorate will for some time be
unable either to formulate their requirements intelligently or
effectively impose a mandate upon their representatives, and

that owing to the inveterate social prejudices of the educated
classes there is a great danger of their abusing the political
power to exploit the masses. This cardinal fact, it was held,
must differentiate the degree and the kind of responsibility
which can be introduced at the outset from that which will be
the eventual resultant of the new system, and must impose
the obligation of ensuring that the forces which now hold the
people together are not completely withdrawn before satisfactory
substitutes are ready to take their place. On the other hand,
it has been urged1 that there is no necessity to wait till the
cardinal fact disappears ; for
“in all countries responsibility in the beginning has
been entrusted to a very small section of the people, and
government has been in the hands of a small educated
minority, who have naturally cared for the interests of
the uneducated masses pending the spread of education
and the consequent extension of the franchise.”
This is of course a familiar line of argument which is
usually put forth in India by the political radicals and social
tories. If we put aside the painful story of the harsh, cruel
and inhuman treatment which the classes in India have
accorded to the masses, truth is on their side, for in every
country there have been downtrodden communities suffering
from social oppression and social injustice, and yet no country
has had to be without political power on that account. But
those who use this argument forget that if other countries
like America with her Negroes and Japan with her Hitas are
in possession of political power without having first destroyed
social inequality, it is due to the fact of their having been in
possession of military power. Military force and moral force are
the two chief means to political freedom, and a country which
cannot generate the former must cultivate the latter. Thus in
India the political problem is entirely a social problem, and a
postponement of its solution virtually postpones the day when
India can have a free government subject to the mandate of
none but her own people.

1
Cf. the evidence of the Hon. V. J. Patel and Mr. Madhava Rao before the
Joint Select Committee on the Government of India Bill. House of Commons
Return 203 of 1919, p. 106.
INDEX
Accounts, Indian, mode of presentation : Budget by Shared Revenues, 1882-
199 1921 : 149 et seq.
Army Expenditure and Strength before Burke Edmund : 236
Mutiny : 80, 81 Burma :
Assam :
Financial Arrangements for: 149
Earthquake Relief Contributions : et seq.
167
Imperial special Grants-in-Aid,
Financial Arrangements for: 152 et
1897-1904: 168
seq.
Imperial special Grants-in-Aid, Permanent Settlement, 1912 : 177
1897-1904: 168 Quasi-permanent Settlement,
Quasi-permanent Settlement, 1904- 1907: 172
5: 171 Revision of Settlements, 1887-8:
Revision of Settlements, 1887-8: 160, 161 ; 1892-3: 162, 163;
160, 161, 162; 1892-3: 162, 163, 1896-7 : 164 et seq.; 1902-3 :
164 ; 1896-7: 164 et seq. 169
Surpluses and Deficits : 167 Cannan, Professor E.: 231 note
See also Eastern Bengal and Canning, Lord : 201, 230
Assam
Central Provinces :
Bengal :
Budget of 1877-8, analysis : 141
Budget of 1877-8, analysis : 139
Famine Relief Contributions,
Government Letter, January 1882 :
200 1896-7 : 164
Imperial special Grants-in-Aid, Financial Settlement, 1882-3: 153
1897-1904 : 167 et seq.
Permanent Settlements : 74, 177 Imperial special Grants-in-Aid,
Quasi-permanent Settlements, 1904- 1897-1904: 168
5: 172; 1906: 175 Permanent Settlement, 1912 : 177
Revision of Settlements, 1887-8: Quasi-permanent Settlement: 170
160, 161 ; 1892-3: 162, 163, 164; Revision of Settlements, 1887-8:
1896-7: 164 et seq. 160; 1892-3: 162, 163; 1896-7:
Shared Revenue Settlements, 1882- 164 et seq.
3: 153 et seq.
Chesney, Colonel: 97
Surpluses and Deficits : 167
Cladwell, Mr: 228 note
Bombay:
Budget of 1877-8, analysis : 142 Civil Service, Government of India
Imperial special Grants-in-Aid, Act, 1858, regulations : 233 note
1897-1904: 168 Colvin, Sir A.: 230 note
Permanent Settlements, 1912: 177 Cowell, Herbert: 66 note
Quasi-permanent Settlements, 1905- Criminal Law Amendment Act, 1908 :
6: 170 235
Revision of Settlements, 1887-8: Criticism of Administrative Changes
160, 161 ; 1892-3: 162, 163, 164; under Reforms Act, 1919: 282 et
1896-7: 164 et seq. seq.
Shared Revenue, Settlements: 1882- Customs and Excise:
3: 153 et seq.
Organization of yield from : 290,
Surpluses and Deficits : 167
291
Bryce, James : 225 note
Revenue, 1792-1817, Table: 77
Budget by Assignments, 1871-2 to 1876-
note
7: 112 et seq.
Budget by Assigned Revenues, 1877-82: Taxes under Imperial System : 75
131 et seq. et seq.
Decentralization in British India, Report llbert, Sir Courtenay : 238

of Royal Commission, 1908 : 71 note, Imperial System of Finance :
178, 199 note, 201, 216 note, 217 note, Act of 1833:68
218 note, et seq. Deficits 1834-46, Table : 72
Devolution Rules, Government of India Derangement of Finances, 1866-70,
Act, 1919 : 299 et seq. Table: 110
Dicey, A. V.: 233 note, 306 Federalism v. Imperialism :89 et. seq.
Disraeli, Benjamin: 72 Irresponsibility of Provincial
Durand, General, the Hon.: 99 Governments: 85 et. seq., 89 et.
Dyarchy in India, effects of: 296, 303, 307 seq.
Dyer, General: 228 Origin and breakdown of : 65 et seq.
East India’s Company’s Affairs : Provincial Contributions to : 199
Committees, 1813 and 1852 : 77, 211 Revenues and Services under: 70 et.
note seq.
Secret Committee, 1771 : 66 Revision of Machinery : 100 et seq.
Eastern Bengal and Assam : Imperial Government:
Formation of Province and Financial relations with Provincial
Financial Settlement, 1906: 175 Governments : 196, 197
Permanent Settlement, 1912 : 180 Limitations and restrictions: 213 et.
See also Assam. seq.
Ellenborough Lord : 86 Import tariffs, Imperial system : 77
Famine and Plague Relief Contributions : Income Tax Act, 1860 : 105
164, 166 Indian Constitution, characteristics of: 226
Federalism in India: Indian Constitutional Reforms Committee,
Opposition to : 179 1918 : 216 note
Origin of Movement: 89 et seq., Indian Councils Act: 125
103, 104, 204 Indian Executive :
Financial changes under Government of Changes in Government, demand
India Act, Criticism of : 282 et seq. for: 225 et seq.
Finlay, J. F. : 89 note Fisher, H.A.L.: Relations with Indian Legislature :
227 note 237
Fowler, R. N.: 228 note Frere, Sir Bartle : Repressive Legislation:
105 note Indian Expenditure:
Ghose, N.: 234 note, 235 note Gokhale, Percentage, 1877-8 to 1916-7, Table:
Mr.: 281 235
Government of India Act, 1919: 225, 244, Royal Commission on : 197, 198 note
255 et seq. Services, Military and Civil, 1809-15,
Changes in Provincial Constitution Table: 81, 82
and Powers : 245 et seq. Indian Legislature, Constitution and
Devolutions and Adjustments : 255 Powers : 237 et seq.
et seq. Indian National Congress, Reforms
Report of Committee on the Bill, Scheme, 1918: 241, 245
1919: 245 note lyengar, Sir Bhashyam : 226 note
Report of Financial Relations Jenkins, Sir Lawrence C. J.: 235 note
Committee, 1919 : 267 et seq. Kelkar, N. C. : 226 note
Report of Committee (Revision of Laing.S. : 101, 105
Draft Rules), 1920: 273 Lal, Hon. Rai Bahadur Bakshi Sohan :
Halsbury, Lord : 233 note 268 note
Hastings, Warren : 229 note Land Revenue:
Hearn, S.: 303 Inequities: 231
Hobart, Lord: 210 note Provincial assessments : 113
Home Rule Demands in India : 284 et seq. Revenue, 1792-1817, Table : 74 note
Houghtom, Bernard : 234 note Taxes under Imperial Finance
Hunter, W. W. : 7 note, 110 note system: 73
INDEX 311
Lawrence, Lord : 94, 102, 109, 290 Home Rule demands : 234, 235
Local Finance before 1870 : 185 Lord Morley on : 289
Local Government Borrowing, Patel, Hon. V. J.: 308 note
Rules under Government of India Patwari Rate, Ajmere, reduction of: 167
Act, 1919: 278 Permanent Settlements in Provincial
Local Taxation, Royal Commission, 1899: Finance : 177, 290
216 note Plague and Famine Relief Contributions :
Logan, A. C.: 219 note 164, 167
Low, Sir Sidney : 225 note Pretyman, Captain : 206 note
Madhava Rao, Mr.: 308 note Provincial Executive and Provincial
Legislature, relations between : 296,
Madras:
297
Divested of Responsible Government:
Provincial Finance:
68
Budgets, 1877-8, analysis of : 137 et
Financial Settlement, 1882-3: 153 et seq.
seq. Budget by Assignment, 1870-2,
Imperial special Grants-in-Aid, 1897- Tables: 115, 116, 117, 118, 121,
1904: 167 122, 123 et seq.
Permanent Settlement, 1912,: 177 Budget by Assigned Revenues, 1877-
Quasi-permanent Settlement, 1904-5: 82, 131 et seq.
170, 174 Budget by Shared Revenues : 149 et
Revision of Settlements, 1887-8: 160, seq.
161 ; 1892-3: 162; 1896-7: 164 et Budget, 1921-2, initial standard
seq. contributions to deficit: 273 etseq.
Mansfield, Sir W. R.: 89 note Budgets of each Province since
Martin, M.: 75 note Reforms Act: 287
Massey, Mr.: 101, 106, 107, 109 note Constitution of, 1870-1 : 118
Mayo, Lord: 110, 111, 112 Contributions to Imperial
Government, 1871-1913: 199 Table
Meston, J. S.: 215 note
Development of : 112 et seq.
Minto, Lord : 226 note, 246
Economy of Management: 132
Montague-Chelmsford Report on
Enlargement of Scope : 213 et seq.
constitutional reforms, 1919 : 245
Expenditure in Imperial Services : 115
Morley, Lord : 239, 240 note, 246
Famine and Plague Relief: 167
Moturpha Tax : 78
Financial Settlements, 1882-3 :153 et
Napier of Merchiston, Lord : 96, 109 seq.
Native Indians: General Results : 127 et seq., 145 et
Civil Service Employment: 82, 83, seq.
233 note Government of India Act, see that
Imperial System, charges : 82 title
Northcote, Sir Stafford : 109 note, 290 Growth of 1871-2 to 1918-19, Table :
North-Western Provinces and Oudh : 182
Budget, 1877-8, analysis : 137, 138 Imperial Government’s Donation,
Famine Relief Contributions : 164 1870-1 : 118
Financial Settlements, 1882-3 : 153 Imperial Grants-in-Aid, 1904-12: 177;
et seq. 1912-19: 180
Imperial Special Grants-in-Aid, 1897- Imperial special Grants-in-Aid, 1897-
1904: 168
1904 : 168
Incorporated Services, Receipts from :
Permanent Settlement, 1912 : 177
134
Revision of Settlements, 1887-8: 160,
Limitations in : 183 et seq.
161 ; 1892-3: 163; 1896-7: 164 et
Local finance as distinguished from :
seq.
183, 184
Surpluses and Deficits, 119
Modifications in Assignments : 120
Pandhari Tax, abolition of: 167 Nature of the system : 196 et seq.
Parliamentary Government in India : Normal yield, adjustment of: 135 et
Empty form of: 225 et seq. seq.
Permanent Settlements, 1912 : 177, Salt Tax : 78, 230

290 et seq. Sayani, Hon. Mr.: 202
Quasi-permanent Settlements, Secretary of State for India, position
1904-5 : 170 et seq. and policy of: 227
Receipts from Now Resources, Seligman, Professor E.R.A. : 282, 284,
1870-76, Table : 129
Smith Adam: 75
Revenue and Charges,
management of: 103 et seq. Strachey, Col. R. : 89 note, 107 note
Revenues, 1921-3, Tables : 294, 295 Strachey, Sir John : 85 note, 102 note,
Revision of Settlements ; 1887-8 : 133, 135
160 et seq.; 1892-3 :162 ; 1896- State Prisoners Regulation Acts, 1850
7 : 164; 1902-3: 169 and 1858:235
Rules governing, 1870-1912: 186 Sykes, Col.: 80
et seq.
Surpluses and Deficits, 1871- Tariffs:
7 :186 ; 1882-7: 159; 1887-92: Resolutions against Indian Tariffs,
162; 1892-7: 232; 1897-1904:
1877-9: 228 note
169; 1904-12: 177; 1912-19 : 181
Customs Duties, see Customs and
Public Meetings, suppression : 235
Excise
Public Works :
Taxation :
Charges and Revenues, 1870 : 55
Growth of: 102
Outlay, 1837-46, Table: 91
Promotion of: 105 Industrial, under Imperial System :
Road Grants, 1870 : 109 75, 78 Inequities in : 230 et seq.
Punjab : Land Revenue, see that title
Budget, 1877-8, analysis : 144 Moturpha Tax : 78
Imperial special Grants-in-Aid, Pandhri Tax abolished : 167
1897-1904 : 168 Provincial Finance, increases
Permanent Settlement, 1912 : 177 under: 129
Quasi-permanent Settlement, 1905- Salt Tax : 78, 230
6: 173 Schedule Taxes, Rules under
Revision of Settlement, 1887-8 : Reform Act, 1919:278 et seq.
160, 161 ; 1892-3: 162 Table of Taxes levied : 79
Shared Revenue Settlement, 1904- Temple, Sir Richard : 94 note
5: 172
Town and Transit Duties : 75
Territorial Revision : 170
Trevelyan, Mr.: 75 note
Raddi, Rai Bahadur K. V. : 272 note
Redlich, J.: 240 note Urdhal, Professor: 223 note
Reform of Indian Constitution : United Provinces of Agra and Oudh :
Declaration by Secretary of Formation of : 170
State, August 1917:243,245 Permanent Settlement 1912 : 177
Government of India Act, see that Quasi-permanent Settlement, 1904-
title 5: 170 et seq., 174
Morley-Minto Reforms, 1909: 246,
253
Venkatramaiah, Y. : 183 note
Popular demand for: 225 et seq.
Vineberg : 298 note
Reports and Returns, 1918-19 : 241
note, 249 note, 266 note
Reports of Committees, 1919 : 245, Webb, S. : 179 note
267 note, 269 note Westland, Sir James : 202
Rules governing Provincial Wilson, James: 101, 105, 296
Finance, 1870-1912: 185 et seq. Wood, Sir Charles : 290

THE ECONOMIC JOURNAL

THE JOURNAL OF THE ROYAL
ECONOMIC SOCIETY
Edited By : J. M. KEYNES AND D. H. MACGREGOR
VOLUME XXXVI
London, MACMILLAN AND CO., Limited,

New York, The macmillan Company,
1926
REVIEW : Page 111

The Evolution of Provincial Finance in British
India by B.R. Ambedkar (London : P.S. King &
Sons. pp. xxi plus 285, 15 s)
Of this group only two pretend to add anything new to

our knowledge of India, the rest are rather text-books for
Indian students. Mr. Ambedkar has the facility of making
forbidding subjects attractive and has produced a very
readable book. Provincial finance in India has so far been
almost entirely neglected by writers on finance and little or
nothing has been published apart from Government Blue
Books and memoranda. The Evolution of Provincial Finance in
British India is a useful introduction written rather from the
historical point of view. It does not pretend to be exhaustive
and is essentially a piece of pioneer work. There are four
parts. Part I traces the history from 1833 up to 1873, when
a new regime was begun. Centralisation having proved a
failure, the opponents of the system wished “ to make the
Local Governments partners in the great joint stock of Indian
Finances...... instead of keeping them on the footing of agents
and servants,” thus anticipating the present reforms. Opposition,

however, was too strong, and as usual the solution was a
compromise, details of which are given in Part II. Various
methods are described, such as “Budget by Assignments”,
“Budget by Assigned Revenues,” and “Budget by Shared
Revenue.” None succeeded in giving the desired results. Part III
is analytical, and is an attempt to that, whatever the financial
relationship between the Provincial and Central Governments,
the former were never in law or fact independent but were
closely regulated. It is an interesting piece of work, but does
not appear to be so fundamentally important as the author
seems to think. Part IV is devoted to finance since the
introduction of the new reforms. The treatment here is not
so good, probably because the space allotted to it is too small
and the subject very complex. The conclusion drawn is that
good finance cannot be expected under the present dyarchical
system of government. Certainly it will be difficult.
The author is to be congratulated upon the impartial way
in which he has discussed an eminently controversial subject.
W. S. THATCHER
Book 3
BLANK
THE PROBLEM
OF THE RUPEE
ITS ORIGIN AND ITS SOLUTION
B. R. AMBEDKAR
Sometime Professor of Political Economy at the Syden-
ham College of Commerce and Economics, Bombay.
LONDON
P. S. KING & SON, LTD.
ORCHARD HOUSE, 2 & 4 GREAT SMITH STREET
WESTMINSTER
1923
Facsimile of the title page and its reverse

DEDICATED
TO THE MEMORY OF
MY
FATHER AND MOTHER
AS A TOKEN OF MY ABIDING GRATITUDE FOR THE
SACRIFICES THEY MADE AND THE ENLIGHTENMENT
THEY SHOWED IN THE MATTER OF MY EDUCATION.
Printed in Great Britain by Butler & Tanner Ltd., Frame and London
z:\ ambedkar\vol-06\vol6-05.indd MK SJ+YS 25-9-2013 319
HISTORY OF INDIAN
CURRENCY & BANKING
BLANK
HISTORY OF INDIAN
CURRENCY & BANKING
By
B. R. Ambedkar
Sometime Professor of Political Economy at the Sydenham
College of Commerce and Economics, Bombay.
[Reprint of the edition of 1947]

DEDICATED
TO THE MEMORY OF
MY
FATHER AND MOTHER
AS A TOKEN OF MY ABIDING GRATITUDE FOR THE
SACRIFICES THEY MADE AND THE ENLIGHTENMENT
THEY SHOWED IN THE MATTER OF MY EDUCATION.
PREFACE TO THE SECOND IMPRESSION
THE PROBLEM OF THE RUPEE was first published in

1923. Ever since its publication it has had a great demand :
so great that within a year or two the book went out of print.
The demand for the book has continued, but unfortunately I
could not bring out a second edition of the book for the reason
that my changeover from economics to law and politics left me
no time to undertake such a task. I have, therefore, devised
another plan : it is to bring out an up-to-date edition of the
History of Indian Currency and Banking in two volumes, of
which The Problem of the Rupee forms volume one. Volume
two will contain the History of Indian Currency and Banking
from 1923 onwards. What is therefore issued to the public
now is a mere reprint of The Problem of the Rupee under a
different name. I am glad to say that some of my friends who
are engaged in the field of teaching economics have assured
me that nothing has been said or written since 1923 in the
field of Indian Currency which calls for any alteration in the
text of The Problem of the Rupee as it stood in 1923. I hope
this reprint will satisfy the public partially if not wholly. I
can give them an assurance that they will not have to wait
long for volume two. I am determined to bring it out with the
least possible delay.
B. R. AMBEDKAR
Rajagraha,
Bombay,
7-5-1947.
BLANK
CONTENTS
CHAP. PAGE
PREFACE TO THE SECOND IMPRESSION 323
AUTHOR’S PREFACE 327
FOREWORD BY PROFESSOR EDWIN CANNAN 331
I FROM A DOUBLE STANDARD TO A SILVER STANDARD 335

II THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY 378
III THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY 415
IV TOWARDS A GOLD STANDARD 445
V FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD 487
VI STABILITY OF THE EXCHANGE STANDARD 502
VII A RETURN TO THE GOLD STANDARD 563
BLANK
PREFACE TO THE FIRST EDITION

In the following pages I have attempted an exposition of the
events leading to the establishment of the exchange standard
and an examination of its theoretical basis.
In endeavouring to treat the historical side of the matter,
I have carefully avoided repeating what has already been said
by others. For instance, in treating of the actual working of
the exchange standard, I have contented myself with a general
treatment just sufficiently detailed to enable the reader to follow
the criticism I have offered. If more details are desired they
are given in all their amplitude in other treatises. To have
reproduced them would have been a work of supererogation ;
besides it would have only obscured the general trend of my
argument. But in other respects, I have been obliged to take
a wider historical sweep than has been done by other writers.
The existing treatises on Indian currency do not give any idea,
at least an adequate idea, of the circumstances which led to the
reforms of 1893. I think that a treatment of the early history
is quite essential to furnish the reader with a perspective in
order to enable him to judge for himself the issues involved in
the currency crisis and also of the solutions offered. In view
of this, I have gone into that most neglected period of Indian
currency extending from 1800 to 1893. Not only have other
writers begun abruptly the story of the exchange standard, but
they have popularized the notion that the exchange standard
is the standard originally contemplated by the Government
of India. I find that this is a gross error. Indeed, the most
interesting point about Indian currency is the way in which
the gold standard came to be transformed into a gold exchange
standard. Some old, but by now forgotten, facts had therefore,
to be recounted to expose this error.
On the theoretical side, there is no book but that of Professor
Keynes which makes any attempt to examine its scientific basis.
But the conclusions he has arrived at are in sharp conflict

with those of mine. Our differences extended to almost
every proposition he has advanced in favour of the exchange
standard. This difference proceeds from the fundamental fact,
which seems to be quite overlooked by Professor Keynes, that
nothing will stabilize the rupee unless we stabilize its general
purchasing power. That the exchange standard does not do.
That standard concerns itself only with symptoms and does
not go to the disease : indeed, on my showing, if anything, it
aggravates the disease.
When I come to the remedy, I again find myself in conflict
with the majority of those who like myself are opposed to the
exchange standard. It is said that the best way to stabilize
the rupee is to provide for effective convertibility into gold. I
do not deny that this is one way of doing it. But, I think, a
far better way would be to have an inconvertible rupee with a
fixed limit of issue. Indeed, if I had any say in the matter, I
would propose that the Government of India should melt the
rupees, sell them as bullion and use the proceeds for revenue
purposes and fill the void by an inconvertible paper. But that
may be too radical a proposal, and I do not therefore press
for it, although I regard it as essentially sound. In any case,
the vital point is to close the Mints, not merely to the public,
as they have been, but to the Government as well. Once that
is done, I venture to say that the Indian currency, based on
gold as legal tender with a rupee currency fixed in issue, will
conform to the principles embodied in the English currency
system.
It will be noticed that I do not propose to go back to the
recommendations of the Fowler Committee. All those, who
have regretted the transformation of the Indian currency
from a gold standard to a gold exchange standard, have
held that everything would have been all right if the
Government had carried out in toto the recommendations
of that Committee. I do not share that view. On the other
hand, I find that the Indian currency underwent that
transformation because the Government carried out those
recommendations. While some people regard that Report as
PREFACE 329
classical for its wisdom, I regard it as classical for its nonsense.

For I find that it was this Committee which, while recommending
a gold standard, also recommended and thereby perpetuated
the folly of the Herschell Committee, that Government should
coin rupees on its own account according to that most naive
of currency principles, the requirements of the public, without
realizing that the latter recommendation was destructive of
the former. Indeed, as I argue, the principles of the Fowler
Committee must be given up, if we are to place the Indian
currency on a stable basis.
I am conscious of the somewhat lengthy discussions on
currency principles into which I have entered in treating the
subject. My justification of this procedure is two-fold. First of
all, as I have differed so widely from other writers on Indian
currency, I have deemed it necessary to substantiate my view-
point, even at the cost of being charged with over-elaboration.
But it is my second justification, which affords me a greater
excuse. It consists in the fact that I have written primarily for
the benefit of the Indian public, and as their grasp of currency
principles does not seem to be as good as one would wish it
to be, an over-statement, it will be agreed, is better than an
understatement of the argument on which I have based my
conclusions.
Up to 1913, the Gold Exchange Standard was not the
avowed goal of the Government of India in the matter of
Indian Currency, and although the Chamberlain Commission
appointed in that year had reported in favour of its
continuance, the Government of India had promised not to
carry its recommendations into practice till the war was over
and an opportunity had been given to the public to criticize
them. When, however, the Exchange Standard was shaken
to its foundations during the late war, the Government of
India went back on its word and restricted, notwithstanding
repeated protests, the terms of reference to the Smith
Committee to recommending such measures as were calculated
to ensure the stability of the Exchange Standard, as though
that standard had been accepted as the last word in the
matter of Indian Currency. Now that the measures of the Smith

Committee have not ensured the stability of the Exchange
Standard, it is given to understand that the Government, as
well as the public, desire to place the Indian Currency System
on a sounder footing. My object in publishing this study at
this juncture is to suggest a basis for the consummation of
this purpose.
I cannot conclude this preface without acknowledging my
deep sense of gratitude to my teacher, Prof. Edwin Cannan, of
the University of London (School of Economics). His sympathy
towards me and his keen interest in my undertaking have
placed me under obligations which I can never repay. I feel
happy to be able to say that this work has undergone close
supervision at his hands, and although he is in no way
responsible for the views I have expressed. I can say that his
severe examination of my theoretic discussions has saved me
from many an error. To Professor Wadia, of Wilson College,
I am thankful for cheerfully undertaking the dry task of
correcting the proofs.

FOREWORD
By Professor Edwin Cannan
I am glad that Mr. Ambedkar has given me the opportunity

of saying a few words about his book.
As he is aware, I disagree with a good deal of his criticism.
In 1893, I was one of the few economists, who believed that the
rupee could be kept at a fixed ratio with gold by the method
then proposed, and I did not fall away from the faith when
some years elapsed without the desired fruit appearing (see
Economic Review, July 1898, pp. 400—403). I do not share
Mr. Ambedkar’s hostility to the system, nor accept most of
his arguments against it and its advocates. But he hits some
nails very squarely on the head, and even when I have thought
him quite wrong, I have found a stimulating freshness in his
views and reasons. An old teacher like myself learns to tolerate
the vagaries of originality, even when they resist “severe
examination” such as that of which Mr. Ambedkar speaks.
In his practical conclusion, I am inclined to think, he is right.
The single advantage, offered to a country by the adoption of
the gold-exchange system instead of the simple gold standard,
is that it is cheaper, in the sense of requiring a little less value
in the shape of metallic currency than the gold standard. But
all that can be saved in this way is a trifling amount, almost
infinitesimal, beside the advantage of having a currency more
difficult for administrators and legislators to tamper with. The
recent experience both of belligerents and neutrals certainly
shows that the simple gold standard, as we understood it before
the war, is not fool-proof, but it is far nearer being fool-proof and
knave-proof than the gold-exchange standard. The percentage
of administrators and legislators who understand the gold
standard is painfully small, but it is and is likely to remain ten

or twenty times as great as the percentage which understands
the gold-exchange system. The possibility of a gold-exchange
system being perverted to suit some corrupt purpose is very
considerably greater than the possibility of the simple gold
standard being so perverted.
The plan for the adoption of which Mr. Ambedkar pleads,
namely that all further enlargement of the rupee issue should
be permanently prohibited, and that the mints should be open
at a fixed price to importers or other sellers of gold, so that in
course of time India would have, in addition to the fixed stock
of rupees, a currency of meltable and exportable gold coins,
follows European precedents. In eighteenth-century England
the gold standard introduced itself because the legislature
allowed the ratio to remain unfavourable to the coinage of
silver: in nineteenth-century France and other countries it
came in because the legislatures definitely closed the mints to
silver, when the ratio was favourable to the coinage of silver.
The continuance of a mass of full legal tender silver coins
beside the gold would be nothing novel in principle, as the
same thing, though on a somewhat smaller scale, took place
in France, Germany, and the United States.
It is alleged sometimes that India does not want gold
coins. I feel considerable difficulty in believing that gold coins
of suitable size would not be convenient in a country with
the climate and other circumstances of India. The allegation
is suspiciously like the old allegation that the “ Englishman
prefers gold coins to paper,” which had no other foundation
than the fact that the law prohibited the issue of notes for less
than £ 5 in England and Wales, while in Scotland, Ireland,
and almost all other English-speaking countries, notes for £ 1
or less were allowed and circulated freely. It seems much more
likely that silver owes its position in India to the decision,
which the Company made before the system of standard gold
and token silver was accidentally evolved in 1816 in England,
and long before it was understood, and that the position has
been maintained, not because Indians dislike gold, but because
FOREWORD 333
Europeans like it so well that they cannot bear to part with

any of it.
This reluctance to allow gold to go to the East is not only
despicable from an ethical point of view. It is also contrary to
the economic interest not only of the world at large, but even
of the countries, which had a gold standard before the war
and have it still or expect soon to restore it. In the immediate
future, gold is not a commodity, the use of which it is desirable
for these countries either to restrict or to economize. From the
closing years of last century it has been produced in quantities
much too large to enable it to retain its purchasing power and
thus be a stable standard of value, unless it can constantly be
finding existing holders willing to hold larger stocks, or fresh
holders to hold new stocks of it. Before the war, the accumula-
tion of hoards by various central banks in Europe took off a
large part of the new supplies and prevented the actual rise
of general prices being anything like what it would otherwise
have been, though it was serious enough. Since the war, the
Federal Reserve Board, supported by all Americans who do
not wish to see a rise of prices, has taken on the new “White
Man’s Burden” of absorbing the products of the gold mines, but
just as the United States failed to keep up the value of silver
by purchasing it, so she will eventually fail to keep up the
value of gold. In spite of the opinion of some high authorities,
it is not at all likely that a renewed demand for gold reserves
by the central banks of Europe will come to her assistance.
Experience must gradually be teaching even the densest of
financiers that the value of paper currencies is not kept up by
stories of “cover” or “backing” locked up in cellars, but by due
limitation of the supply of the paper. With proper limitation,
enforced by absolute convertibility into gold coin which may
be freely melted or exported, it has been proved by theory and
experience that small holdings of gold are perfectly sufficient
to meet all internal and international demands. There is really
more chance of a great demand from individuals than from the
banks. It is conceivable that the people of some of the countries,
which have reduced their paper currency to a laughing stock,
may refuse all paper and insist on having gold coins. But it
seems more probable that they will be pleased enough to get
better paper than they have recently been accustomed to, and
will not ask for hard coin with sufficient insistence to get it. On
the whole, it seems fairly certain that the demand of Europe
and European-colonized lands for gold will be less rather than
greater than before the war, and that it will increase very
slowly or not at all.
Thus, on the whole, there is reason to fear a fall in the value
of gold and a rise of general prices rather than the contrary.
One obvious remedy would be to restrict the production of
gold by international agreement, thus conserving the world’s
resources in mineral for future generations. Another is to
set up an international commission to issue an international
paper currency so regulated in amount as to preserve an
approximately stable value. Excellent suggestions for the
professor’s classroom, but not, at present at any rate nor
probably for some considerable period of time, practical politics.
A much more practical way out of the difficulty is to be
found in the introduction of gold currency into the East. If the
East will take a large part of the production of gold in the
coming years, it will tide us over the period which must elapse
before the most prolific of the existing sources are worked out.
After that we may be able to carry on without change or we
may have reached the possibility of some better arrangement.
This argument will not appeal to those who can think of
nothing but the extra profits which can be acquired during a
rise of prices, but I hope it will to those who have some feeling
for the great majority of the population, who suffer from these
extra and wholly unearned profits being extracted from them.
Stability is best in the long run for the community.
EDWIN CANNAN
CHAPTER I
FROM A DOUBLE STANDARD TO
A SILVER STANDARD
Trade is an important apparatus in a society, based on
private property and pursuit of individual gain ; without
it, it would be difficult for its members to distribute the
specialized products of their labour. Surely a lottery or an
administrative device would be incompatible with its nature.
Indeed, if it is to preserve its character, the only mode for the
necessary distribution of the products of separate industry is
that of private trading. But a trading society is unavoidably
a pecuniary society, a society which of necessity carries on
its transactions in terms of money. In fact, the distribution is
not primarily an exchange of products against products, but
products against money. In such a society, money therefore
necessarily becomes the pivot on which everything revolves.
With money as the focusing-point of all human efforts, interests,
desires and ambitions, a trading society is bound to function
in a regime of price, where successes and failures are results
of nice calculations of price-outlay as against price-product.
Economists have no doubt insisted that “there cannot... be
intrinsically a more significant thing than money,” which at
best is only “a great wheel by means of which every individual
in society has his subsistence, conveniences and amusements
regularly distributed to him in their proper proportions.”
Whether or not money values are the definitive terms of
economic endeavour may well be open to discussion.* But this
much is certain, that without the use of money this “distribution
of subsistence, conveniences and amusements,” far from being a
matter of course, will be distressignly hampered, if not altogether
suspended. How can this trading of products take place without
* Cf. W. C. Mitchell. “The Rationality of Economic Activity,” Journal of Political
Economy, 1910, Vol. XVIII, pp. 97 and 197; also “The Role of Money in Economic
Theory,” by the same, in the American Economic Review (Supplement), Vo. VI,
No. 1, March 1916.
money ? The difficulties of barter have ever formed an

unfailing theme with all economists, including those who
have insisted that money is only a cloak. Money is not only
necessary to facilitate trade by obviating the difficulties
of barter, but is also necessary to sustain production by
permitting specialization. For, who would care to specizlize
if he could not trade his products for those of others which
he wanted ? Trade is the handmaid of production, and where
the former cannot flourish the latter must languish. It is
therefore evident that if a trading society is not to be out
of gear and is not to forego the measureless advantages
of its automatic adjustments in the great give-and-take of
specialized industry, it must provide itself with a sound
system of money.*
At the close of the Moghul Empire, India, judged by
the standards of the time, was economically an advanced
country. Her trade was large, her banking institutions
were well developed, and credit played an appreciable
part in her transactions. But a medium of exchange and
a common standard of value were among others the most
supreme desiderata in the economy of the Indian people
when they came, in the middle of the eighteenth century,
under the sway of the British. Before the occurrence of
this event, the money of India consisted of both gold and
silver. Under the Hindu emperors the emphasis was laid
on gold, while under the Mussalmans silver formed a
large part of the circulating medium.† Since the time of
Akbar, the founder of the economic system of the Moghul
Empire in India, the units of currency had been the
gold mohur and the silver rupee. Both coins, the mohur
and the rupee, were identical in weight, i.e., 175 grs.
troy‡ and were “supposed to have been coined without
any alloy, or at least intended to be so.”§ But whether
they constituted a single standard of value or not is a
matter of some doubt. It is believed that the mohur and
the rupee, which at the time were the common measure
* For the whole of this discussion, cf. H. J. Davenport, The Economics of
Enterprise (1913), Chapters II and III.
† Princep, J., Useful Tables, Calcutta, 1834, pp. 15-16.
‡ Robert Chalmers, History of Colonial Currency, 1893, pp. 336, 340.
§ Dr. P. Kelly The Universal Cambist, 1811, p. 115.
FROM A DOUBLE STANDARD TO A SILVER STANDARD 337
of value, circulated without any fixed ratio of exchange between

them. The standard, therefore, was more of the nature of what
Jevons called a parallel standard* than a double standard† That
this want of ratio could not have worked without some detriment
in practice is obvious. But it must be noted that there existed
an alleviating circumstance in the curious contrivance by which
the mohur and the rupee, though unrelated to each other, bore
a fixed ratio to the dam, the copper coin of the Empire.‡ So that
it is permissible to hold that, as a consequence of being fixed to
the same thing, the two, the mohur and the rupee, circulated
at a fixed ratio.
In Southern India, to which part the influence of the Moghuls
had not extended, silver as a part of the currency system was
quite unknown. The pagoda, the gold coin of the ancient Hindu
kings, was the standard of value and also the medium of exchange,
and continued to be so till the time of the East India Company.
The right of coinage, which the Moghuls always held as
Inter jura Majestatis, § be it said to their credit, was exercised
with due sense of responsibility. Never did the Moghul
Emperors stoop to debase their coinage. Making allowance for
the imperfect technology of coinage, the coins issued from the
various Mints, situated even in the most distant parts of their
Empire¶, did not materially deviate from the standard. The table
* Money and Mechanism of Exchange (1890), p. 95.
† Dr. P. Kelly’s view is that they circulated at their market ratio (loc. cit.).
On the other hand, Sir R. Temple says : “In ancient and mediaeval India the
relative value of the coins of each metal was fixed by the State, and all were legal
tender virtually without any formal limitation” (“General Monetary Practice in
India,” Journal of the Institute of Bankers, Vol. II, p. 406). On another occasion
he said :” The earliest Hindu currency was in gold with a single standard. The
Mohammendans introduced silver, and in later times up to British rule there
was a double standard, gold and silver” (ibid., Vol. XV, p. 9). In contrast to this
it may be noted that the Preamble to Currency Regulations XXXV of 1793 and
other Currency Regulations of early date make it a point to emphasize that under
pre-British regime there was no fixed ratio between the mohur and the rupee.
‡ Cf. Prof. S. V. Venkateswara, on “Moghul Currency and Coinage” in the
Indian Journal of Economics, July, 1918, p. 169; and F. Atkinson, The Indian
Currency Question (1894), p. 1.
§ According to the Mohammedan historian, Khafi Khan, it enraged the Emperor
Aurangzeb when the East India Company in 1694 coined some rupees at Bombay
“with the name of their impure king” (Imperial Gazetteer of India, Vol. IV, p. 515).
¶ It is stated in the Imperial Gazetteer of India (Vol. IV., p. 514), that in the
early days of the Moghul rule, there was only one Mint—at Delhi—which struck
the Imperial coins. The Emperor Sher Sha was the first to introduce a plurality
of Mints for coniage purposes—a practice continued and extended by the later
emperors until between the reigns of Akbar and Bahadur Shah II the Mints
numbered about 200. From the East India Moral and Material Progress Report
for 1872-73 it is clear that not every Mint was open to the coinage of all three
metals, gold, silver and copper; but that some Mints coined only gold, others
silver, and the rest copper; (see Report, pp. 11-12).
below of the assays of the Moghul rupees shows how the

coinage throughout the period of the Empire adhered to the
standard weight of 175 grs. pure.*
Weight Weight
Name of the Rupee in pure Name of the Rupee in pure
Grs. Grs.
Akbari of Lahore 175.0 Delhi Sonat 175.0
Akbari of Agra 174.0 Delhi Alamgir 175.0
Jehangiri of Agra 174.6 Old Surat 174.0
Jehangiri of Allahabad 173.6 Murshedabad 175.9
Jehangiri of Kandhar 173.9 Persian Rupee of 1745 174.5
Shehajehani of Agra 175.0 Old Dacca 173.3
Shehajehani of Ahmedabad 174.2 Muhamadshai 170.0
Shehajehani of Delhi 174.2 Ahmadshai 172.8
Shehajehani of Delhi 175.0 Shaha Alam (1772) 175.8
Shehajehani of Lahore 174.0
So long as the Empire retained unabated sway, there

was advantage rather than danger in the plurality of Mints,
for they were so many branches of a single department
governed by a single authority. But with the disruption of the
Moghul Empire into separate kingdoms these branches of the
Imperial Mint located at different centres became independent
factories for purposes of coinage. In the general scramble
for independence which followed the fall of the Empire, the
right to coinage, as one of the most unmistakable insignia of
sovereignty, became the right most cherished by the political
adventurers of the time. It was also the last privilege to which
the falling dynasties clung, and was also the first to which
the adventurers rising to power aspired. The result was that
the right, which was at one time so religiously exercised,
came to be most wantonly abused. Everywhere the Mints
were kept in full swing, and soon the country was filled with
diverse coins which, while they proclaimed the incessant rise
and fall of dynasties, also presented bewildering media of
exchange. If these money-mongering sovereigns had kept up
their issues to the original standard of the Moghul Emperors,
the multiplicity of coins of the same denomination would
not have been a matter of much concern. But they seemed
to have held that as the money used by their subjects was
made by them, they could do what they liked with their
own, and proceeded to debase their coinage to the extent
* Prinsep, J., op. cit., p. 18.

each chose without altering the denominations. Given the

different degrees of debasement, the currency necessarily lost
its primary quality of general and ready accceptability.
The evils consequent upon such a situation may well be
imagined. When the contents of the coins belied the value
indicated by their denomination they became mere merchandise,
and there was no more a currency by tale to act as a ready
means of exchange. The bullion value of each coin had to be
ascertained before it could be accepted as a final discharge
of obligations.* The opportunity for defrauding the poor and
the ignorant thus provided could not have been less† than
that known to have obtained in England before the great
re-coinage of 1696. This constant weighing, valuing, and
assaying the bullion contents of coins was, however, only one
aspect in which the evils of the situation made themselves
felt. They also presented another formidable aspect. With the
vanishing of the Empire there ceased to be such a thing as an
Imperial legal tender current all through India. In its place
there grew up local tenders current only within the different
principalities into which the Empire was broken up. Under
such circumstances exchange was not liquidated by obtaining
in return for wares the requisite bullion value from the coins
tendered in payment. Traders had to be certain that the coins
were also legal tender of their domicile. The Preamble to the
Bengal Currency Regulation XXXV, of 1793, is illuminating
on this point. It says :—
“The principal districts in Bengal, Behar and Orissa,
have each a distinct silver currency ..................... which
are the standard measure of value in all transactions in
the districts in which they respectively circulate.
* * * * *
* It was this necessity for ascertaining the true bullion value of the debased
coins which gave rise to that class of money-changers known as Shroffs, who
specialized in the business of evaluating the coins at their proper discount from
the standard purity by means of the dates and other characteristics engraved
upon them.
† It is stated that Dr. Roxburgh, who was an eye-witness, was so much
impressed by the sufferings of the poor owing to the bad state of the currency that
he urged upon A. Dalrymple, in a letter dated June 30, 1791, to give prominence
to the evils by inserting a paper in his Oriental Repertory (2 vols., London, 1808),
“on the current coin in circulation over the Company’s Territories which might
be productive of the most solid and lasting advantage to the Governing and the
Governed,” and added, “ You may be able to correct the evil, by which you will
certainly go to heaven, if the prayers of the poor avail, and I may get a step
nearer paradise.” Observations on the Copper Coinage wanted in the Circars, by
A. Dalrymple, London, 1794, p. 1.
“In consequence of the Ryots being required to pay their

rent in a particular sort of rupee they of course demanded
it from manufacturers in payment of their grain, or raw
materials, whilst the manufacturers, actuated by similar
principles with the Ryots, required the same species of
rupee from the traders who came to purchase their cloth
or their commodities.
“The various sorts of old rupees, accordingly, soon
became the established currency of particular districts,
and as a necessary consequence the value of each rupee
was enhanced in the district in which it was current,
for being in demand for all transactions. As a further
consequence, every sort of rupee brought into the district
was rejected from being a different measure of value from
that by which the inhabitants had become accustomed to
estimate their property, or, if it was received, a discount
was exacted upon it, equal to what the receiver would
have been obliged to pay upon exchanging it at the house
of a shroff for the rupee current in the district, or to
allow discount upon passing it in payment to any other
individual.
* * * * *
“From this rejection of the coin current in one district
when tendered in payment in another, the merchants
and traders and the proprietors and cultivators of land
in different parts of the country, are subjected in their
commercial dealings with each other to the same losses
by exchange, and all other inconveniences that would
necessarily result were the several districts under separate
and independent governments, each having a different
coin.”
Here was a situation where trade was reduced, to barter,
whether one looks upon barter as characterized by the absence
of a common medium of exchange or by the presence of a
plurality of the media of exchange ; for in any case, it is obvious
that the want of a “double coincidence” must have been felt by
people engaged in trade. One is likely to think that such could
not have been the case as the medium was composed of metallic
counters. But it is to be remembered that the circulating coins
on India, by reason of the circumstance attendant upon the
diversity in their fineness and legal tender, formed so many
different species that an exchange against a particular species

did not necessarily close the transaction ; the coin must, in
certain circumstances, have been only an intermediate to be
further bartered against another, and so on till the one of the
requisite species was obtained. This is sufficient indication
that society had sunk into a state of barter. If this alone was
the flaw in the situation, it would have been only as bad as
that of international trade under diversity of coinages. But
it was further complicated by the fact that although the
denomination of the coins was the same, their metalic contents
differed considerably. Owing to this, one coin bore a discount
or a premium in relation to another of the same name. In the
absence of knowledge as to the amount of premium or discount,
every one cared to receive a coin of the species known to him
and current in his territory. On the whole, the obstacles to
commerce arising from such a situation could not have been
less than those emanating from the mandate of Lycurgus, who
compelled the Lacedaemonians to use iron money in order
that its weight might prevent them from overmuch trading.
The situation, besides being irritating, was aggravated by
the presence of an element of gall in it. Capital invested in
providing a currency is a tax upon the productive resources
of the community. Nevertheless, wrote James Wilson,* no one
would question
“that the time and labour which are saved by the
interposition of coin, as compared with a system of barter,
form an ample remuneration for the portion of capital
withdrawn from productive sources, to act as a single
circulator of commodities, by rendering the remainder of
the capital of the country so much the more productive.”
What is, then, to be said of a monetary system which did
not obviate the evil consequences of barter, although enormous
capital was widhdrawn from productive sources, to act as a
single circulator of commodities ? Diseased money is worse
than want of money. The latter at least saves the cost. But
society must have money, and it must be good money, too.
The task, therefore, of evolving good money out of bad money
fell upon the shoulders, of the English East India Company,
who had in the meanwhile succeeded to the Empire of the
Moghuls in India.
* Capital Currency and Banking, 1847, p. 15.
The lines of reform were first laid down by the Directors of

the Company in their famous Despatch, dated April 25, 1806,*
to the authorities administering their territories in India. In
this historic document they observed :—
“17. It is an opinion supported by the best authorities,
and proved by experience, that coins of gold and silver
cannot circulate as legal tenders of payment at fixed
relative values...... without loss; this loss is occasioned
by the fluctuating value of the metals of which the coins
are formed. A proportion between the gold and silver
coin is fixed by law, according to the value of the metals,
and it may be on the justest principles, but owing to the
change of circumstances gold may become of greater value
in relation to silver than at the time the proportion was
fixed, it therefore becomes profitable to exchange silver
or gold, so the coin of that metal is withdrawn from
circulation ; and if silver should increase in its value in
relation to gold, the same circumstances would tend to
reduce the quantity of silver coin in circulation. As it
is impossible to prevent the fluctuation in the value of
the metals, so it is also equally impracticable to prevent
the consequences thereof on the coins made from these
metals ............. To adjust the relative values of gold and
silver coin according to the fluctuations in the values of
the metals would create continual difficulties, and the
establishment of such a principle would of itself tend to
perpetuate inconvenience and loss.”
They therefore declared themselves in favour of
monometalism as the ideal for the Indian currency of the
future, and prescribed :—
“21......... that silver should be the universal money
of account (in India), and that all .......... accounts should
be kept in the same denominations of rupees, annas and
pice ...........
The rupee was not, however, to be the same as that of the
Moghul Emperors in weight and fineness The proposal that
“9 .... the new rupee........be of the gross weight of—
Troy grains ... 180
Deduct one-twelfth alloy ... 15
And contain of fine silver troy grs. 165”
*H. of C. Return 127 of 1898.
Such were the proposals put forth by the Court of Directors

for the reform of Indian currency.
The choice of a rupee weighing 180 grs. troy and containing
165 grs. pure silver as the unit for the future currency system
of India was a well-reasoned choice.
The primary reason for selecting this particular weight
for the rupee seems to have been the desire to make it as
little of a departure as possible from the existing practice. In
their attempts to reduce to some kind of order the disorderly
currencies bequeathed to them by the Moghuls by placing them
on a bimetallic basis, the Governments of the three Presidencies
had already made a great advance by selecting out of the
innumerable coins then circulating in the country a species
of gold and silver coin as the exclusive media of exchange for
their respective territories. The weights and fineness of the
coins selected as the principal units of currency, with other
particulars, may be noted from the summary table I. (Page 344)
To reduce these principal units of the different Presidencies
to a single principal unit, the nearest and the least inconvenient
magnitude of weight which would at the same time be an
integral number was obviously 180 grs., for in no case did
it differ from the weights of any of the prevailing units in
any marked degree. Besides, it was believed that 180, or
rather 179.5511, grs. was the standard weight of the rupee
coin originally issued from the Moghul Mints, so that the
adoption of it was really a restoration of the old unit and not
the introduction of a new one.* Another advantage claimed in
favour of a unit of 180 grs. was that such a unit of currency
would again become what it had ceased to be, the unit of weight
also. It was agreed† that the unit of weight in India had at
all times previously been linked up with that of the principal
coin, so that the seer and the manual weights were simply
multiples of the rupee, which originally weighed 179.6 grs.
troy. Now, if the weight of the principal coin to be established
was to be different from 180 grs. troy, it was believed there
would be an unhappy deviation from the ancient practice
which made the weight of the coin the basis of other weights
and measures. Besides, a unit of 180 grs. weight was not only
* Cf. The Despatch, op. cit., para. 8.

† Cf. para. 26-28 of the letter from James Prinsep to the Calcutta Mint
Committee, printed in the Appendix to the Indian Tables by John Muller,
Calcutta, 1836.
TABLE I
344
PRINCIPAL UNITS OF CURRENCY

Silver Coins. Gold Coins.
Issued by
Territory in Date and Gross Pure Gross Pure
the Gov-
which Authority Weight Contents Weight Contents
ernment Name. Name.
it circulated. of Issue. Troy Troy Troy Troy
of
Grs. Grs. Grs. Grs.
Bombay Presidency Surat Rupee 179.0 164.740 Mohur 179 164.740

MK
Madras ” Arcot ” 176.4 166.477 Star 52.40 42.55

Pagoda
Bengal, Bihar Regulations Sicca Rupee

and Orissa XXXV of 1793 (19th Sun)
SJ+YS
Cuttock XII of 1805 179.66 175.927 Mohur 190.804 189.40
Furrukabad
Rupee
Ceded
(Lucknow
Provinces
Sicca of the
Bengal Conquered XLV of 1803 173 166.135 — — —
45th Sun)
Prov-
25-9-2013/YS-11-11-2013
inces
Benares III of 1806 Benares Rupee 175 168.875 — — —

Provinces (Muchleedar)
344
suitable from this point of view, but had also in its favour the
added convenience of assimilating the Indian with the English
units of weight.‡
While these were the reasons in favour§ of fixing the weight
of the principal unit of currency at 180 grs. troy, the project of
making it 165 grs. fine was not without its justification. The
ruling consideration in selecting 165 grs. as the standard of
fineness was, as in the matter of selecting the standard weight,
to cause the least possible disturbance in existing arrangements.
That this standard of fineness was not very different from those
of the silver coins, recognized by the different Governments
in India as the principal units of their currency, may be seen
from the following comparative statement.
TABLE II
DEVIATIONS OF THE PROPOSED STANDARD OF FINENESS FROM
THAT OF THE PRINCIPAL RECOGNIZED RUPEES

Silver Coins recognized as More valuable Less valuable
Standard
Principal Units and their than the Pro- than the Pro-
Fineness
Fineness posed Rupee posed Rupee
of the
Propose
Its Pure
Silver
Name of the Contents In By In By
Rupee
Coin Troy Grs. p.c. Grs. p.c.
Troy Grs.
Grs.
Surat Rupee 164.74 165 … ... .26 .157
Arcot Rupee 166.477 165 1.477 .887 … …
Sicca Rupee 175.927 165 10.927 6.211 … …
Farrukabad R. 166.135 165 1.135 .683 … …
Benares Rupee 169.251 165 4.251 2.511 … …
‡ Ibid. para. 28. How the English and the Indian systems of weights were
made to correspond to each other may be seen from the following :—
Indian English
8 ruttees = 1 massa = 15 troy grs.
12 massas = 1 tola (or sicca) = 180 troy grs.
80 tolas = 1 seer = 2½ troy pounds.
40 seers = 1 maund (or mun) = 100 troy pounds.
§ Attention may be drawn in this connection to the dissenting opinion of
Captain Jervis on the project of 180 grs. troy as the unit of weight for the rupee.
Cf. his most exhaustive treatise called The Expediency and Facility of establishing
the Metrological and Monetary Systems throughout India on a Scientific and
Permanent Basis, grounded on an Analytical Review of the Weights, Measures
and Coins of India …… Bombay, 1836, pp. 49-64.
It will thus be seen that, with the exception of the Sicca

and the Benares rupees, the proposed standard of fineness
agreed so closely with those of the other rupees that the
interest of obtaining a complete uniformity without considerable
dislocation overruled all possible objections to its adoption.
Another consideration that seemed to have prevailed upon
the Court of Directors in selecting 165 grs. as the standard of
fineness was that, in conjunction with 180 grs. as the standard
weight, the arrangement was calculated to make the rupee
eleven-twelfths fine. To determine upon a particular fineness
was too technical a matter for the Court of Directors. It was,
however, the opinion of the British Committee on Mint and
Coinage, appointed in 1803, that* “one-twelfth alloy and eleven-
twelfths fine is by a variety of extensive experiments proved
to be the best proportion, or at least as good as any which
could have been chosen.” This standard, so authoritatively
upheld, the Court desired to incorporate in their new scheme
of Indian currency. They therefore desired to make the rupee
eleven-twelfths fine. But to do so was also to make the rupee
165 grs. pure-a content which they desired, from the point of
view stated above, the rupee to possess.
Reviewing the preference of the Court of Directors for
monometallism from the vantage-ground of latter-day events,
one might be inclined to look upon it as a little too short-
sighted. At the time, however, the preference was well founded.
One of the first measures, the three Presidencies, into which
the country was divided for purposes of administration, had
adopted on their assuming the government of the country, was
to change the parallel standard of the Moghuls into a double
standard by establishing a legal ratio of exchange between
the mohur, the pagoda, and the rupee. But in none of the
Presidencies was the experiment a complete success.
In Bengal† the Government, on June 2, 1766, determined
upon the issue of a gold mohur weighing 179.66 grs. troy, and
containing 149.92 grs., troy of pure metal, as legal tender at
14 Sicca rupees, to relieve the currency stringency caused
* Cf. The Despatch, op. cit., para. 9.
† F. C Harrison, “ The Past Action of the Indian Government with regard to
Gold,” in Economic Journal, Vol. III, p. 54 et seq. Also Minute by Sir John Shore,
in Bengal Public Consultations, dated September 29, 1796.
largely by its own act of locking up the revenue collections in

its treasuries, to the disadvantage of commerce. This was a
legal ratio of 16.45 to 1, and as it widely deviated from the
market ratio of 14.81 to 1, this attempt to secure a concurrent
circulation of the two coins was foredoomed to failure. Owing to
the drain of silver on Bengal from China, Madras, and Bombay,
the currency stringency grew worse, so much so that another
gold mohur was issued by the Government on March 20, 1769,
weighing 190.773 grs. troy and containing 190.086 grs. pure
gold with a value fixed at 16 Sicca rupees. This was a legal
ratio of 14.81 to 1. But, as it was higher than the market ratio
of the time both in India (14 to 1) and in Europe (14.61 to
1), this second effort to bring about a concurrent circulation
fared no better than the first. So perplexing seemed to be
the task of accurate rating that the Government reverted to
monometallism by stopping the coinage of gold on December
3, 1788, and when the monetary stringency again compelled
it to resume in 1790 the coinage of gold, it preferred to let
the mohur and the rupee circulate at their market value
without making any attempt to link them by a fixed ratio. It
was not until 1793 that a third attempt was made to forge a
double standard in Bengal. A new mohur was issued in that
year, weighing 190.895 grs. troy and containing 189.4037
grs. of pure gold, and made legal tender at 16 Sicca rupees.
This was a ratio of 14.86 to 1, but, as it did not conform to
the ratio then prevalent in the market this third attempt to
establish bimetallism in Bengal failed as did those made in
1766 and 1769.
The like endeavours of the Government of Madras* proved
more futile than those of Bengal. The first attempt at bimetalism
under the British in that Presidency was made in the year
1749, when 350 Arcot rupees were legally rated at 100 Star
pagodas. As compared with the then market ratio this rating
involved an under-valuation of the pagoda, the gold coin of the
Presidency. The disappearance of the pagoda caused a monetary
stringency, and the Government in December, 1750, was obliged
to restore it to currency. This it did by adopting the twofold plan
of causing an import of gold on Government account, so as to
equalize the mint ratio to the market ratio, and of compelling
the receipts and payments of Government treasuries to be
exclusively in pagodas. The latter device proved of small value ;
*H. Dodwell, “Substitution of Silver for Gold in South India,” in the Indian
Journal of Economics, January, 1921.
but the former by its magnitude was efficacious enough to

ease the situation. Unluckily, the case was only temporary.
Between 1756 and 1771 the market ratio of the rupee and
the pagoda again underwent a considerable change. In 1756
it was 364 to 100, and in 1768 it was 370 to 100. It was not
till after 1768 that the market ratio became equal to the legal
ratio fixed in 1749 and remained steady for about twelve years.
But the increased imports of silver, rendered necessary for the
prosecution of the second Mysore war, once more disturbed the
ratio, which at the close of the war stood at 400 Arcot rupees
to 100 Star pagodas. After the end of the war, the Government
of Madras made another attempt to bring about a concurrent
circulation between the rupee and the pagoda. But instead of
making the market ratio of 400 to 100 the legal ratio, it was
led by the then increasing imports of gold into the Presidency
to hope that the market ratio would in time rise to that
legally established in 1749. In an expectant mood so induced
it decided, in 1790, to anticipate the event by fixing the ratio
first at 365 to 100. The result was bound to be different from
that desired, for it was an under-valuation of the pagoda. But
instead of rectifying the error, the Government proceeded to
aggravate it by raising the ratio still further to 350 to 100
in 1797, with the effect that the pagoda entirely went out of
circulation, and the final attempt at bimetallism thus ended
in a miserable failure.
The Government of Bombay seemed better instructed in
the mechanics of bimetallism, although that did not help it to
overcome the practical difficulties of the system. On the first
occasion when bimetallism was introduced in the Presidency,*
the mohur and the rupee were rated at the ratio of 15.70 to 1.
But at this ratio the mohur was found to be over-rated, and
accordingly, in August, 1774, the Mint Master was directed
to coin gold mohurs of the fineness of a Venetian and of the
weight of the silver rupee. This change brought down the legal
ratio to 14.83 to 1, very nearly, though not exactly, to the then
prevailing market ratio of 15 to 1, and had nothing untoward
happened, bimetallism would have had a greater success in
Bombay than it actually had in the other two Presidencies. But
this was not to be, for the situation was completely altered by
the dishonesty of the Nawab of Surat, who allowed his rupees,
which were of the same weight and fineness as the Bombay
* Report of Dr. Scott on the History of Coinage in the Bombay Presidency,
with Appendices, Public Consultations (Bombay, dated January 27, 1801).
rupees, to be debased to the extent of 10, 12, and even 15 per

cent. This act of debasement could not have had any disturbing
effect on the bimetallic system prevalent in the Bombay
Presidency, had it not been for the fact that the Nawab’s (or
Surat) rupees were by agreement admitted to circulation in
the Company’s territories at par with the Bombay rupees. As
a result of their being legal tender the Surat rupees, once they
were debased, not only drove out the Bombay rupees from
circulation, but also the mohur, for as rated to the debased
Surat rupees the ratio became unfavourable to gold, and the
one chance for a successful bimetallic system vahished away.
The question of fixing up a bimetallic ratio between the mohur
and the rupee again cropped up when the Government of
Bombay permitted the coinage of Surat rupees at its Mint.
To have continued the coinage of the gold mohur according to
the Regulation of 1774 was out of the question. One Bombay
mohur contained 177.38 grs. of pure gold, and 15 Surat rupees
of the standard of 1800 contained 247.11 grs. of silver. By this
Regulation the proportion of silver to gold would have been
247.11
i.e. 13.9 to 1. Here the mohur would have been much
177.38,
under-valued. It was therefore resolved to alter the standard
of the mohur to that of the Surat rupee, so as to give a ratio
of 14.9 to 1. But as the market ratio was inclined towards
15.5 to 1, the experiment was not altogether a success.
In the light of this experience before them, the Court
of Directors of the East India Company did well in fixing
upon a monometallic standard as the basis of the future
currency system of India. The principal object of all currency
regulations is that the different units of money should bear
a fixed relation of value to one another. Without this fixity
of value, the currency would be in a state of confusion, and
no precaution would be too great against even a temporary
disturbance of that fixity. Fixity of value between the various
components of the currency is so essential a requisite in
a well-regulated monetary system that we need hardly
be surprised if the Court of Directors attached special
importance to it, as they may well have done, particularly
when they were engaged in the task of placing the currency
on a sound and permanent footing. Nor can it be said
that their choice of monometallism was ill-advised, for it must

be admitted that a single standard better guarantees this
fixity than does the double standard. Under the former it is
spontaneous, under the latter it is forced.
These recommendations of the Court of Directors were left
to the different Governments in India to be carried into effect
at their discretion as to the time and manner of doing it. But
it was some time before steps were taken in consonance with
these orders, and even then, it was on the realization of those
parts of the programme of the Court which pertained to the
establishment of a uniform currency that the efforts of the
different Governments were first concentrated.
The task of reducing the existing units of currency to that
proposed by the Court was first accomplished in Madras. On
January 7, 1818, the Government issued a Proclamation*
by which its old units of currency—the Arcot rupee and
the Star pagoda—were superseded by new units, a gold
rupee and a silver rupee, each weighing 180 grs. troy and
containing 165 grs. of fine metal. Madras was followed by
Bombay six years later by a Proclamation† of October 6,
1824, which declared a gold rupee and a silver rupee of the
new Madras standard to be the only units of currency in that
Presidency. The Government of Bengal had a much bigger
problem to handle. It had three different principal units of
silver currency to be reduced to the standard proposed by the
Court. It commenced its work of reorganization by a system
of elimination and alteration. In 1819, it doscontinued‡ the
coinage of the Benares rupee and substituted in its place
the Furrukabad rupee, the weight and fineness of which
were altered to 180.234 and 135.215 grs. troy respectively.
Apparently this was a step away from the right direction.
But even here, the purpose of uniformity, so far as fineness
was concerned, was discernible, for it made the Furrukabad
rupee, like the new Madras and Bombay rupees, eleven-twelfth
fine. Having got rid of the Benares rupee, the next step was
to assimilate the standard of the Furrukabad rupee to that of
Madras and Bombay, as may be seen from the following table.
* Cf. Fort St. George Publc Depart. Consultations, No. 19, dated January 7, 1818.
† Cf. Bombay Financial Consultations, dated October 6, 1824.
‡ Bengal Regulation XI of 1819.
Thus, without abrogating the bimetallic system, substantial

steps were taken in realizing the ideal unit proposed by the
Court, as may be seen from the following table.
TABLE III
UNIFORMITY OF COINAGE AT THE END OF AD. 1833
Silver Coins Gold Coins

Issued
Legal
the Gov-
Denomina- Fine- Denomina- Fine- Ratio
ernment of Weight Weight
nation ness nation ness
Sicca Rupee 192 176 or Mohur 204.710 187.651 1 to 15

11
Bengal 12
Furrukabad 180 165 or … … … …

Rupee 11
12
Bombay Silver Rupee 180 165 or Gold Rupee 180 165 or 1 to 15

11 11
12 12
Madras Silver Rupee 180 165 or ” ” 180 165 or 1 to 15

11 11
12 12
Taking stock of the position as it was at the end of 1833,

we find that with the exception of the Sicca rupee and the gold
mohur of Bengal, that part of the scheme of the Directors which
pertained to the uniformity of coinage was an accomplished
fact. Nothing more remained to carry it to completion than to
discontinue the Sicca rupee and to demonetize gold. At this
point, however, arose a conflict between the Court of Directors
and the three Governments in India. Considerable reluctance
was shown to the demonetization of gold. The Government of
Madras, which was the first to undertake the reform of its
currency according to the plan of the Court, not only insisted
upon continuing the coinage of gold along with that of the
rupee,* but stoutly refused to deviate from the system of
double legal tender at a fixed ratio prevalent in its territories,†
* The Court of Directors were willing to permit the coinage and circulation of
gold unlinked to the rupee, for they had observed in their Despatch :—
“16. Although we are fully satisfied of the propriety of the silver rupee being
the principal measure of value and the money of account, yet we are by no means
desirous of checking the circulation of gold, but of establishing a gold coin on a
principle fitted for general use. This coin in our opinion should be called a gold
rupee and be made of the same standard as the silver rupee.”
† Cf. Fort St.George Public Consultations of August 19, 1817, particularly the
letter of the Accountant-General entered thereon.
notwithstanding the repeated remonstrances addressed by the

Court.* The Government of Bengal clung to the bimetallic
standard with equal tenacity. Rather than demonetize the
gold mohur, it took steps to alter its standard† by reducing
its pure contents‡ from 189.4037 to 187.651 troy grs., so as
to re-establish a bimetallic system on the basis of the ratio
adopted by Madras in 1818. So great was its adherence to the
bimetallic standard that in 1833 it undertook to alter§ the
weight and fineness of the Sicca rupee to 196 grs. troy and
176 grs. fine, probably to rectify a likely divergence between
the legal and the market ratios of the mohur to the rupee.¶
But in another direction the Government in India wanted to
go further than the Court desired. The Court thought a uniform
currency (i.e. a currency composed of like but independent
units) was all that India needed. Indeed, they had given the
Governments to understand that they did not wish for more
in the matter of simplification of currency and were perfectly
willing to allow the Sicca and the mohur to remain as they
were, unassimilated.§§ A uniform currency was no doubt a
great advance on the order of things such as was left by the
successors of the Moghuls. But that was not enough, and the
needs of the situation demanded a common currency based on
a single unit in place of a uniform currency. Under the system
of uniform currency each Presidency coined its own money,
and the money coined at the Mints of the other Presidencies
was not legal tender in its territories except at the Mint. This
monetary independence would not have been very harmful if
there had existed also financial independence between the three
Presidencies. As a matter of fact, although each Presidency had
its own fiscal system, yet they depended upon one another for the
finance of their deficits. There was a regular system of “supply”
between them, and the surplus in one was being constantly
drawn upon to meet the deficits in others. In the absence of
* Cf. The Public Despatches to Madras dated March 6, 1810 ; July 10, 1811 ;
and June 12, 1816.
† Preamble to the Bengal Regulation XIV of 1818.
‡ It, however, increased its weight from 190.895 to 204.710 troy grs.
§ Bengal Regulation VII of 1833.
¶ It may be that this alteration was also intended to make the Sicca rupee
eleven-twelfths fine.
§§Cf. Despatch to Bengal dated March 11, 1829.
a common currency this resource operation was considerably

hampered. The difficulties caused by the absence of a common
currency in the way of the “supply” operation made themselves
felt in two different ways. Not being able to use as legal tender
the money of other Presidencies, each was obliged to lock up,
to the disadvantage of commerce, large working balances in
order to be self-sufficient.* The very system which imposed
the necessity of large balances also rendered relief from other
Presidencies less efficacious. For the supply was of necessity
in the form of the currency of the Presidency which granted,
it, and before it could be utilized it had to be re-coined into
the currency of the needy Presidency. Besides the loss on re-
coinage, such a system obviously involved inconvenience to
merchants and embarassment to the Government.†
At the end of 1833, therefore, the position was that the
Court desired to have a uniform currency with a single standard
of silver, while the authorities in India wished for a common
currency with a bimetallic standard. Notwithstanding these
divergent views, the actual state of the currency might have
continued as it was without any substantial alteration either
way. But the year 1833 saw an important constitutional change
in the administrative relations between the three Presidential ‡
Governments in India. In that year by an Act of Parliaments
there was set up an Imperial system of administration with
a centralization of all legislative and executive authority over
the whole of India. This change in the administrative system,
perforce, called forth a change in the prevailing monetary
systems. It required local coinages to be replaced by Imperial
* The Accountant-General of Bengal, in a letter to the Calcutta Mint Committee,

dated November 21, 1823 wrote:—
“Para. 32. The amount of the balance must also necessarily depend upon
the state of the currency. If the Madras, Bombay, and Furrukabad rupees
instaed of differing in weight and intrinsic value were coined of one standard
weight and value bearing one inscription and in no way differing, the surplus
of one Presidency would at all times be available for the deficiency of another,
without passing through the Mint, and the balance of India might be reduced
in proporion to the increased availability of currency for the disbursements of
the three Presidencies” (Bombay Financial Consultations, February 25, 1824).
† The evil of the system had already made itself felt in Bombay, where the
Government had been obliged by a Proclamation dated April 9, 1824, to declare the
Furrukabad rupee of 1819 standard as legal tender within its territories on a par
with the Bombay rupee, in order to facilitate the supply operation from Bengal. Cf.
Bombay Financial Consultations, dated April 14, 1824.
‡ 3 & 4 Will, IV, c; 85.
coinage. In other words, it favoured the cause of a common

currency as against that of a mere uniform currency. The
authorities in India were not slow to realize the force of events.
The Imperial Government set up by Parliament was not content
to act the part of the Dewans or agents of the Moghuls, as
the British had theretofore done, and did not like that coins
should be issued in the name of the defunct Moghul emperors
who had ceased to govern. It was anxious to throw off the false
garb* and issue an Imperial coinage in its own name, which
being common to the whole of India would convey its common
sway. Accordingly, an early opportunity was taken to give effect
to this policy. By an Act of the Imperial Government (XVII
of 1835) a common currency was introduced for the whole of
India, as the sole legal tender. But the Imperial Government
went beyond and, as if by way of concession to the Court—for
the Court did most vehemently protest against this common
currency in so far as it superseded the Sicca rupee†—legislated
“that no gold coin shall henceforward be a legal tender of
payment in any of the territories of the East India Company.” ‡
That an Imperial Administration should have been by force
of necessity led to the establishment of a common currency for
the whole of India is quite conceivable. But it is not clear why
it should have abrogated the bimetallic system after having
maintained it for so long. Indeed, when it is recalled how the
authorities had previously set their faces against the destruction
of the bimetallic system, and how careful they were not to
allow their coinage reforms to disturb it any more violently
than they could help, the provision of the Act demonetizing
gold was a grim surprise. However, for the sudden volte-face
displayed therein, the Currency Act (XVII of 1835) will ever
remain memorable in the annals of the Indian history. It
marked the culminating-point of a long and arduous process
of monetary reform and placed India on a silver monometallic
basis, with a rupee weighing 180 grs. troy and containing
165 grs. fine as the common currency and sole legal tender
throughout the country.
No piece of British India legislation has led to a greater
* Cf. the sentiments of Tucker in his Memorials of Indian Government (ed.
by Kaye), 1853, pp. 17-19.
†Cf. their Financial Despatch to India, No. 9, dated July 27, 1836.
‡ Section 9 of Act XVII of 1835.
discontent in later years than this Act XVII of 1835. In so far

as the Act abrogated the bimetallic system, it has been viewed
with a surprising degree of equanimity. Not all its critics,
however, are aware* that what the Act primarily decreed was
a substitution of bimetallism by monometallism. The commonly
entertained view of the Act seems to be that it replaced a
gold standard by a silver standard. But even if the truth were
more generally known, it would not justify any hostile attitude
towards the measure on that score. For, what would have been
the consequences to India of the gold discoveries of California
and Australia in the middle of the nineteenth century, if she
had preserved her bimetallic system ? It is well known how
this increase in the production of gold relatively to that of
silver led to a divergence in the mint and the market ratios
of the two metals after the year 1850. The under-valuation of
silver, though not very great, was great enough to confront the
bimetallic countries with a serious situation in which the silver
currency, including the small change, was rapidly passing out
of circulation. The United States† was obliged by the law of
1853 to reduce the standard of its small silver coins sufficiently
to keep them, dollar for dollar, below their gold value in order
to keep them in circulation. France, Belgium, Switzerland, and
Italy, which had a uniform currency based on the bimetallic
model of the French with reciprocal legal tender,‡ were faced
with similar difficulties. Lest a separatist policy on the part of
* To mention only one, cf. S. V. Doraiswami, Indian Currency, Madras, 1915. passim.
† Laughlin, J. L, History of Bimetallism, New York, 1886, pp. 79-83.
‡ The cultural influence of France had led the other countries of Latin origin to
adopt the French monetary system. The political independence acquired by Belgium in
1831 was followed by a change in her monetary system. By the law of 1832, Belgium
from a monetary point of view, became a satellite of France. By that law she adopted
in its entirety the monetary system of France, and even went so far as to give the
French gold pieces of 20 and 40 francs and to the French silver 5-franc pieces the
power of legal tender in Belgium. In Switzerland, Art. 36 of the Constitution of 1848
had vested in the Federal Government the authority to coin money. The law of May
7, 1850, adopted the French monetary system for Switzerland : Art. 8 declared “that
such foreign silver coins as were minted in sufficiently close proximity with the French
system might be granted a legal status as regular media for the payment of debts
in Switzerland.” The various Italian States, prior to unification, had, like the Swiss
Cantons, each its own currency. But with the desire for uniformity of coinage consequent
upon unification, there arose a problem either of selecting one of the old systems or
of adopting a new one which would be common to the whole country. Some form of a
grateful memorial to France was uppermost in the minds of the Italians for the help
the French gave in the matter of their independence, and the adoption of the French
monetary system for Italy was deemed to serve the purpose. Fortunately, Sardinia
already possessed the French system, and the law of August 24, 1862, extended it to
the whole of Italy, with the lire as the unit, and also conferred legal-tender power on
the coins of France, Belgium, and Switzerland, Cf. H.P. Willis, History of the Latin
monetary Union, Chicago, 1910, pp. 15, 27, 36, 37.
each nation,* to protect their silver currency and

particularly the small change, should disrupt the monetary
harmony prevailing among them all, they were compelled
to meet in a convention, dated November 20, 1865,
which required the parties, since collectively called the
Latin Union, to lower, in the order to maintain them
in circulation, the silver pieces of 2 francs, 1 franc,
900
50 centimes, and 20 centimes from a standard of fine
1000
835
to and to make them subsidiary coins.† It is true that
1000
the Government of India also came in for trouble as a result
of this disturbance in the relative value of gold and silver,
but that trouble was due to its own silly act.‡ The currency
law of 1835 had not closed the Mints to the free coinage
of gold, probably because the seignorage on the coinage of
gold was a source of revenue which the Government did not
like to forego. But as gold was not legal tender, no gold was
brought to the Mint for coinage, and the Government revenue
from seignorage fell off. To avoid this loss of revenue, the
Government began to take steps to encourage the coinage of
gold. In the first place, it reduced the seignorage§ in 1837
from 2 per cent, to 1 per cent. But even this measure was
not sufficient to induce people to bring gold to the Mint, and
consequently the revenue from seignorage failed to increase.
As a further step in the same direction, the Government
issued a Proclamation on January 13, 1841, authorizing
the officers in charge of public treasuries to receive the
gold coins at the rate of 1 gold mohur equal to 15 silver
rupees. For some time no gold was received, as at the rate
prescribed by the Proclamation gold was undervalued.¶ But
the Australian and Californian gold discoveries altered the
situation entirely. The gold mohur, which was undervalued at
* Switzerland was the fifrst to reduce the amount of silver in her small coins
in order to keep them in circulation. But these Swiss coins of reduced fineness
crossed the national frontier and, as they were legal tender in other countries of
Latin origin, began to displace their dearer coins of similar denominations, which
contained more silver but which passed current at the same nominal value. This
brought forth a decree in France (April 14, 1864) which revoked the legal tender
power to a concerted action on the part of all the Latin countries concerned.
† For more particulars of the Latin Union, cf. Laughlin, op. cit, pp. 146-9.
‡Cf. H. of C Return, East Indian (Coinage) 254 of 1860.
§ Ibid. p. 8.
¶ Ibid, p. 10.
Rs. 15, became overvalued, and the Government which was

at one time eager to receive gold, was alarmed at its influx.
By adopting the course it did of declaring gold no longer legal
tender, and yet undertaking to receive it in liquidation of
Government demands, it laid itself under the disadvantage
of being open to be embarrassed with a coin which was of
no use and must ordinarily have been paid for above its
value. Realizing its position, it left aside all considerations of
augmenting revenue by increased coinage, and promptly issued
on December 25, 1852, another Proclamation withdrawing that
of 1841. Whether it would not have been better to have escaped
the embarrassment by making gold general legal tender than
depriving it of its partial legal-tender power is another matter.
But, in so far as India was saved the trials and tribulations
undergone by the bimetallic countries to preserve the silver
part of their currency, the abrogation of bimetallism was by
no means a small advantage. For, the measure had the virtue
of fore-arming the country against changes which, though not
seen at the time, soon made themselves felt.
The abrogation of bimetallism in India, accomplished by the
Act of 1835, cannot therefore be made a ground for censure. But
it is open to argument that a condemnation of bimetallism is
not per se a justification of silver monometallism. If it was to be
monometallism it might well have been gold monomentallism.
In fact, the preference for silver monometallism is not a little
odd when it is recalled that Lord Liverpool, the advocate of
monometallism,* whose doctrines the Court had sought to
apply to India, had prescribed gold monometallism for similar
currency evils then prevalent in England. That the Court should
have deviated from their guide in this particular has naturally
excited a great deal of hostile comment as to the propriety of
this grave departure.† At the outset any appeal to ulterior
motives must be baseless, for Lord Liverpool was not a “gold
bug,” nor was the Court composed of “silver men.” As a matter
of fact, neither of them at all considered the question from the
standpoint as to which was a better standard of value, gold or
silver. Indeed, in so far as that was at all a consideration worth
attending to, the choice of the Court, according to the opinion
of the time, was undoubetdly a better one than that of Lord
* The author of A Treatise on the Coinage of the Realm was anticipated by Sir
John Shore, the Governor of Bengal, in his Minute, op. cit., par 55.
† Cf. H. M. Dunning, Indian Currency, 1898, passim; also S. V. Doraiswami,
op. cit., passim.
Liverpool. Not only were all the theorists, such as Locke, Harris,
and Petty, in favour of silver as the standard of value, but the
practice of the whole world was also in favour of silver. No
doubt, England had placed herself on a gold basis in 1816. But
that Act, far from closing the English Mint to the free coinage
of silver, left it to be opened by a Royal Proclamation.* The
Proclamation, it is true, was never issued, but it is not to be
supposed that therefore Englishmen of the time had regarded
the question of the standard as a settled issue. The crisis of
1825 showed that the gold standard furnished too narrow a
basis for the English currency system to work smoothly, and,
in the expert opinion of the time,† the gold standard, far from
being the cause of England’s commercial superiority, was rather
a hindrance to her prosperity, as it cut her off from the rest
of the world, which was mostly on a silver basis. Even the
British statesmen of the time had no decided preference for
the gold standard. In 1826, Huskisson actually proposed that
Government should issue silver certificates of full legal tender.‡
Even as late as 1844 the question of the standard was far
from being settled, for we find Peel, in his Memorandum§ to
the Cabinet, discussing the possibility of abandoning the gold
standard in favour of the silver or a bimetallic standard without
any compunction or predilection one way or the other. The
difficulties of fiscal isolation were evidently not so insuperable
as to compel a change of the standard, but they were great
enough to force Peel to introduce his famous proviso embodying
the Huskisson plan in part in the Bank Charter Act of 1844,
permitting the issue of notes against silver to the extent of one-
fourth of the total issues.¶ Indeed, so great was the universal
faith in the stability of silver that Holland changed in 1847
from what was practically a gold monometallism§§ to silver
monometallism because her statesmen believed that
“it had proved disastrous to the commercial and industrial
* Cf. Dana Horton, The Silver Pound, 1887, p. 161.
† Cf. the evidence of A. Baring (afterwards Lord Ashuburton) before the
Committee for Coin (1828), H. of C. Return 31 of 1830.
‡ See his Memorandum to the Cabinet printed by Gibbs, A Colloquy on
Currency (1894), Appendix, p. xlvii.
§ For which, see Andreades, History of the Bank of England, Supplement I.
¶ For the original purpose of this defunct proviso, see Peel’s Speech on the
Bank Charter Act, dated May 20, 1844, Hansard, Vol. LXXIV, pp. 1334-35.
§§ In theory Holland had adopted bimetallism in 1816. But the legal ratio
of 15.873 to 1 had undervalued silver so much that it had made gold the chief
circulating medium of Holland.
interests of Holland to have a monetary system identical

with that of England, whose financial revulsions, after its
adoption of the gold standard, had been more frequent
and more severe than in any other country, and whose
injurious effects were felt in Holland scarcely less than
in England. They maintained that the adoption of the
silver standard would prevent England from disturbing
the internal trade of Holland by draining off its money
during such revulsions, and would secure immunity from
evils which did not originate in and for which Holland
was not responsible.”*
But stability was not the ground on which either the Court
or Lord Liverpool made their choice of a standard metal to
rest. If that had been the case, both probably would have
selected silver. As it was, the difference in the choice of the
two parties was only superficial. Indeed, the Court differed
from Lord Liverpool, not because of any ulterior motives, but
because they were both agreed on a fundamental proposition
that not stability but popular preference should be the deciding
factor in the choice of a standard metal. Their differences
proceeded logically from the agreement. For, on analysing
the compositon of the currency it was found that in England
it was largely composed of gold and in India it was largely
composed of silver. Granting their common premise, it is
easy to account why gold was selected for England by Lord
Liverpool and silver for India by the Court. Whether the
actual composition of the currency is an evidence of popular
preference cannot, of course, be so dogmatically asserted as
was done by the Court and Lord Liverpool. So far as England
is concerned, the interpretation of Lord Liverpool has been
questioned by the great economist David Ricardo. In his High
Price of Bullion, Ricardo wrote :—
“ For many reasons given by Lord Liverpool, it appears
proved beyond dispute that gold coin has been for near
a century the principal measure of value; but this is, I
think, to be attributed to the inaccurate determination
of the mint proportions. Gold has been valued too
high ; no silver can therefore remain in circulation
which is of its standard weight. If a new regulation
* Report of the U. S. Silver Commission of 1876, p. 68.

were to take place, and silver be valued too high …… gold

would then disappear, and silver become the standard
money.”*
And it is possible that mint proportions rather than popular
preference† could have equally well accounted for the
preponderance of silver in India.‡
Whether any other criterion besides popular; preference
could have led the Court to adopt gold monometallism is a
moot question. Suffice it to say that the adoption of silver
monometallism, though well supported at the time when the Act
was passed, soon after proved to be a measure quite inadequate
to the needs of the country. It is noteworthy that just about
this time great changes were taking place in the economy of
the Indian people. Such a one was a change from kind economy
to cash economy. Among the chief causes contributory to this
transformation the first place must be given to the British
system of revenue and finance. Its effects in shifting Indian
society on to a cash nexus have not been sufficiently realized,§
although they have been very real. Under the native rulers
most payments were in kind. The standing military force
kept and regularly paid by the Government was small. The
bulk of the troops consisted of a kind of militia furnished by
Jageerdars and other landlords, and the troops or retainers
of these feudatories were in great measure maintained on the
grain, forage, and other supplies furnished by the districts in
which they were located. The hereditary revenue and police
officers were generally paid by grants of land on tenure of
service. Wages of farm servants and labourers were in their turn
distributed in grain. Most of its officers being paid in kind, the
State collected very little of its taxes in cash. The innnovations
made by the British in this rude revenue and fiscal system were
* Works, p. 271.
† Mr. Dodwell, in his otherwise excellent article, op. cit., seems to convey
that silver was substituted for gold in Southern India as a result of the natural
preference of the people for the former metal. So eager is he in meeting the
contentions of writers like Mr. Doraiswami that he fails to see how his own facts
controvert his own thesis.
‡ The total coinage of India from 1800 to 1835 was, according to Mr. F. C.
Harrison’s estimate in the Calcutta Review, July, 1892:—
Gold ... ... £ 3,845,000 ounces
Silver ... ... £ 3,781,250,000 ounces
N.B.—In the case of silver, rupees are converted into ounces for comparison. §
Cf. the article “ The Silver Question as regards India,” in the Bombay Quarterly
Review, April, 1857.
of the most sweeping character. As territory after territory

passed under the sway of the British, the first step taken was
to substitute in place of the rural militia of the feudatories
a regularly constituted and a well-disciplined standing army
located at different military stations, paid in cash ; in civil
employ, as in military, the former revenue and police officers
with their followers, who paid themselves by perquisites and
other indirect gains received in kind, were replaced by a host
of revenue collectors and magistrates with their extensive
staff, all paid in current coin. The payments to the army,
police, and other officials were not the only payments which
the British Government had placed on a money basis. Besides
these charges, there were others which were quite unknown
to the native Governments, such as the “Home Charges” and
“ Interest on Public Debt,” all on a cash basis. The State,
having undertaken to pay in cash, was compelled to realize
all its taxes in cash, and as each citizen was bound to pay in
cash, he in his turn stipulated to receive nothing but cash, so
that the entire structure of the society underwent a complete
transformation.
Another important change that took place in the economy
of the Indian people about this time was the enormous
increase of trade. For a considerable period, the British tariff
policy and the navigation laws had put a virtual check on
the expansion of Indian trade. England compelled India to
receive her cotton and other manufactures at nearly nominal
(2½ per cent.) duties, while at the same time she prohibited
the entry of such Indian goods as competed with hers within
her territories by prohibitory duties ranging from 50 to 500
per cent. Not only was no reciprocity shown by England to
India, but she made a discrimination in favour of her colonies
in the case of such goods as competed with theirs. A great
agitation was carried on against this unfair treatment,* and
finally Sir Robert Peel admitted Indian produce to the low
duties levied by the reformed tariff of 1842. The repeal of
the navigation laws gave further impetus to the expansion
of Indian commerce. Along with this, the demand for Indian
produce had also been growing. The Crimean War of 1854
cut off the Russian supplies, the place of which was taken
* Cf. Debates at the East India House on Duties affecting Indian Commerce,
vide the Asiatic Journal and Monthly Register for British and Foreign India,
China, Australia (London, New Series, Vol. XXXVII, January, and Vol. XXXVIII,
May, 1842).
by Indian produce, and the failure of the silk crop in 1853

throughout Europe led to the demand for Asiatic, including
Indian, silks.
The effect of these two changes on the currency situation
is obvious. Both called forth an increased demand for cash.
But cash was the one thing most difficult to obtain. India does
not produce precious metals in any considerable quantity. She
has had to depend upon her trade for obtaining them. Since
the advent of the European Powers, however, the country was
not able to draw enough for the precious metals. Owing to the
prohibitions on the export of precious metals then prevalent in
Europe,* one avenue for obtaining them was closed. But there
was little chance of obtaining precious metals from Europe,
even in the absence of such prohibition ; indeed, precious metals
did not flow to India when such prohibitions were withdrawn.†
The reason of the check to the inflow of precious metals was
well pointed out by Mr. Petrie in his Minute of November,
1799, to the Madras Committee of Reform.‡ According to Mr.
Petrie, the Europeans before they acquired their territorial
possessions
“purchased the manufactures of India with the metals of
Europe : but they were henceforward to make these purchases
with gold and silver of India, the revenues supplied the
place of foreign bullion and paid the native the price of his
industry with his own money. At first this revolution in the
principles of commerce was but little felt, but when opulent
and extensive dominions were acquired by the English, when
the success of war and commercial rivalship had given them
so decided a superiority over the other European nations
as to engross the whole of the commerce of the East, when
a revenue amounting to millions per annum was to be
remitted to Europe in the manufactures of the East, then
were the effects of this revolution severely felt in every part
of India. Deprived of so copious a stream, the river rapidly
retired from its banks and ceased to fertilize the adjacent
fields with overflowing water.”
The only way open, when the prohibitions were withdrawn
* For the History of those imposed by England, cf. Ruding, Annals of Coinage,
3rd. ed. Vol. I, pp. 353-4, 372, 376, 386-7 ; Thomas Violet, An Appeal to Caesar,
London, 1660, p. 26.
† The following figures of the export of precious metals to India from England
are interesting :—
1652-1703 ... £ 1,131,653 (from Mr. Petrie’s Minute).
1747-1795 ... £ 1,519,654 ” ” ”
‡ For the proceedings of the Committee, see India Office Records, “Home
Miscellaneous” Series, Vol. 456.
to obtain precious metals, was to send more goods than this

amount of tribute, so that the balance might bring them in.
This became possible when Peel admitted Indian goods to low
tariff, and the country was for the first time able to draw in
a sufficient quantity of precious metals to sustain her growing
needs. But this ease in the supply of precious metals to
serve as currency was shortlived. The difficulties after 1850,
however, were not due to any hindrance in the way of India’s
obtaining the precious metals. Far from being hindered, the
export and import of precious metals was entirely free, and
India’s ability to procure them was equally great. Neither were
the difficulties due to any want of precious metals ; for, as a
matter of fact, the increase in the precious metals after 1850
was far from being small. The difficulty was of India’s own
making, and was due to her not having based her currency
on that precious metal, which it was easy to obtain. The Act
of 1835 had placed India on an exclusive silver basis. But,
unfortunately, it so happened that after 1850, though the total
production of the precious metals had increased that of silver
had not kept pace with the needs of the world, a greater part
of which was then on a silver basis, so that as a result of her
currency law India found herself in an embarrasing position of
an expanding trade with a contracting currency, as is shown
in the Table IV on page 364.
On the face of it, it seems that there need have been no
monetary stringency. The import of silver was large, and so
was the coinage of it. Why then should there have been any
stringency at all ? The answer to this question is not far to
seek. If the amount of silver coined had been retained in
circulation it is possible that the stringency could not have
arisen. India has long been notoriously the sink of the precious
metals. But in interpreting this phenomenon, it is necessary
to bear in mind the caution given by Mr. Cassels that
“its silver coinage has not only had to satisfy the
requirements of commerce as the medium of exchange, but
it has to suply a sufficiency of material to the silversmith
and the jeweller. The Mint has been pitted against the
smelting-pot, and the coin produced by so much patience
and skill by the one has been rapidly reduced into bangles
by the other.”*
* Minute on Gold Currency for India, dated December 8, 1863, in the Report
of the Bombay Chamber of Commerce, 1863-64. App. I, p. 189.
TABLE IV*
364
TRADE AND CURRENCY

Annual Produc-
Treasure. Excess (+) or Defect (—) of tion (in £,
Merchandise. Total Coinage of
Net Imports of Coinage on Net Imports of 00,000
Years omitted) of
Imports. Exports. Silver. Gold. Silver. Gold. Silver. Gold.

Gold. Silver.
£ £ £ £ £ £ £ £
1850-51 11,558,789 18,164,150 2,117,225 1,153,294 3,557,906 123,717 + 1,440,681 -1,029,577 8,9 7,8
MK
1851-52 12,240,490 19,879,406 2,865,357 1,267,613 5,170,014 62,553 + 2,304,657 -1,205,060 13,5 8,0
1852-53 10,070,863 20,464,633 3,605,024 1,172,301 5,902,648 Nil + 2,297,624 -1,172,301 36,6 8,1
SJ+YS
1853-54 11,122,659 19,295,139 2,305,744 1,061,443 5,888,217 145,679 + 3,582,473 - 915,764 31,1 8,1
1854-55 12,742,671 18,927,222 29,600 731,490 1,890,055 2,676 + 1,860,455 - 728,814 25,5 8,1
1855-56 13,943,494 23,038,259 8,194,375 2,506,245 7,322,871 167,863 + 871,504 -2,338,382 27,0 8,1
1856-57 14,194,587 25,338,451 11,073,247 2,091,214 11,220,014 128,302 + 146,767 -1,962,912 29,5 8,2
1857-58 15,277,629 27,456,036 12,218,948 2,783,073 12,655,308 43,783 + 436,360 -2,739,290 26,7 8,1
25-9-2013/YS-11-11-2013
1858-59 21,728,579 29,862,871 7,728,342 4,426,453 6,641,548 132,273 -1,086,794 -4,294,180 24,9 8,1
1859-60 24,265,140 27,960,203 11,147,563 4,284,234 10,753,068 64,307 - 394,495 -4,219,927 25,0 8,2
* Prepared from figures given in Report Palgrave’s “Memorandum on Currency and Standard of Value,” Appendix B to Third Report
of the Royal Commission on Depression of Trade and Industry. C4797 of 1886. Figures for the production of gold and silver, which are
for calander years, are added from the “Silver Question and the Gold Question,” by R. Barclay.
364
Now it will be seen from the figures given that all the
import of silver was coined and used up for currency purposes.
Very little or nothing was left over for the industrial and
social consumption of the people. That being the case, it
is obvious that a large part of the coined silver must have
been abstracted from monetary to non-monetary purposes.
The hidden source of this monetary stringency thus becomes
evident. To men of the time it was as clear as daylight that
it was the rate of absorption of currency from monetary to
non-monetary purposes that was responsible as to why (to
quote from the same authority)
“notwithstanding such large importations the
demand for money has so far exceeded……..that serious
embarrassment has ensured and business has almost come
to a stand from the scarcity of circulating medium. As
fast as rupees have been coined they have been taken into
the interior and have there disappeared from circulation,
either in the Indian substitute for stocking-foot or in the
smelting-pot into bangles.”*
The one way open was to have caused such additional
imports of silver as would have sufficed both for the monetary
as well as the non-monetary needs of the country. But the
impors of silver were probably already at their highest. For,
as was argued by Mr. Cassels,
“the annual production of silver of the whole world
does not exceed ten million sterling. During the last
few years, therefore, India alone has annually taken,
and to a great extent absorbed, more of the metal than
has been produced by the whole world. It is clear that
this cannot long continue without producing serious
embarrassment. Either the European markets will be
unable or unwilling to supply us, or the value of silver will
rise to an extravagant extent. Under such circumstances
it is not difficult to foresee that the present crisis must
continually recur, and the commerce in this country
must be periodically, if not permanently, crippled by the
scarcity of the circulating medium.”†
Had there been any credit media the contraction of currency
* Minute on Gold Currency for India, dated December 1, 1863. Report, op. cit. p. 184.
† Report, op. cit. p. 189.
might not have been felt as severely as it was. But there was
no credit money worth the name. The Government issued
interest-bearing Treasury notes, which formed a part of the
circulating medium of the country. But, apart from being
insignificant in amount,* these Treasury notes had
“proved a failure, owing, firstly, to the condition that
they would not be received in payment of revenue for
twelve months; secondly, they would be paid off or received
only where issued, so that as the issues were confined to
Calcutta, Madras and Bombay, their use and employment
for purposes of circulation were limited to those cities
…… and lastly, because their amounts were too large and
their period of running at interest too short.”†
Nor was banking so widely developed as to satisfy the
currency needs of comerce. The chief hindrance to its growth
was the attitude of the Court. Being itself a commercial body
largely dealing in exchange, the Court was averse to the
development of banking institutions lest they should prove
rivals. As this traditional policy of hostility continued even
after the Court had ceased to be a body of merchant princes,
banks did not grow with the growth of trade. Indeed, as late
as 1856 banks in India numbered few and their issues were
small, as shown in the table on page 367. (Table V)
The insufficiency of silver and the want of credit currency
caused such an embrrassment to trade that there grew up a
change in the attitude toward the Currency Act of 1835, and
people for once, began to ask whether, although it was well
to have changed from bimetallism to monometallism, it would
not have been better to have preferred gold monometallism to
silver monometallism. As more and more of gold was imported
and coined, the stronger grew the demand for giving it a legal
* Amount of Indian Treasury notes outstanding :—

On April 30, 1850 £804,988
On April 30, 1851 802,036
On April 30, 1852 770,301 Extracted from Table No. 2 of the Return
On April 30, 1853 850,432 relating to East India Revenues, etc.,
On April 30, 1854 850,627 Parliamentary paper 201, VIII, 1858.
On April 30, 1855 889,875
On April 30, 1856 967,711
† How to meet the Financial Difficulties of India, by A. C. B., London, 1859,
p. 13. This is in many ways a most remarkable pamphlet, which suggested many
of the later reforms in Indian currency and banking.
TABLE V
BANKS IN INDIA *
Year of Capital. Notes in Specie in Bills under
Head
Name of the Bank. Estab- Branches and Agencies. Subscribed. Paid up. Circulation. Coffers. Discount.
Offices. £
lishment. £ £ £ £
Bank of Bengal 1809 Calcutta 1,070,000 1,070,000 1,714,771 851,964 125,251
Bank of Madras 1843 Madras 300,000 300,000 123,719 139,960 59,871
Bank of Bombay 1840 Bombay 522,000 522,000 571,089 240,073 195,836
Oriental Bank. 1851 1,215,000 1,215,000 199,279 1,146,529 2,918,399
Agra and U.P. . 1833 Calcutta Agra, Madras, Lahore, 700,000 700,000 — 74,362 —
Canton, and London
MK
N.W. Bank 1844 ” Bombay, Simla, Mus- 220,560 220,000 — — —

sowri and Agra Ag-
encies in Delhi and
Cawnpore
SJ+YS
London & East- 1854 250,000 — 325,000 — —

ern Bank
Commercial Bank 1854 Bombay Agents in London, 1,000,000 456,000 — — —
Calcutta, Canton, &
Shanghai
Delhi Bank . 1844 Delhi Agents in London, — 180,000 — — —
Calcutta, Bombay,
and Madras
Simla Bank . 1844 — 63,850 — — —
Dacca Bank . 1846 30,000 — — — —
25-9-2013/YS-11-11-2013
Mercantile Bank Bombay London, Calcutta, Col- 500,000 328,826 777,156 77,239 109,547
ombo, Kandy, Can-
ton, and Shanghai
FROM A DOUBLE STANDARD TO A SILVER STANDARD
India, China and

Australian Bank had not commenced business
* R. M. Martin, The Indian Empire, Vol. 1, p. 665. N.B.—The table in original does not specify dates, but internal evidence shows that it is a
367
367
about 1856.
status in the existing system of Indian currency.* All were

agreed on the principle of a gold currency : whatever difference
there was, was confined to the method of its adoption. The
introduction of gold on a bimetallic basis was out of the question,
for the Government refused to make what it deemed to be
the “hopeless attempt” to fix the value of gold and silver and
compel their acceptance at that value.† The projects which the
Government was willing to consider‡ were : (1) to introduce
the “sovereign” or some other gold coin and to let it circulate
at its market price from day to day as measured in silver;
(2) to issue a new gold coin, bearing the exact value of a given
number of rupees, and make it a legal tender for a limited
period, when it might be readjusted and again valued, and
made a legal tender for a similar period at the new rate ;
(3) to introduce the English sovereign as a legal tender for
Rs. 10, but limited in legal tender to the amount of Rs. 20 or
two sovereigns ; or (4) to substitute a gold standard for the
silver standard.
Of these projects, the first three were evidently unsafe
as currency expendients. Fixity of value between the various
components of the currency is an essential requisite in a well-
regulated monetary system. Each coin must define a fixed value,
in terms of the others realizable by the most untutored intellect.
When it ceases to do so, it becomes a mere commodity, the value
of which fluctuates with the fluctuations of the market. This
criterion ruled out the first two projects. To have introduced a
coin as money, the value of which could not be vouched for—
as would have been the case under the first project—from
one day to another, apart from the trouble of computing and
ascertaining the fluctuations, would have been a source of such
embarassment that the Government, it must be said, acted
wisely in not adopting it. There was no saving grace in the
second project to recommend its adoption in preference to the
first. If it had been adopted the result would have been that
during the period when a rate remained fixed, gold would have
* The matter was first broached by the native shroffs and merchants of
Calcutta in April. 1859, in a letter to the President of the Bengal Chamber of
Commerce. Both agreed to urge upon the Government the necessity of a gold
currency in India. Cf. Papers relating to the Introduction of a Gold Currency in
India, Calcutta, 1866, pp. 1-3.
† Ibid., p. 6.
‡ Cf. Minute by the Rt. Hon. James Wilson, dated December 25, 1859, Ibid.,
p. 23.
been forced into circulation supposing that its market value

was lower, and at the end of the year, if it was known that
the rate would be revised and the value of the coin be reduced
in conformity with the fall of gold, a general struggle to get
rid of the overrated gold coin and shift the inevitable loss
to the shoulders of others would have certainly ensued. The
third was a somewhat strange proposal. It is possible with a
low-priced metal to strike coins of less than full value for the
purposes of small payments and limit their tender. But this is
not possible with a high-priced metal, the raison d’etre of which
is to facilitate large transactions. The objections to the plan
could hardly be concealed. So long as gold was undervalued,
it would not circulate at all. But once it became overvalued
owing to changes in the market ratio, the rupee would go
out of circulation, and shopkeepers and traders would remain
possessed of a coin which would be of no use in liquidating
large transactions.
The only project free from these faults was the adoption
of a gold standard, with silver as a subsidiary currency. The
strongest argument, the Government could advance against
this demand was that “in a country where all obligations have
been contracted to be paid in silver, to make a law by which
they could forcibly be paid in anything else would simply be
to defraud the creditor for the advantage of the debtor, and
to break public faith.”* However sound the argument might
have been, it was hopelessly inadequate to meet the growing
demand to place the Indian currency on an expanding basis.
Indeed, it cannot be said that the Government was really
serious in its opposition to a gold currency. For the strength
of its position, it relied not so much on the soundness of its
arguments against gold, but on its discovery that a better
solution than a gold currency existed at hand. If what was
wanted was a supplement to the existing currency, then the
remedy proposed by the Government was unassailable. Gold
would have been uneconomical and inconvenient. Silver backed
by paper would make the currency economical, convenient, and
expansive. Indeed, the advantages were so much in favour of
the official alternative that this first attempt against the silver
standard resulted not in the establishment of a gold standard,
but in the introduction of a Government paper currency to
supplement the existing silver standard.
* Ibid, p. 26.
None the less, the desire for a gold standard on the part of
the people was too great to be altogether ignored, though the
demand for it was supposed to have been met by the alternative
measure. The paper currency, as originally conceived by Mr.
Wilson, was a complete counterblast to the gold agitation.
But his successor, Mr. Laing, differed from him in what he
regarded as the “barbarous” exclusion of gold from Indian
currency. He therefore introduced two important provisos in
the original Bill, when the task of carrying it through fell
upon him, owing to the untimely death of Mr. Wilson. One
was to raise the lowest denomination of notes from Rs. 5 to
Rs. 20. The other was
“to authorize the Governor-General in Council from
time to time to direct by order to be published in the
Gazettes of Calcutta, Madras and Bombay, that notes to
an extent not exceeding one-fourth of the total amount of
issues represented by coin and bullion …… be issued in
exchange for gold coin…... or bullion computed at rates
to be fixed by such order .........”
The Act, which afterwards embodied the Bill, adopted the
second proviso in toto, and the first after being modified so
as to fix Rs. 10 as the lowest denomination of notes to be
issued. Although its general tenor is clear, the immediate
aim of the second proviso does not become quite clear from
a perusal of the official papers. The Select Committee on the
Paper Currency Bill seem to have held that the proviso was
innocuous, if not good. It thought
“that on special occasions and in particular transactions
it might be a great advantage to the mercantile community
to know that gold could be made available as money at
a fixed rate. If, on the other hand, at the rate fixed gold
did not enter into circulation it would prove that silver,
with a secure and convertible paper currency, gave perfect
confidence and answered all the wants of the trade and of
the community, and the enactment would remain a dead
letter and be perfectly harmless.”
But there is no doubt that Mr. Laing looked upon it as
an easy means of making a transition to the gold standard.
In his Minute on Currency and Banking, dated May 7, 1862,
he wrote :
“The object of this proviso was simply to leave the door
open for cautious and tentative experiments with regard

to the future use of gold. The importation of gold already
exists and is increasing, and the metal is much appreciated
by the native population as generally to command a
premium ……… Thus, after a time, if the use of gold
becomes more general, and its value more fixed, some
further step might be taken.”
And such seems to have been the impression of the Secretary
of State at the time, for he understood the force of the
recommendation in favour of issuing notes against gold was
that it would “effectively contribute to the introduction of a
gold currency in India.”*
But whether conceived as a relief to the mercantile
community or as an avenue for introducing a gold currency
the proviso was not put into effect. The Secretary of State
objected† to any action being taken with regard thereto. In
the meantime the paper currency did not prove the panacea,
it was avowed to be. The extent it reached and the economy
it effected were comparatively insignificant.
TABLE VI
EXTENT AND ECONOMY OF PAPER CURRENCY
Value of
Government
Presidencies Bullion Coin Notes in
Securities
Circulation
Calcutta on Oct. 31, 1863 …… 1,84,55,922 1,10,44,078 2,95,00,000
Madras on Oct. 31, 1863 …… 73,00,000 …… 73,00,000
Bombay on Jan. 4, 1864 1,17,00,000 1,19,00,000 …… 2,36,00,000
Total 1,17,00,000 3,76,55,922 1,10,44,078 6,04,00,000
As was pointed out by Mr. Cassels‡ the currency notes, after

three years, had been taken only to the extent of about 6 per
cent, of the whole metallic currency, which was then estimated
by Mr. Wilson to be £ 100,000,000 in sterling, and that they
had actually fulfilled their primary object of releasing the
* Par. 59 of the Secretary of State’s Despatch, No. 158, dated September 16,
1862.
† See par. 64 of his Despatch, supra.
‡ Cf. his letter to the Government of bombay, dated January 1, 1864. Vide
Papers, etc., on the Introduction of Gold in India, pp. 51-69
reproductive capital of the country only to the extent of a

million sterling or 1 per cent, of the whole. Owing to the
demand for Indian cotton in the Liverpool market to take the
place of American cotton, the export of which was stopped
during the Civil War, the growing foreign trade assumed
enormous proportions. And as the paper currency gave no
relief, the entire stress fell upon silver. The production of
silver, however, was not increasing much faster than it did
previously, and its absorption by India had not slackened. The
inadequacy of a currency medium therefore continued to be
felt as acutely as before, notwithstanding the introduction of a
paper currency. Not only was gold imported in large quantities,
but was employed for monetary purposes, although it was
not legal tender. The fact was brought to the notice of the
government of India by the Bombay Chamber of Commerce*
in a memorial praying for the introduction of a gold currency
in India, in which it was pointed out
“that there is an increasing tendency to the creation of
a gold ingot currency, but the natives of this country, as
a rude remedy for the defects of the existing silver one,”
and
“that gold bars, stamped with the mark of Bombay banks,
are for this purpose circulated in several parts of the country.”
This led to an agitation for requiring the Government to
give effect to the proviso in the Paper Currency Act,† and the
movement assumed such dimensions that it forced the hands
of the Government. On this occasion, the plan for effecting
the change was boldly conceived. Sir Charles Trevelyan saw
through the weak point of the proviso on which the Government
was called upon to act. He argued that the currency notes
were payable only in the current coin of the country, which in
India was the silver rupee, and to hold a portion of the reserve
gold which could not be tendered in payment of the notes was
seriously to endanger their convertibility in times of political
* Report of the Bombay Chamber of Commerce, 1863-64, App. I, p. 206.
† This time the Government was memorialized by all the Chambers of
Commerce— Bengal, Bombay, and Madras. Action was also urged by the Bombay
Association and the Manchester Chamber of Commerce. But the movement derived
its greatest strength from the support of the Government of Bombay, particularly
by Sir William mansfield’s famous Minute on Gold Currency for India.
TABLE VII*
TRADE AND CURRENCY
Treasure. Annual Produc-

Excess (+) or Defeet (—) of tion (in £,
Merchandise. Total Coinage of
Coinage on Net Imports of 00,000
Years. Net Imports of omitted) of
Imports. Exports. Silver. Gold. Silver. Gold. Silver. Gold.

Gold. Silver.
£ £ £ £ £ £ £ £
MK
1860–61 23,493,716 32,970,605 5,328,009 4,232,569 5,297,150 65,038 – 30,859 – 4,167,531 23,9 8,2
1861–62 22,320,432 36,317,042 9,086,456 5,184,425 7,470,030 58,667 – 1,616,426 – 5,125,758 22,8 8,5
SJ+YS
1862–63 22,632,384 47,859,645 12,550,155 6,848,156 9,355,405 130,666 – 3,194,750 – 6,717,490 21,6 9,0
1863–64 27,145,590 65,625,449 12,796,717 8,898,306 11,556,720 54,354 – 1,239,997 – 8,843,952 21,4 9,8
1864–65 28,150,923 68,027,016 10,078,798 9,839,964 10,911,322 95,672 + 832,524 – 9,744,292 22,6 10,3
1865–66 29,599,228 65,491,123 18,668,673 5,724,476 14,639,353 17,665 – 4,029,320 – 5,706,811 24,0 10,4
1866–67 29,038,715 41,859,994 6,963,073 3,842,328 6,183,113 27,725 – 779,960 – 3,814,603 24,2 10,1
25-9-2013/YS-11-11-2013
1867–68 35,705,783 50,874,056 5,593,961 4,609,466 4,385,080 21,534 – 1,208,881 – 4,587,932 22,8 10,8
1868–69 35,990,142 53,062,165 8,601,022 5,159,352 4,269,305 25,156 – 4,331,717 – 5,134,196 22,0 10,0
FROM A DOUBLE STANDARD TO A SILVER STANDARD
1869–70 32,927,520 52,471,376 7,320,337 5,592,016 7,510,480 78,510 + 190,143 – 5,513,506 21,2 9,5
*Sources same as those used in the case of Table IV.

373
373
distrust or commercial panic.* He therefore ventured beyond

the scope of the agitation, and pronounced that instead of
allowing gold a backdoor entry into the currency system it ought
to be made the standard of value in India. He did not agree
with Mr. Wilson that the substitution of gold for the silver
standard would be “to break faith with the creditor.” Nor was
he much deterred by the fact that before the silver currency
could be reduded to a subsidiary position, the introduction of
gold in India would give rise to a double standard for the time
being ; for he argued that “all nations must pass through a
transition stage of a double standard before they arrive at a
single standard.” Accordingly he proposed that (1) sovereigns
and half-sovereigns of British or Australian standard should be
legal tender in India, at the rate of one sovereign for Rs. 10,
and that (2) Government currency notes should be exchangeable
either for rupees or sovereigns at the rate of one sovereign for
Rs. 10, but that they should not be exchangeable for bullion.
His proposals were accepted by the Government of India and
were communicated to the Secretary of State† for his sanction.
But the Secretary of State, impatient and intolerant of any
deviation from a monometallic system, whittled down the whole
project with scant courtesy. His reply‡ is a grotesque piece of
reasoning and terribly shallow. He was unwilling to allow the
measure, because he felt satisfied that the rate of Rs. 10 to
a sovereign underrated the sovereign too much to permit its
circulation. Here he was on solid ground. The cost of producing
a sovereign at a Mint in India was estimated§ at the time to
be Rs. 10-4-8 ; while the cost of importing it to Calcutta from
England was estimated at Rs. 10-4-10, and from Australia at
Rs. 10-2-9. Whichever was the proper rate, it was certain that
sovereigns could not circulate at the rate of Rs. 10 to 1. It was
* Cf. his Minute dated June, 20, 1864. Vide Papers, etc., on Gold in India p.
147 et seq. He was even opposed to holding silver bullion in the paper currrency
reserve, for this involved on the Currency Department the obligation to get the
silver coined, which was a matter of time, having regard to the limited capacity
of the Indian Mints at the time, while the notes issued were payable in coin
on demand. There was a run on the Paper Currency Department, which found
itself short of coin.
† Cf. Government of India’s Despatch No. 89, dated Simla, July 14, 1864.
‡ Financial Despatch from the Secretary of State, No. 224, dated Setpember
26, 1864.
§ Cf. Letter from the Hon. Claud Brown to the Hon. Sir C. E. Trevelyan, dated
Calcutta, May 28, 1864. Vide Papers, etc., on Gold, p. 265.
a pity that Sir Charles Trevelyan did not propose a higher

ratio* so as to make the circulation of the sovereign an assured
event. But the Secretary of State would have been averse to the
measure just the same, even if the ratio had been favourable
to the sovereign. To the Secretary of State, the measure,
based as it was on an unfavourable ratio, was useless. But if
based on a favourable ratio it was none the less pernicious,
for, it portended the possibility of what he considered as the
most vicious system of double standard, however temporary
it might have been. The mere contingency of giving rise to a
bimetallic system was enough to frighten the Secretary of State
into opposition to the whole measure, for he refused to admit
that “it may be for the public advantage to pass through a
period of double standard in order to change the basis of the
currency from silver to gold.”
The only concession that the Secretary of State was willing
to make was to permit “that gold coin should be received
into public treasuries at a rate to be fixed by Government
and publicly announced by Proclamation” without making it
a general legal tender in India. It will be recalled that this
was a revival of that foolish measure which was abandoned
in 1852 for having embarrassed the Government. To offer to
receive coin which you cannot pay back is to court trouble, and
it was to obviate the too-well-known danger inherent in the
project that this more complete measure was proposed. But
the currency stringency was so great that the Government of
India, rather than obstinately cling to their view, consented to
avail themselves of the suggestion of the Secretary of State,
and issued a Government Notification in November, 1864,
which proclaimed that
“sovereign and half-sovereigns coined at any authorized
Royal Mint in England or Australia of current weight,
shall until further notice be received in all the Treasuries
of British India and its dependencies in payment of sums
due to Government, as the equivalent of 10 and 5 Rs.
respectively ; and that such sovereigns and half-sovereigns
shall, whenever available at any Government Treasury,
be paid at the same rates to any person willing to receive
them in payment of claims against the Government.”
* The reason why he preferred the ratio of 10 to 1 was that that was the
prevalent market ratio in India. His argument was that “the sovereign must be
rated for circulation in India, not with reference to its English, but to its Indian
price estimated in silver.” Probably he was unwilling to overrate the sovereign
because of his fear that “the existing Indian currency would be rapidly revolutionized
and creditors would receive much less than their due.” Cf. his Minute dated
November 23, 1864 Vide Papers, etc. on Gold in India.
The real par, however, was somewhat above Rs. 10 to the

sovereign,* and the notification was therefore inoperative. The
currency situation, on the other hand, continued to be as acute
as ever, and the Government of India was again moved in 1866
by the Bengal Chamber of Commerce to take steps to make the
circulation of gold effective. This time the Chamber insisted on
the institution of a Commission of Inquiry “as to the expediency
of introducing gold into the monetary system of India.” But
the Government of India held† that “ instead of a gold a paper
currency has been introduced, in the expectation that it would
prove a more convenient and acceptable circulating medium
than either of the precious metals,” and consequently “ it must
be shown that paper has not proved and is not likely to prove
a circulating medium adequate to the wants and suitable to the
habits of the country, before an endeavour is made to introduce
gold in supersession of, or in addition to, paper.” A commission
was therefore appointed to inquire into the “operation of
the existing currency arrangements which were established
under Act XIX of 1861,” and to report as to “what may be the
advantage, as based on expediency, of the introduction of the
legal tender of gold into India, in addition to that of silver.”
After an exhaustive investigation, the Commission came to the
conclusion‡ that owing to several causes the paper currency
had failed to establish itself among the circulating media of
the country, but that gold was finding a larger place in the
transactions of the people. The Commission ended by urging
upon the Government “to cause a legal tender of gold to be a
part of the currency arrangements of India.” Now it was the
turn of the Government to give effect to the recommendation.
But, curiously enough, it did not go to the extent of adopting
the recommendation of the Commission which it had itself
appointed. Instead of making gold legal tender, as advised by
the Commission, the only action the Government took was to
issue another Notification on October 28, 1868, which simply
altered the rate of the sovereign to Rs. 10-8, without doing
anything further to avoid the evil consequence attendant upon
that one-sided measure. Fortunately for the Government, even
this correction of the rate did not induce any flow of gold into
* Cf. Appendix A to the Minute by Sir William Mansfield on Gold Currency
for India, H. of C. Return 79 of 1865.
† Resolution in the Financial Department, dated February 3, 1866, in the Fort
William Gazette of the same date, under Notification No. 592.
‡ For the Report; of the Comission, see H. of C. Return 148 of 1868.
the circulation of the country. The currency troubles had by

then subsided, and as no new pressure was exerted upon the
Government, this proved the last of two abortive attempts the
Government made to introduce gold into India.
For the time being, the problem was solved by the natural
course of events. But, as subsequent events showed, the change
to a gold standard would have been better for India.* and
would have been welcomed† in the interests of Europe, which
was then suffering from high prices due to the superfluity of
gold. At this particular juncture, the Government of India was
really at the crossing of ways, and could have averted the
misfortunes that were to befall it and its people if it had sided
with the forces of change and replaced the silver standard by
a gold standard, as it could most easily have done. That those
in charge of Indian affairs should have thrown the weight
of their authority against the change was no dishonest act
deserving of reproach, ‡ but it does furnish one more illustration
of those disastrous human ways, which often lead people to
regard the situation in which they live as most secure, just
when it is most precarious. So secure did they feel about the
currency situation that in 1870, when the Mint Law came
to be revised and consolidated, they were content, as though
nothing had happened or was likely to happen, to allow the
silver standard of 1835 to continue pure and unsullied by any
admixture of gold.§
Alas ! those, who then said¶ that they were not called upon
to take more than a “juridical” view of the Indian currency
question, knew very little what was in store for them.

* It is true Prof. J. E. Cairnes was against the introduction of a gold standard

in India ; but later he withdrew his objections. Cf. his Essays in Political Economy
(London, 1873, pp. 88-90).
†Cf. J. R. McCulloch, Dictionary of Commerce, Ed. 1869, p. 1131.
‡ Mr. H. B. Russell says that they retained the silver standard because they
profited by it on their remittances. Cf. his International Monetary Conferences,
1898, p. 32.
§The original Mint and Coinage Bill contained clauses embodying the notification
of 1868, compelling the Government to receive sovereigns at Public Treasuries,
Cf. Gazette of India, Part V, dated July 23, 1870. But such was the degree of
indifferences shown that they were afterwards dropped by the Select Committee,
which preferred to leave the matter to the discretion of the Executive.
¶ Cf. the speech of the Hon. Mr. Stephen on September 6, 1870, introducing the
Coinage and Mint Bill, Vide Supreme Legislative Council Proceedings (abbreviated
into S.L.C.P.), Vol. IX, p. 398.
CHAPTER II
THE SILVER STANDARD AND
THE DISLOCATION OF ITS PARITY
It is clear how the evolutionary process with respect to the
Indian currency culminated in the establishment of a silver
standard and how the agitation for a gold currency ended in
the silver standard being supplemented by a paper currency.
Before proceeding to inquire into the working of such a mixed
system, it would be useful to review briefly the nature of its
framework.
The metallic part of it was regulated by Act XXIII of 1870.
The coins authorized and legalized 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 enactments
in the matter of coins,* 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
* This may be seen from the following :—
(a) Gold Coins, (i), (ii), and (iii) were authorized by Section VII of Act XVII of
1835. Only (iv) was an addition made by this Consolidating Act of 1870.
(b) Silver Coins, (i), (ii), and (iii) were authorized by Section I of Act XVII of
1835. This Act had also authorized the issue of a silver coin called “ Double Rupee,”
but this was discontinued by Section II of Act XIII of 1862, which substituted in
its place the silver coin No. iv.
(c) Copper Coins, (i), (ii), and (iv) were first authorized by Section I of Act XXI
of 1835, which, however, restricted their circulation to the Presidency of Bengal.
They were afterwards universalized for the whole of India by Act XXII of 1844.
Coin No. (iii) was first introduced by Section II of Act XI of 1854.
TABLE VIII
Denomination of Coins issued by the Gross Wt Remedy in Fineness. Remedy in
Legal-tender Power.
Mint. Troy Grs. Weight. Troy Grs. Fineness.
I. Gold Coins (a)
2 2
(i) Mohur . . 180 ths 165 ths
1000 1000
(ii) Third of a Mohur . . 60 ” 65 ” Not Legal Tender at all.

(iii) Two-thirds of a Mohur . 120 ” 110 ”
(iv) Double Mohur . . 360 ” 330 ”

II. Silver Coins (b) . .
5 2
MK
(i) Rupee . . . . 180 ths 165 ths Unlimited Legal Tender.

1000 1000
(ii) Half-rupee . . . 90 ” 82.5 ”

(iii) Quarter-rupee . . 7 3
ths ths
SJ+YS
45 41.25
1000 1000 Legal Tender for Fractions of a Rupee
(iv) Eighth of a Rupee . . 10 only.
22.5 ths 20.625 ”
1000
III. Copper Coins (c)
1
(i) Pice . . . . 100 ths — — 1
40 Legal Tender for th part of a Rupee.
64
(ii) Double Pice . . . 200 ” — —
1
25-9-2013/YS-11-11-2013
Legal Tender for th part of a Rupee.

32
(iii) Half-pice . . . 50 ” — —
1
Legal Tender for th Part of a Rupee.
128
(iv) Pie . . . 33.3 ” — —
1
Legal Tender for nd Par of a Rupee.
192
THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY 379
379
coins contained the value they were certified to contain. 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 authorized 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.* 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
* This machinery is provided in England by what is known as the “Trial of
the Pyx.” For a history of this in institution and the way it functions, cf. H. of C
Return 203 of 1866. During the time of the East India Company the maintenance
of the standard purity of the Indian coins always formed a most anxious concern
of the Court of Directors. The coins of Indian mintage were regularly required to
be sent over to England, where they were tested at a special Trial of the Pyx and
the verdict reported back for the future guidance of the Mint Masters in India.
Cf. H. of C. Return 14 of 1849. since the winding-up of the Company there is no
machinery to bring the Mint Msasters to book.
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 mille on gold
bullion and coin, and of one per mille 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*— 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 priviliged were immune. 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
* Cf. F. C. Harrison, Economic Journal, 1891, Vol. I, p. 726.
†The reaosns 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 were 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 were
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.
been exercised by any of the banks on any very large scale, not
even by the Presidency Banks,* and was taken away from all
in 1861,† 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. 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‡ 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
* 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 :—
Accounts Notes in
Name of the Bank
current 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)
† For a summary of the controversy re.Bank issue v. Government issue, see
Report of the Bombay Chamber of Commerce for 1859-60, Appendix L, pp. 284-318.
‡ Sect. IV of Act XIX of 1861.
according to all reasonable experience, the paper currency

might be expected to fall.”* Estimating on this basis, the limit
to the investment portion was fixed at 4 crores in 1861,† at 6
crores in 1871‡ and at 8 crores in 1890.§ 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 preseve its value by contracting
and expanding in the same manner and to the same extent
as its metallic counterpart.
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 organization
of the paper currency itself.§§ 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
* Cf. Sir Richard Temple’s speech introducing the Paper Currency Bill, dated
March 25, 1870. Supreme Legislative Council proceedings, Vol. IX, pp. 151-52.
† Act XIX, Sec. X.
‡Act III, Sec. 16.
§ Act XV, Sec. I.
¶The following table shows the distribution of the paper currency reserve at
three different periods :
Percentage of each
Component of the
Composition of the Reserve
Note Reserve to the Total
Period Circula- Circulation
tion
Secu- Secu-
Silver Gold Total Silver Gold
rities rities
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
§§ For a clear and concise sketch of the organization of the paper currency in
India, see the Note of the Government of India in the Report of the U.S. Director,
of the Mint, Washington, 1894, pp. 231-33.
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,* 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 organization of the paper currency in India, what was
largely responsible was the prevalence of internal exchange† in
the country. It raised a serious problem for the Government to
cope with. If notes were to be made universally encashable it was
feared that merchants, instead of using notes as currency, might
use them as remittance on different centres to avoid internal
exchange, and the Government be obliged to move funds between
different centres to and fro, lest it should have to suspend cash
payments. To undertake resource operations on such a vast scale
between such distant centres when facilities for quick transport
were so few, was obviously impossible,‡ and the Government
therefore decided to curtail the encashment facilities of notes it
issued. For the purposes of the paper currency, the Government
divided the country into a number of circles of issue, and each
currency circle was further subdivided into sub-circles,§ and the
notes issued bore on their face the name of the circle or sub-circle
*See. 3 of Act III.
† 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 3¾ 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 popularize 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.’
‡ Cf. the speech of the Hon. Mr. Laing on the Paper Currency Bill dated February
16, 1861, S.L.C.P., Vol. VII, pp. 73-74.
§ Each sub-circle had within it a number of agencies of issue ; but the agencies
were centres not of encashment but only of issue.
from which they originated. Notes issued from any agency of

issue situated in the territory comprised within a circle of issue
were not legal tender in the territory of any other currency
circle, nor were they encashable outside their own circle. Nay
more, the notes issued from sub-circles subject to the same
chief circle were legal tender in one another’s territory, but
were not encashable except at their office of issue or at the
issue office of their chief circle. The sub-circle notes could
thus be cashed at two places, but the notes of the issue office
of the chief circle, though legal tender in the entire territory
covered by it, were encashable nowhere except at its own
counter, not even at any of its own sub-circles.* This want of
universal encashability, though it saved the Government from
the possibility of embarrassment, proved so great a hindrance
to the popularity of the notes that it may be doubted whether
the paper currency could have made a progress greater than
it did even if the lowest denomination of the notes had been
lower than it actually was.
It must, however, be borne in mind that it was not the
intention of the Indian Legislature to make the Indian currency
as economical† as was desired by the Executive Government. The
Legislature was no doubt appealed to by the original author of
the paper currency to turn India into a new Peru, where as much
currency could be had with as little cost‡ but the Legislature
showed a rather prudent reserve on the matter of aiding the
consummation of such a policy. As the centres of encashment
were so few, and the area included within each so large as to
separate the furthest point in a circle by a distance of about
700 miles from the centre of encashment of the circle, it viewed
with dread the authorizing of notes of smaller denomination
* For the inconveniences of the “circle” system and the various measures
contemplated by Government to facilitate the encashment of notes, see Report of
the Bombay Chamber of Commerce for 1868-69, Appendix, pp. 309-16.
† Cf. the whole speech of the Hon. Mr. Sconce dated September 22, 1860,
S.L.C.P., Vol. p. 1143 et seq.
‡Cf. the speech of Mr. Wilson, the originator of paper currency in India, dated
March 3, 1860, where he says : “ In short, to abstract so much coin from the mere
mechanical purpose of the circulation, supplying its place with convertible paper,
would be exactly the same in effect as if suddenly, in the centre of the Maidan,
a rich silver mine had been discovered which produced silver at little or no cost.”
Supreme Legislative Council Proceedings, Vol. VI, p. 250.
which the poor could not refuse and yet could not cash.* Besides
the hardship involved in the want of encashability in the notes,
the Legislature feared they would prove a “ fugitive treasure”
in the hands of the Indian peasant. Not being able to preserve
them from rain and ants, he might have had to pay a heavy
discount to be rid of the notes he could have been forced to
accept †. So opposed was the Legislature to the economizing
clauses of the Paper Currency Bill as contrived to drive out
metallic currency that it gave the Government an option to
choose between legal-tender notes but of higher denomination
and lower-denomination notes but of no legal-tender power.
‡ And as the Government chose to have legal-tender notes,
the Legislature in its turn insisted on their being of higher
denomination. At first it adhered to notes of Rs. 20 as the lowest
denomination, though it later on yielded to bring it down to
10, which was the lowest limit it could tolerate in 1861. Not
till ten years after that, did the legislature consent to the issue
of Rs. 5 notes, and that, too, only when the Government had
promised to give extra legal facilities for their encashment.§
On the whole, the desire of the Indian Legislature was to
make the Indian currency safer, rather than economical, and
such it undoubtedly was.
How did the currency system thus constituted work ?
Stability of value is one of the prime requisites of a good
currency system. But if we judge the Indian currency from
this point of view, we find that there existed such variations
in its value that it is difficult to escape the conclusion that
the system was a failure.
Taking the rate of discount as an evidence of the adequacy
of currency for internal commerce, it was the opinion of such
a high financial authority as Mr. Van Den Berg that the
unexpected contortions and sudden transitions in the Indian
money market were unparalleled in the annals of any other
money market in any other part of the world¶. India is
*Cf. the speeches of the Hon. Mr. Forbes, dated July 13, 1861, S.LC.P. 1154.
† Cf. the speech of the Hon. Mr. Forbes, dated July 13, 1861. Supreme Legislative
Council Proceedings, Vol. VII, p. 768.
‡ Cf. speech of the Hon. Mr. Scone, September 22, 1880, S.L.C.P., Vol. VI,
p. 1151.
§ For such extra facilities, and measures adopted to materialize them, Cf. the
interesting speech of the Hon. Sir Richard Temple on the Paper Currency Bill
dated January 13,1871, S.LC.P., Vol. X, pp. 22-25.
¶ The Money Market and Paper Currency of British India, Batavia, 1884, p. 3.
pre-eminently a country subject to seasonal swings.* Mid-

summer is naturally a period of diminished activity, while
autumn brings renewed vigour in all activities of social and
economic life. Not production alone is affected by seasons. On
the side of consumption, Indian social life is also subject to
seasonal variations. There are marriage season, holiday seasons
and holy seasons. Even distribution has assumed in India quite
a seasonal character. The practice of paying rents, wages,
dividends, and settling accounts at stated intervals has been
gaining ground as a result of contact with Western economic
organization. All these generate a kind of rhythm in the social
demand for money, rising at certain periods of the year and
falling at others. Having regard to the seasonal character of the
economic and social life, the fluctuations caused by the discount
rate soaring high during busy months when it should have been
low enough to liquidate the transactions, and falling low during
* It should be noted that the slack and the busy seasons are not uniformly
distributed over the whole surface of the country. The distribution is roughly as
follows :—
Eastern India Western Northern India
India Southern
Months Bombay India
Rangoon Calcutta and Cawnpore Lahore Madras
Karachi
Busy 3 Months 4 Months 6 Months 6 Months 9 Months 6 Months
Slack 9 Months 8 Months 6 Months 6 Months 3 Months 3 Months
January Busy Slack Busy Slack Busy Slack

February ” ” ” Busy ” Busy
March ” ” ” ” ” ”
April Slack ” ” ” ” ”
May ” ” Slack Slack ” ”
June ” ” ” ” ” ”
July ” ” ” ” Slack ”
August ” Busy ” ” ” Slack
September ” ,, ” Busy ” ”
October ” ,, ” ” Busy ”
November ” ,, Busy ” ” ”
December ” Slack ” Slack ” ”
Busy Jan. to Aug. to Nov. to Feb. to April to Feb. to July
March Nov. April April June
Slack April to Dec. to May to May to July to April to Dec.
Dec. July Oct. Aug. Sept.
Busy … … … Sept. to Octo. to …
Nov. March
Slack … … … Dec. to …
Jan.
slack months when it should have been high enough to prevent

the market from being demoralized, are unavoidable. But what
made the contortions of the Indian money market so obnoxious
was the circumstance that the seasonal fluctuations in the
discount rate were so abnormal.*
The explanation for such a market phenomenon is to be .
sought in the irregularity of the money supply of the country.
In order that money may be had at a uniform price, its supply
should be regulated according to the variations in the demand
for it. It is well to recognize that the demand for money
is never fixed. But it will avail nothing until it is realized
that the changes in the demand for money which take place
from year to year with the growth of population, trade, etc.,
belong essentially to a different category from the fluctuations
in the demand for money which occur within the course of
a year owing to seasonal influences. In any well-regulated
currency it is necessary to distinguish these two categories
of changes in monetary demand, the one requiring steadiness
and expansibility and the other elasticity. On a comparative
view it seems more than plausible that a metallic money is
as especially adapted to furnish this element of steadiness
and stability as paper money is to furnish that of elasticity.
Indeed, so appropriate seem to be their respective functions
that it has been insisted† that in an ideal system, these two
forms of money cannot interchange their functions without
making the currency burdensome or dangerous. The proof of
the soundness of this view, it may be said, is found in the
fact that, excluding the small transactions which take place
by direct barter, the purchasing medium of any commercially
advanced country is always a compound of money and credit.
*The rate of discount of the Bank of Bengal for private paper running thirty
days and after was altered—
In 1876 16 times, with 6½ per cent, as minimum and 13½ per cent. as maximum.
” 1877 21 ” ” 7½ ” ” ” 14½ ” ”
” 1878 10 ” ” 5½ ” ” ” 11½ ” ”
” 1879 15 ” ” 6½ ” ” ” 11½ ” ”
” 1880 8 ” ” 5½ ” ” ” 9½ ” ”
” 1881 9 ” ” 5½ ” ” ” 10½ ” ”
” 1882 9 ” ” 6½ ” ” ” 12½ ” ”
” 1883 14 ” ” 7½ ” ” ” 10½ ” ”
(Van Den Berg, loc. cit.)
†Cf. Prof. R. P. Falkner in A Discussion of the Interrogatories of the Monetary
Commission of the Indianapolis Convention, 1898, Publications of the University
of Pennsylvania in Political Economy and Public Law, No. 13, pp. 25-26.
On the face of it, the Indian currency is also a compound

of money and credit, and as such it may be supposed that
it contained provisions for expansibility as well as elasticity.
But when we come to analyse it we find that it makes no
provision whatever for elasticity. Far from allowing the
credit part of it to expand and contract with the seasonal
demands, the Paper Currency Act placed a rigid limit
upon the volume of its issue regardless of any changes in
the volume of the demand. Here, then, is to be found one
of the causes for the “convulsions” in the discount rates
prevalent in the Indian money market. As was pointed out
by Mr. Van Den Berg :—
“The paper currency established by the Indian
legislator fully answers the purpose, so far as business
requires an easier means of exchange than gold or silver
coin ; but no connection whatever exists between the
issue of the fiduciary currency and the wants of the
public to have their bills or other commodities converted
into a current medium of exchange........... and this is
the sole cause of the unexpected convulsions and sudden
transitions in the money market so utterly detrimental to
business to which the British Indian trade is constantly
exposed.”*
It may, however, be objected that such a view is only
superficial. The Indian Paper Currency Act is a replica of
the English Bank Act of 1844 in all its essentials. Like the
English Bank Act, it set a definite limit to the fiduciary
issue of notes. Like it, it separated the Issue Business
from the Banking Business,† and if it made the banks
in India mere banks of discount, it is because it copied
the Bank Charter Act, which deprived banks in England,
including the Bank of England, from being banks of issue.
And yet, it cannot be said that the English money market
is affected by such “convlusions and sudden transitions”
as has been the case with the Indian money market.
* Op. cit., p. 7.
† The Indian Paper Currency Act carried the principle of separation further than
did the English Bank Charter Act. It not only prevented the Issue Department
being conducted under the aegis of a Banking Department, but also disallowed
the two being housed under the same roof. Such an ideal of separation was held
out by Sir Charles Wood during the debate on the Bank Charter Act. Cf. Hansard
Parliamentary Debates, Vol. LXXIV, p. 1363. Though he was then disappointed he
did not fail to realize his ideal when he became the Secretary of State for India.
On the other hand, it was the considered opinion of Jevons*

that “the Bank of England and bankers generally have just
the same latitude in increasing or diminishing their advances
now (i.e. under the Act of 1884) as they would have under a
[n un] restricted system”; for, as he elsewhere argued, if the
limitation on fiduciary issue is arbitrary, and if people want
more money, “ it is always open to them to use metallic money
instead. The limitation is imposed not upon money itself, but
upon the representative part.”† What, then, is the reason that
the Indian Paper Currency Act should produce the evils which
its English prototype did not ? A priori there need be no such
convulsions in a money market subject to such law. The Act,
by limiting the isue of notes, did seem to leave no choice but
to use metallic money even for seasonal demand. This would
be true if notes were the only form in which credit could be
used. As a matter of fact, this is not so. Credit could take
the form of a promise to pay, issued by a bank, as well as it
could take the form of an order on the bank to pay, without
making any difference to the social economy of the people
who used them. Consequently, if under the provisions of the
Act banks are restricted from issuing promises to pay, it does
not follow that the only way open to them is a resort “to use
metallic money instead,” for they are equally free to consent
to honour as many orders to pay as they like. Indeed, the
success or failure of the Act depends upon which of the two
alternatives the banks adopt. It is obvious that those who
will submit to the ruling of the Act and resort to metallic
money will have to bear the “convulsions,” and those who
will circumvent the Act by utilizing other forms of credit will
escape them. The chief reason, then, why the Act has worked
so well in England and so badly in India, is due to the fact
that, whereas English banks have succeeded in implanting
the order or cheque system of using credit in place of the
note system, Indian banks have unfortunately failed. That
they should have failed was however, inevitable. A cheque
system presupposes a literate population, and a banking
system which conducts its business in the vernacular of the
people. Neither of these two conditions obtains in India. The
*Cf. his Essay on the “Frequent Autumnal Pressure in the Money Market and
the Action of the Bank of England,” Investigations in Currency and Finance (ed.
Foxwell), 1884, p. 179. Italics by Jevons. There is, however, an apparent misprint
in the original, which at the close of the quotation reads “ as they would have
under a restricted system.”
† Money and the Mechanism of Exchange, Kegan Paul, London, 1890, p. 225.
population is mostly illiterate, and even were it otherwise it

could not have availed itself of the cheque system, because
Indian banks refuse to conduct their business in any other
medium but English. Besides, the growth of the cheque system
presupposes a widespread network of banks, a condition which
is far from being fulfilled in India. In the absence of banking,
a cheque is the worst instrument that could be handled. If not
presented within a certain time, a cheque may become stale
and valuless, and is therefore inferior to a note as a store of
wealth. In such circumstances as these, it is no wonder that in
India cheques did not come into being on a sufficiently large
scale to amend the inelasticity of the notes.
But even if Indian banks had succeeded in making use of
credit in a form other than that of notes, they could not have
eased the money market to the same extent as the English
banks have been able to do. One of the incidents of banking
consists in the liability of banks to pay cash on demand. If
all their deposits were received in cash this liability would
involve no risk. As a matter of fact, a larger part of their
deposits consists of bills which they make it their business to
undertake to pay in cash. One of the first things, therefore,
that a banker has to look to is the proportion which his cash
deposits bear to his credit deposits. Now, this proportion
may be adversely affected either by an increase in his credit
deposits or by diminution in his cash deposits. In either case
his ability to pay cash is pro tanto weakened by lowering the
ratio of his total cash to his total liabilities. Against an undue
expansion of credit a banker may effectually guard himself.
But, notwithstanding the development of the cheque system,
there is always lurking the possibility of withdrawal of some
cash at some time or other. A banker must, therefore, provide
by keeping on hand a certain minimum reserve. How large
should be the reserve depends upon what the possibilities for
the withdrawal of cash are. The point is that to the extent of
the reserve the power of the bank to grant credit is curtailed.
If the reserve of the bank is already at the minimum it must
stop discounting or must strengthen its position by recovering
the cash withdrawn from its coffers. Now, it is obvious that
if the amount of money withdrawn is kept in the current of
business where the banks can get at it, they of course can
strengthen their position again immediately, and not only
always keep themselves well away from the danger line of
minimum reserve, but be always prepared to meet the needs
of the money market. What was the position of the Indian

banks from this point of view ? Owing to the absence of a
cheque system the possibilities for the withdrawal of cash are
great, and the reserve was required to be large in consequence
thereof. A large part of their funds being thus held for a
reserve, their resources for discounting were small. But there
was a further weakening of their position as lenders by reason
of the fact that the cash withdrawn did not speedily return to
them. The result was that the Indian banks were obliged to
curtail their discounts to a far greater extent than were the
English banks, in order to preserve a due proportion between
their cash and their credits. The absence of branch banking
was an important desideratum in this regard. But, even if
there were branch banks, the money withdrawn could not
have returned, for it was not left in the current channels of
business. It was locked up in Government treasuries, whose
operations were independent of the banking transactions of the
country. Of course, there could be nothing inherently wrong in
the maintenance by a Government of an Independent Treasury,
and if its operations were to have a resultant connection with
the operations of the business community no harm need arise.
But the operations of the Indian Treasury ran counter to the
needs of business. It locked up when it should have released
its hoards, and released its hoards when it should have locked
them up.
The causes that “convulsed” the Indian money market had
therefore been the inelasticity of the credit media and the
working of the Independent Treasury System in so far as they
were the prime factors affecting the money supply of the country
(see Chart I). The evil effects of such convulsions of the discount
rate can hardly be exaggerated.* In an economy in which almost
every business man must rely, at certain seasons, if not all the
year round, on borrowed capital, the margin of profit may be
wiped out by a sudden rise or augmented by a sudden fall in
the rate of discount leading to under-trading or over-trading.
Such fluctuations increase business risks, lead to higher
business expenses and a greater cost to the consumer. They
bring about swings in prices, promote speculation, and prepare
*For American experience, cf. E. W. Kemmerer, “Seasonal Variations in the

New York Money Market,” in The American Economic Review, March 1911.
for panics. Evils such as these would have in any other country
compelled the authorities to take proper steps to deal with them.
But it is a curious fact that in India no serious attempts were
made to alleviate the sufferings they inflicted upon the trading
community. A reform of the paper currency or the abolition
of the Independent Treasury System would have eased the
situation, though a reform of both would have been better. The
general community, however, was not desirous for a change of
the paper currency,* but was anxious for the abolition of the
Independent Treasury. The Government, on the other hand,
refused to do away with its Independent Treasury System,†
and repudiated even its moral obligation to help the business
* Cf. India in 1880, by Sir Richard Temple, p. 469 ; Sir Charles Wood’s Administration
of Indian Affairs, p. 89 ; also The Indian Statesman, January 15 (1884).
†It should, however, be noted that between 1862 and 1876, at some centres comprising
the head offices and branch offices of the Presidency banks, the Independent Treasury
System was suspended. By way of compensation for the loss of their right of note
issue, the Presidency banks were given certain concession by the Government under
agreements entered into in accordance with Act XXIV of 1861. Among the concessions
one was the use by the banks of Government balances. The first agreement, that of
1862, conceded to the banks the following privileges in regard to the Government
balances : (1) The unrestricted use for banking purposes “ of all moneys and balances
which but for the agreement would have been received or held at the General Treasury
“ up to the limit of 70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case of
the Bank of Bombay, and 15 lakhs in the case of the Bank of Madras. (2) The option
of setting aside the excess over these sums in a separate strong room for production
when demanded, or of investing it in Government paper or other authorized securities,
the power of investment being subject to the condition that the banks should be “at all
times answerable and accountable to Government for the surplus cash balance for the
time being.” (3) The right to interest from Government on the difference between the
actual balance and 50 lakhs in the case of the Bank of Bengal, 30 lakhs in the case
of the Bank of Bombay, and 10 lakhs in the case of the Bank of Madras, whenever
the balances at these banks fell below these minima. (4) Permission to the banks to
use the Government balances at their branches on similar terms, suitable limits being
fixed in each case, as in the head office agreements.
A year after the agreements were executed, difficulties arose with the Bank of
Bengal, which had locked up the funds to such an extent that it was unable to meet
the demands of the Government on the public balances it held. Negotiations were
therefore opened in 1863 for the revision of the agreements, and the revised agreements
came into force on January 2,1866. They contained the following provisions regarding
the public balances : (1) Undertaking by Government to maintain in the hands of
the banks at their head offices an “average cash balance” of 70 lakhs at the Bank of
Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at the Bank of Madras, “so
far as the same may conveniently be done.” (2) Permission to the banks to use the
whole balances for the time being deposited with them for banking purposes. (3) The
right to interest from Government when the Government balance at the head offices
of the Bank of Bengal, Bank of Bombay, and Bank of Madras fell below the minima
of 45 lakhs, 25 lakhs, and 20 lakhs respectively. (4) Permission to employ” the whole
of the balances (at branches) however large for the time being “for banking purposes,
subject to the condition that each branch should” at all times be ready to meet the
drafts of the Government” to the extent of the Government balances at the branch.
community on the somewhat pedantic plea that in locking

up currency it did not lock up capital.* Nor is it possible to
say, since it was not called upon to enunciate a policy, how
far it would have gone to modify the Paper Currency Act so
as to relieve the situation. Before, however, this controversy
could end in a satisfactory solution for imparting to the
currency system that element of elasticity which it needed,
there developed another and a greater evil, which affected its
metallic counterpart in a degree sufficient to destroy its most
vital element of steadiness and stability of value, which it was
its virtue to furnish. So enormous did the evil grow, and so
pervasive were its effects, that it absorbed all attention to the
exclusion of everything else.
These revised agreements were to remain in force till March, 1, 1874. In 1874 the
question of the revision of the charters of the Presidency banks was under consideration,
and it was the aim of the Government to continue to the banks the right to use the whole
Government balances. Just at this time (1874) difficulties occurred with the Bank of bombay
and the government could not draw upon their balances. This led to a reconsideration of the
policy of merging the Government balances with the bank balances and leaving them in the
custody of the banks. After a somewhat lengthy discussion the Government of India reverted
to the system of Independent Treasury by instituting what were called Reserve Treasuries
at the headquarters of the Presidencies which held the Government balances previously
held by the Presidency banks. For a history of this episode see House of Commons Returns
109 and 505 of 1864 ; also J. B. Brunyate, An Account of the Presidency Banks, Chap. VII.
*In the despatch of May 6, 1875, sanctioning the re-establishment of the Independent
Treasury System, the banks were admonished by the Secretary of State thus :” Capital
supplied by Government, and not representing the savings of the community, is a resource
on whose permanence no reliance can be placed, and which therefore tends to lead traders
into dangerous commitments. It gives ease for a time, and produces prosperity which is
at the mercy of an accident. A political exigency suddenly withdraws the adventitious
resources, and the commerce which trusted to it finds itself pledged beyond what its own
resources can make good.” Under the arrangements of 1876 leading to the establishment
of the Reserve Treasuries, the Government agreed as before to pay interest to the banks
when their balances at the banks fell below certain minima. The Government entered into
no formal undertaking as regards maxima, and gave the banks to understand “that the
Government will ordinarily not leave with the headquarters of the banks, otherwise than
temporarily, more than the following sums ; Bank of Bengal 100 lakhs, Bank of Madras 30
lakhs, and Bank of Bombay 50 lakhs. But this condition will not be inserted in the contract,
which will impose no obligation upon the Government to leave any balances whatever with
the banks........... The Government will not undertake to give to the banks the exclusive
custody of all the public balances where the Government banks with the banks.” The
question of the amount of balances which the Government would have with the banks in
the ordinary course being thus settled, the only way left open to give help to the banks to
meet seasonal demands was to grant loans to the Presidency banks for its balances held
in the Reserve Treasuries. After 1900 it agreed to make such loans of a limited amount
at the bank rate. Up to 1913 only six loans were made, which shows that the terms of
such loans were rather onerous. The Chamberlain Commission of 1913 recommended loans
rather than the abolition of the Independent Treasury system. The war, however, hastened
the course of events. It proved the necessity of co-operation between the Presidency banks
and the Government, and also the need of a large and powerful Banking Institution. This
was accomplished by the amalgamation of the Presidency banks into an Imperial Bank of
India (Act XLVII of 1920), with the inauguration of which the Independent Treasury system
is again in the process of abolition. For a history of episodes of the Independent Treasury
after 1876, see Appendices to the Interim Report of the Chamberlain Commission, Vol. I,
Cd. 7070 of 1913, Nos. I and II.
What fixity of value between the different units of its

currency is to the internal transactions of a country, a par
of exchange is to its internal transactions. A par of exchange
between any two countries expresses the relative exchange
values of their respective currencies in terms of each other.
It is obvious from this that the par of exchange between any
two countries will be stable if they employ the same metal
functioning as their standard money, freely convertible into
and exportable as bullion, for in that case they would have
as a measure of value a common medium, the value of which
could not differ, given freedom of commerce, in the two
countries by more than the cost of its transhipment, i.e., within
specie points. On the other hand, there can be no fixed par of
exchange between two countries, having different metals as
their currency standards of value. In that case, their exchange
is governed by the relative values of gold and silver, and must
necessarily fluctuate with changes in their value relation. The
limit to the exchange fluctuations between them will be as
wide or as narrow as the limit to fluctuations in the relative
values of the two metals may happen to be. When, therefore,
two countries such as England and India are separated by
differences in their metallic standards, theoretically there
could be no possibility for a stable par of exchange between
them. But, as a matter of fact, notwithstanding the difference
in their metallic standards, the rate of exchange between
England and India seldom deviated* from the normal† rate of
1 s. 10½ d. for R. 1. So steady was the rate up to 1873 that
few people were conscious of the fact that the two countries
had different currency standards. After 1873, however, the
rupee-sterling exchange suddenly broke loose from this normal
parity, and the dislocation it caused was so great and so
disorderly (Chart II) that no one knew where it would stop.
*It appears, however, from the chart that the rupee-sterling exchange before
1873 was not quite stable. But the fluctuations in it are to be attributed to quite
a different set of factors. It should be noted that the rates of exchange used
for reducing the Indian moneys into sterling during the time of the East India
Company had been various : moreover, they had so little relation to the intrinsic
value of the coins exchanged that the actual rates officially given were far from
the actual market rates. As having a bearing on this interesting subject, consult
H. of C. Sessional Papers 735 II of 1931-32 ; Appendix No. 20, Correspondence,
etc., relating to the rates of exchange at which the currencies of India are converted
into sterling ;also Tucker, H. St. George, Remarks on the Plans of Finance, 1821,
passim, and Memorials of Indian Government, 1853, by the same, pp. 382-85.
†Normal only if 15½ to 1 be taken as the normal ratio between gold and silver,
which was the case for nearly seventy years.
The rupee-sterling exchange was in reality a reflection of

the gold-silver exchange. When, therefore, it is said that the
rupee-sterling before 1873 was stable at 1s. 10½ d., it merely
meant that the gold-silver exchange before 1873 was stable at
the ratio of 1 to 15½ ; and that the rupee-sterling exchange was
dislocated after 1873 meant that the gold-silver exchange lost
its old moorings. The question which therefore arises is why
was the ratio of exchange between gold and silver disturbed
after 1873, as it never was before that year ? Two factors
have been appealed to as affording a sufficient explanation of
what then appeared as a strange phenomenon. One was the
demonetization of silver as the standard money medium by
the principal countries of the world. This movement in favour
of demonetization of silver was the outcome of an innocent
agitation for uniformity of weights, measures, and coinages.
In so far as the agitation was aimed at such uniformity, it
was in every way beneficial. But it also exemplifies how the
pursuit of good sometimes leaves behind a legacy of evils. At
the Great Exhibition held in London in 1851 the great difficulty
of comparing the different exhibits, owing to the differences
of weights, measures, and coinages as between the countries
of their origin and other countries, was amply demonstrated
to the representatives of the different nations assembled at
that exhibition.* The question of international uniformity in
weights, measures, and coins was discussed by the various
scientific assemblies gathered at this exhibition, and although
nothing tangible came out of it, the question was not allowed
to be dropped : it was taken up at the Brussels International
Statistical Congress held two years after. Opinion had so far
advanced that the next Statistical Congress, held at Paris,
issued a declaration, which was confirmed by the Vienna
Statistical Congress of 1859, strongly urging the necessity of
bringing about the desired uniformity in the weights, measures,
and coinages of different countries.† Encouraged by the action of
England, which had made in 1862 the metric system of weights
and measures optional, the 1863 International Statistical
Congress of Berlin resolved to invite the different Governments
“ to send to a special Congress delegates authorized to consider
* Report of the Royal Commission on International Coinage, 1868, p. v.

† Cf. Russell, H. B., International Monetary Conferences, 1998, pp. 18-25.
and report what should be the relative weights in the........gold

and silver coins, and to arrange the details by which the
monetary systems of the different countries might be fixed,
upon a single unit decimally subdivided.”* The significance of
this Congress can hardly be overlooked. It made a departure.
At the former Congresses the question debated was largely one
of uniformity in weights and measures. But at this Congress “
that phase of it was subordinated to uniform coinage and was
well-nigh laid aside.”† Though the resolution was a departure,
it should not have been fraught with serious consequences if
the reform had been confined to the question of uniformity of
coinage. But there occurred a circumstance which extended its
application to the question of currency. When this agitation for
uniform coinage grew apace, the French quite naturally wished
that their coinage system, which had already been extended
over the area comprised by the Latin Union, should be taken
as a model to be copied by other countries outside the Union
in the interest of uniformity. With this end in view the French
Government approached the British Government of the time,
but was told in reply that the British Government could not
consider the suggestion until France adopted the single gold
standard.‡ Far from being taken aback, the French Government,
then so anxious to cultivate the goodwill of England, proved
so complacent that it felt no compunction in conceding to the
British the pre-requisite it demanded, and indeed went so far
out of the way, when the Conference met in Paris in 1867, that
it actually manoeuvred§ the Assembly into passing a resolution
“that for uniform international coinage it was necessary that
gold alone should be the principal currency of the world.” So
much importance was attached to the question of uniformity
of coinage that those who passed the resolution seemed not to
have noticed what sacrifice they were called upon to make for
its achievement. Perhaps it would be more correct to say that
they did not know that they were affecting by their decision the
currency system of the world. All they thought they were doing
at the time was to promote uniformity of coinage and nothing
*Quoted by Russell, op. cit., p. 25.
† Russell, loc. cit.
‡ Cf. evidence of Prof. Foxwell, Q. 23,876, Royal Commission on Agricultural
Depression in England, 1892.
§ For which cf. Russell, op., p. 46.
more.* But whatever the extenuating circumstances, the result

was disastrous, for when the resolution came to be acted
upon by the different countries assembled, the real end of
the Conference, namely uniformity of coinage, was completely
lost sight of, and the proposed means eventually became the
virtual end.
The ball once set rolling, the work of demonetizing silver
began to grow apace. First in the field was Germany. Having
vanquished France in the war of 1870, she utilized the war
indemnity in the reform of her chaotic currency† by hastening
to adopt a gold currency for the United Empire of Germany.
The law of December 4, 1871, authorized the change, with the
mark as the unit of currency. Silver was demonetized by this
enactment; but the existing silver coins continued to be legal
tender though their further coinage was stopped, along with
the new gold coins at the legal ratio of 15 to ½ to 1. This full
legal-tender power of the silver coins was taken away from
them by the law of June, 9, 1873, which reduced them to the
position of a subsidiary currency.‡ This policy was immediately
copied by other countries of Germanic culture.§ In 1872 Norway,
Sweden, and Denmark formed a Scandinavian Monetary Union,
analogous to the Latin Monetary Union, by which they agreed to
demonetize silver as was done by Germany. This treaty, which
established a gold standard and reduced the existing silver
currency to a subsidiary status, was ratified by Sweden and
Denmark in 1873 and by Norway in 1875. Holland also followed
the same course. Till 1872 she had a pure silver standard.
In that year she closed her Mint to the free coinage of silver,
although the old silver money continued to be legal tender to
any amount. In 1875 she went a step further and opened her
Mints to the free coinage of gold. Her policy differed from that
of the Germanic countries in that she only suspended the free
coinage of silver, while the latter had demonetized it. Even
the Latin Union was unable to resist this tide against silver.
As a consequence of this exclusion of silver, the Latin Union,
*An honourable exception must be made in the case of Dr. Mees, the
representative of Holland, who drew attention to the harm likely to result from
this resolution.
† For a history of the movement for the unification of German currency prior
to 1870, cf. H.P. Willis, “ The Vienna Monetary Treaty of 1857,” in the Journal
of Political Economy, Vol. IV, p. 187 ett seq.
‡ For the text of the Laws, see Appendix to History of Bimetallism, by Prof.
J. L. Laughlin, New York, 1886.
§ Cf. Report of the Committee on the Depreciation of Silver, 1876, p. xxix.
enlarged as it was by additional members, naturally desired

to take precautionary measures against being flooded by the
influx of this depreciated silver. Nor was this fear unfounded,
for the silver tendered for coinage at the Belgian Mint in
1873 was three times greater than what was tendered in
1871. Rather than be embarrassed, Belgium, by the law of
December 8, 1873, suspended the free coinage of her silver
five-franc pieces. This action of Belgium forced the hands of
the other members of the Union to adopt similar measures.
The delegates of the Union met in Paris in January, 1874, and
“agreed to a treaty supplementary to that originally
framed in 1865, and determined on withdrawing from
individuals the full power of free coinage by limiting to a
moderate sum the silver five-franc pieces which should be
coined by each State of the Union during the year 1874.*
The respective quotas fixed for 1874 were slightly increased
in 1875, but were reduced in 1876.† But the actual coinage did
not even reach these small quotas. So greatly was the Union
perturbed by the silver situation that during 1877 the coinage of
silver five-franc pieces was, with the exception of Italy,‡ entirely
suspended. This action was, however, only a preliminary to
the treaty of November 5, 1878, by which the Latin Union
agreed to close its Mints to the free coinage of silver till further
action. Though at first sine die, the closure proved in the end
perpetual.§ Simultaneously with the precautionary measures of
the Latin Union, Russia suspended, in 1876, the free coinage
* Laughlin, op. cit., p. 155.

† The quotas fixed at the Conferences for the several members of the Union
were :—
In Millions of Francs.
1874 1875 1876
France ... ... 60 75 54
Belgium ... ... 12 50 36
Italy ... ... 40 15 10
Switzerland ... 8 10 7
...
Greece ... ... ... ... ...
120 150 110
In 1874 Italy was allotted an extra 20 million francs. Ibid., p. 155.
‡She was allowed to coin 10 millions of them.
§ Ibid., p. 158.
of silver except to such an amount as was necessary for the

purposes of her trade with China,* and the Imperial Decree of
November 22, 1878, directed that all customs duties above 5
roubles and 15 copecks should be payble in gold.† Austria in like
manner suspended the free coinage of silver in 1879.‡
On the other side of the Atlantic, an important event had taken
place in the United States. In 1870 that Government resolved to
consolidate the Mint laws, which had not been revised since 1837,
in a comprehensive statute. Since the legislation of 1853, the silver
dollar was the only coin which the United States Mints coined
freely. But in the new consolidated Mint Statute of 1873, the
silver dollar was deleted from the list of coins to be issued from
the Mint, so that it virtually amounted to suspension of the free
coinage of silver in the United States.§ The silver dollars previously
coined continued to circulate as full legal tender, but that power
was taken away by the law of June, 1874, which declared that
“the silver coins of the United States shall be a legal tender at
their nominal value for any amount not exceeding five dollars in
any one payment.”
The other factor appealed to in explanation of the dislocation
of the relative values of gold and silver was the great increase in
the production of silver as compared to gold.
TABLE IX
RELATIVE PRODUCTION OF GOLD AND SILVER
(Ounces)
Index Number
Annual Average for Average
Period Total Production
Production Annual
Production
Gold Silver Gold Silver Gold Silver
1493-1600 24,266,320 734,125,960 224,693 6,797,463 100 100
1601-1700 29,330,445 1,197,073,100 293,304 11,970,731 130,5 176,1
1701-1800 61,088,215 1,833,672,035 610,882 18,336,720 271,8 269,7
1801-1840 20,488,552 801,155,495 512,217 20,028,887 227,9 293,1
1841-1870 143,186,224 931,091,326 4,772,876 31,038,378 2,124,1 456,6
1871-1890 106,950,802 1,715,039,955 5,347,545 85,751,998 2,375,4 1,261,5
*Report of the Directors of the Mint, Washington, 1893, p. 23.
† Cf. P. Willis,” Monetary Reform in Russia,” in the Journal of Political Economy, Vol.
V, p. 291.
‡ Cf. F. Wieser, “Resumption of Specie Payment in Austria-Hungary,” in Journal of
Political Economy, Vol. 1, pp. 380-7.
§ This measure was the subject of a strange controversy. The gold men argued that it
was deliberately adopted, while the silver men decried it as a surreptitious act due to a
“combination of rascally contrivance and rascally connivance.” Prof. Laughlin has well cleared
the mystery surrounding this Act. He shows by reference to debates in Congress on the
legislation of 1853 that Congress knew that by refusing to alter the ratio between gold and
silver it was placing the country on a gold standard. Too much consideration, he thinks,
has been wasted on the Act of 1873, which merely took legal notice of the consequences of
the Act of 1853. Cf. his History of Bimetallism, pp. 80 and 93-95.
The history of the production of the precious metals

in modern times begins from the year 1493, a date which
marks the discovery of the American continent. Reviewing
the results of the production from 1493 to 1893, a period
in all of 400 years, we find that during the first hundred
years the production of gold and silver rises at a uniform
rate of progression. Assuming the annual average production
of each during the first century (1493-1600) in the modern
history of their production to be 100, it will be seen that
in the next century (1601-1700) the index number for the
production of gold rises to 130 and that of silver to 176.
This rate of progression is also kept up in the succeeding
century (1700-1800), during which the figure for both gold
and silver approximates to 270, and continues without
much disturbance up to 1840, when the respective index
numbers stood at 228 for gold and 293 for silver. From
this point onwards, the relative production of the two
metals underwent a complete revolution. During the next
thirty years (1841-70) the production of gold reached
unprecedented heights, while that of silver lagged behind,
relatively speaking. The index number for silver production
advanced only to 450, but that for gold went up to 2,124.
This revolution was followed by a counter-revolution, as a
result of which the position as it stood at the end of 1870
was well-nigh reversed. The production of gold received
a sudden check, and though it had increased enormously
between 1840-70 it remained stationary between 1870-
93. On the other hand, the production of silver, which
was steady between 1841-70, increased threefold between
1870-93, so that the index number for its average annual
production during the latter period stood at 1,260.
In the controversy which arose over the reasons,
which brought about this dislocation and decline in the
value of silver in terms of gold, there were parties to
whom one of these two factors was a sufficient cause.
One side argued that had suspension or demonetization
of silver not taken place, its value could never have
fallen. This position was vehemently challenged by the
other side, which believed in the over-supply of silver
as the primary cause of its depreciation. Now, was the
argument from relative over-supply sufficient to account for

the fall in the gold value of silver ? On the face of it, the
explanation has the plausibility of a simple proposition. It is
one of the elementary theorems of political economy that the
value of a thing varies inversely with its supply, and if the
supply of silver had largely increased, what could be more
natural than that its value in terms of gold should fall ? The
following were the relevant facts which formed the basis of
the argument:—
TABLE X
GOLD AND SILVER*
RELATIVE PRODUCTION AND RELATIVE VALUE
Correlation between
Ratio of Relative Production
Produc- Ratio of Index and Relative Value
Index
tion (by value of Number
Number Relative
Period Weight) Gold to for the Relative
for the Produc-
of Gold Silver Ratio of Value of
Ratio of tion of
to Silver As 1 Produc- Silver
Value Silver
As 1 Grain to tion Falls —
Grain to: Falls —
Rises+
Rises+
1681-1700 31.8 14.95 100 100 . . . . . .
1701-1720 27.7 15.21 87 101.7 –13 –1.7
1721-1740 22.6 15.10 71 101 – 29 –1.0
1741-1760 21.7 14.70 67 98.3 –33 +1.7
1761-1780 31.5 14.40 99 96.3 – 1 +3.7
1781-1800 49.4 15.08 155.6 100.8 +55.6 –.8
1801-1810 50.3 15.67 158.0 104.8 +58.0 –4.8
1811-1820 47.2 15.68 148.0 104.9 +48.0 –4.9
1821-1830 32.4 15.82 101.9 105.8 +1.9 –5.8
1831-1840 29.4 15.77 92.4 105.4 –7.6 –5.4
1841-1850 14.2 15.81 44.6 105.8 –55.4 –5.8
1851-1855 4.4 15.45 13.8 103.3 –86.2 –3.3
1856-1860 4.5 15.28 14.0 102.2 –86.0 –2.2
1861-1865 5.9 15.42 18.55 103.1 –81.5 –3.1
1866-1870 6.9 15.52 21.7 103.8 –78.3 –3.8
1871-1875 11.3 16,10 35.5 107.6 –64.5 –7.6
1876-1880 13.2 17.79 41.5 119.0 –58.5 –19.0
1881-1886 17.3 18.81 54.4 125.8 –45.6 – 25.8
1886-1890 19.9 20.98 62.6 140.3 –37.4 –40.3
1891-1895 20.0 26.75 62.9 178.9 –37.1 –78.9
* The table is based on figures of M. de Foville of the French Mint, as given

by Mr. F. B. Forbes in The Bimetallist of July, 1897, pp. 125-28.

The facts thus presented led to two conclusions. The first is

that the supposed enormous increase in the relative production
of silver was an assumption which had no foundation in
reality. On the contrary, a glance at the figures for relative
production discloses the curious fact that since the beginning
of the eighteenth century silver, instead of rising, has been
falling in proportion. With the exception of the first quarter
of the nineteenth century, silver had formed, throughout the
two centuries covered by the table, a diminishing proportion
as compared with gold.* Indeed, never was the proportion of
silver so low as it was in the latter half of the nineteenth
century, and even when after 1873 it began to grow it did not
reach half the magnitude it had reached in the beginning of
the eighteenth century. The second conclusion which these facts
were claimed to sustain was that the value of silver in terms of
gold did not move in sympathy with its supply relative to that
of gold. According to theory, the value of silver should have
been rising because the relative volume of its production had
been diminishing. On the other hand, a closer examination of
the figures of relative values and relative productions, as given
in the foregoing table, instead of showing any close correlation
(see Chart III) between them, pointed to the contrary. Instead
of supply and value being inverse in proportion, it showed that
as its supply was falling there was also a fall in its value.
Such being the facts of history, it was contended that they
gave no support to those who rested their case on over-supply
rather than on demonetization as a sufficient explanation for
the depreciation of silver.
Apart from such minor points, the issue was considerably
narrowed by the peculiarity of the events of the twenty years
preceding and following the year 1873.† Compare, it was said,
the period commencing with 1848 and ending with the year 1870
with the period following 1870, and there emerges the arresting
fact that these two periods, though they have been the opposite
* In view of this, it is a matter of some surprise that such an eminent economist
as Prof. W. Lexis should have ceased to be bimetallist on the ground that the
enormous increase of silver militated against the establishment of a permanently
high ratio with gold. Cf. his essay on “ The Present Monetary Situation,” in the
Economic Studies of the American Economic Association, 1896, Vol. I, No. 4, pp.
273-77. The habit of measuring the production of silver in terms of value is no
doubt largely responsible for this quite unfounded notion.
† Cf. H. S. Foxwell, “Bimetallism : Its Meaning and Aims,” in The (Oxford)
Economic Review (1893), Vol. III, p. 302.
of each other with reference to the relative values of the two

metals, were alike with reference to the changes in their
relative supply. The period between 1870 and 1893 on the
side of relative production was marked by the preponderance
of silver. The period between 1848 and 1870 is an exact
parallel to the above period with respect to changes in the
relative supply of the two precious metals, only in this case
it was gold that had increased in volume. Now, if it is over-
supply that governed the value relations of the two metals
in the second period (1870-93) the same should be true of
their value relations in the first period (1848-70). Was there,
then, a disturbance in the relative values of the two metals
in the first period anything like what took place in the second
period ? It was insisted that the disturbance in the ratios of
production of the two metals in the first period was enormously
greater than that which occurred in the second period. Indeed,
comparatively speaking, the disturbance in the second period
was nothing to speak of. And yet their relative value during
the first period was well-nigh constant at the ratio of 1 to 15½,
while in the second it fluctuated between 16.10 and 26.75.
Those, who argued that the value of silver fell after 1873
because of its over-supply, were thus faced with the problem
as to why the value of gold did not fall when its supply had
become so abundant before 1873. The whole controversy was
therefore centred into the question as to what could have made
this difference in the two situations ? If the colossal increase
in the production of gold in the first period did not raise the
value of silver by more than 2 per cent., how was it that a
comparatively insignificant rise in the relative production of
silver in the second period led to such an enormous rise in
the price of gold ? What was the controlling influence present
in the one case which was absent in the other ? Those who
held that it was demonetization of silver that was responsible
for its depreciation argued that, though alike in every way,
the two periods differed in one important particuar. What
distinguished them was the fact that in the former it was a
common practice to define the standard money of a country
as a certain quantity of gold or a certain quantity of silver.
Prior to 1803 the two metals were rated differently in different
countries,*but since that date the rating of 1 to 15½ became
more uniform, with the result that the monetary standard
throughout that period was either 1 gr. of gold or 15½ grs. of
* For these ratios, see Appendix, Table B, to A Colloquy on Currency, by H.
H. Gibbs.
silver. On the other hand, during the second period, the “or”
which characterized the first period was deleted by the silver-
demonetizing and suspending decrees. In other words, the first
period was characterized by the prevalence of bimetallism under
which the two metals could be used inter-changeably at a fixed
given ratio. In the second period they could not be so used
owing to the fact that the fixed ratio necessary for interchange
had been abrogated. Now, could the existence or non-existence
of a fixed ratio be said to be such a powerful influence as to
make the whole difference that set the two periods in such
marked contrast ? That this was the factor which made the
whole difference was the view of the bimetallists. It was said
that, by virtue of the monetary system prevalent during the
first period, gold and silver were rendered substitutes and
were regarded as “one commodity of two different strengths.”
So related, the conditions of supply had no effect upon their
ratio of exchange, as would have been the case in respect of
a commodity without a substitute. In the case of commodities
which are substitutes, the relative scarcity of one can give it
no greater value in terms of the other than that defined by
their ratio of exchange, because by reason of the freedom of
substitution the scarcity can be made good by the abundance
of the other. On the other hand, the relative abundance of one
cannot depreciate its value in terms of the other below the ratio
of exchange, because its superfluity can be absorbed by the
void created in consequence of a paucity of the other. So long
as they remain substitutes with a fixed ratio of substitution,
nothing originating in demand or supply could disturb their
ratio. The two being one commodity, whatever changes take
place in the demand or supply of either system beyond the
needs of commerce express themselves in the price level exactly
as though one of them alone was the money medium ; but
their ratio of exchange will be preserved intact in any case
In support of this was cited the authority of Jevons, who
said*:—
“ Whenever different commodities are thus applicable to
the same purposes their conditions of demand and exchange
are not independent. Their mutual ratio of exchange cannot
vary much for it will be closely defined by the ratio of their
utilities. Beef and mutton differ so slightly that people eat them
almost indifferently. But the wholesale price of mutton, on
* Theory of Political Economy, 4th ed./, 1911, pp. 134-36.
an average, exceeds that of beef in the ratio of 9 to 8, and

we must therefore conclude that people generally esteem
mutton more than beef in this proportion, otherwise they
would not buy the dear meat...... So long as the equation
of utility holds true, the ratio of exchange between
mutton and beef will not diverge from that of 8 to 9. If
the supply of beef falls off people will not pay a higher
price for it, but will eat more mutton ; and if the supply
of mutton falls off, they will eat more beef...... We must,
in fact, treat beef and mutton as one commodity of two
different strengths—just as gold at 18 carats and gold at
20 carats are hardly considered as two but rather as one
commodity, of which twenty parts of one are equivalent
to eighteen of the other.
“It is upon this principle that we must explain,
in harmony with Cairnes’ views, the extraordinary
permanence of the ratio of exchange of gold and silver,
which from the commencement of the eighteenth century
up to recent years never diverged much from 15 to 1. That
this fixedness of ratio did not depend entirely upon the
amount or cost of production is proved by the very slight
effect of the Australian and Californian gold discoveries,
which never raised the gold price of silver more than about
42/3 per cent., and failed to have more than a permanent
effect of 1½ per cent. This permanence of relative values
may have been partially due to the fact that gold and
silver can be employed for exactly the same purposes,
but that the superior brilliancy of gold occasions it to be
preferred, unless it be about 15 or 15½ times as costly
as silver. Much more probably, however, the explanation
of the fact is to be found in the fixed ratio of 15½ to 1,
according to which these metals are exchanged in the
currency of France and some other continental countries.
The French Currency Law of the year XI established an
artificial* equation—
Utility of gold = 15 ½ X utility of silver
* It is this artificiality of the bimetallic system which unfortunately befogs the
minds of some people and prejudices those of others. Some do not understand why
the price determination of two commodities used as money should be so different
from the price determination of any other two commodities as to be governed by
a ratio fixed by law. Others are puzzled as to why, if gold and silver are a pair
of substitutes, should they require a legal ratio while other pairs of substitutes
circulate without a legal ratio, merely on the basis of the ratio of their utility.
These difficulties are well explained away by Prof. Fisher thus :
and it is probably not without some reason that Wolowski

and other recent French economists attributed to this
law of replacement an important effect in preventing
disturbance in the relations of gold and silver.”
But granting that before 1873 the ratio was preserved owing
to the compensatory action of the bimetallic law, can it be said
that it would have been maintained after 1873 if the law had
not been suspended ? To give an uncompromising affirmative
as the bimetallists did is to suppose that bimetallism can
work under all conditions. As a matter of fact, though it is
workable under certain conditions it is not workable under other
conditions. These conditions are well described by Prof. Fisher.*
The question under bimetallism is whether the market ratio
“......two forms of money differ from a random pair of commodities in being substitutes.
Two substitutes proper are regarded by the consumer as a single commodity. Thus lumping
together of the two commodities reduces the number of demand conditions, but does not
introduce any indeterminateness into the problem because the missing conditions are at
once supplied by a fixed ratio of substitution. Thus if ten pounds of cane sugar serve the
same purpose as eleven pounds of beet-root sugar, their fixed ratio of substitution is ten
to eleven......... In these cases the fixed ratio is based on the relative capacities of the two
commodities to fill a common need, and is quite antecedent to their prices...... The substitution
ratio is fixed by nature, and in turn fixes the price ratio.
“In the single case of money, however, there is no fixed ratio of substitution...... We have
here to deal not with relative sweetening power, nor relative nourishing power, nor with
any other capacity to satisfy wants—no capacity inherent in the metals and independent
of their prices. We have instead to deal only with relative purchasing power. We do not
reckon a utility in the metal itself, but in the commodities it will buy. We assign their
respective desirabilities or utilities to the sugars...... before we know their prices, but we
must inquire the relative circulating value of gold and silver before we can know at what
ratio we ourselves prize them. To us the ratio of substitution is incidentally the price ratio.
The case of the two forms of money is unique. They are substitutes, but have no natural
ratio of substitution, dependent on consumers’ preferences.
“ The foregoing considerations...... are overlooked by those who imagine that a fixed legal
ratio is merely superimposed upon a system of supply and demand already determinate, and
who seek to prove thereby that such a ratio is foredoomed to failure...... the...... analogy......
is unsound ......Gold and silver ...... are not completely analogous even to two substitutes
because for two forms of money there is no consumers’ natural ratio of substitution. There
seems, therefore, room for an artificial ratio......”—Purchasing Power of Money, 1911, pp. 376-77
* Elementary principles of Economics, 1912, pp. 228-29. In the illustrations given by Prof.
Fisher he appears, although he does not mean it, to make the success or failure of bimetallism
hang upon the question whether or not the two metals are maintained in circulation. For
in the illustration which he gives to show the failure of bimetallism—Fig. 14 (b)—his film f
shows gold to be entirely thrown out of circulation ; while in the illustration he gives to
show the success of bimetallism—Fig. 15 (b)—his film f shows gold to be only partially
thrown out of circulation. But there seems to be no reason to suppose that there cannot be
a third possibility, namely, that while the position of the film is f is as in Fig. 14 (b)—a
possibility in which bimetallism succeeds although one of the two metals is entirely pushed
out of circulation. For the success of bimetallism it is not necessary that both the metals
should remain in circulation. Its success depends upon whether or not the compensatory
action succeeds in restoring the relative values of the two bullions to that legally established
between the two coins. If it succeeds in achieving that, the ratio would be preserved even
if the compensatory action drives one metal entirely out of circulation.
between gold and silver bullion will always be the same as

the legal ratio between gold and silver coins freely minted
and possessing unlimited legal-tender power. Now supposing
the supply of silver bullion has increased relatively to that of
gold bullion, the result will obviously be a divergence in the
mint and the market ratio. Will the compensatory action of
the bimetallic law restore the equilibrium ? It may succeed in
doing it or it may not. If the increase in the supply of silver
bullion and the decrease in that of gold bullion are such
that a decrease in that of silver caused by its inflow into the
currency and an increase in that of gold caused by its outflow
from currency can restore them to their old levels as bullion,
bimetallism would succeed ; in other words, the market ratio
of the two bullions would tend to return to the mint ratio. But
if the increase in the supply of silver bullion and the decrease
in that of gold is such that the outflow of silver bullion into
currency reduces the level of the silver bullion to the old level,
but the outflow of gold bullion from currency does not suffice
to raise the level of the gold bullion to the old level, or if the
outflow of gold from currency raises the level of the gold bullion
to the old level, but the inflow of silver into currency does
not result in the reduction of the level of silver bullion to its
old level, bimetallism must fall; in other words, the market
ratio of the two bullions will remain diverted from the mint
ratio legally established between their coins.
Under which of these two possibilities could the
circumstances arising after 1873 have fallen ? That is a
question about which no one can say anything definitely.
Even Jevons, who admitted the success of the bimetallic law
in the earlier period, was not very sanguine about its success
in the latter period. It was he who observed*
“ that the question of bimetallism is one which does not
admit of any precise and simple answer. It is essentially
an indeterminate problem. It involves several variable
quantities and many constant quantities, the latter being
either inaccurately known or, in many cases, altogether
unknown......”
* Investigations, etc. (ed. Foxwell), p. 317.

Nonetheless, it is certain that the divergence between the

mint ratio and the market ratio under a bimetallic system
must be smaller than may be the case where there is no
bimetallic systgem. Whenever the market ratio diverges
from the mint ratio the compensatory action under the
bimetallic law tends to restore the equilibrium, and even
where it fails in restoring it, it does succeed in abridging
the gulf between the two ratios. That being the case, it
is safe to argue that had there been no demonetization of
silver after 1873 the ratio between gold and silver would
have probably been preserved as it was during the monetary
disturbances of the earlier period. At any rate, this much
is certain, that the market ratio between the two metals
could not have diverged from the mint ratio to the extent
it actually did.*
It is therefore a sad commentary on the monetary
legislation of the seventies that if it did not actually help
to create, for no purpose, a problem unknown before, it
certainly helped to make worse a bad situation. Prior to
1870, not all countries had a common currency. There
were India and countries of Western Europe which were
exclusively on a silver basis, and others, like England
and Portugal, which were exclusively on a gold basis, and
yet none of them felt the want of a common standard of
value in their mutual dealings. So long as there existed
the fixed-ratio system in France and the Latin Union
the problem was really provided for, for under it the two
metals behaved as one and thereby furnished a common
standard, although all countries did not use the same
metal as their standard money. It was therefore a matter
of comparative indifference to most countries which metal
they used so long as there was some one country which
used either at a certain defined ratio. With the destruction
of this fixed ratio what was thus a matter of comparative
indifference became a matter of supreme concern. Every
country which had before enjoyed the benefits of a common
international standard without having a common currency
was faced with a crisis in which the choice lay between
* Fisher, Purchasing Power of Money, 1911, pp. 134-35.

sacrificing its currency to securing a common standard or

hugging its currency and foregoing the benefits of a common
standard. That exigencies of a common standard ultimately
led to its accomplishment was as it should have been, but it
was not a fact before a great deal of harm and some heavy
burdens had brought home to people what the want of it really
meant to them.

CHAPTER III
THE SILVER STANDARD AND THE EVILS OF ITS
INSTABILITY
The economic consequences of this rupture of the par of
exchange were of the most far-reaching character. It divided the
commercial world into two sharply defined groups, one using
gold and the other using silver as their standard money. When
so much gold was always equal to so much silver, as was the
case previous to 1873, it mattered very little, for the purposes
of international transactions, whether a country was on a gold
or on a silver standard ; nor did it make any difference in
which of the two currencies its obligations were stipulated and
realized. But when, owing to the dislocation of the fixed par, it
was not possible to define how much silver was equal to how
much gold from year to year or even from month to month,
this precision of value, the very soul of pecuniary exchange,
gave place to the uncertainties of gambling. Of course, all
countries were not drawn into this vortex of perplexities in the
same degree and to the same extent, yet it was impossible for
any country which participated in international commerce to
escape from being dragged into it. This was true of India as
it was of no other country. She was a silver-standard country
intimately bound to a gold-standard country, so that her
economic and financial life was at the mercy of blind forces
operating upon the relative values of gold and silver which
governed the rupee-sterling exchange.
The fall increased the burden of those who were under
an obligation to make gold payments. Amongst such, the
most heavily charged was the Government of India. Owing
to the exigencies of its political constitution, that Government
has been under the necessity of making certain payments in
England to meet: (1) interest on debt and on the stock of the
guaranteed railway companies ; (2) expenses on account of the
European troops maintained in India; (3) pensions and non-
effective allowances payable in England; (4) cost of the home
administration*; and (5) stores purchased in England for

use or consumption in India. England being a gold-standard
country, these payments were necessarily gold payments. But
the revenues of the Government of India out of which these
payments were met were received in silver, which was the sole
legal-tender money of the country. It is evident that even if
the gold payments were a fixed quantity their burden must
increase pari passu with the fall in the gold value of silver.
But the gold payments were not a fixed quantity. They have
ever been on the increase, so that the rupee cost of the gold
payments grew both by reason of the growth in their magnitude,
and also by reason of the contraction of the medium, i.e. the
appreciation of gold, in which they were payable. How greatly
this double levy diminished the revenues of India, the figures
in Table XI give a convincing testimony.
TABLE XI
INCREASE IN THE RUPEE COST OF GOLD PAYMENTS†
Total Excess of Amount of this Excess due to
Rupees needed
to provide for
Average (1)
the net Sterling (2)
Rate of Fall in the
Financial Payments of the Increase in gold
Exchange Rate of
Year Year over those payments over
for the Exchange over
required to meet those of the
Year that of
the Sterling Year 1874-75
1874-75
Payments of
1874-75
s. d. R R R
1875-76 1 9.626 86,97,980 41,13,723 45,84,257
1876-77 1 8.508 3,15,06,824 1,44,68,234 1,70,38,590
1877-78 1 8.791 1,30,05,481 1,14,58,670 1,15,46,811
1878-79 1 7.794 1,85,23,170 1,04,16,718 81,06,452
1879-80 1 7.961 39,23,570 1,65,37,394 -1,26,13,824
1880-81 1 7.956 3,12,11,981 1,92,82,582 1,19,29,399
1881-82 1 7.895 3,18,19,685 1.98,76,786 -1,19,42,899
1882-83 1 7.525 62,50,518 1,86,35,246 2,48,85,764
1883-84 1 7.536 3,44,16,685 2,33,46,040 1,10,70,645
1884-85 1 7.308 1,96,25,981 2,48,03,423 51,77,442
1885-86 1 6.254 1,82,11,346 2,54,95,337 -4,37,06,683
1886-87 1 5.441 4,69,16,788 4,46,68,299 22,48,489
1887-88 1 4.898 4,63,13,161 4,96,60,537 - 33,47,376
1888-89 1 4.379 9,00,38,166 6,59,71,998 2,40,66,168
1889-90 1 4.566 7,75,96,889 6,06,98,370 1,68,98,519
1890-91 1 6.090 9,06,11,857 4,65,48,302 4,40,63,555
1891-92 1 4.733 10,44,44,529 6,54,52,999 3,89,91,530
* Since the Reform Act of 1920 that part of this cost which was “political” has
been placed upon the British Estimates.
† Compiled from figures in Appendix II, p. 270, of the Indian Currency
Committee of 1843.
THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY 417
The effect of such a growing burden on the finance of

the Government may well be imagined ; the condition of the
Government, embarrasing at first, later became quite desperate
under this continuously increasing burden. It enforced a policy
of high taxation and rigid economy in the finances of the
Government. Analysing the resource side of the Indian Budgets
from the year 1872-73, we find that there was hardly any
year which did not expire without making an addition to the
existing imposts of the country. In 1872-73, there commenced
the levy of what were called Provincial Rates. The fiscal year
1875-76 witnessed the addition of R. 1 per gallon in the excise
duty on spirits. In 1877-78 the Pass Duty on Malwa opium
was raised from Rs. 600 to Rs. 650 per chest. An addition of
a Licence Tax and Local Rates was made in the year 1878-79,
and an increase of Rs. 50 per chest took place in the Malwa
Opium Duty in the following year. With the help of these
imposts the Government expected to place its finances on an
adequate basis. By the end of 1882, it felt quite secure and
even went so far as to remit some of the taxes, which it did
by lowering the customs duties and the Patwari Cess in the
North-Western Provinces. But the rapid pace in the fall of the
exchange soon showed that a resort to further taxation was
necessary to make up for the increased cost of the sterling
payments. To the existing burdens, therefore, was added in
1886 an Income Tax, a duty of 5 per cent. on imported and
also on non-illuminating petroleum. The Salt Duty was raised
in 1888 in India from Rs. 2 to Rs. 2½ and in Burma from
3 annas to R. 1 per maund. The Patwari Cess of the North-
Western Provinces, repealed in 1882, was re-imposed in 1888.
The rates of duty on imported spirit and the excise duties
on spirits were not only raised in 1890, but were afterwards
added to in every province. An excise duty on malt liquor
was levied in 1893, and another on salted fish at the rate of
6 annas per maund. The yield of the taxes and duties levied
from 1882-83 was* as follows:—
Sources 1882-83 1892-93
Rs. Rs.
Salt ... ... 5,67,50,000 8,14,90,000
Excise ... ... 3,47,50,000 4,97,90,000
Customs ... ... 1,08,90,000 1,41,80,000
Assessed Taxes ... ... 48,40,000 1,63,60,000
* Report of the Indian Currency Committee, 1893, App. II, p. 263.

All this additional burden was due to the enhanced cost

of meeting the gold payments, and “would not have been
necessary but for the fall in the exchange.”*
Along with this increase of resources the Government
of India also exercised the virtue of economy in the cost of
administration. For the first time in its history, the Government
turned to the alternative of employing the comparatively
cheaper agency of the natives of the country in place of the
imported Englishmen. Prior to 1870, the scope of effecting
economy along this line was very limited. By the Civil Service
Reforms of 1853† the way was cleared for the appointment of
Indians to the posts reserved by the Statute of 1793† for the
members of the covenanted Civil Service. But this reform did
not conduce to any economy in the cost of the administration,
because the Indian members carried the same high scale of
salaries as did the English members of the Civil Service. It was
when the Statute of 1870 (33 Vic. c. 3) was passed permitting
the appointment by nomination of non-covenanted Indians to
places reserved for the covenanted Civil Service on a lower
scale of salary, that a real scope for economy presented itself
to the Government of India. Hard pressed, the Government
of India availed itself of the possibilities for economy held
out by this statute. So great was the need for economy and
so powerful was the interest of the Government in reducing
its expenditure that it proceeded, notwithstanding increased
demands for efficient administration, to substitute the less
expensive agency of non-covenanted civilians in place of the
more expensive agency of the convenanted civilians. The scale
on which this substitution was effected was by no means small,
for we find that between 1874 and 1889 the strength of the
convenanted service recruited in England was reduced by more
than 22 per cent., and was further expected to be reduced
by about 12 per cent., by the employment of unconvenanted
Indians to the posts usually reserved for covenanted civilians.§
Besides substituting a cheap for a dear agency in the
administration, the Government also sought to obtain relief by
applying the pruning knife to the rank growth in departmental
* J.E.O’Conor, Report of the Indian Currency Committee, 1898, App. II, p. 182.
† Cf. Report of the Public Service Commission, C 5327 of 1887.
‡ This provision of the Act has been re-enacted by the Act of 1861.
§ Cf. evidence of Mr. Jenkins, Q. 12. Mil. of Evid. of the Select Committee on
East India (Civil Servants), H. of C. 327 of 1890.
extravagences.* Even with such heroic efforts to increase

the revenue and reduce the expenditure the finances of the
Government throughout the period of the falling exchange
were never in a flourishing state, as is shown in Table XII.
Much more regrettable was the inability of the Government,
owing to its financial difficulties, to find money for useful public
works. The welfare of the Indian people depends upon turning
to best account the resources which the country possesses.
But the people have had very little of the necessary spirit
of enterprise in them. The task, therefore, has fallen upon
the Government of India to provide the country with the two
prime requisites of a sustained economic life, namely a system
of transport and a network of irrigation. With this object in
view the Government had inaugurated a policy of developing
what were called “Extraordinary Public Works,” financed by
capital borrowings. For such borrowings India, as was to be
expected, hardly offered any market, the people being too
poor and their savings too scanty to furnish a modicum of the
required capital outlay. Like all governments of poor peoples,
the Government of India had therefore to turn to wealthier
countries that had surplus capital to lend. All these countries
unfortunately happened to be on the gold standard. As long
as it was possible to say that so much gold was equal to so
much silver, the English investor was indifferent whether the
securities of the Government of India were rupee securities or
sterling securities. But the fall in the gold value of silver was
also a fall in the gold value of the rupee securities, and what
was once a secure investment ceased to be so any more. This
placed the Government in a difficult position in the matter
of financing its extraordinary public works. Figures in Table
XIII are worth study.
The English investor would not invest in the rupee securities.
An important customer for the Indian rupee securities was thus
lost. The response of the Indian money market was inadequate.
To issue sterling securities was the only alternative to enable
the Government to tap a bigger and a more constant reservoir
for the drawing of capital to India; but as it was bound to
increase the burden of the gold payments, which it was the
* Cf. Calcutta Civil Finance Committee’s Report, 1886 ; also The Report of the
Civil Finance Commissioner (1887), who completed the work of the Committee
after it was dissolved.
TABLE XII
420
REVENUE AND EXPENDITURE OF THE GOVERNMENT OF INDIA

In India. In England. Final Result.
Average
Year. Rate of Net Expendi-
Surplus Net Sterling Surplus (+) or
Exchange. Net Revenue. ture excluding Exchange.
Revenue. Revenue. Deficit (-)
Exchange.
d. R. R. R. £ R. R.
1874-75 22.156 39,564,216 25,897,098 13,667,118 12,562,101 1,045,239 59,778

1875-76 21.626 40,053,419 24,541,923 15,511,496 12,544,813 1,377,428. 1,589,255
MK
1876-77 20.508 38,253,366 25,355,285 12,898,081 13,229,646 2,252,611 —2,584,176

1877-78 20.791 39,275,489 27,658,021 11,617,468 13,756,478 2,123,030 —4,262,040
1878-79 19.794 44,415,139 25,778,928 18,636,211 13,610,211 2,891,902 2,134,098
1879-80 19.961 45,258,197 29,384,030 15,874,167 14,223,891 2,878,169 —1,227,893
SJ+YS
1880-81 19.956 44,691,119 34,880,434 9,810,085 11,177,231 2,264,848 —3,031,394

1881-82 19.895 45,471,887 27,717,249 17,754,638 11,737,688 2,421,499 3,595,451
1882-83 19.525 42,526,173 25,500,437 17,025,736 13,299,976 3,050,923 674,837
1883-84 19.536 43,591,273 23,566,381 20,024,892 14,770,257 3,375,158 1,879,477
1884-85 19.308 41,585,347 24,763,779 16,821,568 13,844,028 3,363,986 — 386,446
1885-86 18.254 42,635,953 27,352,132 15,283,821 13,755,659 4,329,888 —2,801,726
1886-87 17.441 44,804,774 25,124,335 19,680,439 14,172,298 5,329,714 178,427
25-9-2013/YS-11-11-2013
1887-88 16,898 45,424,150 25,968,025 19,456,125 15,128,018 6,356,939 —2,028,832

1888-89 16.379 46,558,354 25,051,147 21,507,207 14,652,590 6,817,599 37,018
1889-90 16.566 50,005,810 26,367,855 23,637,955 14,513,155 6,512,767 2,612,033
1890-91 18.090 49,403,819 25,579,727 23,824,092 15,176,866 4,959055 3,688,171

1891-92 16.733 50,023,142 27,013,618 23,009,524 15,716,780 6,825,909 467,535
420
strongest interest of the Government to reduce, the resort to

the London money market, unavoidable as it became, was
somewhat restrained,* with the result that the expansion
of extraordinary public works did not proceed at a pace
demanded by the needs of the country. The effects of this
financial derangement, consequent on the fall of the exchange,
were not confined to the Government of India. They were
immediately felt by the municipalities and other local bodies
who were dependent upon the Government for financial aid.
So long as the cash balances were overflowing in the treasury
of the Government, “one of the most useful ways” to employ
them was found in lending a portion of them to these local
institutions. As they had just then been inaugurated under
the local self-government policy of Lord Ripon’s regime, and
were looked upon only as an experiment, their taxing and
borrowing powers were rigidly limited. Consequently, this
financial aid from the Central Government by way of temporary
advances was a resource of inestimable value to them. When,
however, the cash balances of the Central Government began
to diminish owing to the continued losses by exchange, these
facilities were severely curtailed,† so that the very vitality of
these institutions was threatened just at the moment when
they needed all help to foster their growth and strengthen
their foundations.
Addressing the Secretary of State, the Government of India,
in a despatch of February 2, 1886, observed‡:—
“10. We do not hesitate to repeat that the facts set
forth in the preceding paragraphs are, from the point of
Indian interests, intolerable ; and the evils which we have
enumerated do not exhaust the catalogue. Uncertainty
regarding the future of silver discourages the investment
of capital in India, and we find it impossible to borrow
in silver except at an excessive cost.
“On the other hand, the Frontier and Famine Railways
which we propose to construct, and the Coast and Frontier
* During the period of falling exchange the distribution of the debt of India
was as follows:—
Sterling Debt Rupee Debt
End of 1873-74 ... 41,117,617 66,41,72,900
End of 1898-99 ... 124,268,605 1,12,65,04,340
Indian Currency Committee (1898), Appendix II p. 179
† Cf. Financial Statement, 1876-77, p. 94.
‡ See C. 4868 of 1886, p. 8.
TABLE XIII
422
PRICE MOVEMENTS OF RUPEE AND STERLING SECURITIES OF THE GOVERNMENT OF INDIA *

Price of 4 per cent. Rupee Paper. Price of Sterling India Stock.
Rates of Exchange.
Year. In Calcutta. In London. 4 per cent. 3½ per cent. 3 per cent.
Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest.
d. d.
1873 227/8 215/8 105 1017/8 97 94½ 1061/3 101¼
1874 231/8 213/4 104½ 99½ 98 94½ 1033/4 101

1875 223/16 21¼ 1027/8 1013/4 94 91 106¼ 103¼
MK
1876 223/8 18½ 1017/8 983/4 893/4 78 1057/8 1017/8

1877 22¼ 209/16 987/8 93¼ 88½ 81 1045/8 102¼
1878 21 183/4 967/8 93½ 82½ 753/8 1045/8 99
1879 205/8 185/8 947/8 91¼ 80 77¼ 1053/8 1007/8
1880 203/8 193/4 100 9215/16 813/8 773/4 1055/8 1021/8
SJ+YS
1881 201/16 19½ 1045/8 100 86 81¼ 1063/8 1037/8 1037/8 1003/4
1882 206/16 191/16 1021/10 955/8 85 81 1051/8 1027/8 1017/8 993/4
1883 199/16 193/16 1011/8 979/16 82 793/4 1045/8 1027/16 1031/8 1013/8
1884 193/4 1815/16 1005/8 955/16 813/4 78¼ 1043/8 1015/8 1071/8 1013/4 96¼ 913/4
1885 193/16 173/3 ½ 987/16 92¼ 77½ 73¼ 1031/16 983/4 1023/4 97½ 91½ 853/4
1886 18 161/8 973/4 973/16 73 66¼ 103½ 101¼ 1023/4 993/4 901/8 865/8
1887 183/16 155/8 993/16 955/16 7111/16 677/8 1023/4 100½ 103¼ 100¼ 923/4 953/8
1888 171/8 16 1003/16 973/4 693/8 66¼ 1027/8 100½ 107¼ 1045/8 98 95
1889 1615/16 16 1003/8 971/16 691/8 663/8 109½ 1067/8 1011/8 99
25-9-2013/YS-11-11-2013
1890 202/3 9/2 167/8 1037/8 9613/16 87¼ 683/4 108½ 105¼ 1003/4 95¼
1891 18¼ 165/8 10713/16 1041/16 803/4 74¼ 109½ 105 99 94½
1892 1611/16 145/8 10815/16 10311/16 74½ 62 109½ 1061/8 98½ 947/8
* Appendix II to the Report of the Indian Currency Committee of 1893, p. 272. These prices differ slightly from those given in Appendix
IV to the First Report of the Gold and Silver Commission, 1886, and also from those in the Statistics of British India (First Issue) for
1906-07, Part IV, (a) Finance Tables 7 and 8 of the division called Prices.
422
defences which we have planned, are imperatively required

and cannot be postponed indefinitely.
“We are forced, therefore, either to increase our sterling
liabilities, to which course there are so many objections,
or to do without the railways required for the commercial
development of the country, and its protection against
invasion and the effects of famine.
* * * * *
“11. Nor can the difficulties which local bodies
experience in borrowing in India be overlooked. The
Municipalities of Bombay and Calcutta require large sums
for sanitary improvements, but the high rate of interest
which they must pay for silver loans operates to deter
them from undertaking expensive works, and we need
hardly remind your Lordship that it has quite recently been
found necessary for Government to undertake to lend the
money required for the construction of docks at Calcutta
and Bombay, and that when the Port Commissioners of
Calcutta attempted to raise a loan of 75 lakhs of rupees
in September, 1885, guaranteed by the Government of
India, the total amount of tenders was only Rs. 40,200,
and no portion of this insignificant amount was offered
at par.........”
The importation of capital on private account was hampered
for similar reasons, to the great detriment of the country. It
was urged on all hands, and was even recommended by a Royal
Commission,* that one avenue of escape from the ravages of
recurring famines, to which India so pitifully succumbed at such
frequent intervals, was the diversification of her industries. To
be of any permanent benefit, such diversified industrial life could
be based on a capitalistic basis alone. But that depended upon
the flow of capital into the country as freely as the needs of the
country required. As matters then stood, the English investor,
the largest purveyor of capital, looked upon the investment of
capital in India as a risky proposition. It was feared that once
the capital was spread out in a silver country every fall in
the price of silver would not only make the return uncertain
when drawn in gold, but would also reduce the capital value of
his investment in terms of gold, which was naturally the unit
*Cf. The Report of the Famine Commission of 1880, Part II, C 2735 of 1880,
pp. 175-76.
in which he measured all his returns and his outlays. This

check to the free inflow of capital was undoubtedly the most
serious evil arising out of the rupture of the par of exchange.
Another group of people, who suffered from the fall of
exchange because of their obligation to make gold payments,
was composed of the European members of the Civil Service
in India. Like the Government to which they belonged,
they received their salaries in silver, but had to make gold
remittances in support of their families, who were often left
behind in England. Before 1873, when the price of silver in
terms of gold was fixed, this circumstance was of no moment to
them. But as the rupee began to fall the face of the situation
was completely altered. With every fall in the value of silver
they had to pay more rupees out of their fixed salaries to obtain
the same amount of gold. Some relief was no doubt given to
them in the matter of their remittances. The Civil Servants
were permitted, at a sacrifice to the Government, to make their
remittances at what was called the Official Rate of Exchange.*
It is true the difference between the market rate and the
official rate was not very considerable. None the less, it was
appreciable enough for the Civil Servants to have gained by
2½ per cent. on the average of the years 1862-90† at the cost
of the Government. The Military Servants obtained a similar
relief to a greater degree, but in a different way. Their salary
was fixed in sterling, though payable in rupees. It is true the
Royal Warrant which fixed their salary also fixed the rate of
exchange between the sterling and the rupee for that purpose.
But as it invariably happened that the rate of exchange fixed
by the Warrant was higher than the market rate, the Military
Servants were compensated to the extent of the difference at
* As was explained by Mr. Waterfield before the Select Committee on East India
(Civil Servants), H. C. Return 327 of 1890, Q. 1905-17, it was first instituted in
1824 and was arrived at as follows : In December of each year a calculation was
made at the India Office of the cost of sending a rupee to India, based on the
market price of silver in London, and of the cost of bringing a rupee from India,
based on the price of bills on London in Calcutta. A mean between the two was
struck and taken as the adjusting rate for the coming official year between the
India Office and the British Treasury in regard to such transactions or payments
undertaken by one Government as the agent of the other. It was fixed anew
for each and formed a fair average rate, although it was sometimes above and
sometimes below the market rate of exchange.
† Ibid, Q. 1925-26.
the cost of the Indian Exchequer.* This relief was, comparatively

speaking, no relief to them. The official or the warrant rates
of exchange, though better than the market rates of exchange,
were much lower than the rate at which they were used to
make their remittances before 1873. Their burden, like that
of the Government, grew with the fall of silver, and as their
burden increased their attitude became alarmist. Many were
the memorialists who demanded from the Government adequate
compensation for their losses on exchange.† The Government
was warned‡ that
“the ignorant folk who think India would be benefited
by lowering present salaries are seemingly unable to
comprehend that such a step would render existence on this
reduced pay simply impossible, and that recourse would
of necessity be had to other methods of raising money.”
Such, no doubt, was the case in the earlier days of the
East India Company, when the Civil Servants fattened on
pickings because their pay was small,§ and it was to put a
stop to their extortions that their salaries were raised to what
appears an extra-ordinary level. That such former instances
of extortions should have been held out as monitions showed
too well how discontented the Civil Service was owing to its
losses through exchange.
Quite a different effect the fall had on the trade and
industry of the country. It was in a flourishing state as
compared with the affairs of the Government or with the
trade and industry of a gold-standard country like England.
Throughout the period of falling silver there was said to
be a progressive decline relatively to population in the
employment afforded by various trades and industries in
England. The textile manufactures and the iron and coal
trade were depressed as well as the other important trades,
* Cf. F. S. 1887-8, pp. 39-40. This cost was as follows :—
1847-75 ... Rs. 6,40,000 1885-86 Rs. 4,00,000
1884-85 ... Rs. 18,43,000 1886-87 Rs. 5,15,000
† Cf. Report of the Indian Currency Committee, 1893, App. I, pp. 185-90 and
p. 202, for memorials of the European Civil Servants.
‡ Cf. Col. Hughes-Hallett, M.P., The Depreciation of the Rupee : its Effect on
the Anglo-Indian Official—the Wrong and the Remedy, London, 1887, p. 14.
§ The connection between the rapacious conduct of the early European Civil
Servants and the smallness of their salaries was well brought out by Clive in
his speech dated March 30, 1772, during the course of the debate in the House
of Commons on the East India Judicature Bill, Hansard, Vol. XVII, pp. 334-39.
including the hardware manufactures of Birmingham and

Sheffield, the sugar-refining of Greenock, Liverpool, and
London, the manufactures of earthenware, glass, leather, paper,
and a multitude of minor industries.* The depression in English
agriculture was so widespread that the Commissioners of 1892
were “ unable to point to any part of the country in which [the
effects of the depression] can be said to be entirely absent,”
and this notwithstanding the fact that the seasons since 1882
“were on the whole satisfactory from an agricultural point of
view.”† Just the reverse was the case with Indian trade and
industry. The foreign trade of the country, which had bounced
up during the American Civil War, showed greater buoyancy
after 1870, and continued to grow throughout the period of
the falling exchange at a rapid pace. During the short space of
twenty years the total imports and exports of the country more
than doubled in their magnitude, as is shown by Table XIV.
TABLE XIV
IMPORTS AND EXPORTS (BOTH MERCHANDIZE AND TREASURE)§
Year Exports Imports Year Exports Imports
R. R.
1870-71 57,556,951 39,913,942 1881-82 83,068,198 60,436,155
1871-72 64,685,376 43,665,663 1882-83 84,527,182 65,548,868
1872-73 56,548,842 36,431,210 1883-84 89,186,397 68,157,311
1873-74 56,910,081 39,612,362 1884-85 85,225,922 69,591,269
1874-75 57,984,549 44,363,160 1885-86 84,989,502 71,133,666
1875-76 60,291,731 44,192,378 1886-87 90,190,633 72,830,670
1876-87 65,043,789 48,876,751 1887-88 92,148,279 78,830,468
1877-78 67,433,324 58,819,644 1888-89 98,833,879 83,285,427
1878-79 64,919,741 44,857,343 1889-90 105,366,720 86,656,990
1879-80 69,247,511 52,821,398 1890-91 102,350,526 93,909,856
1880-81 76,021,043 62,104,984 1891-92 111,460,278 84,155,045
§ From Appendix II (Nos. 1 and 2) to the Report of the Indian Currency

Committee of 1898.
* Report by Dunraven, Farrer, Muntz, and Lubbock in the Final Report of

the Royal Commission on Depression of Trade and Industry, par., 54, C. 4893.
† Final Report of the Royal Commission on Agricultural Depression in England,
C 8540 of 1897, par. 28.
TABLE XV. NATURE OF INDUSTRIAL PURSUITS IN ENGLAND AND INDIA *
Distribution of Indian Exports exclusive of Treasure. Distribution of English Exports exclusive of Treasure.
Manufac- Unclassi- Manufac- Unclassi-
Raw Food Raw Food
tured Arti- fied Arti- Total. tured Arti- fied Arti- Total.
Materials. Articles. Materials. Articles.
cles. cles. cles. cles.
1857 11 34 22 23 100 90.9 4 4.9 .2 100
1858 6 35 26 33 100 91.4 3.4 5.1 .1 100
1859 6.5 40 15.5 38 100 91.5 3.8 4.6 .1 100
1860 5.7 43.6 17.7 33 100 91.9 3.6 4.4 .3 100

MK
1861 5.8 46.5 15.3 32.4 100 90.4 4.8 4.8 — 100
1862 5 52 16 27 100 90.3 4 4.8 .9 100
1863 3.7 58.7 10.6 27 100 91.0 4 4 1.0 100
1864 4 69.2 9.3 17.5 100 92.5 3.7 3.7 .1 100
SJ+YS
1865 3.5 68 12 16.6 100 92.1 3.6 3.6 .7 100

1866 4.2 67.2 10.3 18.3 100 92 3.7 3.7 .4 100
1867 4 58 11 27 100 92.2 3.8 3.7 .3 100
1868 4 58.5 11.5 26 100 92 4.4 3.4 .2 100
1869 4.8 60.5 14 20.7 100 92 4.2 31 .7 100
1870 4.4 63.6 9 23 100 91 4 4 1.0 100
1871 3.7 65.3 11 20 100 90 4.4 4.9 .7 100
25-9-2013/YS-11-11-2013
1872 3.3 61.4 13.5 21.8 100 91.2 5.4 3.5 .9 100
* The figures for India are calculated from the Statistical Abstract for British India, Second Number (1857-866), Table No. 34, and
the Eighth Number (1864-1873), Table No. 24. Figures for England are taken from Appendix C (Statement 6) to the First Report of the
Royal Commission of the Depression of Trade and Industry, 1885, with this alteration—that the separate figures in the original under
“Manufactured” and “Partially Manufactured” are here grouped under “Manufactured.” The “Unclassified Articles” under Indian Exports
427
are for the most part “Jewellery.”

TABLE XVI
CHANGES IN INDUSTRIAL PURSUITS OF INDIA*
Imports Exports
Years
Manufactured Raw Manufactured Raw
Rs. Rs. Rs. Rs.
1879 25,98,65,827 13,75,55,837 5,27,80,340 59,67,27,991
1892 36,22,31,872 26,38,18,431 16,42,47,566 85,52,09,499
Percentage of
39 91 211 43
increase
Total Annual 2.8 6.5 15 3
Not only had the trade of India been increasing, but the
nature of her industries was also at the same time undergoing
a profound change. Prior to 1870, India and England were, so
to say, non-competing groups. Owing to the protectionist policy
of the Navigation Laws, and owing also to the substitution
of man by machinery in the field of production, India had
become exclusively an agricultural and a raw-material-
producing country, while England had transformed herself into
a country which devoted all her energy and her resources to
the manufacturing of raw materials imported from abroad into
finished goods. How marked was the contrast in the industrial
pursuits in the two countries is well revealed by the analysis
of their respective exports in Table XV.
After 1870, the distribution of their industrial pursuits was
greatly altered, and India once again began to assume the role
of a manufacturing country. Analysing the figures for Indian
imports and exports for the twenty years succeeding 1870,
(see Table XVI) we find that the progress in the direction of
manufactures formed one of the most significant features of
the period.
This change in the industrial evolution was marked by the
growth of two principal manufactures. One of them was the
* From Ranade’s Essays on Indian Economics, p. 104.

manufacture of cotton. The cotton industry was one of the

oldest industries of India, but during 100 years between 1750
and 1850 it had failed into a complete state of decrepitude.
Attempts were made to resuscitate the industry on a capitalistic
basis in the sixties of the ninetenth century and soon showed
signs of rapid advance. The story of its progress is graphically
illustrated in the following summary in Table XVII:—
TABLE XVII
THE DEVELOPMENT OF INDIAN COTTON TRADE AND INDUSTRY
Growth of Trade (Average Annual Quantities
in each Quinquennium)
1870-71 1875-76 1880-81 1885-86 1890-91
to to to to to
1874-75 1879-80 1884-85 1889-90 1894-95
Imports of raw cotton— 23 52 51 74 89
thousands or cwts.
Exports of raw cotton— 5,236 3,988 5,477 5,330 4,660
thousands of cwts.
Imports of twist and yarn 33.55 33.55 44.34 49.09 44.79
Growth of Industry (at end of each fifth year)
Number of mills 48 58 81 114 143
Number of spindles—000— 1,000 1,471 2,037 2,935 3,712
omitted
Number of looms—000— 10 13 16 22 34
omitted
Number of persons employed ... 39,537 61,836 99,224 ...
Another industry which figured largely in this expansion

of Indian manufactures was jute. Unlike the cotton industry
of India, the jute industry was of a comparatively recent
origin. Its growth, different from that of the cotton industry,
was fostered by the application of European capital, European
management, and European skill, and it soon took as deep
roots as the cotton industry and flourished as well as the latter
did, if not better. Its history was one of continued progress as
will be seen from Table XVIII.
This increasing trend towards manufactures was not without
its indirect effects on the course of Indian agriculture. Prior
to 1870 the Indian farmer, it may be said, had no commercial
outlook. He cultivated not so much for profit as for individual
self-sufficiency. After 1870 farming tended to become a business
and crops came more and more to be determined by the course
of market prices than by the household needs of the farmer.
This is well illustrated by figures in Table XIX.
Such was the contrast in the economic conditions prevalent

in the two countries. This peculiar phenomenon of a silver-
standard country steadily progressing, and a gold-standard
country tending to a standstill, exercised the minds of many of
TABLE XVIII
DEVELOPMENT OF JUTE INDUSTRY AND TRADE
Average Annual of each Quinquennium
1870-71 1875-76 1880-81 1885-86 1890-91
Growth to to to to to
1874-75 1879-80 1884-85 1889-90 1894-95
Exports-
Raw, million cwt. 5.72 5.58 7.81 9.31 10.54
Gunny bags, millions 6.44 35.96 60.32 79.98 120.74
Cloth, million yds. ... 4.71 6.44 19.79 54.20
Growth of Industry
Number of—
Mills ... 21 21 24 26
Looms, 000 omitted ... 5.5 5.5 7 8.3
Spindles, 000 omitted ... 88 88 138.4 172.4
Persons employed, in
... 38.8 38.8 52.7 64.3
thousands
its observers. The chief cause was said to be the inability

of the English manufacturers to hold out in international
competition. This inability to compete with the European
rivals was attributed to the prevalence of protective tariffs
and subsidies which formed an essential part of the industrial
and commercial code of the European countries. Nothing of
the kind then existed
TABLE XIX
GROWTH OF AGRICULTURAL EXPORTS OF INDIA
1868-69 1873-74 1877-78 1882-83 1887-88 1891-92
Wheat 100 637.41 2,313.47 5,152.36 4,914.37 11,001.44
Opium 100 118.38 123.83 122.47 120.20 116.82
Seeds 100 111.26 305.87 239.97 403.60 480.99
Rice 100 131.66 119.84 203.28 185.55 220.36
Indigo 100 116.91 121.57 142.17 140.76 126.33
Tea 100 169.35 293.17 507.25 775.09 1,075.75
Cofee 100 86.04 69.98 85.31 64.59 74.11
in India, where trade was as free and industry as unprotected

as any could have been, and yet the Lancashire cotton-spinner,
the Dundee jute manufacturer and the English wheat-grower
complained that they could not compete with their rivals in
India. The cause, in this case, was supposed to be the falling
exchange.* So much were some people impressed by this view
that even the extension of the Indian trade to the Far East was
attributed to this cause. Already, it was alleged, the dislocation
of the par of exchange between gold and silver had produced
a kind of segregation of gold-using countries and silver-using
countries to the exclusion of each other. In a transaction
between two countries using the same metal as standard it
was said the element of uncertainty arising from the use of
two metals varying in terms of each other was eliminated.
Trade between two such countries could be carried on with
less risk and less inconvenience than between two countries
using different standards, as in the latter case the uncertainty
entered into every transaction and added to the expense of
the machinery by which trade was carried on. That the Indian
trade should have been deflected to other quarters† where,
owing to the existence of a common standard the situation
trade had to deal with was immune from uncertainties, was
readily admitted. But it was contended that there was no reason
why, as a part of the segregation of commerce, it should have
been possible for the Indian manufacturer to oust his English
rival from the Eastern markets to the extent he was able to
do (see Table XX, p. 432).
The causes which effected such trade disturbances formed
the subject of a heated controversy.‡ The point in dispute was
whether the changes in international trade, such as they were,
were attributable to the monetary disturbances of the time.
Those who held to the affirmative explained their position by
arguing that the falling exchange gave a bounty to the Indian
producer and imposed a penalty on the English producer. The
* Cf. The Final Report of the Royal Commission on Gold and Silver Part I,
pars. 99-101, for a summary of the argument.
† The distribution of Indian trade during this period was as shown on the
page 432 footnote.
‡ See the evidence and memoranda by Profs. Marshall and Nicholson before
the Royal Commission on Gold and Silver (1886); also Prof. Lexis, “ The Agio on
Gold and International Trade,” in the Economic Journal, Vol. V, 1895.
TABLE XX
EXPORTS OF COTTON GOODS TO EASTERN MARKETS
Piece-goods, yds., 000
Yarn, lbs. 000 omitted
Years omitted
From India From U. K. From India From U. K.
1877 ... 7,927 33,086 15,544 394,489
1878 ... 15,600 36,467 17,545 382,330
1879 ... 21,332 38,951 22,517 523,921
1880 ... 25,862 46,426 25,800 509,099
1881 ... 26,901 47,479 30,424 587,177
1882 ... 30,786 34,370 29,911 454,948
1883 ... 45,378 33,499 41,534 415,956
1884 ... 49,877 38,856 55,565 439,937
1885 ... 65,897 33,061 47,909 562,339
1886 ... 78,242 26,924 51,578 490,451
1887 ... 91,804 35,354 53,406 618,146
1888 ... 113,451 44,643 69,486 652,404
1889 ... 128,907 35,720 70,265 557,004
1890 ... 141,950 37,869 59,496 633,606
1891 ... 169,253 27,971 67,666 595,258
† DISTRIBUTION OF INDIAN TRADE

Annual Average for each Quinquennium in Millions of
rupees
1875-76 to 1879-80 1880-81 to 1884-85
Countries
Imports Exports Total Imports Exports Total
United Kingdom ... 323.68 278.15 601.83 434.45 344.22 778.67
China ... 14.05 132.27 146.32 19.23 134.94 154.17
Japan ... .02 .33 .35 .19 2.09 2.28
Ceylon ... 5.74 22.97 28.71 5.35 16.37 21.72
Straits Settlement 10.83 26.11 36.94 15.88 33.65 49.53
Annual Average for each Quinquennium in Millions of

rupees
1885-86 to 1989-90 1890-91 to 1894-95
Countries
Imports Exports Total Imports Exports Total
United Kingdom ... 510.47 360.59 871.06 526.24 338.40 864.64
China ... 21.64 134.54 156.18 28.69 133.30 161.90

Japan ... .25 7.27 7.52 1.51 14.44 15.95
Ceylon ... 5.86 20.56 26.42 6.42 31.18 37.60
Straits Settlement 20.09 42.54 62.63 23.32 52.56 75.88
existence of this bounty, which was said to be responsible for the

shifting of the position of established competitors in the field of
international commerce, was based on a simple calculation. It
was said that if the gold value of silver fell the Indian exporter
got more rupees for his produce and was therefore better off,
while by reason of the same fact the English producer got
fewer sovereigns and was therefore worse off. Put in this naive
form, the argument that the falling exchange gave a bounty
to the Indian exporters and imposed a penalty on the English
exporters had all the finality of a rule of arithmetic. Indeed,
so axiomatic was the formula regarded by its authors that
some important inferences as to its bearing on the trade and
industrial situation of the time were drawn from it. One such
inference was that it stimulated exports from and hindered
imports into the silver-using countries. The second inference
was that the fall of exchange exposed some English producers
more than others to competition from their rivals in silver-using
countries. Now, can such results be said to follow from the fall
of exchange ? If we go behind the bald statement of a fall of
exchange and inquire as to what determined the gold price of
silver the above inferences appear quite untenable. That the
ratio between gold and silver was simply the inverse of the
ratio between gold prices and silver prices must be taken to
be an unquestionable proposition. If therefore the gold price
of silver was falling it was a counterpart of the more general
phenomenon of the fall of the English prices which were
measured in gold, and the rise of the Indian prices which
were measured in silver. Given such an interpretation of the
event of the falling exchange, it is difficult to understand
how it can help to increase exports and diminish imports.
International trade is governed by the relative advantages
which one country has over another, and the terms on which it
is carried on are regulated by the comparative cost of articles
that enter into it. It is, therefore, obvious that there cannot
be a change in the real terms of trade between countries
except as a result of changes in the comparative cost of these
goods. Given a fall in gold prices all round, accompanied by
a rise in silver prices all round, there was hardly anything
in the monetary disturbance that could be said to have
enabled India to increase her exportation of anything except
by diminishing her exportation or increasing her importation
of something else. From the same view of the question of the
falling exchange it follows that such a monetary disturbance
could not depress one trade more than another. If the falling
or rising exchange was simply an expression of the level of
general prices, then the producers of all articles were equally
affected. There was no reason why the cotton trade or the
wheat trade should have been more affected by the fall of
exchange than the cutlery trade.
Not only was there nothing in the exchange disturbance to
disestablish existing trade relations in general or in respect of
particular commodities, but there was nothing in it to cause
benefit to the Indian producer and injury to the English
producer. Given the fact that the exchange was a ratio of the
two price-levels, it is difficult to see in what sense the English
producer, who got fewer sovereigns but of high purchasing
power, was worse off than the Indian producer, who got
more rupees but of low purchasing power. The analogy of
Prof. Marshall was very apt. To suppose that a fall of exchange
resulted in a loss to the former and a gain to the latter was
to suppose that, if a man was in the cabin of a ship only ten
feet high, his head would be broken if the ship sank down
twelve feet into a trough. The fallacy consisted in isolating the
man from the ship when, as a matter of fact, the same force,
acting upon the ship and the passenger at one and the same
time, produced like movements in both. In like manner, the
same force acted upon the Indian producer and the English
producer together, for the change in the exchange was itself a
part of the more sweeping change in the general price-levels
of the two countries. Thus stated, the position of the English
and Indian producer was equally good or equally bad, and the
only difference was that the former used fewer counters and
the latter a larger number in their respective dealings.
A bounty to the Indian producer and a penalty to the
English producer, it is obvious, could have arisen only if the
fall of silver in England in terms of gold was greater than the
fall of silver in terms of commodities in India. In that case
the Indian producer would have obtained a clear benefit by
exchanging his wares for silver in England and thus securing
a medium which had a greater command over goods and
services in India. But a priori there could be no justification
for such an assumption. There was no reason why gold price
of silver should have fallen at a different rate from the gold
price of commodities in general, or that there should have
been a great difference between the silver prices in England
and in India. Statistics show that such a priori assumptions
were not groundless. (See Table XXI).
TABLE XXI. MOVEMENTS PRICES, WAGES SILVER INDIA ENGLAND *
OF AND BETWEEN AND
Index No. for
Net Imports of Silver into India. Index No. for

Index No. for Gold Index No. for
Silver Prices of Index No. for
Gold Years. Prices of Wages in
Amount Commodities in Wages in India.
Years. Price of Silver. Commod- England.
Rs. India.
ties in England.
(1) (2) (3) (4) (5) (6) (7) (8)
1871-72 6,587,296 99.7 1871 100 — 100 100
1872-73 739,244 99.2 1872 105 — 109 105.8
1873-74 2,530,824 97.4 1873 107 100 111 112
1874-75 4,674,791 95.8 1874 116 101 102 113
MK
1875-76 1,640,445 93.3 1875 103 97 96 111.6
1876-77 7,286,188 86.4 1876 107 98 95 110
1877-78 14,732,194 90.2 1877 138 97 94 109.8
1878-79 4,057,377 86.4 1878 148 99 87 107
SJ+YS
1879-80 7,976,063 84.2 1879 135 100 83 105.8
1880-81 3,923,612 85.9 1880 117 99 88 106.5
1881-82 5,381,410 85.0 1881 106 99 85 106.5
1882-83 7,541,427 84.9 1882 105 100 84 106.5
25-9-2013/YS-11-11-2013
1883-84 6,433,886 83.1 1883 106 102 82 108
1884-85 7,319,581 83.3 1884 114 101 76 109
1885-86 11,627,028 79.9 1885 113 106 72 108
1886-87 7,191,743 74.6 1886 110 105 69 107
1887-88 9,319,421 73.3 1887 111 114 68 108
1888-89 9,327,529 70.4 1888 119 112 70 109.8
1889-90 11,002,078 70.2 1889 125 112 72 113
1890-91 14,211,408 78.4 1890 125 113 72 118
1891-92 9,165,684 74.3 1891 128 118 72 118
1892-93 12,893,499 65.5 1892 141 110 68 117.4
1893-94 13.759,273 58.5 1893 138 119 68 117.4
* Col. (2) is from Appendix II, Table No. 2 of the I.C.C. of 1898. Cols. (3), (5), (6), and (7) are from Atkinson’s “Silver Prices in India,”
in the Journal of the Statistical Society, March, 1897. Col. (8) is based on the figures given by W. T. Layton in his Introduction to the
Study of Prices (1912), Table I, Col. 1, p. 150, re-scaled to 1871 as 100.
435
It is obvious that if silver was falling faster than

commodities, and if silver prices in India were lower than silver
prices in England, we should have found it evidenced by an
inflow of silver from England to India. What were the facts ?
Not only was there no extraordinary flow of silver to India,
but the imports of silver during 1871-93 were much smaller
than in the twenty years previous to that period.* This is as
complete a demonstration as could be had of the fact that the
silver prices in India were the same as they were outside, and
consequently the Indian producer had very little chance of a
bounty on his trade.
Although such must be said to be the a priori view of the
question, the Indian producer was convinced that his prosperity
was due to the bounty he received. Holding such a position he
was naturally opposed to any reform of the Indian currency,
for the falling exchange which the Government regarded a
curse he considered a boon. But however plausible was the
view of the Indian producer, much sympathy would not have
been felt for it had it not been coupled with a notion, most
commonly held, that the bounty arose from the export trade,
so that it became an article of popular faith that the fall of
exchange was a source of gain to the nation as a whole. Now
was it true that the bounty arose from the export trade ? If it
were so, then every fall of exchange ought to give a bounty.
But supposing that the depreciation of silver had taken place
in India before it had taken place in Europe could the fall
of exchange thus brought about have given a bounty to the
Indian exporter ? As was explained above, the Indian exporter
stood a chance of getting a bounty only if with the silver he
obtained for his produce he was able to buy more goods and
services in India. To put the same in simpler language, his
bounty was the difference between the price of his product
and the price of his outlay. Bearing this in mind, we can
confidently assert that in the supposed case of depreciation
of silver having taken place in India first, such a fall in the
Indian exchange would have been accompanied by a penalty
instead of a bounty on his trade. In that case, the exporter
from India would have found that though the Indian exchange,
i.e. the gold price of silver, had fallen, yet the ratio which
gold prices in England bore to silver prices in India had
* Cf. figures for imports of silver in Chap. I. It will, however, be noted how
closely the flow of silver into India between 1872 and 1893 followed the fall in
gold price of silver.
fallen more, i.e. the price he received for his product was smaller
than the outlay he had incurred. It is not quite established
whether silver had fallen in Europe before it had fallen in
India.* But even if that were so the possibility of a penalty
through the fall of exchange proves that the bounty, it there
was any, was not a bounty on the export trade as such, but
was an outcome of the disharmony between the general level
of prices and the prices of particular goods and services within
the country, and would have existed even if the country had
no export trade.
Thus the bounty was but an incident of the general
depreciation of the currency. Its existence was felt because
prices of all goods and services in India did not move in the
same uniform manner. It is well known that at any one time
prices of certain commodities will be rising, while the general
price level is falling. On the other hand, certain goods will
decline in price at the same time that the general price-level
is rising. But such opposite movements are rare. What most
often happens is that prices of some goods and services,
though they move in the same direction, do not move at the
same pace as the general price level. It is notorious that when
general prices fall wages and other fixed incomes, which form
the largest item in the total outlay of every employer, do not
fall in the same proportion ; and when general prices rise
they do not rise as fast as general prices, but generally lag
behind. And this was just what was happening in a silver-
standard country like India and a gold-standard country like
England during the period of 1873-93 (see Chart IV). Prices
had fallen in England, but wages had not fallen to the same
extent. Prices had risen in India, but wages had not risen to
the same extent. The English manufacturer was penalized, if
at all, not by any act on the part of his Indian rival, but by
reason of the wages of the former’s employees having remained
the same, although the price of his products had fallen. The
Indian producer got a bounty, if any, not because he had an
English rival to feed upon, but because he did not have to
pay higher wages, although the price of his product had risen.
The conclusion, therefore, is that the falling exchange could
not have disturbed established trade relations or displaced the
* See infra. Chap. IV,

commodities that entered into international trade. The utmost

that could be attributed to it is its incidence in economic
incentive. But in so far as it supplied a motive force or took
away the incentive, it did so by bringing about changes in the
social distribution of wealth. In the case of England, where
prices were falling, it was the employer who suffered ; in the
case of India, where prices were rising, it was the wage-earner
who suffered. In both cases there was an injustice done to
a part of the community and an easy case for the reform of
currency was made out. The need for a currency reform was
recognized in England ; but in India many people seemed
averse to it. To some the stability of the silver standard had
made a powerful appeal, for they failed to find any evidence of
Indian prices having risen above the level of 1873. To others
the bounty of the falling exchange was too great a boon to be
easily given away by stabilizing the exchange. The falsity of
both the views is patent. Prices in India did rise and that, too,
considerably. Bounty perhaps there was, but it was a penalty
on the wage-earner. Thus viewed, the need for the reform of
Indian currency was far more urgent than could have been said
of the English currency. From a purely psychological point of
view there is probably much to choose between rising prices
and falling prices. But from the point of view of their incidence
on the distribution of wealth, very little can be said in favour
of a standard which changes in its value and which becomes
the via media of tranferring wealth from the relatively poor
to the relatively rich. Scrope said : “Without stability of value
money is a fraud.” Surely, having regard to the magnitude of
the interests affected, depreciated money must be regarded as
a greater fraud. That being so, the prosperity of Indian trade
and industry, far from being evidence of a sound currency,
was sustained by reason of the fact that the currency was a
diseased currency. The fall of exchange, in so far as it was a
gain, registered a loss to a large section of the Indian people
with fixed incomes who suffered from the instability of the
silver standard equally with the Government and its European
officers.
So much for the fall of silver. But the financial difficulties
and social injustices it caused did not sum up the evil effects
produced by it. Far more disturbing than the fall were the
fluctuations which accompanied the fall (see Chart V).
The fluctuations greatly aggravated the embarrassment of
the Government of India caused by the fall in the exchange value
of the rupee. In the opinion of the Hon. Mr. Baring (afterwards

Lord Cromer),*
“It is not the fact that the value of the rupee is,
comparatively speaking, low that causes inconvenience.
It would be possible, although it might be exceedingly
troublesome, to adjust the Indian fiscal system to a
rupee of any value. What causes inconvenience alike to
Government and to trade is that the value of the rupee
is unstable. It is impossible to state accurately in Indian
currency what the annual liabilities of the Government of
India are. These liabilities have to be calculated afresh
every year according to the variations which take place
in the relative value of gold and silver, and a calculation
which will hold good for even one year is exceedingly
difficult to make.”
Owing to such fluctuations, no rate could be assumed in
the Budget which was likely to turn out to be the true market
rate, As matters stood, the rate realized on an average during
a particular year differed so widely from the Budget rate
that the finances of the Government became, to employ the
phraseology of a finance minister, a “veritable gamble.” How
greatly the annual Budget must have been deranged by the
sudden and unprovided-for changes in the rupee cost of the
sterling payments Table XXII on page 442 may help to give
some idea.
If Government finance was subjected to such uncertainties
as a result of exchange fluctuations, private trade also became
more or less a matter of speculation. Fluctuations in exchange
are, of course, a common incident of international trade. But
if they are not to produce discontinuity in trade and industry
there must be definite limits to such fluctuations. If the limits
are ascertainable, trade would be reasonably certain in its
calculation, and speculation in exchange would be limited within
the known limits of deviations from an established par. Where,
on the other hand, the limits are unknown, all calculations of
trade are frustrated and speculation in exchange takes the place
of legitimate trading. Now, it is obvious that fluctuations in the
exchange between two countries will be limited in extent if the
two countries have the same standard of value. Where there
is no such common standard of value the limits, though they
* Financial Statement, 1883-84, p. 26.
TABLE XXII
442
FLUCTUATIONS OF EXCHANGE AND FLUCTUATIONS IN THE RUPEE COST OF GOLD PAYMENTS*

Estimated Rate of Ex-
Rate of Exchange actually Changes in the Rupee Cost of Sterling Payments conse-
change on which the
Financial Year. realized on the Average quent upon Changes between the Estimated and the
Budget of the Year was
during the Year. Realized Rates of Exchange.
framed.
Increase. Decrease.
s. d. s. d. Rs. Rs.
1874-75 1 10.375 1 10.156 15,91,764 —

1875-76 1 9.875 1 9.626 19,57,917 —
MK
1876-77 1 8.5 1 8.508 — 76,736

1877-78 1 9.23 1 8.791 38,43,050 —
1878-79 1 8.4 1 7.794 56,87,129 —
1879-80 1 7 1 7.961 — 84,40,737
SJ+YS
1880-81 1 8 1 7.956 4,24,722 —

1881-82 1 8 1 7.895 10,17,482 —
1882-83 1 8 1 7.525 37,46,890 —
1883-84 1 7.5 1 7.536 — 3,62,902
1884-85 1 7.5 1 7.308 18,97,307 —
1885-86 1 7 1 6.254 56,82,638 —
1886-87 1 6 1 5.441 65,17,721 —
1887-88 1 5.5 1 4.898 71,90,097 —
25-9-2013/YS-11-11-2013
1888-89 1 4.9 1 4.379 77,98,400 —

1889-90 1 4.38 1 4.566 — 27,31,892
1890-91 1 4.552 1 6.09 — 2,35,51,744
1891-92 1 5.25 1 4.733 80,09,366 —

* Compiled from figures given in the Final Report of the Gold and Silver Commission, p. 40, and in App. II, p. 270, to the Report of
the Indian Currency Committee, 1893.
442
exist, are too indefinite to be of much practical use. The

rupture of the fixed par of exchange, having destroyed a
common standard of value between gold and silver countries,
removed the limits on the exchange fluctuations between such
countries. As a result of such variations in the value of the
standard measure, trade advanced by “rushes and pauses,”
and speculation became feverishly active.*
That progress of trade depends on stability is a truism
which seldom comes home until it is denied in fact. It is
difficult to appreciate its importance to healthy enterprise
when government is stable, credit is secure, and conditions
are uniform. And yet so great is the handicap of instability
that everywhere business men have been led by a variety
of devices to produce stability in domains enveloped by
uncertainty. Everywhere there have grown up business
barometers forewarning business men of impending changes
and so enabling them to forearm against them by timely
changes in their operations. The whole of insurance business
is aimed at giving stability to economic life. The necessity
which compelled all regularly established Governments to
maintain standard measures by which the true proportion
between things as to their quantities might be ascertained and
dealings in them regulated with certainty was motivated by
the same purpose. The meticulous precision with which every
civilised country defines its standard measures, and the large
machinery it maintains to preserve them from deviation, are
only evidences of the great importance that an economic society
must continue to attach to the matter of providing precision
of expression and assurance of fulfilment with regard to the
contracts entered into by its members in their individual or
corporate capacities.
Important as are the standard measures of a community,
its measures of a community, its measure of value is by far
the most important of them all.† The measures of weight,
extension, or volume enter only into particular transactions.
If the pound, the bushel, or the yard were altered the evils
would be comparatively restricted in scope. But the measure
of value is all-prevading.
* Evid. Indian Currency Committee, 1898, Q. 6,290, 9,808-10.

† Cf. Harris, An Essay upon Money and Coins (reprinted by J. R. McCulloch
in his volume of Scarce Tracts on Money, Part I, Chap. II, par. 21 ; Part II, Chap.
II, pars. 11, 13, and 20).
“There is no contract,” Peel declared.* “public or

private, no engagement national or individual, which is
unaffected by it. The enterprises of commerce, the profits
of trade, the arrangements made in all domestic relations
of society, the wages, of labour, pecuniary transactions
of the highest amount and of the lowest, the payment of
national debt, the provision for national expenditure, the
command which the coin of the smallest denomination has
over the necessaries of life, are all affected”
by changes in the measure of value. This is because every
contract, though ultimately a contract in goods, is primarily
a contract in value. It is, therefore, not enough to maintain
constancy in the measures of weight, capacity, or volume. A
contract as one of goods may remain exact to the measure
stipulated, but may nevertheless be vitiated as a contract in
values by reason of changes in the measure of values. The
necessity of preserving stability in its measure of value falls
on the shoulders of every Government of an orderly society.
But its importance grows beyond disputes as society advances
from status to contract. The conservation of the contractual
basis of society then becomes tantamount to the conservation
of an invariable measure of value.
The work of reconstituting a common measure of value in
some form or other, which those misguided legislators of the
seventies helped to destroy, it was found, could not be long
delayed with impunity. The consequences that followed in the
wake of that legislation, as recounted before, were too severe
to allow the situation to remain unrectified. That efforts for
reconstruction should have been launched before much mischief
was done only shows that a world linked by ties of trade will
insist, if it can, that its currency systems must be laid on a
common gauge.

* Cf. his speech dated May 6, 1844, delivered during the Commons debates
on the Bank Charter Act. Hansard, Vol. XXXIV, p. 720.
CHAPTER IV
TOWARDS A GOLD STANDARD
The establishment of stable monetary conditions was
naturally enough dependent upon the restoration of a common
standard of value. Plain as was the aim, its accomplishment
was by no means an easy matter. Two ways seemed at first
to be open for carrying it out in practice. One was to adopt a
common metal as currency, and since all important countries
of the world had gone over to the gold standard it meant
the silver-standard countries should abandon their standard
in favour of gold. The other was to let the gold and silver
standard countries keep to their currencies and to establish
between them a fixed ratio of exchange so as to make the two
metals into a common standard of value.
The history of the agitation for the reform of the Indian
currency is a history of these two movements. The movement
for the introduction of a gold standard was, however, the first
to occupy the field. The failure of the notification of 1868
may be said to have marked the failure of a policy, but the
movement for a gold currency in India started in the sixties
was not altogether stamped out of the country. That the
movement still had life in it is shown by the fact that it was
revived four years later by Sir R. Temple, when he became
the Finance Minister of India, in a memorandum* dated
May 15, 1872. The important particular in which he differed
from his predecessors consisted in the fact that while they
all aimed to make the British sovereign the principal unit of
the gold currency in India, he desired to give that place to
the Indian gold coin, the “mohur.” Why his predecessors did
not do the same when the problem of correctly rating the
soverign was said to have baffled them so much is a little
surprising when it is recalled that the Indian Mints had
been since long past issuing the “mohur”, which, as it was
possible to rate it correctly, could as well have been made the
principal unit of the gold currency in India. That they did not
* Printed as Appendix I, No. 12, to the Report of the Indian Currency Committee
of 1898.
can only be explained on the assumption that they were anxious

to kill two birds with one stone. The adoption of the sovereign,
besides supporting a gold currency in India, was also calculated
to promote the movement of international uniformity of coinage
then in vogue. The utility of the “mohur” was in this respect
comparatively inferior to that of the sovereign. But when Sir
Richard Temple came upon the scene the prospect of some
universal coin being internationally adopted seemed to be fast
vanishing. At all events the Report of the English Commission
on International Coinage, presided over by Lord Halifax, had
pronounced adversely as to any change in the standard of
the English sovereign. Untrammelled by any considerations
for such a wider issue, Sir R. Temple was free to recommend
the adoption of the “mohur” as the unit of currency in place
of the sovereign.*
“We have,” he wrote, “gold pieces representing fifteen,
ten and five rupees respectively; and believed to represent
these several sums very correctly, as regards the relative
value of gold and silver ......... that ......... we should take
the first opportunity to declare the gold coins legal tender
to unlimited amount; that gold pieces should continue to
bear the fixed relation to the rupee; that for a time it
might be necessary to permit the rupee to remain legal
tender to an unlimited amount, which would involve
temporarily the difficulty of a double standard; that the
transition period of double standard should be as short
as possible, silver being reduced to a token coinage, and
being made legal tender up to a small amount only; and
that gold should be ultimately the one legal standard.”
He proposed the ratio of 10 rupees for 120 grs. of standard
i.e. 110 grs. of fine gold.† but he did not share the temerity of
Sir Charles Trevelyan.‡ So intent was he on the project of a gold
currency that he was prepared to alter the ratio so as to make it
favourable to gold. The question of ratio, he observed, was one which
“the Government of India ought to be able to determine.
“Nevertheless, he said,” I would not object to make the sovereign a legal tender
for 10 rupees and 4 annas. But, the sovereign being worth 10 rupees and a fraction
over, there might be some slight trouble of calculation in changing it for silver,
and this would be a drawback in respect of the use of the sovereign as currency
in India. And if this objection were urged, I would not press for the sovereign
being declared legal tender. But we should continue, under any circumstances,
to receive the sovereign in our Treasuries at the present rating.”
† This was a ratio of 15 : 1, which was a slight undervaluation of gold.
‡ Supra, Chap. I.
TOWARDS A GOLD STANDARD 447
These are questions which have been determined by every

nation that has adopted a gold currency. No doubt it is a
difficult and important problem, but it cannot be insoluble,
and it ought to be solved.”
Such in outline was the first proposal for a gold currency.
It was projected before the fall in the value of silver had
commenced, and was therefore more a culmination of the
past policy than a remedy against the ensuing depreciation
of silver. In that consisted, probably, the chief strength of
the proposal. It was in good time to avoid the cost of hauling
up the currency which later on proved so very deterrent and
caused the defeat of so many other projects. Besides, it cannot
be said that at the time the memorandum was presented
the Government was not warned of the impending crisis; for
the wave of demonetizing silver had already commenced two
years before.* But, for some reason not known to the public,
no action was taken on the proposal.
The second plan for the introduction of a gold currency was
that of Colonel J. T. Smith, the able Mint Master of India. His
plan was avowedly a remedy for the falling exchange.† The
plan was set forth in the first essay in the brouchure, Silver
and the Indian Exchanges,‡ and may be described in his own
words as follows:—
“6. Although it cannot be denied that the difficulty of
effecting this object of restoring the Indian exchange to its
normal condition is much greater now than it would have
been some years ago, owing to the decline which has already
taken place, yet there seems to be sufficient ground for
belief that, even now, if decided measures were adopted, it
would not be too late to restore the currency to its former
value for home (India)) payments; and that, too, without any
shock or disturbance; the principal step being that of putting
a stop to the coinage of silver on private account, at the
* Lord Northbrook, who was the Viceroy of India when this proposal was made,
in his evidence before the I.C.C of 1898, Q. 8,447, suggested that the reason for
his not adopting it then was that “that was a time when gold was appreciating,
and it was impossible to do.” This is, of course, historically untrue except on the
hypothesis that the propsal came for consideration long after it was submitted.
† Ho had previously taken part in the agitation for the introduction of a gold
standard in India during the sixties with the sovereign as the unit. But that
was as an advocate of the movement for uniformity of international coinage.
Cf. his Remarks on a Gold Currency for India and Proposal of Measures for the
Introduction of the British Sovereign, etc., etc. London, 1868.
‡ London, Effingham Wilson, 1876.
same time taking measures to discourage the importation,

or at the least the circulation, of foreign-made, silver coins,
and opening the Mints for the receipt of gold bullion for
coinage.
“ 7. To explain how this would operate, I must observe
that
“8. ... the internal trade of the Empire of India has
increased and is increasing..............................
“9. Whatever may be the cause, the internal trade of
India has, ever since the beginning of this century, required
constant and steady additions to her currency, averaging
during the last thirty-eight years upwards of five millions
of pounds sterling per annum in value. Besides this, the
returns show that the balance of imports over exports of
gold bullion, during the same period, exceeded an average
of two and a half millions sterling annually, having been,
during the last twenty years, more than four millions per
annum.
“10. Such being the case, it apears to be a necessary
consequence that, if the supply of rupees were put a stop
to, the remainder must increase in local value, as compared
with commodities, till they resumed the position which
they held on a par with gold, at the rate of 10 rupees to a
sovereign, for the fifteen years previous to 1870.
“11. After that point had been attained, it would be
the interest of merchants to take gold into the Indian
Mints for coinage; and they would do so, indeed, before the
attainment of this improvement of the exchanges, owing
to the premium or ‘batta’ which would at first be obtained
for the gold coins.
“12. By this means gold would gradually be brought
into India; and, as it has been shown that an addition to
the circulating medium of at least five million sterling per
annum is necessary, and no more silver coins being admitted
(into the currency), it will slowly accumulate there..................
“13. The proposal therefore is that, after due notice, the
coinage of silver on behalf of private individuals and advances
upon silver bullion should be suspended; that part of the Act
23 of 1870, which makes it incumbent on the Government
to receive and coin it, being repealed; the Government
retaining in their own hands the power of replenishing the
silver currency whenever they may deem it expedient. That
gold bullion should be received by the Government at the

mint rate of 38 rupees 14 annas per standard ounce, and
coined into sovereigns and half-sovereigns (representing
38 rupees 15 annas), or ten or five rupee-pieces of the
same value, which should be declared legal tender, but
not demandable, the present silver rupees continuing to
be legal tender, as before.’*
At the time the Smith plan was presented, the fall of
silver had made itself felt so that a considerable support in
favour of the plan was forthcoming. The support of the trading
community was embodied in the resolution, dated July 15,
1876, of the Bengal Chamber of Commerce, which urged “that
it was expedient, in view of any ultimate measures that the
Government may adopt, that Clause 19 of Act XXIII of 1870,
making it obligatory on the Mints in India to receive all silver
tendered for coinage, and also Section II, Clause (b) of Act III
of 1871, making it obligatory on the Currency Department
to issue notes against silver bullion sent in, be temporarily
suspended, at the discretion of Government, and that during
each such suspension or till further notice it be not lawful to
import coined rupees from any foreign port.” A similar feeling
was voiced by the Calcutta Trades Association. By this time the
fall of exchange had also commenced to tell upon the finances
of the Government of India, so much so that Sir William Muir,
in his Financial Statement for 1876-77, was led to observe :—
“ The sudden depreciation of silver and the consequent
enhancement of charge to the Government of India in
laying down yearly the sum required in England of about
fifteen millions sterling, without doubt cast a grave shadow
on the future. In truth, it may be said that the danger,
from whatever point of view considered, is the gravest
which has yet threatened the finances of India. War,
famine, and drought have often inflicted losses on the
Exchequer far greater than the charge which threatens
us in the present year. But such calamities pass away;
the loss is limited; and when it has been provided for
the finances are again on sure and stable ground. This
is not the case with the present cause of anxiety. Its
immediate effects are serious enough. ......... But that which
adds significance to it is that the end cannot be seen;
* This was calculated to make the rupee-sterling exchange 2 s. gold. The
average rupee-sterling exchange in 1876 was about 1s. 9.645d. This would have
placed a small premium on gold which would have no doubt soon disappeared
owing to the appreciation of the rupee consequent upon the stoppage of its coinage.
the future is involved in uncertainty.’*

In the face of such a situation nothing would have been
more natural than to expect the Government precipitating
into some kind of action to save itself, if not others, from an
impending calamity. Far from taking immediate steps, the
Government not only failed to take any initiative, but showed,
when pressed by the Bengal Chamber of Commerce to act
upon the foregoing resolution, a surprising degree of academic
somnolence only to be expected from an uninterested spectator.
No doubt the proposal of the Bengal Chamber was defective in
that it did not suggest the opening of the Indian Mints to the
coinage of gold. The Government of India was sharp enough
to fasten upon this defect. It made plain to the Chamber that
if it had proposed the free coinage of gold.
“such a recommendation would not have been open to
the objections that appear fatal, in limine, to the adoption
of the resolution actually adopted...... viz. to close the
Mints temporarily to the free coinage of the one metal into
legal-tender money, without simultaneously opening them
to the free coinage of the other into legal tender money.’
Did it, then, adopt the proposal of Colonel Smith, which
contained such a recommendation ? Not at all! Why did it
not, then, adopt a remedy to which it saw no objections ? The
reason was that it had arrived at a different diagnosis of the
causes of the monetary disturbances. To the Government the
possibilities of explaining “the disturbance in the equilibrium
of the precious metals” seemed to be many and varied.† (1)
The value of gold being unchanged, the value of silver had
fallen ; (2) the value of silver being unchanged, the value of
gold had risen ; (3) the value of gold had risen, and the value
of silver had fallen ; (4) the value of both metals had risen,
but the value of gold more than that of silver; (5) the value
of both metals had fallen, but the value of silver more than
that of gold. In the midst of such possibilities, marked, more
by pedantry than logic, the Government warned the currency
reformers that
“the character of the remedies indicated, if the disturbance
is found to be due to a rise in the value of gold, will obviously
* P. 93.
† Cf. The Resolution of the Government of India relating to the Depreciation in
the Value of Silver, dated September 22, 1876, par. 6, Commons Paper 449 of 1893.
differ from what would be suitable in the case of a fall

in the value of silver.”*
Out of these possibilities what seemed to it to be proven
was that “gold had risen in value since March, 1872,”† and
therefore if any reform was to be effected it should fall upon
the gold-standard countries to undertake it. Situated as the
Government of India then was, it could have suffered itself
without incurring much blame to be hurried into some kind of
currency reform that promised to bring relief. To have refused
to allow the exigencies of a crisis to rule its decisions on such
a momentous issue as the reform of currency, need not imply
a spirit of obstinacy. On the other hand, it bespeaks a spirit
of caution which no reader of that illuminating despatch of
October 13, 1876, conveying to the Secretary of State its
decision to wait and watch, can fail to admire. But it is hardly
possible to speak in a similar commendatory manner of the
underlying attitude of the Government of India. Whether it is
possible to hold that gold had appreciated but that silver had
not depreciated may be left for logician to decide upon. But
for a silver-standard country to refuse to undertake the reform
of her currency system on the plea that it was gold that had
appreciated was no doubt a tactical error. In military matters
there is probably such a thing as depending on a position; but
in currency matters there cannot be such a thing. The reason
is that in the former strength sometimes lies in the weakness
of the other. But in the case of the latter the weakness of one
becomes the weakness of all. There can be no doubt, therefore,
that the Government, in discarding its responsibility to do the
needful in the matter, committed the same kind of mistake as
a man who, in the words of Prof. Nicholson,‡ “should suppose
that the ship cannot sink because there is no leak in the
particular cabin in which he happens to sleep.”
That the attitude of inaction was unwise was soon brought
home to the Government of India. Within a short space of two
years it was obliged to reconsider the position taken in 1876.
In a despatch dated November 9, 1878,§ the Government of
India observed :—
“5. It was to have been expected that a subject so
encompassed with difficulties should not receive any early
* Commons Paper 449 of 1893. † Ibid, par. 16.
‡ Money and Monetary Problems, § P. P., C. 4868. of 1886, p. 18.
1895., p. 90.
settlement, and it was probably the wisest, as it was certainly

the most natural course, to allow further time to elapse before
attempting any final solution of the grave problem it involved.
The improvement that took place in the value of silver in the
year 1877 favoured this policy in action; and it is only now,
when a fresh fall has brought down the rupee to a value hardly
greater than that which it had in July, 1876, that the serious
nature of the risk which our existing currency law entails on
us is once more forced on our attention by its practical effects
on the Home remittances.
* * *
“21. The uncertainty that has now for some years
prevailed with reference to the value of silver, and
the consequent disturbances in the exchange, have......
been causes of continued financial difficulty to the
Government...... and it is not possible to doubt that similar
results must have been produced by these disturbances in
the trade transactions of the country, or that investments
of foreign capital in India, either for trading or other
purposes, must have been very seriously interferred with
by their influence.
“23. Such we hold to be a true statement of the
present difficulties and prospective risks of maintaining
the existing Currency Law, and we feel assured that
they have not been in any way overstated. It remains
for us to inquire whether any practical remedy could be
devised that should not be open to serious objections, or
the risks attending the adoption of which should not be
so great as to prohibit it. We feel most fully the heavy
responsibility that will rest on us in dealing with the
currency of India ; but it is plain that the responsibility
for doing nothing is no less great. Whether the law is
left as it is, or whether it is changed, the result will be
equally due to our action, and we cannot, if we would,
avoid facing this grave question.
“24. To obtain fixity of exchange by the adoption
of a gold standard, and the substitution of a gold
for a silver currency through the direct action of
Government, has, we think, been conclusively shown
to be impracticable by the despatch of the Government
of India of October last, and this plan therefore calls
for no further notice. The increase in the weight
of the rupee, also noticed in that despatch, is equally

undeserving of attention, as in fact, it would give no
security for the future, and would entail a heavy charge
without accomplishing the esssential point to be aimed at.
There remains the simpler, and first proposed suggestion,
the limitation of the coinage of silver, which, though
rejected in 1876 by the Government of india...; appears
to us to call now for a closer examination.
“25. This suggestion in its main features is, that the
Coinage Act shall be so far modified as to withdraw the
free right of the public to take silver bullion to the Mint
for coinage, and either to suspend it entirely in future,
or limit it for a time.
“26. It is obviously an essential part of any such
scheme, if it is to have the effect of fixing the exchange
value of the rupee, that the power of obtaining that coin
in future shall be regulated in some manner by a gold
payment, and that the relation between sterling and
rupee currency shall thus be fixed irrespective of the
fluctuations in the relative value of the metals of which
the coins are formed.
“27. It is not, on the other hand, an essential part of
such a plan that any particular relation of value should
be thus fixed at two shillings...... or at any smaller or
larger proportion. All that is necessary is that the rate,
being once fixed, shall remain for the future unchanged.
* * *
“33. Probably the most important question is ......
whether or not it is practicable to maintain a silver
coinage as the principal element in our currency, with a
very limited gold coinage, or without a legal-tender gold
coinage at all. The Government of India, in its despatch
of 1876, expressed an opinion adverse to the possibility of
maintaining such a system...... On a full reconsideration
of this point, we are led to take the opposite view, and to
think that such a system would be perfectly practicable
and would lead to no material difficulty. It is true that
there is no country in which such a condition of things
actually exists. But those countries, and there are many
of them, in which an inconvertible paper currency exists
or has existed, give proof that the far greater anomaly
of a currency devoid of any intrinsic value whatever
is capable of performing the work of a metallic currency

satisfactorily, and of maintaining its local exchange value,
so long as an excessive issue is only guarded against.
* * * *
“37. (Such) instances (as the British shilling and the
French five franc piece) seem to show that neither in
the way of surreptitious coinage, nor of discredit from
depreciation of intrinsic value, it is probable that there
would be any serious difficulty in keeping the rupee in
circulation at its present weight, at a nominal value of
two shillings, with a gold standard and a partial gold
coinage.
* * *
“46. We are thus led to the general conclusion that
it will be practicable, without present injury to the
community as a whole, or risk of future difficulties, to
adopt a gold standard, while retaining the present silver
currency of India, and that we may thereby in the future
fully protect ourselves from the very real and serious
dangers impending over us so long as the present system
is maintained. We consequently desire to recommend to
Her Majesty’s Government the adoption of such a change
at the earliest moment possible, and we shall proceed to
explain, in all necessary detail, the measures by which
we advise that it should be effected.
* * *
“50. It has to be borne in mind that it is not the
object of our action to force on India a gold currency,
or to displace the silver currency, but rather to avoid
such a result, or to check the tendency in that direction,
so far as it can be done consistently with the adoption
of the gold standard. We are consequently led to the
conclusion that, while we give certain facilities for the
introduction of gold coins into India, we should not yet
go so far as to declare them a general legal tender; and
that we should at the same time, make provision for the
coining of silver, without limit as to quantity, but on
terms that will give no advantage to the introduction of
silver in relation to gold.
“51. These objects we propose to attain as follows:—We
first take power to receive British or British Indian gold coin
in payment for any demands of the Government, at rates to
be fixed from time to time by the Government, till the

exchange has settled itself sufficiently to enable us to
fix the rupee value in relation to the pound sterling,
permanently at two shillings. Simultaneously with this,
the seignorage on the coining of silver would be raised to
such a rate as would virtually make the cost of a rupee,
to persons importing bullion, equal in amount to the value
given to the rupee in comparison with the gold coins above
spoken of. We should thus obtain a self-acting system under
which silver would be admitted for coinage, at the fixed
gold rate, as the wants of the country required; while a
certain limited scope would be given for the introcduction
and use of gold coin, so far as it was found convenient
or profitable.”
Such was the scheme outlined by the Government of India.
The reason why it rejected the Smith plan, although it was
simple, economical, and secure, was because it contemplated
a demand by India on the world’s dwindling stock of gold.
Now, in the circumstances then existing, this was a fatal
defect, and the powers-that-be had already decided that at
all cost India must be kept out of what was called the “
scramble for gold.” Therefore, to have proposed an effective
gold standard was to have courted defeat. A mild and diluted
edition of a gold standard such as was proposed by the
Government was all that stood any chance of success. But
even this timid attempt did not fare well at the hands of
the Committee* appointed jointly by the Secretary of State
and the Chancellor of the Exchequer to examine and report
upon the proposals. The members of the Committee were “
unanimously of opinion that they cannot recommend them
for the sanction of Her Majesty’s Government.”† The reasons
which led to the rejection of the proposals we are not permitted
to know. Although the Report of the Committee was made
public, the proceedings have never seen the light of day.
Indeed, there has been a most stern and obstinate refusal on
the part of the officials to allow a peep into them. Why they
should be regarded as confidential after a lapse of nearly
half a century it is difficult to imagine. Enough, however,
was revealed by Sir Robert Giffen, who was a member of this
* It was composed of Louis Mallet, Edward Stanhope, T. L. Seccombe, R. E.

Welby, T. H. Farrer, R. Giffen, and A. J. Balfour.
† For Report of the Committee, see Commons Paper C 4868 of 1886, p. 26.
Committee, in evidence before the Indian Currency Committee

of 1898* for us to know the contents of this closely guarded
document. It seems that the Committee declared against the
proposals because it thought they were calculated to make
the Indian currency a “managed” currency. At the time when
the Committee delivered its opinion the current prejudice was
unanimously against such a system. All acknowledged writers on
currency were pronounced opponents of an artificially regulated
system.† A naturally automatic currency was their ideal. In
addition to being misled by this prejudice, the Committee
felt convinced that the situation would soon ease itself by
the natural working of economic forces without necessitating
a reform of the Indian currency. This conviction on the part
of the Committee was founded on the high authority of the
late Mr. Walter Bagehot‡ that the disturbance could not but
be temporary. His argument was that the depreciation would
encourage exports from India, and discourage imports, and
the unfavourable balance of trade thus brought about would
induce a flow of silver to India, tending to raise its price. He
was also of opinion that increased demand for silver would
also arise from outside India. He argued that the reduction
of demand caused by the demonetization of silver by some
countries would be more than compensated for by the adoption
of silver by other countries then on a paper basis for their
impending resumptions of specie payment.
Whatever might be said with regard to the Committee’s
preference of a natural to an artificial system of currency,
there can be no doubt that in turning down the proposals of
the Government, in the hope that silver would recover, it was
grossly deceived. The basic assumptions on which the Committee
was led to act failed to come true. To the surprise of everybody
India refused to absorb this “white dirt.” Indeed, it was one of
the puzzles of the time to know why, if silver had fallen so much
* Q. 10,025-50
† So novel was the idea at the time that the United States Monetary Commission,
1876, was surprised when some of the witnesses expressed themselves in favour
of regulating the principal metallic unit of account in the currency system of a
country by Government agency. See 44 Congress 2nd Session Senate Document,
No. 703 p. 47-48.
‡ Cf. his some Articles on the Depreciation of Silver, and on Topics connected
with it, London, 1877; pp. 10, 55, and 80; also his evidence before the Select
Committee on the Depreciation of Silver, Lords Paper 178 of 1876, Q. 1,361-1,450.
in Europe, it did not go to India in larger quantities. Many

blamed the Secretary of State for the sale of his Council Bills.*
These bills, it was said, presented an alternative mode of
remittance so much better as to prevent the sending of silver
to india, and thereby caused a diminution in the demand for it.
That this was not a correct view is obvious.† Silver could not
have gone to India more than it did even if Council Bills had
been abolished. Council Bills must be regarded as ordinary trade
bills drawn against services and commodities, and could not be
said to have competed with the transmission of bullion in any
special manner different to that attributable to the trade bills.
The only bearing the Council Bills may be said to have had
upon the issue in question lies in the fact that to the extent
they figured in the transactions they prevented India from
buying other commodities. But there was nothing to prevent
her residual buying power left over after paying for the Council
Bills from being utilized in the purchase of silver in preference
to other commodities. That this buying power would be used
in purchasing silver because it was depreciated in Europe was
theoretically an unsound assumption on the part of Mr. Bagehot.
The deciding factor which could have caused such a diversion of
this residual buying power to the purchase of silver was whether
it was appreciated in India. Only on that condition could there
have been a flow of it to India. But as matters then stood, it was
the opinion of Prof. Pierson‡ that when the general depreciation
of silver commenced all over the world, it had been forestalled
in that part of the globe in which India lies. India was already
glutted with silver. Under ordinary circumstances India would
have sent back a large portion of its silver to Europe. But the
general depreciation prevented her from doing so; and now there
were two opposing forces, one tending to produce an export of
silver from India to Europe and the other tending to produce
an export of silver from Europe to India; and, although the
latter was the stronger of the two, the former was sufficiently
powerful to prevent any considerable quantity of silver from
being exported from Europe to India. If the Committee was
deceived in one part of its assumptions, it was also disappointed
* This argument was prominently put forth in the Report (pp. xxx—xxxv) of the
Select Committee on the Depreciation of Silver., 1876; and also by Monometallic
Members of the Gold and Silver Commission, 1886, Cf. pp. 77-79 of the final
Report, Part II.
† Cf. evidence of Professor Marshall before the Gold and Silver Commission,
1886, Q. 10,164-76.
‡ Cf. his reply to the Circular of the Gold and Silver Commission, 1886. Second
Report, App. VII (1), p. 254.
in others. Far from resuming specie payments in terms of

silver, as Mr. Bagehot expected the countries then on paper
basis to do, they one and all demonetized silver to the great
disappointment of all those who adhered to the policy of “wait
and see.”
The falsification by India and other countries of such
anticipations led to a change in the angle of vision of most of the
European countries who had theretofore shown no inclination
to do anything by way of reducing the chaotic currencies to
some kind of order. They were advised by eminent authorities
not to hurry. Jevons said* :—
“We only need a little patience and a little common
sense to surmount the pratical difficulties. Within the next
few years good harvests in India will, in all probability,
enable that country to buy up all our suplus silver, as
it has been in the habit of doing, with rare exceptions,
since the time of Pliny...... In future years any amount
of silver could be got rid of without loss, if it be sold
gradually and cautiously.”
When, however, it was found that the waiting period
would be more painful if not longer than what it pleased the
proverbial peasant to undergo, in order to let the stream run
dry so as to permit of his forbidding it without wetting his
feet, there grew up an agitation in Europe to undertake the
necessary reform to prevent the depreciation of silver.
Far from being sentimental, the agitation was real
and derived its force from the evils which arose out of the
existing currency conditions. The monetary condition of most
of these countries was very unhealthy. Their schemes of an
effective gold standard with silver as token currency were
arrested in the midst of their progress. Germany, when she
demonetized silver, had retained her silver thalers as full
legal tender at the old ratio with gold, only to get time to be
rid of them to the extent necessary to reduce them to a truly
subsidiary position. But, before she could do so, her policy
of demonetization had commenced to tell upon the value of
silver, and the continued fall thereof compelled Germany to
retain the thalers as legal tender at their old value, despite
the fact that their metallic value was fast sinking. Precisely
the same was the result of the action of the Latin Union
on their system of currency. They had stopped their further
* Op. cit., p. 354.
coinage of the silver five-franc pieces ; but they could do

nothing with those that were already coined except to permit
them to circulate at the old mint par, although the metallic
par continued to change with changes in the market values
of gold and silver. The United States was also involved in
similar evils, although they arose from choice rather than
from necessity. Yielding to an agitation of the silver men, it
passed in 1878 a law called the Bland Allison Act, requiring
the Secretary of the Treasury to purchase and coin each month
not less than $2,000,000 and not more than $4,000,000 worth
of silver bullion into standard silver dollars, which were to be
full legal tender for all debts public and private,” except where
otherwise expressly stipulated in the contract,”* As the metalic
value of these dollars fell with every fall, while their legal
value remained as before, they became, like the thalers and
the francs, overvalued coins. It is clear† that when the stock of
a country’s currency is not equally good for all purposes it is
relatively speaking in an unsatisfactory condition. Though good
for internal purposes, these coins were useless for international
payments. Besides making the whole currency system unstable
and top-heavy, they could not be made to serve the purpose of
banking reserves, which it is the prime function of a metallic
currency to perform in modern times. The possibilities they
opened for illicit coinage were immense. But what made their
existence such a source of menace was the fact that a large
proportion of the total metallic money of these countries was
of this sort. The figures given by Ottomar Haupt in Table
XXIII (see p. 461) prove sufficiently the difficulties that these
countries had to face in regulating and controlling such a
mass of token currency.
If a gold-standard country like England had escaped these
difficulties it was only to meet others equally embarrassing.
As has been pointed out before, the continued fall of prices,
the reflex part of the appreciation of gold, had produced a
depression in the trade and industry of the country never
known before in its history. Apart from this, the monetary
disturbances affected the yield on capital investment, the
mainstay of so many of her people, by reducing the field for
its employment. Said the American Commission :—
* Report of the Monetary Commission of the Indianapolis Convention, Chicago,
1898,pp. 138-45.
† Cf. the speech of Prof. Pierson, Delegate of the Netherlands at the International
Monetary Conference of 1881, Report of the Delegates of the United States,
Cincinnati, 1881, pp. 77-84.
“Within twenty years from 1877 to 1897, it could

probably be correctly stated that the power of money
to earn dividends was reduced to one-half, or in nearly
that proportion. That reduction of the earning power of
capital affected injuriously everybody who depended upon
investments for a living. It affected also the profits and
enterprises of the captains of industry and the kings of
finance. In England and in France the price of Government
securities rose to a point which made it no longer possible
for the man of small means to invest in them and acquire
an adequate support during his declining years.”*
It is, of course, open to doubt whether the conclusion drawn
is the right one. But the fact remains that owing to monetary
disturbances the field for the investment of English capital
had become considerably restricted. And, as a way of getting
a living, capital investment was an important resource to the
English people.
To mend such a situation there were convened one after
another three International Monetary Conferences to establish
a bimetallic par between gold and silver. The first International
Monetary Conference was convened at Paris in the year 1878
at the invitation of the United States. The second met at the
same place in 1881 at the joint call of France and the United
States. The third and the last assembled by the wish of United
States in Brussels during the year 1892.
From the gravity of the situation nothing could have been
more natural than to expect these Conferences to fructify
into an agreement upon the consummation of the project for
which they were called into being. But, far from reaching any
agreement, the deliberations of these Conferences proved to
be entirely futile. Only the second Conference showed any
sign of agreement. The first and the third marked a strong
deviation in the opposite direction. The advance, if any, that
was made, as a result of these deliberations, was summed up
in the pious opinion that it was necessary to retain and enlarge
the monetary use of silver. But so weak on the whole was the
response that practice failed to testify as to the sincerity of
this solemn declaration.
* Report on the Introduction of the Gold-exchange Standard into China and

other Silver-using Countries by the Commission on International Exchange. 58th
Congress, 2nd Session, House of Representatives Docment, No. 144, Washington,
1903, p. 101.
TABLE XXIII
DISTRIBUTION OF THE STOCK OF MONEY IN DIFFERENT COUNTRIES *
Monetary Circulation at the Beginning of 1892.
Countries.
Fractional Cur- Billon
Gold. Silver. Uncovered Notes
rency. Money.
Austria . . fl. 65,000,000 197,000,00 601,000,000 40,000,000 14,000,000

MK
England . . .£ 118,000,000 — 10,000,000 26,000,000 1,900,000
France . . . fr. 3,900,000,000 3,200,000,000 572,000,000 280,000,000 280,000,000

SJ+YS
Germany . . m. 2,500,000,000 430,000,000 450,000,000 457,000,000 57,000,000
Holland . . fl. 64,000,000 135,000,000 98,000,000 7,600,000 1,800,000
Italy . . . li. 485,000,000 81,000,000 847,000,000 150,000,000 75,000,000

TOWARDS A GOLD STANDARD
Russia . . . .£ 59,500,000 — 51,200,000 8,200,000 1,000,000

25-9-2013/YS-11-11-2013
Spain . . . pes. 160,000,000 646,000,000 548,000,000 190,000,000 157,000,000
U.S.A. . . doll. 671,000,00.0 458,000,000 419,000,000 77,000,000 18,000,000
*The figures are as given by Ottomar Haupt (London: Effingham, Wilson & Co., 1892, p. 160.)
461
461
The reasons for the failure of these Conferences to reach a

bimetallic agreement have not been properly understood. One
cannot read the debates on bimetallism at these Conferences
without observing that the opposing parties approached the
subject with different objectives. To one the principal objective
was the maintenance of a stable ratio of exchange between
gold and silver irrespective of the question whether one or both
remained in circulation; to the other it was the maintenance
of the two metals in concurrent circulation. As a consequence
of this difference in the lines of their approach an agreement
on a bimetallic project became well-nigh impossible.
The workability of bimetallism in the sense of maintaining a
stable ratio between gold and silver is necessarily an indefinite
proposition. Nonetheless, it cannot be said, if the debates at
these Conferences are taken as a guide, that the possibility of
a successful bimetallic system in the stable-ratio sense of the
term had been denied by the majority of economic theorists,
or by the Governments who met at these Conferences. On
the other hand, the Conference of 1881, the most important
of the three, was remarkable for its confession regarding the
workability of the system. All Governments, barring a few minor
ones, were in favour of it. Even the British Government, in
consenting to bring into operation the silver clause of the Bank
Charter Act, must be said to have given its word of approval.
But what did bimetallism promise, as a piece of mechanism,
to maintain the two metals in concurrent circulation ? The
bimetallists used to cite the example of France in support
of the stability of the double standard. But was there a
concurrent circulation of two metals in France under the
bimetallic system ? Far from it. For, although it was a virtue
of the system that changes in the production of the two metals
made no appreciable variations in the fixed ratio of exchange,
yet the slightest of such as did occur were sufficient to effect
the greatest revolution in the relative circulation of the two
metals, as the following table clearly brings out:—
TABLE XXIV
MINTAGE OF GOLD AND SILVER IN FRANCE*
Gold Silver Ratio of
Period
Million Francs Million Francs Value
1803 to 1820 … 868 1,091 1 : 15.58
1821 to 1847 … 301 2,778 1 : 15.80
1848 to 1852 … 448 543 1 : 15.67
1853 to 1856 … 1,795 102 1 : 15.35
1857 to 1866 … 3,516 55 1 : 15.33
1867 to 1873 … 876 587 1 : 15.62
* Table submitted to the Paris International Monetary Conference of 1881 by
M. Pierson, Delegate for the Netherlands.
In mitigation of this, the bimetallists had nothing to offer.

There were, no doubt, such schemes as the one proposed by
Prof. Marshall, consisting of paper based on a linked bar of
gold and silver in certain fixed proportions,* having the object
of converting this “either-metallism” into double-metallism.
But such schemes apart, the free-mintage-cum-fixed-ratio
plan of bimetallism gave no guarrantee against alternation
in the circulation. Indeed, under that plan the alternation is
the very soul of the mechanism which keeps the ratio from
being disturbed. The only thing the bimetallists could say in
mitigation of this was that† the alternation in currency would
confine itself to bank reserves and would not be extended to
the pockets of the people. This was only an eyewash,‡ for how
could the banks arrange their reserves except in conformity
with the prejudices of the people ? Even international agreement
to use gold and silver at a fixed ratio was no guarantee that
this concurrent circulation would be maintained. Stability
of ratio did depend to a large extent upon an international
agreement, for, although it could be maintained by the action
of one nation, the deviations of the ratio in that case would
probably be greater. But mere international agreement has no
virtue of itself to prevent one metal driving out the other. To
suppose that Gresham’s Law is powerless under international
agreement is a gross mistake. Gresham’s Law is governed by
the relative production of the two metals to the total currency
needs of the movement. Supposing the production of one metal
relatively to the other was so enormous as to more than suffice
for the currency needs, how could international agreement
prevent the former from driving the latter entirely out of
circulation ? On the other hand, international agreement, far
from discouraging, would encourage the process.
In adopting bimetallism, therefore, the nations had to make
a choice between a stable ratio and a concurrent circulation, for
there might arise a situation in which there was a stable ratio
* Cf. Contemporary Review for March, 1887. it is interesting to note that
essentially the same plan was suggested 115 years before Prof, marshall by James
Stewart when his advice was sought by the East India Company as to the method
of reforming the then chaotic currency of Bengal. He refrained from pressing it
upon the Company because he thought “mankind were not all philosophers.” Cf.
his Principles of Money as applied to the Present State of the Coin of Bengal (2nd
Edition, 1772), pp. 8-11; cf. also William Ward, On Monetary Derangements, in
a Letter addressed to the Proprietors of Bank Stock, London, 1840, p. 8.
† Cf. Prof. Foxwell, Oxford Economic Review, 1893, Vol. III, p. 297.
‡ Cf. the reply by Prof. Cannan, ibid., p. 457.
but no concurrent circulation of both the metals. If the

Conferences broke down, it was not because they did not
recognize the possibility, which was unanimously upheld by
such an impartial tribunal as the Gold and Silver Commission
of 1886, of a stable ratio being maintained under a bimetallic
regime. They broke down because the bimetallic system did
not guarantee the concurrent circulation of the two metals.
However, it is certain the impossibility of concurrent circulation
could not have been such a drawback if the immediate effect
of bimetallism would have been a flow of gold into circulation.
But as matters then stood the immediate effect would have
been to bring silver into circulation. It was this more than
anything else which scared away most of the nations from the
adoption of the bimetallic system. Now, it is a curious thing
that nations which had assembled together to bring about
a stable ratio between gold and silver should have rejected
a system which gave a promise of such a stability on the
comparatively less significant ground that it had the effect of
altering the composition of the circulation from gold to silver.
But the fact must be recognized that at the time the question
of reconstituting the bimetallic system was agitating the public
mind, in most of the European countries gold and silver had
ceased to be regarded as equally good for currency purposes.
The superiority of gold to silver as a carrier of large value in
small bulk was coming more and more to be appreciated in the
latter part of the nineteenth century, and no plan of stabilization
which did not provide for the unhindered circulation of gold
was likely to meet with common approval. This prejudice was
in no way confined to a gold-standard country like England.
The closing of the Mints by the Latin Union is a proof positive
of the change in the attitude of the bimetallic countries. As
Jevons argued*:—
“So long …… as its operation resulted in substituting
a beautiful coinage of napoleons, half-napoleons, and five-
franc pieces in gold for the old heavy silver ecus, there was
no complaint, and the French people admired the action
of their compensatory system. But when [after 1873] it
became evident that the heavy silver currency was coming
back again …… the matter assumed a different form.”
* Money and Mechanism of Exchange, 1890, p. 143.
So great was the prejudice in favour of gold that the

interests of the chief Powers in the various Conferences,
it may be truly said, waxed and waned with the changes
in the volume of their gold reserves.* In 1878, the United
States took the lead in calling the Conference because the
working of the Bland Allison Act checked the inflow of gold
necessary for its cash payments. Germany was indifferent
because she had enough gold and was confident of selling
off her demonetized silver without loss. In 1881 France
and Germany showed more anxiety for reform because the
former had lost all her gold and the latter was unable to
palm off her silver. By 1892 none was so poorly supplied
with gold as was the United States, largely as a result of
a reckless policy which did her harm without doing good
to anyone else, and she was therefore left alone to support
the cause of silver.
Possessed as almost every Government was by this
prejudice for gold, it was not an ineradicable prejudice. What
the countries wanted was a lead from an influential nation.
Throughout the debates at these Conferences one thing stood
out very clearly. If England could have brought herself to
adopt a bimetallic system, others, like sheep, would have
followed suit. But she was too much wedded to her system to
make a change, with the result that bimetallism, as a way
out of the currency difficulties, became a dead project. The
vanishing of the prospect of re-establishing the bimetallic
system as a result of her obstinacy was a small matter to
the European countries. They had virtually made gold, the
international form of money, as the basis of their currency,
and were therefore quite indifferent as to the issue ; but it
was a terrible blow to the hopes of India. After the proposal
of 1878 had been turned down, bimetallism was considered by
the Government of India as the remedy, and its advent looked
forward to for salvation. It is true that in the beginning of
bimetallic discussions the attitude of the Indian Government
was rather lukewarm. In a despatch dated June 10, 1881,† to
the Secretary of State, it was revealed that the Government
of the time was divided in its opinion regarding the merits
of bimetallism. The Viceroy and another member of Council
refused their support on the ground that bimetallism was
unsound in principle,‡ and even the majority who thought
* Cf. The Report of the Indian Delegation to the International Monetary
Conference of 1881, C 3229 of 1882, p. 7 ; also Russell, op. cit., pp. 374-5.
† P.P.C 3229 of 1882, p. 33 et seq.
‡ Ibid, p. 37.
differently on this aspect of the question were not then prepared

to go to the length of joining a bimetallic union, although they
did not see any objection to doing so “if a sufficiently large
number of other Governments were prepared to join” in it.
With the growth of their financial difficulties, however, this
slender faith in bimetallism considerably deepened, so much
so that in 1886 the Government addressed to the Secretary of
State a despatch* urging him to take the initiative in calling
an International Monetary Conference to establish a stable
ratio between gold and silver. So intense was its interest in
the consummation of bimetallism that it did not hesitate to
administer a sharp rebuke to the Treasury when they negatived
its suggestion referred to them for consideration by the
Secretary of State.† With such feelings of faith and hope the
Government of India entered these international Conferences
and watched their fortunes. But no Government could have
been treated with such suspicion and injustice as was the
Government of India. Its admission to the bimetallic union
was desired by none of the Powers, not even by England.‡
It was treated as a villain whose advances were nothing but
manoeuvres to pounce upon the already dwindling stock of gold.
Not only was it planned to keep India out of the bimetallic
union, but she was to be required to pledge herself not to take
a mean advantage of the union after its efforts had succeeded
in establishing a stable ratio by making gold legal tender.§
All these guarantees the Government of India had offered in
a pathetic faithfulness to the cause of bimetallism, on the
success of which it had depended so much. Consequently,
when the attempt failed, the disappointment caused to the
Government of India almost broke its heart. It is not too
severe to say that the part played by the British authorities
in causing this disappointment was highly irresponsible—
one might almost say wicked. They forced India against her
declared wishes to keep to the silver standard, partly to trail
her off from making any demand for gold, and partly to silence
the criticisms of other nations that Britain was not taking
* Dated February 2, 1886, see C. 4868 of 1886, p. 5 et. seq.
† Cf. the despatch of September 4, 1886, App. II to the First Report of the
Royal Commission on Gold and Silver, 1886.
‡ Cf. the evidence before the Gold and Silver Commission of 1886 of Mr. S.
Smith, Q. 4,825-30 ; also of Mr. Watney, Q. 9,427.
§ Cf. The Report of the Indian Delegates, p. 12.
her share in the matter of rehabilitating silver.* This was

not the only advantage exacted from a country bound to obey.
On the one hand it restrained the Government of India from
taking any independent line of action in the matter of currency
reform, and on the other such means as were calculated to make
good the losses which arose from a depreciating currency were
subjected to Parliamentary censure. The House of Commons
was twice moved, once in 1877 and again in 1879, to resolve
that the Government of India should lower its tariff, ostensibly
in the interest of free trade, but really in the interests of relief
to the depressed condition of Lancashire. The consequence
was that the Government could not tap one important source
of its revenue in times of its greatest adversity. The only
adequate recompense, the British authorities could have made
to a Government so completely paralysed by their dictations,
and of whose interests they so loudly claimed to be the lawful
trustees, was to have consented to join the bimetallic union,
the consummation of which only waited upon their grace. But,
as is well known, they did nothing of the kind, so that, after
a period of enforced waiting and by no means unavoidable
suffering, the Government of India, at the end of 1893, found
itself just where it was at the beginning of 1878.
Like all common-sense people who pray and yet do not
fail to keep their powder dry, this interval was utilized by the
silver-ridden countries, with the exception of the United States,
in strengthening their gold basis no less than in attending the
deliberation of the Monetary Conferences on the amusing plans
for extending the use of silver.† Mr. Goschen, at the Conference
of 1878, had quite philosophically remarked that States feared
to employ silver because of its depreciation and the depreciation
continued because the States feared to employ it. Now, if the
first part of the diagnosis was correct, we should have found
the States seriously engaged in the task of rehabilitating silver
when its price was propped up by the silver legislation of the
United States. On the other hand, just so far as the monthly
purchases of silver, under the Bland Allison Act of 1878, or the
Sherman Act of 1890, held up the price of silver, not only did
they not feel anxious to take steps to restore it to its former
* Cf. the speech of Mr. Goschen at the International Monetary Conference of
1878, Third Session. Report of the American Delegates, Senate Executive Document,
No. 58, Forty-fifth Congress, Third Session, Washington, 1879, pp. 50-52.
† Cf. for the variety of plans suggested at the Conferences The Report of the
American Delegates to the International Monetary Conference of 1892, Washington,
1893.
position, but they actually took advantage of the rise to discard

it.* And it is not possible to blame them either, for with the
prospect of a bimetallic union vanishing into thin air the
accumulation of this dead weight would have only ended in
a gratutious embarrassment. India alone refused to profit by
the squeeze, which the United States took vicariously for other
nations, and allowed precious time to slip by, with the result
that it was thrown back upon the same remedy, the adoption
of which was negatived in 1878.
If it was to be a gold standard it would have been better
if it had been done in 1878. The plan then outlined by the
Government of India was no doubt too complicated and too
flimsy to be practicable. But its rejection should not have
altogether suspended the introduction of a gold standard. If
it was to be one of an orthodox kind on the English pattern,
it would have no doubt involved some cost to the Government
in being obliged to sell at a reduced price a part of the silver
stock of the country in order to give the rupee a subsidiary
position and to fill the void by a gold currency. The cost of this
conversion in 1878 would have been inconsiderable, for the fall
of silver from its normal gold price was only 12½ per cent. On
the other hand, if it was to be on such an unorthodox plan as
that of Colonel Smith, it would have involved no cost at all to
the Government† beyond that involved in the installation of new
machinery for the coinage of gold at the Mint. But in 1893 both
* Cf. Russell, op. cit., p. 410 ; also Prof. F. A. Walker, “The Free Coinage of
Silver,” in The Journal of Political Economy (Chicago), Vol. I, p. 174.
† So evident was this the case that the London Times, although it did not
agree that any change was then urgently called for, yet observed in the leading
article in its issue of October 25, 1876, p. 9, cl. 2 : “The Governor-General in
Council dismisses the suggestion of a gold standard on the ground that the
present condition of affairs, bad as it is, does not call for so costly a remedy ;
but this involves a misconception of the proposal. The substitution of a gold for
a silver currency in India would be a most extensive and costly operation, but
to refuse to coin silver and to offer to coin gold for all comers would involve no
cost beyond that of new machinery. If it was announced that after a certain day
the coinage of silver was suspended, and that gold could be coined instead, for
whoever might bring it, in coins that would be exchangeable for rupees at a fixed
rate, there would be introduced into India the bimetallic system prevailing in
France, and a change in the currency would be gradually introduced. At first no
gold would be brought to be coined, but as the suspense of the coinage of silver
operated to raise the value of the rupees in existence to the par value defined
by the fixed rate of exchange of rupees and gold, gold would be more and more
brought to the Mint, and would find its way into circulation. The process would
be automatic and not costly, but it would be extremely slow, etc.”
these processes of bringing about a gold standard seemed quite

hopeless. The impossibility of the plan of conversion was quite
out of the question. The fall in the value of silver in 1893 was
nearly 35 per cent. Even the prospect of the Smith plan did not
appear very bright owing to the enormous addition of rupees to
the circulation of the country. If it had been adopted in 1878,
all the subsequent additions to the currency would have been
in gold, with the result that by 1893 the proportion of gold
to silver would have been large enough to have endowed the
whole currency system with the desired stability in relation
to countries on a purely gold basis. In 1893 the mass of silver
currency had grown to enormous proportions, so that it looked
certain that it would take decades before the stoppage of
silver coinage could make the rupee a stable and secure form
of currency.
The plans showing a way out of an impasse such as this
were legion. One was the issue of heavier rupees.* The second
was to make silver limited legal tender and to authorize the
Secretary of State to sell in London gold or silver Indian stock
to the extent of his gold payments, to be liquidated by the
Government of India by the issue of unlimited legal-tender
notes called “bons.”† The third was that England and India
should, as between them, adopt a bimetallic standard on a
new basis,‡ or to admit the rupee as full legal tender in the
United Kingdom.§ The fourth was to regulate the opening
and closing of Mints to coinage on the basis of deviations of
actual exchange rates from the rate of exchange fixed at the
opening of each year for the Council drafts of the Secretary
of State. Under this scheme, so long as the actual rate did
not exceed the fixed rate by less than 5 per cent., the free
coinage of silver was to be suspended.¶ The fifth was to
provide that on the one hand the Secretary of State should fix
a minimum rate for his drafts, and that the Government of
India on the other should levy a duty on all imports of silver
equal to the difference between the daily official quotations
of bar silver in London and the price of silver corresponding
to the rate fixed for the Council drafts.‡‡ The sixth was
to introduce a bimetallic coin, to be called the Imperial
* By Aston and also by R. West, I.C.C, 1893. App. III, pp. 281 and 325.
† By Atkins, ibid., p. 282.
‡ By Chapman, ibid., p. 282.
§ By Woodhouse, ibid., p. 33.
¶ By Graham, ibid., p. 305.
‡‡ By M. Schilizz, ibid., p. 319.
florin or rupee, made of the value of 2s. and containing 4 per

cent, weight in gold and the balance in silver.* The seventh
was to establish independent gold and silver standards without
any fixed ratio of exchange between them.† or with some
slight inducement for the use of gold in transactions of larger
denominations.‡‡ Although the Government of India was not
in agreement with these clever if not crazy plans of currency
reforms, it agreed in the aim they had in view, namely, to
place India on a gold basis without involving the actual use
of gold in place of the existing rupees in circulation. With
this aim in view it revived for adoption the more simple and
more scientific plan of Colonel Smith. As a preliminary, the
Government reverted to the policy of the resolution of the
Bengal Chamber of Commerce, to the adoption of which it saw
such “fatal objections” in 1876. In the despatch dated June
21, 1892, which contained the proposals, the Government of
India asked for nothing more. In the words of their author§
they proposed
“ ……That the Indian Mints should be closed to the
unlimited coinage of silver, and no further steps taken
until the effect of closing the Mints had been ascertained.
“The ratio at which the change from silver to the gold
standard should be made was subsequently to be settled
and it was said that a ratio based on the average price of
silver during a limited period before the Mints had been
closed would probably be the safest and most equitable.
When this ratio had been settled, the Mints were to be
opened to the coinage of gold at that ratio, and gold coins
were to be made legal tender to any amount.”
These proposals were submitted for examination to
a Departmental Committee, commonly known as the
Herschell Committee. They were said to be defective
in one important particular, and that was the absence
of due recognition of the necessity of a gold reserve for
the maintenance of the value of the rupee. Many people
felt doubtful of the success of the proposals unless
* By Stalkart, ibid, p. 322 ; also a very similar one by Merington, ibid, p. 316.
† By Perry, ibid, p. 323.
‡‡ By Claremonth Daniell, ibid., p. 292.
§ Sir David Barbour, The Standard of Value, 1912, pp. 202-3. Italics not in
the original.
backed by an adequate gold reserve. But the Herschell

Committee, after an extended investigation into the working
of the currency systems of different countries, reported*:—
“It is impossible ……… to review foreign systems of
currency, without feeling that, however admirable may
be the precautions of our own [English] currency system,
other nations have adopted different systems which appear
to have worked without difficulty, and enabled them to
maintain for their respective currencies a gold standard
and a substantial parity of exchange with the gold-using
countries of the world”
with little or no gold. The Committee, therefore, was completely
satisfied with the proposals of the Government of India, and
not only sanctioned their adoption,† but added, by way of
introducing a modification in them, that
“The closing of the Mints against the free coinage of
silver should be accompanied by an announcement that,
though closed to the public, they will be used by the
Government for the coinage of rupees in exchange for gold
at a ratio to be then fixed, say 1s. 4d. per rupee, and
that at the Government Treasuries gold will be received
in satisfaction of public dues at the same ratio.”‡
These recommendations were carried into effect on June
26, 1893, which forms as great a landmark in the history
of Indian currency as did the year 1835. On that date were
promulgated one legislative enactment and three executive
notifications, together calculated to accomplish the object
in view. The Act (VIII) of 1893 was only a repealing Act. It
repealed:—
(i) The Indian Coinage Act, XXIII of 1870.
Sections 19 to 26 (both inclusive), requiring the Mint
Masters to coin all silver brought to their Mints for coinage.§
* Report, par. 93.

† Report, par. 155.
‡ Report, par. 156.
§ These sections also contained provisions for the coinage of all gold brought
to the Mints for the purpose by private persons. The quantity brought to the
Mints was quite trifling, and the gold coins, i.e. the mohurs struck, were not
legal tender. As they were to be superseded by sovereigns to be coined at the
Mints upon their being subsequently thrown open to the free coinage of gold,
it was thought undesirable that any more of these mohurs should be coined
Consequently, along with silver, Mints were also closed to gold.
(ii) The Indian Paper Currency, 1882.*

(a) Section 11, Clause (b), requiring the Paper Currency
Department to issue notes against silver coin made
under the Portuguese Convention Act, 1881,†
(b) Section 11, Clause (a), requiring the Paper Currency
Department to issue notes against silver bullion or
foreign silver coin.‡
(c) Section 13. Only the proviso limiting the gold portion
of the Paper Currency Reserve to one-fourth of the
Total Reserve.§
These repeals by the Act were supplemented by an executive
Notification No. 2663, announcing in conformity with the
suggestion of the Herschell Committee that the Government
Treasuries would receive sovereigns and half-sovereigns of
current weight in payment of public dues at the rate of 15
rupees and 7 rupees 8 annas respectively.
Since gold was not made general legal tender by any of
the above measures, it was feared that the Government might
be embarrassed by the accumulation in its Treasuries of a
stock money which it could not pay out in discharge of its
obligations. To enable Government to rid the Treasuries of
gold, should it accumulate in them to an inconvenient extent,
there followed another Notification, No. 2664, requiring that
the Currency Department should issue, on the requisition of
the Controller-General, currency notes in exchange for gold
coin or gold bullion, at the rate of one Government rupee for
7.53344 grs. trey of fine gold, or sovereigns or half-sovereigns
at the rate of 15 rupees and 7 rupees 8 annas respectively.
To give effect to the second modification introduced by the
Herschell Committee, there was issued a third Notification,
No. 2662, to the effect that
“The Governor-General in Council hereby announces
that, unitil further orders, gold coins and gold bullion will
be received by the Mint Masters of the Calcutta and Bombay
* The repeal of these sections of the Act also called for the repeal of other
sections depending upon them, such as sections 14 and 15 and alterations in
Sections 21 and 28, to bring the whole Act in accord with the policy of a gold
standard then inaugurated.
† The Convention had come to an end and the retention of the clause was
therefore unnecessary.
‡ The retention of this clause would have been inconsistent with the closure
of the Mints.
§ As gold was to be the future standard of India, this limitation was no longer
necessary.
Mints respectively, in exchange for Government rupees,

at the rate of 7.53344 grs. troy of fine gold for one rupee
on the following conditions :—
(1) Such coins or bullion must be fit for coinage.
(2) The quantity tendered at one time must not be less
than 50 tolas.
(3) A charge of one-fourth per mille will be made on all
gold coin or bullion which is melted or cut so as to
render the same fit for receipt into the Mint.
(4) The Mint Master, on receipt of gold coin or bullion
into the Mint, shall grant to the proprietor a receipt
which shall entitle him to a certificate from the Mint
and Assay Masters for the amount of the rupees
to be given in exchange for such coin or bullion
payable at the General (Reserve) Treasury, Calcutta
or Bombay. Such certificates shall be payable at the
General Treasury after such lapse of time from the
issue thereof as the Comptroller-General may fix,
from time to time.”
Before the policy adumbrated by these measures was
carried to completion there came up a move for the undoing
of it. After the failure of the International Monetary
Conference of 1892 the United States and France, two
countries most heavily burdened with an overvalued stock
of silver, opened negotiation with the British Government,
asking the latter to agree to certain conditions on the
grant of which they were to open their Mints to the free
coinage of silver at the ratio of 15½ to 1. These conditions
included :*
(1) Opening of the Indian Mints, which had been closed
to the free coinage of silver, and an undertaking not
to make gold legal tender in India.
(2) Placing one-fifth of the bullion in the Issue Department
of the Bank of England in silver.
(3) (a) Raising the legal-tender limit of silver in England
to £10.
* Cf. Correspondence respecting the Proposals on Currency made by the Special
Envoys from the United States, P.P.C. 8667 of 1897, p. 3.
(b) Issuing the 20s. notes based on silver, which shall

be legal tender.
(c) Retirement, gradual or otherwise, of the 10s. gold
pieces, and substitution of paper based on silver.
(4) Agreement to coin annually a certain quantity of silver.
(5) Opening of English Mints to the coinage of rupees and
for coinage of British dollars, which shall be full legal
tender in Straits Settlements and other silver-standard
Colonies, and tender in the United Kingdom to the limit
of silver legal tender.
(6) Colonial action, and coinage of silver in Egypt.
(7) Something having the general scope of the Huskisson
plan.
In these negotiations the Treasury again reverted to its old
pose. It refused to discuss the conditions requiring a change
in the British currency, but argued that the opening of the
Indian Mints, if brought about, should be regarded as an
adequate “contribution which could be made by the British
Empire towards any international agreement with the object
of securing” a stable monetary par of exchange between gold
and silver,* and the representatives of the United States
and France seemed to have concurred in that view. The
negotiations, however, failed, because of the firm stand taken
by the Government of India. The Government had suffered too
long to be the scapegoat of the Treasury. Nor did it see any
reason why it should be called upon to pull the chestnuts off
the fire for the benefit of France and the United States. In
a letter commenting upon the proposals, the Government of
India observed†:—
“The changes which are involved in the arrangements
proposed to Her Mahesty’s Government are the following :
France and the United States are to open their Mints to the
free coinage of silver, continuing the free coinage of gold and
the unlimited legal tender of coins of both metals, the ratio
remaining unchanged in France and being altered in the
French ratio of 15½ to 1 in the United States. India is to open
* Cf. letter dated October 16, 1897, to the Foreign Office, P.P.C. 8667 of 1897,
p. 15.
† Despatch dated September 16, 1897, to the Secretary of State, ibid, p. 9.
Italics not in the original
her Mints to silver, to keep them closed to gold, and to

undertake not to make gold legal tender. France and the
United States would thus be bimetallic; India would be
monometallic (silver) ; whilst most of the other important
countries of the world would be monometallic (gold).
* * * * *
“The first result of the suggested measures, if they
even temporarily succeed in their object, would be an
immense disturbance of Indian trade and industry, by
the sudden rise from about 16d. to about 23d. the rupee.
Such a rise is enough to kill our export trade, for the
time at least …… such an arrangement as is proposed
is an infinitely more serious question for India than for
either of the other two countries, for it seems clear that
practically the whole risk of disaster from failure would
fall on india alone. What would happen in each of the
three countries if the agreement broke down and came to
an end ? France possesses a large stock of gold, and the
United States are at present in much the same situation
as France, though the stock of that metal is not so large.
It may be admitted that if no precautions were taken
these gold reserves might disappear under the operation
of the agreement, and in that case, if the experiment
ultimately failed, the two countries concerned would suffer
great loss. But it is inconceivable that precautions would
not be taken, at all events, so soon as the danger of the
depletion of the gold reserves manifested itself, and,
therefore, it is probable that no particular change would
take place in the monetary system of France or the United
States, the only effect of the agreement being a coinage
of silver which would terminate with the termination of
the agreement. Thus the whole cost of the failure, if the
experiment should fail, would be borne by India. Here the
rupee would rise with great swiftness, it would keep steady
for a time, and then, when the collapse came, it would
fall headlong. What course could we then adopt to prevent
the fluctuation of the exchange value of our standard of
value with the fluctuations in the price of silver ? We do
not think that any remedy would be open to us, for if the
Indian Mints were reopened to silver now, it would ……
be practically impossible for the Government of India to
close them again, and even if they were closed it would
only be after very large additions had been made to the
amont of silver in circulation.”
But soon after it had refused to be diverted from the goal

it had placed before itself, namely the introduction of a gold
standard, it was faced with a crucial problem in its existing
monetary arrangements. The rupee stock, the addition to
which was stopped since 1893 by the closure of the Mints,
was large enough to meet the needs of the people for some
considerable time, in the first few years after the closure, the
rupee currency was not only abundant but was also redundant.
Soon it ceased to be redundant, and indeed by the end of 1898
it became scarce, so much so that the discount rate in the
Indian money market rose to 16 per cent., and continued at
that pitch during the larger part of the year. Such was the
outcry against what was called the policy of “starving” the
currency, that the Government was obliged to pass an Act (No.
II) of 1898 to permit currency notes issued in India against
gold tendered in London to the Secretary of State. The Act
was doubly easeful to the then starved condition of the Indian
money market. By the measures adopted in 1893 gold was not
general legal tender, so it could not be used when the rupee
currency fell short of the needs of the time. The new Act, it
is true, did not make gold general tender, but permitted it to
be used on behalf of the general public* as a backing for the
issue of currency notes which were general legal tender. The
Act, however, could have required that gold be laid down in
India before notes could be issued. But as the remittance of
gold to India took some three or four weeks, it was feared†
that the remedy might” prove too tardy to be effective” unless
the interval was done away with by providing that gold with
the Secretary of State in London was lawfully tantamount to
gold with the Paper Currency Department in India for the
purposes of note issue.
In doing this the Act only testified to the urgency of
the situation. A sound currency system must be capable of
expansion as well as contraction. The Government, by the
closure of the Mints in 1893, had contracted the currency to
the point of danger. In 1898 it was called upon to undertake
measures to provide for its expansion. Now, there were two
methods open to bring about this desired result. One was to
keep the Mints closed and to permit additions to currency
through the use of the gold by making the sovereign general
* By Notification No. 2664 of 1893, notes could be issued against gold only
to the Comptroller-General.
† Cf. the speech of the Hon. Sir James Westland introducing the Bill, dated
January 14, 1898.
legal tender. This was the plan proposed by the Government

of India, in their despatch dated March 8, 1898,* they
argued ;—
“Our present intention is rather to trust to the
automatic operations of trade. The amount of coin required
for the needs of commerce increases every year: and as
we print no increase in the amount of silver coin, we
may reasonably expect that the effect of the increasing
demand for coin will raise exchange to a point at which
gold will flow into the country, and remain in circulation.
The position will thus become stronger and stronger as
time goes on, but at the beginning at least, gold will not
be in circulation in the country to more than the extent
necessary to secure stability of exchange. The mass of the
circulation will be a silver circulation, maintained at an
appreciated value (just as it is at present), and we can be
content to see gold coin remain little more than a margin,
retained in circulation by the fact that its remittance
out of the country could create a scarcity of coin which
would have the effect of raising the exchange value of the
silver rupee in such manner as to bring it back, or, at
the very best, stop the outward current of remittance. We
shall have attained a gold standard under conditions not
dissimilar from those prevailing in France, though not a
gold circulation in the English sense ; and this last may
possibly not be necessary at all.”
Besides expanding the currency through the use of
gold, there was aisc another mode of effecting the same
object. It was urged that this increase of currency might
as well take place by Government coining rupees whenever
there arose a need for additional currency. Though the
Mints were closed, the Government, by Notification No.
2662, had undertaken to give rupees to anyone desiring
to have them at the rate of 7.53344 grs. troy of fine gold
per rupee.† The Government had only to give effect to that
notification to augment the currency to any extent desired.
Prominent in the advocacy of this plan of expanding the
currency were Mr. Probyn and Mr. A. M. Lindsay. Both
claimed that the plan of the Government of India was
* Cf correspondence respecting the Proposals on Currency made by the

Government of India, C. 6840 of 1898, p. 3.
† See supra.
defective because, although it provided for the expansion

of currency by making gold legal tender, it made the rupee
entirely inconvertible, and thereby likely to defeat the policy
of stabilizing its exchange value. On the other hand, they
deemed their plans to be superior to that of the Government
of India because they recognized the obligation to provide
for the conversion of the rupee currency on certain terms.
Although the plans of both of them had contemplated some
kind of convertibility, yet they materially differed in the
particular mode in which conversion was to be effected.
Mr. Probyn proposed*:—
1. That legislative effect should be given to the notification
of 1893, under which the public can obtain rupees at
the Indian Mints and Reserve Treasuries in exchange
for gold, at the rate of 1s. 4d.
2. That the gold so received should be part of the paper
currency reserve, and should be held either in the form
of full legal-tender gold coins of the United Kingdom,
or gold bars representing not less than Rs. 1,000 each.
3. That in order to give the rupee currency automatic
power of contraction, Government should be empowered
(though not required) so soon as the portion of the paper
currency reserve has continuously for one year been
less than that held in gold, to give gold in exchange for
rupees or rupee notes at the rate of 1s. 4d., if presented
for the purpose in quantities of Rs. 10,000.
4. That the existing Rs. 10,000 notes should be called in,
and, in future, notes of Rs. 10,000, payable at the option
of the holder either in gold or in silver rupees, should
be issued in exchange for gold alone, gold in the form
of bars being specially reserved to meet any such notes
outstanding.
Mr. Lindsay, on the other hand, followed on lines quite
different from those adopted by Mr. Probyn. He proposed† that
the Government should offer to sell, without limit on the one
* Cf. his Indian Coinage and Currency, Effingham Wilson, London, 1897,
passim, particularly p. 121. Also the summary by Lindsay in the Economic
Journal, Vol. VII, pp. 574-75.
† The earliest elaboration of his plan is to be found in his article in the Calcutta
Review for October, 1878, under the title, “A Gold Standard without a Gold
Coinage in England and India,” and the latest, in his pamphlet called Ricardo’s
Exchange Remedy, Effingham Wilson, 1892. The plan was further developed in
the newspaper Pioneer of Allahabad (India), dated January 6, 1898, full extracts
from which are given in C. 8840 of 1898, p. 13.
hand, rupee drafts on India at the exchange of 16 1/16d. the

rupee, and on the other hand, sterling drafts on London at the
rate of exchange of 153/4d. the rupee. The funds necessary for
the transactions were to be kept separate from the ordinary
Government balances in “Gold Standard” Offices in London
and in India. The London Office was to be kept in funds to
meet drafts drawn on it—
(1) by borrowing in gold to the extent of five or ten million
sterling;
(2) by the rceipts realized by the sale of drafts on India;
(3) by the receipts realized by the sale of silver bullion in
rupee melted down ;* and
(4) when necessary, by further gold borrowing.
The Indian Gold Standard Office was to be kept in funds
to meet the drafts drawn on them—
(1) by the receipts realized by the sale of drafts on London ;
and
(2) by the coinage when necessary of new rupees from
bullion, purchased by the London Gold Standard Office
and sent to India.
The principal point of difference between the scheme of
currency advocated by the Government of India on the one
hand and that put forth by Messrs. Probyn and Lindsay
consisted in the fact that the former proposed to establish a
gold standard with a gold currency, while the latter proposed
to establish a gold standared without a gold currency.
To adjudicate upon the relative merits of a gold standard
with a gold currency and a gold standard without a gold
currency, the Secretary of State appointed another departmental
Committee, under the chairmanship of Sir Henry Fowler.
After taking a mass of important evidence, the Committee
observed† :—
“50. On this scheme [of Mr. Probyn] we remark that,
while bullion may be regarded as the international medium
of exchange, there is no precedent for its permanent adoption
for purposes of internal currency; nor does it accord with
* Mr. Lindsay contemplated that when the demand for gold drafts on London
became so great as to indicate the necessity, the volume of the rupee currency
should be contracted by melting down the rupees and selling the silver for gold
to be deposited in the London “Gold Standard” Office.
† Report of the Committee appointed to inquire into the Indian Currency, P.P.
C 9390 of 1899, p. 15.
either European or Indian usage that the standard metal

should not pass from hand to hand in the convenient
form of current coin. No real support for such a scheme
is to be drawn from the purely temporary provisions of
“Peel’s Act” of 1819, whereby, for a limited period, the
Bank of England, as a first step to the resumption of cash
payments, was authorized to cash, in stamped gold bars,
its notes, when presented in parcels of over £ 200. Little
or no demand for gold bullion appears to have been made
on the Bank itself in 1321.
* * * * *
“53. It is evident that the arguments which tell against
the permanent adoption of Mr. Probyn’s bullion scheme,
and in favour of a gold currency for India, tell more strongly
against Mr. Lindsay’s ingenious scheme for what has been
termed ‘an exchange standard.’ We have been impressed
by the evidence of Lord Rothschild, Sir John Lubbock,
Sir Samuel Montagu and others, that any system without
a visible gold currency would be looked upon with distrust.
In face of this expression of opinion, it is difficult to avoid
the conclusion that the adoption of Lindsay’s scheme
would check that flow of capital to India upon which her
economic future so greatly depends. We are not prepared
to recommend Mr. Lindsay’s scheme, or the analogous
schemes proposed by the late Mr. Raphael and by Major
Darwin, for adoption as a permanent arrangement; and
existing circumstances do not suggest the necessity for
adopting any of these schemes as a provisional measure
for fixing the sterling exchange.”
The Committee preferred the scheme of the Government
of India, and outlined a course of action to be adopted for
placing it on a permanent footing, which may be stated in
the Committee’s own language as follows:—
“54. We are in favour of making the British sovereign
a legal tender and a current coin in India. We also
consider that, at the same time, the Indian Mints
should be thrown open to the unrestricted coinage of
gold on terms and conditions such as govern the three
Australian branches of the Royal Mint. The result
would be that, under identical conditions, the sovereign
would be coined and would circulate both at home
and in India. Looking forward, as we do, to the effective

establishment in india of a gold standard and currency,
based on the principles of the free inflow and outflow of
gold, we recommend these measures for adoption.”
These recommendations were accepted by the Secretary of
State,* who decided that—
“the policy of keeping the Indian Mints closed to the
unrestricted coinage of silver shall be maintained,”
and called upon the Government of India as soon as it deemed
expedient to
“take the necessary steps for making the British sovereign
a legal tender and a current coin, and make preparations
for the coinage of gold under the conditions suggested by
the Committee.”
The first recommendation of the Committee was given
effect to by the Government passing an Act commonly called
the indian Coinage and Paper Currency Act (XXII) of 1899.
That Act made the sovereign and half-sovereign legal tender
throughout India at the rate of Rs. 15 and Rs. 7½ respectively,
and authorized the issue of currency notes in exchange for them.
Along with placing the Indian currency on a gold basis, the
Government was anxious to open a Mint for the free coinage
of gold. But as the coin to be issued from the Mint was the
English “sovereign” the Government of India was entirely in the
hands of the British Treasury. According to the provisions of the
English Coinage Act of 1870, it was necessary to issue a Royal
Proclamation in order to constitute an Indian Mint a branch of
the Royal Mint, a matter entirely dependent on the consent of
the Treasury. It was the intention of the Government of India
to announce the Proclamation simultaneously with the passing
of the Act making the sovereign legal tender. Indeed it held
back the legislation pending the arrival of the proclamation.†
and proceeded with it reluctantly when it was advised that
there was likely to be “some further delay over the Proclamation
owing to legal and technical questions.” The objections raised
by the Treasury, though merely technical, at first seemed to
be quite insuperable,‡ and had it not been for the conciliatory
attitude of the India Office the negotiations would have broken
* See despatch dated July 25, 1899, No. 140 (Financial), C. 9421 of 1899.
† Cf. the speech of the Hon. Mr. Dawkins on the Indian Coinage and Paper
Currency Bill, dated September 8, 1899.
‡ Cf. H. of C. Return 495 of 1913, p. 14.
down. But the Treasury was not willing to give the project
a chance. Just when a compromise was arrived at on the
technical side of the question, the Treasury turned round
and raised the question whether a Mint for gold coinage
was at all necessary in India. The Treasury argued :—
“While expressing their satisfaction that an
agreement has now been reached, my Lords think it
desirable, before practical steps are taken to carry out
the scheme, to invite Lord George Hamilton to review the
arguments originally advanced in favour of the coinage
of the sovereign in India, and to consider whether the
course of events, in the two years which have elapsed
since the proposal was made, has not tended to diminish
their force, and to render such advantages as are likely
to accrue from the establishment of a branch Mint
wholly incommensurate with the expense to be incurred...
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... On the
other hand the estimates of the Government of India
of gold available for coinage in that country are less
than was anticipated, nor is any considerable increase
expected, at any rate for some time ……
The staff would have to be maintained in idleness

for a large part of the year, at a considerable cost to
the Indian Exchequer... It is, of course, for Lord George
Hamilton to decide whether, in spite of these objections,
the scheme is to be proceeded with.”
The India Office replied :—

“The establishment of a Mint for the coinage of gold
in India is the clearest outward sign that can be given
of the consummation of the new currency system; and
to abandon the proposal now must attract attention and
provoke criticism and unrest ………. His Lordship is
not inclined to abandon the scheme at the stage which
it has now reached.”
The Treasury sent a trenchant rejoinder, in which it

remarked:—
“Indian currency needs are provided from other
sources, and there is no real demand for the local
coinage of sovereigns …… My Lords cannot believe
that the position of the Gold Standard in India will be
strengthened, or public confidence in the intention of
the Government confirmed, by providing machines for
obtaining gold coin …… The large measure of confidence
already established is sufficiently indicated by the course
of exchange since the Committee’s Report and still more
by the readiness with which gold has been shipped to
India ……”
That the Treasury acted “in a spirit of scarcely veiled
hostility to the whole proposal” is unmistakable. But it
cannot be denied that the Treasury used arguments that
were perfectly sound. It was inconsequential to the working
of the gold standard whence the coined sovereigns came. So
long as a Mint was open to the free coinage of sovereigns the
Indian gold standard would have been complete irrespective
of the location of the Mint. Indeed, to have obtained coined
sovereigns from London would have not only sufficed, but
would have been economical. The anxiety displayed by the
government was not, however, on account of the want of a
gold Mint. Indeed, so slight was its faith in the necessity of
it that in view of the opposition of the Treasury it gracefully
consented to drop the proposal. What troubled it most
was the peculiar position of the rupee in the new system
of currency. Throughout the despatch of the Government
of India there ran a strain of regret that it could not see
its way to demonetize the rupee and to assimilate the
Indian currency to that prevailing in England. A general
perusal of the despatch leaves the impression that though
it recommended the assimilation of the Indian currency
to that of France and the United States, it did so not
because it thought that their systems furnished the best
model, but because it believed that a better one was not
within reach. Having regard to the accepted view of the
French and the United States currency systems, it was
natural that the Government of India did not feel very
jubilant about its own. According to that view of the currency

systems of these two countries, the position of the five-franc
piece and the silver dollar has always been presented as
being very anomalous. Even so great an authority as Prof.
Pierson was unable to assign them a place intelligible in the
orthodox scheme of classifying different forms of money.*
In a well-ordered system of gold standard of the orthodox
type, gold is the only metal freely coined and the only one
metal having full legal-tender power; silver, though coined,
is coined only on Government account in limited amounts,
and being of less intrinsic value than its nominal value, is
a limited legal tender. The former type of coins are called
standard coins and the latter subsidiary coins, and the two
together make up the ideal of a monometallic gold standrd
such as has been established in England since 1816. In a
scheme of things like this, writers have found it difficult
to fit in the dollar or the five-franc piece. Their peculiarity
consists in the fact that although their intrinsic value is
less than their nominal value they have been inconvertible
and are also unlimited legal tender. It is owing to this
anomaly that the title of gold standard has been refused
to the American and French currency systems. Few can
have confidence in what is called the limping standards
in which it is said that somehow “the silver coin, though
intrinsically of less value than the gold, hobbles along,
maintained at equality by being coupled with its stronger
associate.”‡
But was the French system of currency so very different
from the English as to create doubt as to its stability ?
Whatever may have been the differences between the two
systems a closer analysis shows that they are fundamentally
identical. If we read together the French bimetallic law of
1803 and the Mint Suspension Decree of 1878 on the one
hand, and on the other the provisions of the English Gold
Standard Act of 1816,
* Cf. Principles of Economics, Vol. I, p. 569.

† It was owing to this want of faith that Germany took away, by the law of
October 1, 1907, the full legal-tender power from her silver thalers. In the United
States the silver dollar is not legal tender if it is specifically excluded by the
terms of a contract. Cf. A. C. Whitaker, Foreign Exchange, Appleton, New York,
1920, pp. 8. and 477.
‡ C. F. W. Taussig, Principles, 2nd ed., 1913, p. 280.
together with the Bank Charter Act of 1844, and compare,

do we find any substantial difference between the French
and English systems of currency? Prior to 1878 there was
an unlimited issue in France of both gold and silver coins of
unlimited legal tender. Prior to 1844 there was an unlimited
issue in England of both gold sovereigns and Bank of England
notes, both of unlimited legal tender, in 1844 England put
a limit on the issue of bank notes, but did not deprive the
issues of their legal-tender power.* In 1878 France did
precisely the same thing as England did with her notes in
1844. By the decree of mint suspension, France virtually,
though indirectly, put a limit on the silver five-franc coins
without depriving them of their legal-tender power. If we
regard the French five-franc coins as notes printed on silver,
it is difficult to see what constitutes the difference between
the two systems which leads economists to call one a gold
standard and the other a limping standard. If the silver
franc limps or hobbles along, so does the bank note, and
the former can hobble better than the latter because of
the two it has a comparatively greater intrinsic value. If,
however, it is argued that the bank note is convertible into
gold, while the five-franc piece is not, the reply is that the
comparison must be made with the fiduciary notes of the
bank of England. Those notes are practically inconvertible.
For, at any given time, with the gold the Bank of England
has in its Issue Department the fiduciary portion of the
notes remains uncovered, and may, therefore, be regarded
as inconvertible as the delimited issue of the five francs.
But even if it is insisted that the fiduciary notes cannot
be regarded as inconvertible as the five franc pieces, it
must be pointed out that the similarity of the two is not
to be determined by considerations of convertibility or
inconvertibility. The attribute of convertibility with which
the fiduciary notes of the Bank of England are endowed
is a superfluous attribute which in no way improves
their position as compared with the five-franc pieces.
What makes them identical is the fact that they are
both subjected to a fixed limit of issue. Thus viewed, the
French limping standard and the English gold standard are
* The Bank of England notes were made legal tender by Lord Althorpe’s Act
of 1833.
nothing but two different illustrations of the “currency principle”

in so far as a fixed limit of issue on a fiduciary currency is a
cardinal feature of that principle.
Not only is the French monetary system identical with
the English in its organization, but the design in both cases
was identical. In the controversy which raged over the Bank
Charter Act of 1844, the motives of Lord Overstone were not
quite clearly grasped by his opponents of the banking school
of thought. Lord Overstone was not very much interested in
providing a method for preventing the depreciation of the note
issue, as his opponents thought him to be. His supreme concern
was to prevent gold disappearing from circulation. Starting
from a chain of reasoning the solidity of which can hardly be
said to be open to question, he came to the conclusion that
gold would be driven out of circulation by an increase in the
issue of notes. To keep gold in circulation the only remedy
was to put a limit on the issue of notes, and this was the
purpose of the Bank Charter Act of 1844. Now, precisely the
same was the object of France in suspending the coinage of
silver. As has already been pointed out, owing to the fall in
the value of silver after 1873, gold was being rapidly driven
out of circulation by the substitution of this depreciated metal.
To prevent this result from assuming a vast proportion, the
French adopted the same remedy as that of Lord Overstone,
and through their suspension of silver coinage protected their
gold from going out of circulation, which would have certainly
been the case if no limit had been put on silver issues.
It would not, therefore, be amiss to argue that the plan
contemplated by the Government of India, and approved of by
the Fowler Committee in being similar to the French system,
was based on the same principles as governed the English
currency system, which, according to Jevons, were a “monument
of sound financial legislation.”

CHAPTER V
FROM A GOLD STANDARD TO A GOLD
EXCHANGE STANDARD
For once it seemed that the problem of a depreciating
rupee was satisfactorily solved. The anxieties and difficulties
that extended over a long period of a quarter of a century
could not but have been fully compensated by the adoption of
a remedy like the one described in the last chapter. But by
an unkind turn of events, the system originally contemplated
failed to come into being. In its place there grew up a system
of currency in india which was in every way the very reverse
of it. Some thirteen years after legislative sanction had been
given to the recommendations of the Fowler Committee, the
Chamberlain Commission on Indian Finance and Currency
reported that
“in spite of the fact the Government adopted and
intended to carry out the recommendations of the
Committee of 1898, the Indian currency sysem to-day
differs considerably from that contemplated by the
Committee, whilst the mechanism for maintaining the
exchange has some important features in common with
the suggestions made to the Committee by Mr. A. M.
Lindsay.”*
It will be recalled† that in Mr. Lindsay’s scheme Indian
currency was to be entirely a rupee currency; the Government
was to give rupees in every case in return for gold, and gold
for rupees only in case of foreign remittances. The scheme was
to be worked through the instrumentality of two offices, one
located in London and the other located in India, the former to
sell drafts on the latter when rupees were wanted and the latter
to sell drafts on the former when gold was wanted. Surprisingly
similar is the system prevailing in India to-day-. Corresponding
to Mr. Lindsay’s proposals, which, be it noted, were rejected in
1898, the Government of India has built up two reserves, one
of gold and the other of rupees, out of the cash balances, the
paper currency, and the gold-standard reserve. Each of these
is, by the nature of the currency system, composite. The cash
* Report, P. P. Cd. 7068 of 1913, p. 13.

† See Chap. IV, supra.
balances, which are fed from revenue receipts, gather in

their net rupees as well as sovereigns, both being legal
tender. Notes being issuable against both, the paper-currency
reserve always contains sovereigns and rupees. Up to August,
1915, the gold-standard reserve was also held partly in gold
and partly in rupees.* By a system of sorting, technically
called “transfers,” the Government secures the command
over rupees and sovereigns necessary for discharging the
obligations it has undertaken.† The location of these funds
is also very much as designed by Mr. Lindsay. The cash
balances, being the till-money of the Government, are
necessarily distributed between the Government of India in
India and the Secretary of State in London, the portion held
by the latter being entirely in gold and that held by the
former being in silver. The gold-standard reserve, like the
cash balances, is not a statutory reserve. Consequently its
location is perfectly within the competence of the Executive.
That being so, it has been so arranged that the gold portion
of the fund shall be held by the Secretary of State in London,
and the rupee portion, so long as it was maintained, by
the Government of India in India. The only reserve which
did not easily lend itself to currency manipulation was the
paper-currency reserve, for the reason that its disposition
and location were governed by law. In that behalf, legal
power has been taken to alter the location of the gold
part of that reserve by making permanent the provision of
the temporary Act II of 1898, which authorized the issue
of notes in India against gold tendered to the Secretary
of State in London. Thus the Secretary of State and the
Government of india, under the new system of currency,
hold two reserves, one of gold, mainly in the possession of
the former and located in London, and the other of rupees,
entirely in the possession of the latter and held in India. But
the similarity of the existing system to that of Mr. Lindsay
is not confined to the maintenance of these funds and their
location. It extends even to the modes of operating these two
funds. For, as suggested by Mr. Lindsay, when rupees are
wanted in India the Secretary of State sells what are called
* The rupee branch has been discontinued since that date, on the recommendation
of the Chamberlain Commission.
† Besides, if the Government falls short of rupees, it has the legal power to
convert the gold in the paper-currency reserve into rupees to replenish the stock.
FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD 489
“Council Bills,” encashable into rupees at the Government

Treasuries in India, thereby providing the rupee currency in
India. When gold is wanted the Government of India sells
what are called “Reverse Councils “on the home Treasury in
London, which are encashed by the Secretary of State, thereby
providing gold for foreign remittances. The result of the sale
of “Council Bills” and of the “Reverse Councils” on the two
funds has been to transform the Indian currency from being a
gold standard with a gold currency, as desired by the Fowler
Committee, into what is called a gold standard without a gold
currency, as wished for by Mr. Lindsay.
This system which has grown up in place of the system
originally contemplated by the Government of india is called
the gold-exchange standard. Whatever that designation may
mean it was not the plan originally contemplated by the
Government of India in 1898. How the departure came about
we shall deal with in another place. Here it is enough to
state—one may also say necessary, for many writers seem to
have fallen into an error on this point—that the Government
did not start to establish a gold-exchange standard. Rather it
was contemplating the establishing of a true gold standard,
which, however inadequately understood by the men who
framed it, was in essential aggreement with the principles
governing the English Bank Charter Act of 1844.
What are we to say about the new system ? The Chamberlain
Commission, while reporting that there was a departure from
the ideal of a gold standard with a gold currency, observed* :—
“But to state there has been this departure is by no
means to condemn the action taken, or the system actually
in force ……”
Now why not ? Is not the system the same as that proposed
by the Government in India in 1878 and condemned by the
Committee of 1879 ? It is true the arguments urged against
that plan by the Committee of 1879 were not of much weight.†
Nonetheless the plan was essentially unsound. The material
point in the introduction of a gold standard must be said to be
one of limitation on the volume of rupees, and it is from this
point of view that we must judge the plan. But there was nothing
in the plan of 1878 that could be said to have been calculated to
bring that about. Far from putting any limitation on the volume
* Report, Par, 46 † See supra, Chap. IV.
of rupees, the plan had deliberately left the Mints open to

the free coinage of silver. A matter of some interest in the
plan was the projection of a system of seignorage so arranged
so to make the bullion value of the rupee equal to the gold
value given to it. But as a means of limiting the coinage of
rupees it was futile. The mere levy of a seignorage cannot
be regarded as sufficient in all circumstances to effect a
limitation of coinage. Everything would have depended upon
how closely the seignorage corresponded with the difference
between the mint and market price of silver in terms of gold. If
the seignorage fell short of the difference it would have given
a direct impetus to increased coinage of rupees until their
redundancy had driven them to a discount. In this respect the
plan was a reproduction in a worse form of the English Gold
Standard Act of 1816. Like the Government of India’s plan of
1878, that Act, while purporting to introduce a gold standard,
had authorized the opening of the Mint, which was closed, to
the free coinage of silver with a seignorage charge. It is not
generally recognized how stupid were the provisions of that
Act,* the ideal of all orthodox gold monometallists, in so far
as they contemplated the free coinage of silver. Fortunately
for England the Royal Proclamation, compelling the Mint
Master to coin all silver brought to the mint, was never issued.
Otherwise the working of the gold standard would have been
considerably jeopardized.† The Act of 1816 had at least taken
one precaution, and that was a limit on the legal-tender power
of silver. In the scheme of the Government of India, not only
free coinage of silver was permitted, but silver was conceded
the right of full legal tender. In so far, therefore, as the plan
did not provide for controlling the volume of rupees it was
subversive of the gold standard it had in view.
The only difference between this plan of 1878 and the
system now in operation in India is that under the former the
Mints were open to the public, while under the latter they are
open to the Government alone. In other words, in the one case
rupees were coined on behalf of the public, and in the other they
are being coined on behalf of the Government. It is not to be
supposed that the plan of closing the Mints to the public was not
thought of by the Government in 1878. On the other hand, the
* Cf., however, R. G. Hawtrey, Currency and Credit, 1919, pp. 302-3.
† Some witnesses before the Lords Committee on Cash payments, appointed
in 1819, raised doubts whether, having regard to the silver clause of the Act of
1816, resumption of cash payments was worth while as a means of establishing
a gold standard in England. Cf. particularly the evidence of Mr. Fletcher and
also Mr. Mushet before the Committee.
Government of India had then considered the feasibility

of taking over into its hands the coinage of rupees, and
had rejected it on some very excellent grounds. In their
despatch outlining the scheme the Government of the day
observed :—
“48. The first point to be guarded in attempting to
carry out the proposed change, is to provide for complete
freedom for any expansion of the currency which the trade
requirements of the country demand. This, we think could
not be properly secured if the Mints were wholly closed
for the coining of silver for the public. If this measure
were adopted, the responsibility for supplying the silver
demand would be thrown on the Government, and in the
present position of the market for gold and silver bullion
in India it would not be possible to accept such a duty.
“49. What might at first sight appear the simplest,
and therefore the best way of allowing for the expansion
of the Indian silver currency with a gold standard, would
be for the Government to undertake to give silver coin
in exchange for gold coin to all comers, at the rates
fixed by the new system, and to open the Mints for the
coinage of gold, while they were closed for silver. But in
the absence of any supply of silver in india from which
to obtain the necessary material for coinage, such an
obligation could not be accepted, without involving the
Government in complicated transactions in the purchase
and storing of bullion which it would be very inexpedient
to enter on.”
With these reasons, interesting in so far as they
were prophetic of the scandals connected with the recent
silver purchases by the India Office,* we are not directly
concerned. What is of importance is whether this difference
in the mode of issue makes any vital difference to the
question of an effective limit on the volume of rupees.
Now, there is a great deal of confused thinking as to the
precise virtue of the closing of the Mints to the private
coinage of silver. It was generally believed, the closing of
the Mints having given a monopoly to the Government in
the matter of issuing rupees, that this monopoly would
somehow sustain the value of the rupees in terms of gold by
preventing their over-issue. The closing of the Mints, it must
* See P. P. 400 of 1912.
be admitted, has given the Government the position of a

monopolist. But how a monopoly prevents an over-issue is not
easy to grasp. The closing of the Mints to the free coinage
of silver is the same as depriving banks of the liberty of
issuing notes and giving it exclusively to a central bank. But
nobody has ever argued that because a central bank has a
monopoly of issue it cannot therefore over-issue. Similarly,
because the Government of India is a monopolist it would be
absurd to argue that it cannot therefore over-issue. Indeed, a
monopolist can issue as much as private people put together,
if not more. Again, from the standpoint of influence of profits
on coinage the present plan is much inferior to that of 1878.
It is true in both cases profits depend upon the volume of
coinage. But in the former the amount of profit was no
incentive to coinage, either to the Government, because it
had no power to coin, or to the people who determined the
volume of coinage, because the regulation of seignorage
practically controlled it by making it unprofitable to bring
additional bullion to the Mint. In the present case, the coinage
being entirely in the hands of the Government, a hankering
after profits, generated by the silly notion of the necessity
of a “backing” to the currency, might create an impulse to
undertake additional coinage, especially if the price of silver
fell very low and produced a wide margin between the Mint
and the market price of the rupee.*
If it is argued, as it well may be, that the will of the
Government of India as a monopolist, i.e. its desire to
see that its currency is not depreciated, may bring about
a limitation on the issue of rupees which could not have
been possible had the Mints remained open to the public
in general, the reply is that this will to limit could be
effective only if the Government had the power to refuse
to issue. Central banks limit their currencies so far as will
is concerned, because they are not obligated to issue to
anyone and everyone. But the position of the Government
of India is lamentably weak in this respect. It is bound to
issue currency when asked for. It is true that every issue
does not involve a net addition to the existing volume of
* From this point of view the proposition of Prof. Keynes, that the gold value
of the rupee may be fixed irrespective of the cost price of silver, must, having
regard to the existing system of currency, be looked upon as a somewhat unsafe
position. Cf. his evidence before the Indian Currency Committee of 1919, Q. 2,688.
currency; for a portion of the new issue is a re-issue of what is

returned from circulation. Nonetheless, it cannot be said that the
Government by reason of its monopoly has put an effective limit
on the volume of rupee currency. On the other hand, having no
escape from the liability to issue currency, the exercise of this
cherished privilege has recoiled on the Government, so much so
that this monopoly of issue, instead of strengthening the position
of the Government, has weakened it considerably.* The view of
the Chamberlain Commission†
“that while the Government are very large dealers in the
exchange market, they are not monopolists (!) and it seems
doubtful if they could successfully stand out for any such [fixed
minimum rate] at all times of the year,”
is therefore interesting as a confession that the closing of the
Mints has not had the virtue of so limiting the coinage of rupees
as to enable the Government to dictate at all times the price of
the rupee, which none but it alone can manufacture.
Thus the present standard is different from the standard
proposed in 1878 only in name. If this one is characterized by
the adoption of the rate of exchange as an index for regulating
the volume of currency, the same must be said of the former. But
as Mr. Hawtrey remarks.‡ whatever means are adopted for the
manipulation of the currency,
“the value of the rupee will be determined by the quantity
in circulation.”
In other words, what must be said to be essential for the safety
of a gold standard is a provision against over-issue of rupees. But,
as we saw, neither the plan of 1878 nor the present one can be
said to be free from that danger. Consequently we must conclude
that, being essentially alike, the arguments that are valid against
the former are also valid against the latter.
But the Chamberlain Commission will not allow that the
exchange standard is a resuscitation of a condemned plan. On the
other hand, it has sought to inspire confidence in that standard
by holding out§
“that the present Indian system has close affinities with
other currency systems in some of the great European countries
and elsewhere ……”
* The danger involved in this indefinite liability to issue rupee currency was
recognized by the Smith Currency Committee of 1919, which recommended that
this obligation should be withdrawn. See Report, par. 68. Of course its motive
was different.
† Report, par. 132.
‡Currency and Credit, 1919, p. 341.
§ Report, par. 46.
To get an idea as to what these affinities are, or rather were, we

must look into Chapter II of Mr. Keynes’s interesting treatise on
Indian Currency and Finance. In that treatise of his, Mr. Keynes
has attempted to show that there is a fundamental likeness
between the operations of the Indian currency system and the
operations as they used to be of the central banks of some of
the important countries of Europe. He found that it used to be
the practice of these banks to hold foreign bills of exchange for
the purpose of making remittances to foreign countries. Between
the selling of such foreign bills and selling of reverse councils
by the Government of India he observed a close fundamental
likeness, inasmuch as both involved
“the use of a local currency mainly not of gold, some
degree of unwillingness to supply gold locally in exchange
for the local currency, but a high degree of willingness to sell
foreign exchange for payment in local currency at a certain
maximum rate.”*
But, as Prof. Kemmerer points out.† it is difficult to see
what likeness there is between the Government of India selling
reverse councils and the European banks holding foreign bills.
Far from being alike, the two practices must be regarded as the
opposite of each other. In selling reverse councils
“the Government sells drafts against its foreign gold
credit (i.e. its gold reserve), when money at home is relatively
redundant, as evidenced by exchange having reached the gold
export point. Thereby it relieves the redundancy through the
withdrawing from circulation and locking up the local money
received in payment for the drafts. Under the practice of
holding foreign bills to protect the money market, the central
bank sells its foreign bills, when money at home is relatively
scarce, as means of securing gold for importation or preventing
its exportation. In the former case, the sale of drafts takes the
place of an exportation of gold, and the resulting withdrawal
of local money from circulation is in essentials an exportation ;
in the latter case the sale of the drafts abroad is part of a
process for securing gold for importation, or for preventing
its exportation.”
The Indian currency system therefore bears no analogy to
the European currency systems, as Mr. Keynes would have us
believe. But if a parallel is needed, then the true parallel to the
* Kenynes, Indian Currency and Finance, p. 29.
† Cf. his review of Keynes in the Quarterly Journal of Economics, February,
1914, p.
Indian system of currency is that system which prevailed in

England during the Bank Suspension period (1797-1821). The
fundamental likeness between the two systems becomes quite
unmistakable if we keep aside for the moment the remittance
operations of the Government of India and the Secretary of
State, which becloud the true features of the Indian currency
system. If we tear this veil and take a close view, the following
appear to be the prominent features of the Indian system :—
(1) The gold sovereign is full legal tender.
(2) The silver rupee is also full legal tender.
(3) The Government undertakes to give rupees for
sovereigns, but does not undertake to give sovereigns
for rupees, i.e. the rupee is an inconvertible currency
unlimited in issue.
Turning to the English system of currency during the period
of the Bank Suspension, we find :—
(1) The gold sovereign was full legal tender.
(2) The paper notes of the Bank of England circulated as
money of general acceptability by common custom if
not by law.*
(3) The Bank of England undertook to give notes for gold
or mercantile bills or any other kind of good equivalent,
but did not give gold for notes, i.e. the notes formed an
inconvertible currency unlimited in issue.
Only in one respect can the analogy be said to be imperfect.
The Indian Government has undertaken—not, be it noted,
as a statutory obligation, but merely as a matter subject
to the will of the executive, to convert the rupee into gold
at a fixed rate for foreign remittances if the exchange falls
below par. This, it must be allowed, the bank of England did
not do during the suspension period. Everything, therefore,
turns upon the question whether this much convertibility
is a sufficient distinction to mark off the Indian currency
from the English currency of the suspension period into a
separate category and invalidate the analogy herein said
to exist between the two systems. To be able to decide one
way or the other we must firmly grasp what is the true
import of convertibility. Prejudice against an inconvertible
currency is so strong that people are easily satisfied with
a system which provides some kind of convertibility,
however small. But to assume this attitude is to trifle with
* Cf. Andreades, History of the Bank of England, p. 198.
a very crucial question. We must keep clear in our mind

what it is that essentially marks off a convertible from an
incovertible currency. The distinction commonly drawn,
that the one is an automatic and the other is a managed
currency, must be discarded as a gross error. For, if by a
managed currency we mean a currency the issue of which
depends upon the discretion of the issuer, then a convertible
currency is as much a managed currency as an inconvertible
currency is. The only point of contrast lies in the fact that
in the management of a convertible currency the discretion
as to issue is regulated, while in an inconvertible currency
it is unregulated. But even if regulated the issue remains
discretionary and to that extent a convertible currency is
not so safe as to mark it off from an inconvertible currency.
The enlargement of its issue being discretionary and the
effect of such issues being to drive specie out of circulation,
a convertible currency may easily become inconvertible.
The difference between a convertible and an inconvertible
currency is therefore ultimately a distinction between a
prudent and an imprudent management of the right to
issue currency. In other words, convertibility is a brake on
the power of issue. Bearing this in mind, and also the fact
that a convertible currency by reason of mismanagement
has the tendency to become inconvertible, it is possible for
us to imagine how severe must be the obligations as to
convertibility in order to prevent prudent management of
currency from degenerating into an imprudent management
resulting in over-issue. If, therefore, it is true that in
countries having a convertible currency the affairs were so
prudently managed that when specie left the country the
paper money not only did not increase to take its place,
but actually diminished, and that usually by a greater
absolute amount than the gold currency, it was because
the obligations as to convertibility were those of “effective
absolute immediate convertibility.”* We can now appreciate
why Prof. Sumner said† that
“convertibility in the currency is like conscientiousness
in a man : it has many grades and is valuable in proportion
as it is strict and pure.”
* “No single word can convey the full meaning,” says Prof. Nicholson, War
Finance, 2nd ed., 1918, p. 36.
† A History of American Currency, New York, 1874, p. 116.
That being so, it would be foolish to assume that we are

immune from the consequences of an inconvertible currency
until we know what is the grade of the convertibility that is
provided. Now, what is the character of the convertibility of
the rupee in India ? It is a deferred, delegalized, delocalized,
and therefore a devitalized kind of convertibility. Indeed,
really speaking it is not a convertibility, but rather it is a
moratorium which is a negation of convertibility, for what does
the provision for convertibility for foreign remittances mean in
practice ? It simply means that until a fall of exchange takes
place there is a moratorium or inconvertibility in respect of
the rupee. Not only is there a moratorium as long as exchange
does not fall, but there is no guarantee that the moratorium
will be lifted when a fall does occur. It may not be lifted, for
it is a matter of conscience and not of law.* Is such a grade
of convertibility, if one has a predilection for that term, very
far removed from the inconvertibility of the bank notes during
the suspension period ? Let those who will say so. For a person
not endowed with high and subtle imagination the distinction
between such a convertibility and absolute inconvertibility is
too thin to persuade him that the two systems are radically
different; indeed, when we come to analyse the problem of
prices in India and outside India we shall find another piece
of evidence to show that they are not different, and that the
analogy between the two is perfect enough for all practical
purposes.
* The Finance Member of the Viceroy’s Council, in his Financial Statement

for 1908-09 (p. 23, italics not in the original), observed :— “Had we complied with
the demand for issues [of gold] without limit, the whole available supply might
have been drawn off in a few weeks …… For these reasons we decided to stand
by our legal rights. ...We are not bound to give sovereigns in exchange for rupees
except at our own convenience. The currency offices were accordingly instructed
not to issue gold in larger quantities than £ 10,000 to any individual on any one
day.” These words were used to explain the attitude of the Government regarding
its sense of obligation as to convertibility of the rupee in the exchange crisis of
1907 ! The degree of convertibility being a matter of administrative discretion it
is difficult to define the extent to which it is given effect to in practice. Official
evidence is inclined to impress upon the public that practically the rupee is
convertible. If that is so, why not make it legally convertible. For, if convertibility
is complete in practice a legal convertibility cannot impose upon the Government
greater obligations than what the official evidence suggests the Government to
be actually assuming. It is said that Government does not do so because it is
afraid that exchange speculators will take advantage of it. But why should they
not ? Are they not holders of rupees ? It does not, however, appear to have been
adequately realized that this defence implies that the currency is issued so much
beyond the point of the “saturation” that its value is always, on the margin of
being affected by an element of speculation.
It may, however, he said that an inconvertible currency may

be so well managed as not to give rise to a premium on gold,
so that there may be little to choose between it and a perfectly
convertible currency. But whether an inconvertible currency will
be so well managed is a question of practical working. Again,
whether the absence of premium on gold suffices to place an
inconvertible currency on par with a convertible currency, so far
as the price problem is concerned, is also a matter depending
on circumstances. All these questions will be considered in their
proper places.* What we are considering at this stage are the
inherent potentialities of an inconvertible currency. Suffice it
to say here that the name Gold Exchange Standard cannot
conceal the true nature of the Indian Monetary Standard. Its
essence consists in the fact that although gold is unlimited
legal tender there is alongside an unlimited issue of another
form of fiduciary currency well-nigh inconvertible, and also
possessing the quality of unlimited legal tender.
It needs no acute power of penetration to see that, so
interpreted, the existing currency system in India is the
opposite of the system outlined by the Government in 1898
and passed by the Fowler Committee. The two are opposites
of each other for the same reason for which the Bank Charter
Act was the opposite of the Bank Suspension Act in England.
Under both the Acts the currency in England was a mixed
currency, partly gold and partly paper. The difference was that
by the Bank Suspension Act the issue of gold became limited
and that of paper unlimited, while under the Bank Charter Act
the process was reversed, so that the issue of paper became
limited and that of gold unlimited. In the same manner, under
the original scheme of the Government of India, the issue of
rupees was to be limited and that of gold unlimited. Under
the existing system the issue of gold has become limited while
that of rupee has become unlimited.
Was this an improvement on the plan originally contemplated
by the Government of India ? The only objection to that plan
was that it made the rupee an inconvertible rupee.† But is
* For reasons giving rise to a premium on gold in terms of the rupee, see
Chap. VI. For reasons explaining how there can be a general depreciation of the
rupee without there being a specific depreciation of it in terms of gold, see end
of Chap. VI and beginning of Chap. VII.
† Both Lindsay and Probyn had attacked the plan of the Government of India
on this score, and had claimed that their plans were superior because they had
at least provided some sort of convertibility.
convertibility such a necessary condition, and, if so, when ? The

idea that convertibility is necessary to maintain the value of
a currency is, on the face of it, a preposterous idea. No one
wants the conversion of bananas into apples to maintain the
value of bananas. Bananas maintain their value by reason of
the fact that there is a demand for them and their supply is
limited. There is no reason to suppose that currency forms an
exception to this rule. Only we are more concerned to maintain
the value of currency at a stable level than we are of bananas
because currency forms a common measure of value. What
is wanted to maintain the value of currency, or of any other
thing for the matter of that, is an effective limit on its supply.
Convertibility is useful, not because it directly maintains the
value of a currency, which is nonsense, but because it has
the effect of putting a limit on the supply of currency. But
convertibility is not the only way of achieving that object. A
plan which lays down an absolute limit on issue has the same
effect—indeed, a far more powerful effect—on the supply of
currency. Now, had the Mints remained entirely closed to the
coinage of rupees there would have been placed an absolute limit
on the issue of currency, and all the purposes of convertibility
would have been served by such an inconvertible rupee. Nay,
more ; such an inconvertible rupee currency would have been
infinitely superior* to the kind of pseudo-convertible rupee
which we have in India to-day.* With an absolute limit there
could have been no danger of a fall in the value of the rupee.
If anything there would have been a danger of an indefinite
appreciation of the rupee, but that was efectually guarded
against by gold having been made general legal tender. A
second effect of an absolute limit on the currency would have
been to free it from management by reason of the fact that
all question regarding the volume of issues had been settled
once for all.
In these respects, therefore, the gold-exchange standard is
an impairment of the original plan of an inconvertible rupee
with fixed limit of issue supplemented by gold. Again, from the
standpoint of controlling the price-level, the exchange standard
cannot be said to have been an improvement on the original
plan. Of course, it is possible to say that such a perversion of
the original system is no matter for regret. Whether gold is a
standard of value, or whether fiduciary money is a standard of
* In his comparison of the Limping Standard with the Exchange Standard,
Prof. Fisher seems entirely to overlook these considerations. Cf. his Purchasing
Power, etc., 1911, pp. 131-32.
value, is a matter of infifference, for neither can be said

to have furnished a stable standard of value. A gold
standard has proved to be as unstable as a paper standard,
because both are susceptible of contraction as well as
expansion. All this, no doubt, is true. Nevertheless it is to
be noted that in any monetary system there is no danger
of indefinite contraction.* What is to be guarded against
is the possibility of indefinite expansion. The possibility of
indefinite expansion, however, varies with the nature of
money. When the standard of value is standard metallic
money the expansion cannot be very great, for the cost of
production acts as a sufficient limiting influence. When a
standard of value is a convertible paper money the provisions
as to reserve act as a check on its expansion. But when a
standard of value consists of a money the value of which is
greater than its cost and is inconvertible, the currency must
be said to be fraught with the fatal facility of indefinite
expansion, which is another name for depreciation or rise of
prices. It cannot, therefore, be said that the Bank Charter
Act made no improvement on the Bank Restriction Act.
Indeed, it was a great improvement, for it substituted a
currency less liable to expansion in place of a currency
far more liable to expansion. Now the rupee is a debased
coin.† inconvertible, and is unlimited legal tender. As such,
it belongs to that order of money which has inherent in it
the potentiality of idenfinite expansion, i.e. depreciation
and rise of prices. As a safeguard against this the better
plan was no doubt the one originally designed, namely of
putting a limit on the issue of rupees, so as to make the
Indian currency system analogous to the English system
governed by the Bank Charter Act of 1844.
* Cf. Hawtrey, R. G., op. cit., Chap. I.
† It is difficult to understand why some writers on Indian currency do not
like to admit this fact. Cf. the discussion on Mr. Madan’s paper at the annual
meeting of the Indian Economic Association (Indian Journal of Economics, Vol.
III, Part 4, Serial No. 12, p. 560). It is true the debasement of the rupee is not so
obvious as it would have been had it taken the form of continuing the weight and
making it baser, or of preserving the same fineness and making it lighter. But,
as Harris points out in his Essay upon Money and Coins (Part II, Chap. I, par.
8), the “altering the denominations of the coins, without making any alteration at
the Mint or in the coins themselves,” “as supposing ninepence, or as much silver
as there is in ninepence, should be called a shilling,” is a mode of debasement
not different from that of the rupee, and is virtually the same as the other two
modes of debasement. So viewed it is difficult to avoid the conclusion that the
rupee is a debased coin.
If there is any force in the line of reasoning adopted above,

then it is not easy to agree with the opinion entertained by the
Chamberlain Commission of the Exchange Standard. Indeed,
it raises a query whether for all that the Commission said
there is not somewhere some weakness in the system likely to
bring about its breakdown. It therefore becomes incumbent to
examine the foundations of that standard from a fresh point
of view.

CHAPTER VI
STABILITY OF THE EXCHANGE STANDARD
It will be recalled that at the time the Indian Mints were

closed to the free coinage of silver there were two parties in
the country, one in favour of and the other opposed to the
closure. Being placed in an embarrassing position by the
fall of the rupee, the Government of the day was anxious to
close the Mints and raise its value with a view to obtaining
relief from the burden of its gold payments. On the other
hand it was urged, on behalf of the producing interest of
the country, that a rise in the exchange value of the rupee
would cause a disaster to Indian trade and industry. One
of the reasons, it was argued, why Indian industry had
advanced by such leaps and bounds as it did during the
period of 1873-1893 was to be found in the bounty given
to the Indian export trade by the falling exchange. If the
fall of the rupee was arrested by the Mint closure, it was
feared that such an event was bound to cut Indian trade
both ways. It would give the silver-using countries a bounty
as over against India, and would deprive India of the bounty
which it obtained from the falling exchange as over against
gold-using countries.
Theory had already scoffed at these fears. It is therefore
interesting to see that later history has also confirmed the
verdict of theory. Indian trade with a gold-standard country
like England or a silver-standard country like China did not
suffer a setback, notwithstanding an arrest in the fall of the
rupee. The following figures furnish sufficient evidence to
support the contrary:—
TABLE XXV
TRADE OF INDIA WITH UNITED KINGDOM (BEFORE AND AFTER THE MINT CLOSURE)
Exports to U.K Imports from U.K.

Annual Average.
Bullion and Bullion and
Merchandise. Total. Merchandise. Total.
Specie. Specie.
£ £ £ £ £ £
I 1889-93 . . . . 31,569,891 1,180,646 32,750,537 31,837,482 7,694,149 39,531,631

MK
II 1894-98 . . . . 26,329,764 2,215,049 24,544,813 28,963,180 6,750,736 35,713,916
III 1899-1903 . . . . 28,709,819 2,089,656 30,799,475 33,498,480 7,301,172 40,799,652

SJ+YS
IV 1903-8 . . . . . 36,784,628 2,232,857 39,017,485 47,294,311 9,586,706 56,881,017
Percentage of Increase (+) or

Decrease (—) in—
Period II in comparison 1
—16.598 +87.613 —25,055 —9.028 —12.261 —9.657
with Period I
Period III in comparison with

+ 9.039 —5.661 +25.483 + 15.659 + 8.154 + 14.240
25-9-2013/YS-11-11-2013
Period II
Period IV in comparison with

+28.126 + 6.853 +26.682 +41.183 +31.304 + 39.415
Period III
Period IV in comparison with

+ 16.518 +89.122 + 19.135 +48.549 +24.597 + 43.887
Period I
503
503
TABLE XXVI
504
TRADE OF INDIA WITH CHINA
Exports to China. Imports from China.

Annual Average.
Merchandise. Treasure. Total. Merchandise. Treasure. Total.
£ £ £ £ £ £
I 1889-93 . . . . 9,454,014 20,223 9,474,238 1,666,840 1,992,914 3,659,754

MK
II 1893-98 . . . . 8,509,284 112,105 8,621,389 1,713,529 503,357 2,216,886
III 1898-1903 . . . . 9,679,830 183,647 9,863,477 1,309,975 798’,053 2,108,028
IV 1903-8— . . . . . 12,461,535 160,879 12,622,414 1,248,822 919,402 2,168,224

SJ+YS
Percentage of Increase (+) or

Decrease (—) in—
Period II in comparison with —9.993 + 454.333 —9.002 + 2.801 —74.743 —39.425

Period I
Period III in comparison with + 13.756 + 63.817 + 14.407 —23.551 +58.546 —4.910
Period II
25-9-2013/YS-11-11-2013
Period IV in comparison with +28.737 —12.398 +27.971 —4.668 + 15.206 + 2.856

Period III
Period IV in comparison with +31.812 +695.508 +33.229 —25.078 —53.866 —40.755

Period I
504
STABILITY OF THE EXCHANGE STANDARD 505
That the arrest in the fall of the rupee should have lifted
the burden from Indian finances was just as was expected to
follow from the closure of the Mints. Notwithstanding important
reductions in taxation and large expenditure of social utility,
the annual budgets since the mint closure have shown few
deficits (see p. 506).
Now there is a tendency among some writers to interpret
these facts as unmistakable proofs of the soundness of the
currency system. It is argued that if the trade of the country
has not received a setback,* and if the finances of the country
have improved,† then the implication is that the currency of
which such results can be predicated must be good. It is not
necessary to warn students of currency that such easy views
on the soundness of the currency system, however plausible,
are devoid of the logic necessary to carry conviction. Trade no
doubt is dependent on good money, but the growth of trade
is not a conclusive proof that the money is good. It should be
noted that during the periods of debased coinages so common
at one time the social misery and nuisance arising therefrom
were intolerable, yet during the same periods it was possible
for countries to make great advance in trade. Speaking of
seventeenth-century England, when that country was afflicted
with debased and constantly changing coinage and when there
was, besides, a long period of civil war and confusion, Lord
Liverpool, who was above all statemen of his day most alive
to the evils of a bad currency, remarks :—
“It is certain, however, that during the whole of
this period, when our coins were in so great a state of
confusion, the commerce of the kingdom was progressively
improving, and the balance of trade almost always in
favour of this country.”‡
That commerce can increase even when currency is bad is
easily supported from the experience of India herself. In no
period did Indian trade make such strides as it did between
1873 and 1893. Was the Indian currency of that period good ?
On the other hand, it is possible to hold that if trade is good it
may be because the currency is bad. The trade of India between
1873 and 1893 flourished because it received a bounty. But the
bounty was a mulcting of the Indian labourer, whose wages did
not rise as fast as prices, so that the Indian prosperity of that
* Keynes, op. cit., p. 3.
† Barbour, D., The Standard of Value, p. 224.
‡ A Treatise on the Coins of the Realm (reprint of 1880), p. 135.
TABLE XXVII
506
FINANCES OF THE GOVERNMENT
Surplus + Surplus + Surplus + Surplus + Surplus +

Years. Years. Years. Years. Years.
Deficit — Deficit — Deficit — Deficit — Deficit —
Rs £ £ £ £
MK
1893-94 —1,546,998 1898-9 + 2,640,873 1903-4 + 2,996,400 1908-9 —3,737,710 1913-14 + 2,312,423
SJ+YS
1894-95 + 693,110 1899-1900 + 2,774,623 1904-5 + 3,456,066 1909-10 + 606,641 1914-15 -1,785,270
1895-96 + 1,533,998 1900-1 + 1,670,204 1905-6 + 2,091,854 1910-11 +3,936,287 1915-16 -1,188,661
25-9-2013/YS-11-11-2013
1896-97 —1,705,022 1901-2 + 4,950,243 1906-7 + 1,589,340 1911-12 + 3,940,334 1916-17 + 7,478,170
1897-98 —5,359,211 1902-3 + 3,069,549 1907-8 + 300,615 1912-13 + 3,107,634 — —

506
period was founded not upon production, but upon depredation

made possible by the inflation of currency.
Similarly it cannot be granted without reserve that the
new currency system must be good because it has obviated
the burden of the gold payments and given relief to the Indian
taxpayer. Such a view involves a misconception of the precise
source of the burden of India’s gold payments during the period
of falling exchange. It has been widely held that the burden of
gold payments was caused by the fall in the gold value of silver,
a view which carried with it the necessary implication that if
India had been a gold-standard country she would have escaped
that heavy burden. That it is an erroneous view hardly needs
demonstration.* It is not to be denied that India bore an extra
burden arising from the increased value of the gold payments.
But what is not sufficiently realized is that it was a burden which
weighed on all gold debtors irrespective of the question whether
their standard was gold or silver. In this respect the position of
a gold-standard country like Australia was not different from a
silver-standard country like India. In so far as they were gold
debtors they suffered each in the same way from the same cause,
namely the appreciation of the standard in which their debts
were measured. The fact that one discharged her debts in gold
and the other in Silver made no difference in their condition,
except that the use of silver by India to discharge her debts
served as a refractory medium through which it was possible
to see the magnitude of the burden she bore. The fall of silver
measured and not caused the burden of India’s gold payments.
The arrest in the fall of the rupee cannot be accepted as a prima
facie proof of a relief to the taxpayer and therefore an evidence
of the soundness of the currency system. It is possible that the
benefit may have been too dearly paid for.
Although favourably impressed by the increase of trade
and the buoyancy of Government finances under the exchange
standard, the Chamberlain Commission did not care to found
its case for it on the basis of such arguments. The chief ground
on which it rested was that the currency system was capable of
maintaining the exchange value of the rupee at a fixed par with
gold.† We must therefore proceed to examine this claim made
by the Commission on behalf of the exchange standard. The
table No. XXVIII presents the requisite data for an elucidation
of the question.
* Cf. evidence of Prof. Marshall before the Gold and Silver Commission, 1886
Q. 10,140-50.
† Report, pp. 18 and 20.
TABLE XXVIII
508
Gold Value of the Rupee

As expressed in Terms of Gold.
As expressed in Terms of Foreign Exchange
(1) (2)
Bates on
Rupee Price of Sovereigns. Rupee Price of Bar Gold
London. Par R. = ls. 4d. Years.
Par Rs. 15 = 1 Sovereign. Par Tola = Rs. 23-14-4.
Years. Highest. Lowest. Highest. Lowest. Highest. Lowest.
s. d. s. d. Rs. A. P. Rs. A. P. Rs. A. P. Rs. A. P.
1892-93 1 3.969 1 2.625 1893 16 10 6 15 6 0 26 11 0 24 14 0

1893-94 1 4.031 1 1.500 1894 19 0 0 16 1 0 32 4 0 25 9 0
MK
1894-95 1 1.906 1 0.000 1895 19 5 0 18 2 6 30 8 0 27 6 0

1895-96 1 2.875 1 1.000 1896 17 7 0 16 1 0 27 13 6 27 2 0
1896-97 1 3.842 1 1.781 1897 16 10 0 15 3 0 26 12 6 25 4 0
1897-98 1 4.125 1 2.250 1898 15 7 0 15 1 0 24 10 0 24 0 0
1898-99 1 4.156 1 3.094 1899 15 4 0 15 0 0 24 2 0 23 4 0
SJ+YS
1899-1900 1 4.375 1 3.875 1900 15 1 3 15 0 0 24 2 0 23 15 6

1900-1901 1 4.156 1 3.875 1901 15 0 0 15 0 0 24 2 0 24 0 0
1901-1902 1 4.125 1 3.875 1902 15 4 6 15 2 6 24 2 6 24 0 0
1902-1903 1 4.156 1 3.875 1903 15 3 0 15 1 6 24 3 0 24 0 0
1903-1904 1 4.156 1 3.875 1904 15 5 0 15 1 3 24 2 0 24 0 3
1904-1905 1 4.156 1 3.970 1905 15 4 0 15 1 6 24 2 0 24 0 0
1905-1906 1 4.156 1 3.937 1906 15 1 0 15 2 0 24 4 6 24 0 0
1906-1907 1 4.187 1 3.937 1907 15 4 0 15 0 0 24 4 0 23 15 6
1907-1908 1 4.187 1 3.875 1908 15 1 0 15 0 0 24 10 0 24 2 0
25-9-2013/YS-11-11-2013
1908-1909 1 4 1 3.875 1909 Premium between 12 and 3% 24 3 6 23 15 0

1909-1910 1 4.156 1 3.875 1910 15 5 0 15 0 0 24 4 0 23 15 0
1910-1911 1 4.156 1 3.87b 1911 15 0 0 15 0 0 24 0 6 23 14 0
1911-1912 1 4.156 1 3.937 1912 15 0 0 15 0 0 24 0 0 23 14 0

1912-1913 1 4.156 1 3.970 1913 15 0 0 15 0 0 24 0 3 —
1913-1914 1 4.156 1 3.937 1914 15 14 0 15 2 0 26 10 0 23 15 6
1914-1915 1 4.094 1 3.937 1915 15 13 6 15 5 0 25 14 0 24 8 0
508
Assuming, for the moment, the criterion laid down by the

Commission to be correct, can it be said from the data given above
that the rupee has maintained its gold value ? It would be over-
confident if not rash to say that the system, even from the narrow
point of view of the Commission, has been an unquestioned success.
Between June, 1893, and January, 1917, the rupee was rated
to gold at the rate of 1 rupee equal to 7.53344 troy grs. of fine
gold. At that rate the sovereign should be equal to 15 rupees, the
mint price of gold should be Rs. 23-14-4 per tola (i.e. 180 grs.) of
bar gold 100 touch, and the exchange on London should be 1s.
4d., and should have varied within 1s. 4.125 d., the import point,
and 1s. 3.906 d., the export point, for gold.
Taking a general survey of the stability of the rupee with
regard to its value in terms of gold, it will be noticed that from
the date of the Mint closure up to 1898 the rupee was far below
par. The depreciation of the rupee, measured in terms of exchange
or price of gold or sovereign, ranged somewhere between 25 to
30 per cent. So great was the depreciation that it redoubled the
difficulties confronting the Government when the rupee was not
fixed to gold. The financing the Home Treasury by the usual
means of selling Council Bills became well-nigh impossible.* The
Secretary of State found himself in an embarrassing position.
Offering to sell below par involved the obloquy of having led the
way to the defeat of the policy of stabilizing exchange. Refusing
to sell at market rates involved the danger of a dry Treasury.
The Government of India suggested that the Secretary should
lay down a minimum rate for or a maximum amount of the bills
that he put upon the market. The Secretary of State agreed to
neither, but consented to reduce his drawings so as not to unduly
depress the exchange rate. The drawings of the secretary of State
during the first fiscal year since the Mint closure have been the
smallest on record :—
TABLE XXIX
Council Drawings
Amount of Drawings Rate at which drawn
Date of drawing
£ 1,000 omitted (Pence per Rupee)
1893. June ... 2,478 15.039
July ... 25 15.974
August ... 78 15.243
September ... 7 15.350
October ... 5 15.334
November ... 617 15.251
December ... 14 15.242
1894. January ... 98 14.408
February ... 1,023 13.787
March ... 1,915 13.870
April ... 1,368 13.626
* See Commons Paper 7 of 1894, East India (Currency and Sale of Bills).
The curtailment of drawings to save the rate of exchange

from being lowered was not an unmitigated good, for it imposed
the necessity of a resort to the by no means inexpensive method
of sterling borrowings to finance the Home Treasury.* The
remittances by drawings fell short of the net disbursements
of the Home Treasury in 1893-94 by £6,588,000, which deficit
was met by permanent sterling borrowings to the extent
of £7,430,000, the interest on which added to the already
overheavy burden of the gold payments. Rather than incur
such a penalty the Secretary of State gave up the attempt to
dominate the market and preferred to follow it. But this let-
go policy was not without its cost. The drop in the exchange
below 1s. 4d. added to the burden of remittances to the Home
Treasury, and also compelled the Government to grant exchange
compensation allowance to its European officers, civil and
military—an aid which it had so far withheld. The cost to the
Government involved by the fall of the rupee below par was
quite a considerable sum.†
TABLE XXX
Cost of the Fall of the Rupee
Total on all Counts for
Loss on Loss by three Years
Loss by Total on
Council Increase of
Exchange each
Years Bills Pay of
Compensation Account in In Sterling
being sold British In Rupees
Allowance each Year at 1s. 4d.
below par Troops
Rs. £
1894-95 ... 3,74,15,000 78,02,000 37,84,000 4,90,01,000
1895-96 ... 3,05,91,000 87,18,000 49,38,000 4,42,47,000 11,91,86,000 7,945,733
1896-97 ... 1,66,48,000 48,95,000 44,25,000 2,59,38,000
In the midst of such a situation it is no wonder if the

faith of the Government in the ultimate stability of the
rupee had given way, for we find that in October, 1896, the
Financial Member of the Council had personally come to the
conclusion that it would be better in the interest of stability
to substitute 15d. for 16d. as the par of exchange between
the rupee and gold.‡ But the suggestion was dropped as the
rupee showed signs of reaching the gold par, which it did in
January, 1898, after a period of full five years of depreciation
from the established par.
* Evidence of Sir H. Waterfield before the Fowler Committee, Q. 4,332-39.
† Evidence of Hon. A. Arthur before the Fowler Committee. Q. 1,806-7.
‡ Cf. Shirras, Indian Finance and Banking, p. 168.
Between January, 1898, and January, 1917, twice did

the rupee fall below its gold par. The year 1907-8 records
the second occasion when the parity of the rupee under the
exchange standard broke down. The actual rates of exchange
prevailing in the market were as follows:—
TABLE XXXI
RATES OF EXCHANGE, LONDON ON INDIA (FROM “THE TIMES”)
Par R. = 1s. 4d.
On Calcutta On Bombay
Date
Highest Lowest Highest Lowest
1907. September ... 1 41/32 1 331/32 1 41/32 1 331/32
October ... 1 4 /32
1
1 3 /32
31
1 4 /32
1
1 331/32
November ... 1 4 1 325/32 1 331/32 1 323/32
December ... 1 315/16 1 327/32 1 315/16 1 327/32
1908. January ... 1 3 /16
15
1 3 /32
29
1 3 /16
15
1 37/8
February ... 1 331/32 1 37/8 1 331/32 1 37/8
March ... 1 3 /32
29
1 3 /32
27
1 3 /32
29
1 327/32
April ... 1 37/8 1 327/32 1 327/32 1 327/32
May ... 1 37/8 1 327/32 1 315/16 1 327/32

June ... 1 329/32 1 327/32 1 37/8 1 327/32
July ... 1 3 /8
7
1 3 /32
27
1 3 /8
7
1 327/32
August ... 1 329/32 1 327/32 1 329/32 1 327/32
September ... 1 331/32 1 329/32 1 331/32 1 37/8
October ... 1 3 /16
15
1 3 /8
7
1 3 /32
29
1 315/16
November ... 1 329/32 1 37/8 1 37/8 1 37/8
December ... 1 3 /16
15
1 3 /32
29
1 3 /32
31
1 37/8
After a crisis lasting over a year the rupee recovered to

its old gold par and remained fixed at it, though by no means
firmly, for another seven years, only to suffer another fall
from its parity during the year 1914-15 (see table, p. XXXII).
After 1916 the stability of the exchange standard was
threatened by a danger arising from quite unsuspected quarters.
The Indian exchange standard was based upon the view that the
gold value of silver was bound to fall or at least not likely to
rise to a level at which the intrinsic value of the rupee became
, higher than its nominal value. The price of silver at which the
intrinsic value of the rupee equalled its nominal value was 43d.
per ounce. So long as the intrinsic value of the rupee remained
TABLE XXXII
RATES OF EXCHANBE, LONDON ON CALCUTTA (FROM THE
NATIONAL BANK OF INDIA)

1914 1915
Month
Highest Lowest Highest Lowest
January ... ... ... 1 3 /16
15
1 315/16
February ... ... ... 1 41/32 1 339/32
March ... ... ... 1 4 1 315/16
April ... ... ... 1 315/16 1 329/32
May ... 1 4¼ 1 315/16 1 315/16 1 37/8
June ... 1 331/32 1 315/16 1 37/8 1 327/32
July ... 1 3 /32
31
1 3 /16
13
1 3 /32
22
1 323/32
August ... 1 37/8 1 313/16 1 315/16 1 327/32
September ... 1 315/16 1 313/16 1 4 1 315/16
October ... 1 3 /16
15
1 3 /16
15
... ...
November ... 1 3 /16
15
1 3 /16
15
... ...
December ... 1 3 /16
15
1 3 /16
15
... ...
below its nominal value, i.e. the price of silver did not rise
above 43d., there was no danger of the rupee circulating as
currency. Once the price of silver rose above that point the
danger of the rupee passing from currency to the melting-
pot was imminent. Now, with the exception of a brief period
from September, 1904, to December, 1907, the gold price of
silver had since 1872 showed a marked tendency to fall. The
decline in its price was so continuous and so steady as to
create the general impression that the low price had come
to stay. Indeed, so firm was the impression that the framers
of the exchange standard had never taken into account the
contingency of a rise in the price of silver above 43d. So little
was it anticipated, that the system was not criticized on
this ground by any of the witnesses who deposed before the
successive Committees and Commission on Indian currency.
But the unexpected may happen, and unfortunately did happen
after 1916, and happened suddently. On February 10, 1914,
the cash price in London of silver per ounce of standard
fineness was 26 5/8d. It fell to 22 11/16d. on February 10,
1915, and though it jumped to 27d. on the same date in
1916, yet it was below the rupee melting-point. After the last-
mentioned date its rise was meteoric. On February 9, 1917, it
rose to 37 5/8 d.; on February 8, 1918, to 43d.; and on the

same date in 1919 to 48 7/16d., thereby quite overshooting the
rupee melting-point. But the price of silver broke all record
when on February 11, 1920, it reached the colossal figure of
89 ½d. per standard ounce.
The rise in the intrinsic value of the rupee above the
nominal value at once raised a problem as to how the rupee
could be preserved in circulation. Two ways seemed open
for the solution of the problem. One was to scale down the
fineness of the rupee, and the other to raise its gold parity.
All other countries which had been confronted by a similar
problem adopted the former method of dealing with their
silver coinage—a method which was successfully tried in the
Philippines and the Straits Settlements and Mexico in 1904-7,
when a rise in those years in the price of silver had created
a similar problem in those countries.* The Secretary of State
for India adopted the second course of action and kept on
altering the rupee par with every rise in the price of silver.
The alterations of the rupee par following upon the variations
in the price of silver are given below:—
TABLE XXXIII
Date of Alteration of the Rupee Par. Pitch of the Par.
s. d.
January 3, 1917 ... ... ... ... 1 4¼
August 28, 1917 ... ... ... ... 1 5
April 12, 1918 ... ... ... ... 1 6
May 13, 1919 ... ... ... ... 1 8
August 12, 1919 ... ... ... ... 1 10
September 15, 1919 ... ... ... ... 2 0
November 22, 1919 ... ... ... ... 2 2
December 12, 1919 ... ... ... ... 2 4
After having played with the rupee par, for two years, in
this manner, as though such alterations involved no social
consequences, the Secretary of State, on May 30, 1919,
appointed a new Currency Committee under the chairmanship
of Babing-ton Smith, to recommend measures “to ensure a
stable gold exchange standard.” The majority of the Committee,
after half a year of cogitation, reported to the effect† that
* Cf. E. W. Kemmerer, Modem Currency Reforms, 1916, pp. 349-354, 445-49,
and 535-47.
† See Report, P.P.Cd. 527 of 1920, par. 59.
“(i) The object should be to restore stability to the rupee, and to

re-establish the automatic working of the currency system
at as early a date as practicable.
“(ii) The stable relation to be established should be with gold
and not with sterling.
“(iii) The gold equivalent of the rupee should be sufficiently high
to give assurance, so far as is practicable, that the rupee,
while retaining its present weight and fineness, will remain
a token coin, or in other words, that the bullion value of
the silver it contains will not exceed its exchange value.
“After most careful consideration” (the Committee
said) “we are unanimous (with the exception of one of our
members who signs a separate report) in recommending
that the stable relation to be established between the
rupee and gold should be at the rate of one rupee to
11.30016 grs. of fine gold both for foreign exchange and
internal circulation.” i.e. the rupee to be equal to 2s.
(gold).
The minority report, which harped on the old cry of a
stimulus of low exchange and penalty of high exchange,
stood out for the maintenance of the old rate of 15 rupees
to the gold sovereign or 113.0016 grs. troy of pure gold, and
recommended the issue of a two-rupee silver coin of reduced
fineness compared with the old rupee, so long as the price
of silver in New York was over 92 cents.*
By the announcements of February 2, 1920, the
recommendations of the majority of the Committee were
accepted by the Secretary of State and also by the Government
of India, which abandoned the old parity of 7.53344 grs. per
rupee for the new parity of 11.30016 grs. troy. Now, has the
rupee maintained its new parity with gold ?
In the matter of ascertaining this fact the exchange
quotation on London is no guide, for the value of the rupee
was 2s. gold and not 2s. sterling. Had gold and sterling
been identical the case would have been otherwise. But
during the war, owing to the issue of virtually inconvertible
money, the pound sterling had depreciated in terms of
gold. We must therefore take as our standard a currency
which had kept its par with gold. Such a currency
was the American dollar, and the exchange quotation
* Report, p. 41.
on New York is therefore more directly helpful in measuring

the gold value of the rupee than is the sterling quotation on
London. We can also employ the actual rupee-sterling quotation
as a measure by comparing it with the amount of sterling the
rupee should have purchased, as an equivalent of 11.30016
grs. of fine gold, when corrected by the prevailing cross-rate
between New York and London.*
Compared with the par of exchange, the actual exchange,
either on New York or on London, indicates a fall of the rupee
which is simply staggering (See table XXXIV).
Consider, along with the external gold value of the rupee,
its internal value in terms of sovereigns and bar gold (see
table XXXV).
The tables need no comment. The rupee is not only far
away from 2s. (gold), but is not even 1s. 4d. (sterling).
Do not the facts furnish an incontrovertible proof of the
futility of the exchange standard ? How can a system which
fails to maintain its value in terms of gold, which it is supposed
to do, be regarded as a sound system of currency ? There must
be somewhere some weakness in the mechanism of a system
which is liable to such occasional breakdowns. The rupee fell
or rather was below par in 1893, and did not reach its parity
to any real degree of firmness until 1900. After an interval of
seven years the rupee again falls below par in 1907. The year
1914 witnesses another fall of the rupee. A meteoric rise since
1917, and again a fall after 1920. This curious phenomenon
naturally raises the question : Why did the rupee fail to
maintain its gold parity on these occasions ? A proper reply
to this question will reveal wherein lies the weakness of the
exchange standard.
* The formula for this computation is as follwos :—
if x pence = 1 rupee
= 11.30016 grs. fine gold,
2:3.22 grs. fine gold = 1 dollar
D dollars = 1 pound sterling
= 240 pence.
11.30016 × 240 11,680

Then x = pence.
23.22 × D D
Cf. Rushforth, F. V., The Indian Exchange Problem, 1921, p. 9.

TABLE XXXIV
516
ACTUAL GOLD VALUE OF THE RUPEE AND THE NEW PARITY IN TERMS OF FOREIGN EXCHANGES
New York on Bombay in cents. Bombay on London in s. d.
As in the
1920. 1921. 1922. 1920. 1921. 1922.
Middle of
the Month of— Par Actual Par Actual Par Actual Par Actual Par Actual Par Actual
Rate. Rate. Rate. Rate. Rate. Rate. Rate. Rate. Rate. Rate. Rate. Rate.
January . 0.4866 0.4400 0.4866 0.2925 0.4866 0.2800 2 7½ 2 35/8 2 75/16 1 55/8 2 35/8 1 31/13/6
MK
February . 0.4866 0.4850 0.4866 0.2800 0.4866 0.2845 2 103½ 2 91/8 2 51/13/6 1 41/8 2 27/32 1 39/16
March . . 0.4866 0.4850 0.4866 0.2625 0.4866 0.2787 2 72/39/2 2 53/4 2 53/31/2 1 31/4 2 22/39/2 1 35/16
April . . 0.4866 0.4775 0.4866 0.2625 0.4866 0.2785 2 2 2½ 1

SJ+YS
57/16 2 33/4 2 51/13/6 1 35/8 31/8
May . . . 0.4866 0.4325 0.4866 0.2675 0.4866 0.2930 2 61/39/2 2 21/8 2 57/32 1 31/2 2 2¼ 1 39/16
June . . 0.4866 0.4125 0.4866 0.2525 0.4866 0.2900 2 53/31/2 1 101/13/6 2 62/39/2 1 33/8 2 21/8 1 31/39/2
July . . . 0.4866 0.3900 0.4866 0.2400 0.4866 0.2900 2 53/31/2 1 81/16 2 89/32 1 3¼ 2 25/8 1 35/8
August . . 0.4866 0.3650 0.4866 0.2475 0.4866 0.2916 2 89/32 1 101/16 2 72/39/3 1 43/4 2 23/16 1 31/39/2
25-9-2013/YS-11-11-2013
September . 0.4868 0.3325 0.4866 0.2675 0.4866 0.2875 2 99/16 1 101/16 2 71/35/2 1 51/16 2 26/16 1 39/16
October . 0.4866 0.3025 0.4866 0.2825 0.4866 — 2 92/31/2 1 73/4 2 61/32 1 57/16 — —
November . 0.4866 0.3025 0.4866 0.2695 0.4866 — 2 109/16 1 71/8 2 51/36/2 1 41/8 — —
December . 0.4866 0.2650 0.4866 0.2775 0.4866 — 2 99/16 1 51/4 2 4 1 37/8 — —

516
TABLE XXXV
GOLD VALUE OF THE RUPEE AND THE NEW PARITY IN TERMS OF
THE PRICE OF SOVEREIGNS AND GOLD
1920 1921 1922
Price of
Price of Price of
Bar Price of
Price of Bar Gold Price of Bar Gold
Gold per British
Months British per Tola British per Tola
Tola Sovereigns
Sovereigns 100 Touch Sovereigns 100 touch
100 touch Par 10
Par 10 Rs. Par Rs. Par 10 Rs. Par Rs.
Par Rs. Rs.
= 1 Sov. 15-14-10 = 1 Sov. 15-14-10
15-14-10 = 1 Sov.
=1 Tola =1 Tola
= 1 Tola
Rs. A. P. Rs. A. P. Rs. A. p. Rs. A. P. Rs. A. p.
January ... Nominal 28 0 0 Nominal 17 14 0
Official Figures not yet

February ... ” 22 0 0 ” 17 14 0
Official Figures not yet

March ... ” 24 0 0 ” 17 14 0
April ... ” 24 8 0 18 12 0 ...
published
May ... ” 22 12 0 19 0 0 ...
published
June ... ” 22 4 0 19 12 0 ...
July ... ” 23 0 0 20 9 0 ...
August ... ” 21 8 0 20 9 0 ...
September ... ” 25 4 0 19 2 0 ...
October ... ” 27 6 0 18 14 0 ...
November ... ” 28 10 0 18 8 0 ...
December ... ” 27 12 0 18 6 0 ...
The only scientific explanation sufficient to account for
the fall of the rupee would be to say that the rupee had lost
its general purchasing power. It is an established proposition
that a currency or unit of account will be valued in terms of
another currency or unit of account for what it is worth, i.e.
for the goods which it will buy. To take a concrete example,
Englishmen and others value Indian rupees inasmuch and
in so far as those rupees will buy Indian goods. On the
other hand, Indians value English pounds (and other units
of account, for that matter) inasmuch and in so far as those
pounds will buy English goods. If rupees in India rise in
purchasing power (i.e. if the Indian prices level falls) while
pounds fall in purchasing power or remain stationery or rise
less rapidly (i.e. if the English price level rises relative to the
Indian price-level), fewer rupees would be worth as much as
pound, i.e. the exchange value of the rupee in terms of the
pound will rise. On the other hand, if rupees in India fall in
purchasing power (i.e. if the Indian price-level rises) while
pounds rise in purchasing power or remain stationary or fall
less rapidly (i.e. if the English price-level falls relative to the
Indian price-level), it will take more rupees to be worth as
much as a pound, i.e. the exchange value of the rupee in terms
of the pound will fall.
On the basis of this theory the real explanation for a fall

in the Indian exchange should be sought for in the movement
of the Indian price-level. Lest there be any doubt regarding
the validity of the proposition let us take each of the occasions
of the fall and find out whether or not the fall was coincident
with the fall in the purchasing power of the rupee.*
TABLE XXXVI
PERIOD I, 1890-99
Currency in Circulation +
Rupees Notes Index Number Index Number
of prices in of prices in
Years Amount in Index
India England
Crores of Number
1890-94=100 1890-94 = 100
Rs. 1890-94 = 100
(1) (2) (3) (4) (5)
1890 ... 120 92 113 104
1891 ... 131 100 106 105
1892 ... 141 108 100 99
1893 ... 132 101 96 99
1894 ... 129 99 85 93
1895 ... 132 101 89 90
1896 ... 127 97 99 89
1897 ... 125 96 120 90
1898 ... 122 93 109 91
1899 ... 131 100 108 94
TABLE XXXVII
PERIOD II, 1900-1908
Currency in Circulation Index Number Index Number
Rupees + Notes of prices in of prices in
Years
Amount in Index Number India England
Crores of Rs. 1890-94 = 100 1890-94 = 100 1890-94=100
(1) (2) (3) (4) (5)
1900 ... 134 103 126 103
1901 ... 150 115 120 98
1902 ... 143 109 115 96
1903 ... 147 113 111 97
1904 ... 152 116 110 100
1905 ... 164 126 120 100
1906 ... 185 142 134 107
1907 ... 190 145 138 113
1908 ... 181 139 147 104
* The figures for the following tables are taken, unless otherwise stated, from
the Report of the Price Inquiry Committee, Calcutta, 1914.
TABLE XXXVIII
PERIOD III, 1909-14*
Currency in Circulation
Index Number Index Number
Rupees + Notes
Years
India England
Amount in Index Number
1890-94 = 100 1890-94 = 100
Crores of Rs. 1890-94 = 100
(1) (2) (3) (4) (5)
1909 ... 198 152 138 105
1910 ... 199 152 137 110
1911 ... 209 160 139 114
1912 ... 214 164 147 117
1913 ... 238 182 152 124
1914 ... 237 182 156 124
* Figures for 1913 and 1914 are those of Mr. Shirras given in the Appendix
to his Indian Finance and banking. Figures in column 3 are calculated from his
figures.
TABLE XXXIX
PERIOD IV, 1915-1921*
Currency in Circulation
Index Number Index Number
Rupees + Notes
Years
Amount in Index Number India England
Crores of Rs. 1913 = 100 1913=100 1913=100
(1) (2) (3) (4) (5)
1915 ... 266 104 112 127.1
1916 ... 297 116 125 159.5
1917 ... 338 132 142 206.1
1918 ... 407 155 178 226.5
1919 ... 463 180 200 241.9
1920 ... 411 160 209 295.3
1921 ... 393 114 183 182.4
* Index numbers of prices are taken from the League of Nations Memorandum
on Currency, 1913-1921, 2nd Ed. (1922). Table VIII. Figures for Circulation are
taken from H. S. Jevon’s. The Future of Exchange and Indian Currency, 1922,
p. 44, Index numbers of circulation are calculated.
Now do these tables confirm, or do they not, the argument

that the fall in the gold value of the rupee is coincident
with a fall in the general purchasing power of the rupee ?
What was the general purchasing power of the rupee when
a fall in its gold value occurred ? If we scrutinize the facts
given in the above tables in the light of this query there
can be no doubt as to the validity of this argument. From
the tables it will be seen that the gold value of the rupee
improved between 1893-1898 because there was a steady, if
not unbroken, improvement in its general purchasing power.
Again, on the subsequent occasions when the exchange fell,
as it did in 1908, 1914, and 1920, it will be observed that
those were the years which marked the peaks in the rising
price-level in India ; in other words, those were the years
in which there was the greatest depreciation in the general
purchasing power of the rupee. A further proof, if it be needed,
of the argument that the exchange value of the rupee must
ultimately be governed by its general purchasing power is
afforded by the movements of the rupee-sterling exchange
since 1920 (see Table XL).
But, although such is the theoretical view confirmed by
statistical evidence of the causes which bring about these
periodic falls in the gold value of the rupee (otherwise spoken
of as the fall of exchange), it is not shared by the Government
of India. The official explanation is that a fall in the gold
value of the rupee is due to an adverse balance of trade.
Such is also the view of eminent supporters of the exchange
standard like Mr. Keynes* and Mr. Shirras.†
No doubt, some such line of reasoning is responsible for
the currency fiasco of 1920. How is it possible otherwise
to explain the policy of raising the exchange value of the
rupee ? Both the Smith Committee on Indian Currency‡ and
the Government of India§ were aware of the fact that the
rupee was heavily depreciated, as evidenced by the rise of
prices in India.
*Op. cit., p. 16.
† op. cit, p. 4.
‡Cf. Report, pp. 19-21.
§ Memorandum from the Government regarding Indian price movements. App.
XXVIII to the Report of the Currency Committee of 1919.
TABLE XL
Rupee-
Sterling Average Sterling
Rupee
Price in Rate of Purchasing
Prices in
Date England Exchange Power
India.
(Statist). London on Parity .
1913=100
1913=100 Calcutta 16dx
Col. 3
Col. 2
(1) (2) (3) (4) (5)

d. d.
1920. January ... 202 289 27.81 22.89
February ... 203 306 32.05 24.12
March ... 194 301 29.66 25.40
April ... 193 300 27.88 25.95
May ... 190 298 25.91 25.77
June ... 192 293 23.63 25.08
July ... 196 282 22.63 24.49
August ... 193 263 22.75 24.70
September ... 188 244 22.31 24.94
October ... 188 232 19.88 24.00
November ... 186 215 19.69 22.62
December ... 179 209 17.44 21.81
1921. January ... 169 200 17.66 21.96
February ... 164 191 16.31 20.98
March ... 162 183 15.53 20.40
April ... 163 186 15.75 19.63
May ... 170 182 15.44 17.98
June ... 172 176 15.53 17.14
July ... 171 163 15.38 17.40
August ... 178 161 16.25 16.36
September ... 178 157 17.22 15.82
October ... 178 156 17.02 14.65
November ... 173 161 16.25 14.89
December ... 169 157 15.94 14.86
1922. January ... 162 156 15.88 15.41
February ... 159 156 15.59 16.70
March ... 160 157 15.34 15.70
April ... 160 159 15.19 15.90
May ... 162 159 15.59 15.70
June ... 169 160 15.63 15.14
July ... 170 158 15.69 14.87
August ... 166 153 15.66 14.74
Given this fact, any question of raising the gold value of

the rupee to 2s. gold when the rupee had scarcely the power to
purchase 1s. 4d. sterling was out of the question. The Committee
indulged in loose talk about stabilizing the Indian exchange.
But even from this standpoint the Committee’s insistence on
linking the rupee to gold must be regarded as little grotesque.
Stable exchange, to use Prof. Marshall’s language, is something
like bringing the railway gauges of the world in unison with the
main line. If that is what is expected from a stable exchange,
then what was the use of linking the rupee to gold which
had ceased to be the “main line” ? What people wanted was a
stable exchange in terms of the standard in which prices were
measured. Linking to gold involved unlinking to sterling, and it
is sterling which mattered and not gold. Given this importance
of sterling over gold, was any policy of exchange stabilization
called for ? First of all it should have been grasped that such
a policy could succeed only if it was possible to make sterling
and rupee prices move in unison, for then alone could the ratio
of interchange between them be the same. What control had
the Government of India over the sterling ? They might have
so controlled the rupee as to produce the effect desired, but
all that might have been frustrated by an adverse move in the
sterling. The success of the policy of linking to sterling would
have been highly problematical although highly desirable. But
was it called for ?
Now the problem of stabilization is primarily a problem
of controlling abnormal deviations from the purchasing-power
parity between two currencies. In the case of India there were
no abnormal deviations from the rupee-sterling purchasing-
power parity. On the other hand, the Indian exchange was
moving in a more or less close correspondence with it. There
was therefore no ground for originating any policy of exchange
stabilization. But, supposing there were abnormal deviations
and that, owing to some reasons known to it, the Committee
believed that the exchange value of the rupee was not likely to
return to the point justified by its general purchasing power, in
that case the Committee should have fixed the exchange value
well within the range of the purchasing power of the rupee.
As it was, the value of the rupee fixed by the Committee the
rupee never had. In giving a value to the rupee so much above
its purchasing-power parity, it is obvious the Committee

originated a solution for the simple problem of stabilizing the
rupee which involved the much bigger and quite a different
problem of deflation or raising the absolute value of the rupee.
How was the object to be attained ? The Committee never
considered that problem. And why ? Was it because the price
of silver had gone up ? May be. But it is doubtful whether
the Committee could have believed firmly that the value of
silver was going to be permanently so high as to require a
modification of the gold par. Anyone who cared to scrutinize
the rise in the price of silver could have found that the rise
was largely speculative and could not have been permanent.
TABLE XLI
PRICE OF SILVER IN STERLING (PENCE)*
Range of
Year Highest Lowest Average
Variation
1913 293/8 25 15
/16 27 9/16 3 7/16
1914 273/4 22 1/8 25 5/16 5 5/8
1915 27¼ 22 5/16 23 11

/16 4 15
/16
1916 371/8 26 11
/16 31 5/16 10 7/16
1917 55 35 11
/16 40 7/8 19 11
/16
1918 49½ 42 ½ 47 /16

9
7
1919 79 /8 1
47 /4
3
57 /16
1
31 3/8
1920 89½ 38 7/8 61 7/16 50 5/8
1921 433/8 30 5/8 37 12 3/4
But supposing that the rise in the price of silver was not
speculative, did it follow that the rupee was appreciated ? The
diagnosis of the Committee was an egregious blunder. With
the facts laid before the Committee it is difficult to understand
how anyone with a mere smattering of the knowledge of price
movements could have concluded that because silver had
appreciated the rupee had therefore appreciated. On the other
hand, what had happened was that the rupee had depreciated
in terms of general commodities, including gold and silver.
Indeed, the appreciation of silver was a depreciation of the
rupee. The following (Table XLII) is conclusive evidence of
that fact :—
* From Kirkaldy’s British War Finance, 1921, p. 35. Figures for 1921 are
added from the Indian Paper Currency Report.
TABLE XLII
DEPRECIATION OF THE RUPEE
Index
Price of Bar Gold in Price of Silver in India Number
Date India (Bombay) per (Bombay) per 100 for Prices
Tola of 180 grs. Tolas in India
1913=100
Rs. A. Rs. A.
1914 ... 24 10 65 11 ...

1915 ... 24 14 61 2 112
1916 ... 27 2 78 10 125
1917 ... 27 11 94 10 142
1918 August ... (July) 34 0 (May 16) 117 2 178
” ... (Nov. 28) 82 10 ...
” ... 30 0 ... ...
” Sept. ... 32 4 ... ...
1919 March ... 32 0 113 0 200
Thus, the rise in the price of silver was a part of the

general rise of prices of the depreciation of the rupee. The
Committee desired to raise the gold value of the rupee to 10
rupees per sovereign when it cost twice that number of rupees
to purchase a sovereign in the market. So marked was the
depreciation of the rupee in terms of gold that a few months
before the Committee submitted its report the Statesman (a
Calcutta paper) wrote:—
“If you land in the country with a sovereign the
Government will take it away from you and give you
eleven rupees three annas in return. If you are in the
country and happen to have a sovereign and take it to
the currency office you will get firfteen rupees for it. On
the other hand, if you take it to the bazar you will find
purchasers at twenty-one rupees.”
These facts were admitted by the Finance Department of
the Government of India to be substantially correct,* and yet
in the face of them the Committee recommended the 2s. gold
parity for the rupee. The Committee confused the rupee with the
silver, and thus failed to distinguish the problem of retaining
the rupee in circulation and raising its exchange value in terms
of gold. The latter solution was applicable only if the rupee had
appreciated. But as it was silver that had appreciated in terms
* Cf. the reply of the Hon. Mr. Howard to the question of the Hon. Mr. Sinha
on September 23, 1919. S.L.C.P., Vol. LVII, p. 417.
of the rupee, the only feasible solution was to have proposed

the reduction of the fineness of the rupee. Had the Committee
regarded silver as a commodity distinct from the rupee like any
other commodity to be measured in terms of the rupee as a
unit of account, probably it might have avoided committing the
blunder which it did. But what is more than probable is that
the Committee did not think that the general purchasing power
of the rupee was a factor of any moment in the consideration
of the matter it was asked to report upon. What was of prime
importance in its eyes for the maintenance of the exchange
value of the rupee was a favourable balance of trade, and that
India had at the time the Committee drafted its Report. For
the Committee, in the course of its general observations on
the exchange standard, remarked :
“that the system had proved effectual in preventing
the fall in the value of the rupee below 1s. 4d., and unless
there should have been profound modifications in India’s
position as an exporting country with a favourable trade
balance, there was no reason to apprehend any breakdown
in this respect.”*
Proceeding on this view of the question it was quite natural
for the Committee to have argued that if a favourable balance
of trade sustained 1s. gold exchange, why should a similar
balance of trade not sustain 2s. gold exchange ?
Again, it is only on some such hypothesis that one
can explain why the recommendations of the Committee
were adopted at all when the necessity for their adoption
had passed away. Even if the intrinsic value of the rupee
exceeded its nominal value, there was no danger of a
wholesale disappearance of the rupee from circulation in view
of the enormous volume of rupees in India.† What would
have taken place was not a wholesale melting of rupees,
but a constant dribble of an irregular and illegal character
leading to the contravention of the orders then issued by
the Government of India against the melting or exportation
of the rupee coin. At the time when the Committee reported
(December, 1919) the price of silver was no doubt high, but
it was certainly falling during 1920 when the Government
* Report, par. 33.
† Cf. evidence of Mr. Keynes before the Committee of 1919. Q. 2,665-68.
took action on the Report. Indeed, on August 31, 1920, when

the Bill to alter the gold value of the rupee was introduced into
the Council, gold was selling at 23¼ rupees to the tola, while
if the sovereign was to be equal to 10 rupees, the market price
of gold should have been Rs. 15-14-0 per tola, so that there
was a difference of Rs. 7½ or 33 per cent. between the market
ratio of gold to the rupee and the new mint ratio. Moreover,
the price of silver had also gone down in the neighbourhood of
44d., so that there was no danger of the rupee being melted
out of circulation.* But, notwithstanding such a disparity, the
Government rushed to fix a higher gold parity for the rupee.
The financial reason for this rash act was of course obvious.
The impending constitutional changes were to bring about a
complete separation between provincial and imperial finance in
British India. Under the old system of finance it was open for
the central Government to levy “benevolences” in the form of
contributions on the Provincial Governments to meet such of
its imperious wants as remained unsatisfied with the help of
its own resources, apart from the lion’s share it used to take
at every settlement of the provincial finance. Under the new
constitution it was to be deprived of this power. The Central
Government was therefore in search of some resource to obtain
relief without appearing to tax anybody in particular. A high
exchange seemed to be just the happy means of doing it, for it
was calculated to effect a great saving on the “home charges.”
But how was this high exchange to be maintained, supposing it
was desirable to have a high exchange from the financial point
of view ?† Not only had the price and silver gone down and the
rupee shown evident marks of depreciation in terms of gold,
but the balance of trade had also become adverse to India at
the time when the government proceeded to take action on the
Report of the Committee. But this enactment, so singular in its
rashness, was none the less founded upon the hope that the
balance of trade would become favourable in time and thus help
to maintain the 2s. gold value of the rupee. That this is a correct
* Cf. the speech of the Hon. Mr. Tata on the Indian Coinage (Amendment)
Bill, S.L.C.P., Vol. LIX, p. 112.
† In the recent discussions on the Indian exchange it has been entirely
overlooked that this was the underlying motive of raising the Indian exchange
to 2s. gold. But it was laid bare by the Finance Member of the Council in his
speech on March 10, 1920, in the course of the debate on the resolution re Reverse
Councils, S.L.C.P., Vol. LVIII, p. 1292.
interpretation of the Government’s calculations is borne out

by the following extract from the letter which it addressed
to the Bengal Chamber of Commerce in explanation of the
currency fiasco.* After speaking of the necessity for granting
international credits to revive commerce, the letter goes on
to say:—
“ But for the rest they [i.e. the Government of India]
can now only rely on the natural course of events and
the return of favourable export conditions, combined with
the reduction of imports...... to strengthen the exchange.
Experience has demonstrated that in the present condition
of the world trade stability is at present unattainable, but
the Government of India see no reason why the operation
of natural conditions...... should not allow of the eventual
fixation of exchange at the level advocated in the report
of the Currency Committee.”
Which of the two views is correct ? Is it the low purchasing
power of the rupee which is responsible for its fall, or is it due
to an adverse balance of trade ? Now, it must at once be pointed
out that an adverse balance of trade, as an explanation of the
fail of exchange, is something new in Indian official literature.
A fall of exchange was a common occurrence between 1873
and 1893, but no official ever offered the adverse balance of
trade as an explanation. Again, can the doctrine of the adverse
balance of trade furnish an ultimate explanation for the fall
that occurred in 1907, 1914, and 1920? First of all, taking into
consideration all the items visible and invisible, the balance-
sheet of the trade of a country must balance. Indeed, the
disquisitions attached to the Indian Paper Currency Reports
wherein this doctrine of adverse balance as a cause of fall in
exchange is usually to be found, never fail to insist that there is
no such thing as a “drain” from India by showing item by item
how the exports of India are paid for by the imports, even in
those years in which the exchange has fallen. The queer thing
is, the same Reports persist in speaking of an adverse balance
of trade. Given the admission that all Indian exports are paid
for, it is difficult to see what remains to speak of as a balance.
Why should that part of trade liquidated by money be spoken
of as a “balance” ? One might as well speak of a balance of
* The letter was published in the Times of India, November 20, 1920, p. 14,
col. 6.
trade in terms of cutlery or any other commodity that enters

into the trading operations of the country. The extent to which
money enters into the trading transactions of two countries
is governed by the same law of relative values as is the case
with any other commodity. If more money goes out of a country
than did previously, it simply means that relatively to other
commodities it has become cheaper. But if there is such a
thing as an adverse balance in the sense that commodity
imports exceed commodity exports, then there arises the
further question : Why do exports fall off and imports mount
up ? In other words, given a normal equilibrium of trade, what
causes an adverse balance of trade ? For this there is no official
explanation. Indeed, the possibility of such a query is not
even anticipated in the official literature. But the question is
a fundamental one. An adverse balance of trade in the above
sense is only another way of stating that the country has
become a market which is good to sell in and bad to buy from.
Now a market is good to sell in and bad to buy from when the
level of prices ruling in that market is higher than the level
of prices ruling outside. Therefore, if an adverse balance of
trade is the cause of the fall of exchange, and if the adverse
balance of trade is caused by internal prices being higher
than external prices, then it follows that the fall of exchange
is nothing but the currency’s fall in purchasing power, which
is the same thing as the rise of prices. The adverse balance of
trade is an explanation a step short of the final explanation.
Try to circumvent the issue as one may, it is impossible to
escape the conclusion that the fall in the exchange value of
the rupee is a resultant of the fall in the purchasing power
of the rupee.
Now what is the cause of the fall in the purchasing power
of the rupee ? In that confused, if not absurd, document, the
Report of Price Inquiry Committee,* one cause of the rise of
prices in India was assigned, among others,† to the decline in
supplies relatively to population. In view of the more or less
generally accepted theory of quantity of a currency as the chief
determinant of its value, the line of reasoning adopted by the
* This Committee was appointed in 1910 to investigate into the rise of prices
in India and was composed of Messrs. Datta, Shirras, and Gupta. The first and
the last named commissioners being members of the Finance Department of the
Government of India, the Committee may be regarded as more or less an official
body. The results of its investigations appeared in 1914 in five volumes, Vol. I
of which contained the Report signed by Mr. Datta.
† See Report, paras. 126-27.
Committee is somewhat surprising. But there is enough

reason to imagine why the Committee preferred this particular
explanation of the rise of prices. The position of the Government
with regard to the management of the Indian currency is
somewhat delicate. Already the issue of paper currency was
in the hands of the Government. By the Mint closure it took
over the management of the rupee currency as well. Having
the entire control over the issue of currency, rupee and paper,
the Government becomes directly responsible for whatever
consequences the currency might be said to produce. It must
not, also, be forgotten that the Government is constantly
under fire from an Opposition by no means over-scrupulous
in the selection of its counts. As a result of this situation the
Government walks very warily, and is careful as to what it
admits. Lord Castlereagh, in the debate on Horner’s resolution
of 1811 stating that bank notes were depreciated by over-issue,
asked the House of Commons to consider what Napoleon would
do if he found the House admitting the depreciation even if it
was a fact. The Government of India is in the same position,
and had to think what the Opposition would do if it admitted
this or that principle. The reason why the Government of India
adheres to the adverse balance of trade as an explanation of
the fall of exchange is the same which led the Committee to
ascribe the rise of prices to the shortage of goods. Both the
doctrines have the virtue of placing the events beyond the
control of the Government and thus materially absolving the
Government from any blame that might be otherwise cast upon
it. What can the Government do if the balance of trade goes
wrong ? Again, is it a fault of the Government if the supply of
commodities declines ? The Government can move safely under
the cover of such a heavy armour!* But does the explanation
offered by the Committee invalidate the explanation that the
cause of the rise of prices in India was excess of currency ? The
value of money is a resultant of an equation (of exchange)†
between money and goods. To that equation there are obviously
* It may, however, be noted that this explanation of a shortage of goods,

which was apparently offered as most likely to absolve the Government from any
blame for having inflated the currency, was repudiated by the Government in
its resolution reviewing the Report of the Committee, probably because such an
admission on its part was likely to be interpreted as an argument to show that
under it India was getting poorer. But the Government, in a hurry, did not realize
that with the repudiation of this doctrine no other explanation was left except
that of an increased issue of money to account for the rise of prices in India.
† The words in bracket are inserted from the Problem of Rupee.—Ed.
two sides, the money side and the commodity side. It is an

age-worn dispute among economists as to which of the two is
the decisive factor when the result of the equation of exchange
undergoes a change, i.e. when the general price-level changes.
There are economists who when discussing the value or the
general purchasing power of money emphasize the commodity
side in preference to the money side of the equation as the
chief determinant of it. To them if prices in general fall it may
not be due to scarcity of money ; on the other hand, it may
be due to an increase in the volume of commodities. Again, if
prices in general rise they prefer to ascribe it to a decrease
in the volume of commodities rather than to an increase in
the quantity of money. It is possible to take this position, as
some economists choose to do, but to imagine that the quantity
theory of money is thereby overthrown is a mistake. As a
matter of fact, in taking that position they are not damaging
the quantity theory in the least. They are merely stating it
differently. The weakness of the position consists in failing to
take note of what the effect on the general price-level would
be if in speaking of increase or decrease of commodities they
included a corresponding increase or decrease of currency. If
the volume of commodities increases, including the volume of
currency, then there is no reason why general prices should fall.
Similarly, if the volume of commodities decreases, including the
volume of currency, then there is no reason why general prices
should fall. Similarly, if the volume of commodities decreases,
including the volume of currency, then there is no reason why
general prices should rise. The commodity explanation is but
the reverse side of the quantity explanation of the value of
money. Recasting the argument of the Committee in the light
of what is said above, we can say without departing from its
language that the rise of prices in India was due to the supply
of currency not having diminished along with the diminution
in the supply of goods. In short, the rupee fell in purchasing
power because of currency being issued in excess, and there
is scarcely any doubt that there has been a profuse issue of
money in India since the closing of the Mints in 1893.
The first period, from 1893-98 was comparatively speaking
the only period marked by a rather halting and cautious policy
in respect of currency expansion. The reason no doubt was the
well-known fact that at the time the Mints were closed the
currency was already redundant. Yet the period was not immune
from currency exapansion.* At the time the Mints were

closed the silver bullion then in the hands of the people
was depreciated as a result of the fall in its value due to
the closure. An agitation was set up by interested parties to
compel the Government to make good the loss. Ultimately,
the Government was prevailed upon by Sir James Mackay
(now Lord Inchcape), the very man who forced Government
to close the Mints, to take the silver from the banks. The
Government proposed to the Secretary of State that they
be allowed to sell the silver even at a loss rather than coin
and add to the already redundant volume of currency. The
Secretary of State having refused, the silver was coined
and added to the currency. The stoppage of Council Bills
in 1893-94 had temporarily accumulated a large number of
rupees, in their Treasuries, a transaction which practically
amounted to a contraction of currency. But the Government
later decided to spend them on railway construction—a policy
tantamount to an addition to currency. The resumption of
Council Bills after 1894 had also the same effect, for a
sale of bills involves an addition to currency. In view of
the heavy cost of financing the Home Treasury by gold
borrowings, the resumption of sale was a pardonable act.
But what was absolutely unpardonable was the increase in
the fiduciary portion of the paper-currency reserve from 8
to 10 crores,† thereby putting 2 crores of coined rupees into
circulation, particularly so because the Finance Minister
refused to pay any heed to its incidence on the currency
policy, arguing :—
“I am a little doubtful whether, in discussing the
question of the investment of the currency reserve, we
are at liberty to look at outside considerations of that
kind.”†
All told, the additions to the currency during the first
period were negligible as compared to what took place in the
second period, 1900-1908. This period was characterized by a
phenomenal increase in the volume of currency poured by the
Government into circulation. Speaking of the coinage of rupees
* Cf. H. M. Ross, The Triumph of the Standard, Calcutta, 1909, pp. 16-17.
† By Act XV of 1896.
‡ Financial Statement, 1896-97, p. 89.
during this period, Mr. Keynes, anything but an unfriendly

critic of the Government’s policy observed* :—
“The coinage of rupees recommenced on a significant
scale in 1900 a steady annual demand for fresh coinage
(low in 1901-2, high in 1903-4, but at no time abnormal),
and the Mints were able to meet it with time to spare,
though there was some slight difficulty in 1903-4. In
1905-6 the demand quickened, and from July 1905 it quite
outstripped the new supplies arising from the mintage of
the uncoined silver...... This slight scare, however, was
more than sufficient to make the Government lose their
heads. Having once started on a career of furious coinage,
they continued to do so with little regard to considerations
of ordinary prudence...... without waiting to see how the
busy seasons of 1906-7 would turn out, they coined heavily
throughout the summer months...... During the summer
of 1907, as in the summer of 1906, they continued to coin
without waiting until the prosperity of the season 1907-8
was assured.”
Evidently, in this period the Government framed their
policy “as though a community consumed currency with the
same steady appetite with which some communities consume
beer.” The period also witnessed a material expansion of the
paper currency. Up to 1903 the use of the currency notes was
limited by reason of the fact that they were not only legal tender
outside their circle of issue, but also because their encashability
was restricted to the offices of the circles of their issue. This
was a serious limitation on the extension of paper currency
in India. by Act VI of 1903 the Rs. 5 was made universal in
British India excepting Burma, i.e. was made legal tender in
all circles, and also encashable at all offices of issue. Along
with this the fiduciary portion of the paper-currency reserve
was increased to Rs. 12 crores by Act III of 1905. The first
event was only calculated to enlarge the circulation of the
notes, but the second event had the direct effect of lowering
the value of the rupee currency.
The third period (1909-14) was comparatively a moderate
but by no means a slack period from the standpoint of currency
expansion in India. The first three years of the period were,
so to say, years of subdued emotion with regard to the rupee
coinage. With the exception of the year 1910, when there was
no net addition to rupee coinage, and 1911, when the addition
*Op. cit., pp. 131-35.
was a small one, the coinage in the years 1909 and 1912
ranged from 24 to 30 lakhs. But during the last two years of
this period there was a sudden burst of rupee coinage, when
the total reached 26½ crores. The expansion of paper currency
took place also on a great scale during this period. In 1909 the
Rs. 5 were universalized in Burma as they had previously been
in other parts of India. This process of universalization was
carried further during this period, when, under the authority
granted by the Paper Currency Act (II of 1910), the Government
universalized notes of Rs. 5 and Rs. 50 in 1910, of Rs. 100 in
1911. Along with the stimulus thus given to the increase of
paper currency, the Government actually expanded the fiduciary
portion of the issue from 12 to 14 crores by Act VII of 1911,
thereby throwing into circulation 2 crores of additional rupees.
During the fourth period (1915-1920) all prudential
restraints were thrown overboard.* The period coincided with
the Great War, which created a great demand for Indian
produce and also imposed upon the Government the necessity
for meeting large expenditure on behalf of H. M. Government.
Both these events necessitated a great increase in the current
means of purchase. There were three sources open to the
Government to provide for the need: (1) importation of gold;
(2) increase of rupee coinage ; and (3) increase of paper currency.
It must not be supposed that the Government of India had no
adequate means to provide the necessary currency. Whatever
expenditure the Government of India incurred in India, the
Secretary of State was reimbursed in London. So the means
were ample. The difficulty was that of converting them to proper
account. Ordinarily, the Secretary of State purchases silver out
of the gold at his command to be coined in India into rupees.
This usual mode was followed for the first two years of the
period, and the currency was augmented by that means. But
the rise in the price of silver made that resource less available.
The Secretary of State had therefore to choose between sending
out gold or issuing paper. Of the two, the former was deemed
to be too unpatriotic. Indeed, the Secretary of State believed
that from an Imperial point of view it was entirely ungracious
even to “earmark” the gold he received in London as belonging
to India. But how was demand for additional currency in India
to be met ? As a result of deliberation it was agreed that to
provide currency in India without employing gold the best plan
* For a view of the currency policy of this period the primary source are the
Annual Financial Statements, for these years, of the Government of India.
was for the Secretary of State to invest at one end the gold he
received on India’s behalf in the purchase of British Treasury
bills, and the Indian Government to issue currency notes at the
other end on the security of these bills. Such a procedure, it
will be observed, involved a profound modification in the basic
theory of Indian paper currency. That theory was to increase
the fiduciary issue by investing a portion of the metallic
reserves only when the proportion of the latter to the total of
the notes in active circulation had shown, over a considerable
period, a position sufficiently strong to warrant an extension
of the invested reserves and a corresponding diminution of the
metallic reserves. The main effect of the principle was that
the extent of the paper currency was strictly governed by the
habits of the people, for whatever the amount of fiduciary
issue at any given moment it represented metallic reserves
which were once in existence. Under the new scheme the old
principle was abandoned and paper currency was issued without
any metallic backing, and what is more important is that its
magnitude instead of being determined by the habits of the
people, was determined by the necessity of the Government
and the amount of security it possessed. This fatal and facile
procedure was adopted by the Government of India with such
avidity that within four years it passed one after another eight
Acts, increasing the volume of notes issuable against securities.
The following table gives the changes in the limits fixed by
the Acts and the total issues actually made under them :—
TABLE XLIII
ISSUE OF CURRENCY NOTES
Acts prescribing the Fiduciary Issue of Currency Notes
Act Act Act Act Act Act Act
Limits to fiduciary
I. V of IX of XI of XIX of VI of II of XXVI
issues.
1915 1916 1917 1917 1918 1919 1919
In Lakhs o Rupees:
(a) Permanent ... 14,00 14,00 14,00 14,00 14,00 14,00 14,00
(b) Temporary ... 6,00 12,00 36,00 48,00 72,00 86,00 106,00
Total limit ... 20,00 26,00 50,00 62,00 86,00 100,00 120,00
Total issues of
II. 61.63 67.73 86,38 99,79 153,46 179,67*
currency notes
Silver 32,34 23,57 19,22 10,79 37,39 47,44
Gold 15,29 24,16 18,67 27,52 17,49 32,70
III. Reserve Securities 14,00 20,00 48,49 61,48 98,58 99,53
* On November 30, 1919. The rest of the figures are for march 31
But this facile procedure could not be carried on ad

infinitum except by jeopardizing the convertibility of the
notes. Consequently the very increase of paper money,
added to the increased demand for currency, compelled the
Government to go in for the provision of metallic money
for providing current means of purchase and also give a
backing to the watered paper issues. The rising price of
silver naturally made the Government go in for gold. An
Ordinance was issued on June 29, 1917, requiring all gold
imported into India to be sold to Government at a price
based on the sterling exchange, and opened a gold Mint at
Bombay for the coinage of it into mohurs*. Frantic efforts
were made to acquire gold from various quarters. The removal
of the embargo on the export of gold by the U.S.A. on June
9, 1917, and the freeing of the market for South African
and Australian gold, enabled the Government to obtain
some supply of that metal. From July 18, 1919, immediate
telegraphic transfers on India were offered against deposit
at the Ottawa Mint in Canada of gold coin or bullion at a
rate corresponding to the prevailing exchange rate, and at
New York at competitive tenders from August 22, 1919.
Arrangements were also made for the direct purchase
of gold in London and U.S.A. Finally, to encourage the
private import of gold, the acquisition rate was altered
from September 15, 1919, so as to make allowance for the
depreciation of the sterling. But the gold thus obtained
was a negligible quantity. Besides, the issue of gold did not
serve the purpose the Government had in mind—namely
its retention in circulation. In the nature of things it was
impossible. The rupee was depreciated in terms of gold to an
enormous extent, and consequently at the rate of exchange
gold passed out of circulation as quickly as it was issued
by the Government. What the Government could do was
to make the use of gold and silver coins illegal for other
than currency purposes and to prevent their exportation,
which it did by the Notifications of June 29 and September
3, 1917. Realizing that it could not rely upon gold the
Government renewed its efforts to enlarge the rupee coinage.
To facilitate the purchase of that metal the import of
*Act XIV of 1918.

silver on private account into India was prohibited on September

3, 1917. This measure, however, removed only a few of the
smaller competitors for the world’s diminished supply of silver,
and the world-demand remained so heavy that the Secretary of
State was unable to obtain sufficient supply notwithstanding the
great conservation effected in the use of silver by substituting
nickel coinage for silver coins of subsidiary order,* and by the
isue of notes of denominations as low as that of R. 1† and of
R. 2-8.‡ The Government of the United States was therefore
approached on the subject of releasing a portion of the silver
dollars held in their reserve. The American Government
consented and passed the Pittman Act, under which the
Government of India acquired a substantial volume at 101½
cents per fine ounce. The total silver purchased during this
period was as follows :—
TABLE XLIV
RUPEE COINAGE, 1915—20
Silver purchased Silver purchased Total

Year in Open Market, from U. S. A., Standard
Standard Ounces. Standard Ounces. Ounces.
1915-16 ... ... 8,636,000 ... ...
1916-17 ... ... 124,535,000 ... ...
1917-18 ... ... 70,923,000 ... ...
1918-19 ... ... 106,410,000 152,518,000 ...
1919-20 ... ... 14,108,000 60,875,000 ...
Total 324,612,000 213,393,000 538,005,000
Now, recalling the fact that from 1900 to 1914 the

Government had coined about 532 million standard
ounces of silver,§ it means that the coinage of silver by
Government during these five years exceeded the amount
coined in the fourteen preceding years by five million ounces.
* Act IV of 1918 and XXI of 1919.
† First issued on December 1, 1917.
‡ First put into circulation on January 2, 1918.
§ Cf. the figures given by L. Abrahms in his evidence to the Currency Committee
of 1919.—Mit. of Evid., Q. 37-41.
Thus the fall in the gold value of the rupee is an

inevitable consequence of the exercise of the power to issue
inconvertible currency in unlimited quantities. This is the
fate of all inconvertible currencies known to history. But
it is said that an exception must be made in the case of
the rupee currency, for if the Government has the liberty
of issuing it in unlimited quantities it has also resources
to counteract the effects of a fall when it does occur. We
must therefore turn to an examination of these resources.
The basis of the reasoning is that the rupee is a token
currency, and that if the value of a token currency is
maintained at par with gold by applying to it the principle
of redemption into gold* it should be possible to maintain
the value of the rupee at par with gold by adopting a
similar mechanism. What is wanted is an adequate gold
fund, and so long as the Government has it, we are
assured that we need have no anxiety on the score of a
possible fall in the value of the rupee. Such a fund the
Government of India has, and on all the three occasions
when the gold value of the rupee fell below par that fund
was operated upon. The process of redemption is carried
on chiefly in three ways : (1) The sale of what are called
reverse councils, by which the Government receives rupees
in India in return for gold in London ; (2) the release
of gold internally in; receipt for rupees in India ; and
(3) the stoppage of the Secretary of State’s council bills
to prevent further rupees from going into circulation. The
cumulative effect of these, it is said, is to contract the
currency and raise its value to par. Although all the three
may be employed, the first is by far the most important
means adopted by the Government in carrying through
this process of redemption. The extent of the redemption
effected on the three occasions when it was employed may
be seen from the three following tables :—
* See the very interesting discussion by Laughlin of the laws of token money
in his Principles of Money, Chap. XV. It may be said in passing that Laughlin
is an opponent of the quantity theory of money, but in his discussion of token
money he virtually admits it.
I. REDEMPTION OF CURRENCY, 1907-8

TABLE XLV
By the sale of Reverse By Release
Councils of Gold- Private
Diminution Export of Drawings
of Govt. Gold Coin of the Secre-
Date
Amount Amount Stock of during tary of
offered sold Gold the State.
during Month.
the Month.
£ £ £ £ £
1907—
September ... ... ... 152,000 14 858,896
October ... ... ... 254,000 9,109 921,678
November ... ... ... 532,000 3 427,344
December ... ... ... 338,000 2,501 571,905
1908—
March 26 ... 500,000 70,000 226,000 ... 172,669
(for the
whole
month)
April 2 ... 500,000 449,000
” 9 ... 500,000 340,000
” 16 ... 500,000 441,000 461,000 ... 66,834
” 23 ... 500,000 329,000
” 30 ... 500,000 205,000
May 7 ... 500,000 81,000
” 14 ... 500,000 145,000 645,000 ... 62,764
” 21 ... 820,000 793,000
” 28 ... 500,000 500,000
June 4 ... 1,000,000 755,000
” 11 ... 1,000,000 70,000 334,000 ... 169,810
” 18 ... 500,000 Nil
” 25 ... 500,000 50,000
July 2 ... 500,000 470,000
” 9 ... 500,000 304,000
” 16 ... 500,000 500,000 16,000 ... 186,847
” 23 ... 1,000,000 968,000
” 30 ... 1,000,000 860,000
Aug. 6 ... 1,000,000 418,000
” 13 ... 500,000 310,000 354,000 ... 262,217
” 20 ... 500,000 Nil
” 27 ... 500,000 Nil
Sept. 3 ... 500,000 Nil 502,000 ... 1,431,012
” 10 ... 500,000 Nil
Total ... 15,320,000 8,058,000 4,394,000 249,942

II. REDEMPTION IN 1914-16

TABLE XLVI
Reverse Drawings of the
Date Councils S. of S.
(in £ 000) (in Lakhs of Rs.)
1914. April ... ... Nil 270
May ... ... ” 61
June ... ... ” 68
July ... ... ” 66
August ... ... 2,778 72
September ... ... 1,515 25
October ... ... 1,895 41
November ... ... 1,044 32
December ... ... 1,250 30
1915. January ... ... 225 29
February ... ... Nil 181
March Total ... ” 287
8,707 1,162
1915. April ... ... Nil 1,53
May ... ... ” 1,03
June ... ... 651 17
July ... ... 3,377 8
August ... ... 815 23
September ... ... 50 2,17
October ... ... Nil 2,25
November ... ... ” 2,02
December ... ... ” 3,28
1916. January ... ... ” 5,26
February ... ... ” 6,02
March Total ” 6,33
... 4,893 30,37

III. REDEMPTION IN 1920

TABLE XLVII
SALE OF REVERSE COUNCILS (FIGURES IN THOUSANDS OF POUNDS)
Amount Progressive
Amount Amount
applied for Total of
Date of sale. offered at sold at
at each Amount
each Sale. each Sale.
Sale. sold.
1920. January 2 ... 1,000 770 770 770
” 8 ... 1,000 8,499 990 1,760
” 15 ... 2,000 300 300 2,060
” 22 ... 2,000 4,890 2,000 4,060
” 29 ... 2,000 1,334 5,000 5,394
February
... 2,000 32,390 2,000 7,394
5
” 12 ... 2,000 41,312 2,000 12,394
” 19 ... 2,000 122,335 2,000 14,394
” 26 ... 2,000 78,417 2,000 16,394
March 3 ... 2,000 64,931 2,000 18,394
” 11 ... 2,000 117,185 2,000 20,394
” 18 ... 2,000 153,559 2,000 22,394
” 25 ... 2,000 56,295 2,000 24,394
” 31 ... 2,000 35,050 1,988 26,382
April 1 ...
” 8 ... 2,000 16,721 2,000 28,382
” 15 ... 2,000 48,270 2,000 30,382
” 22 ... 2,000 59,020 2,000 32,382
” 29 ... 1,000 53,210 1,000 33,382
May 6 ... 1,000 89,514 1,000 34,382
” 13 ... 1,000 101,625 1,000 35,382
” 20 ... 1,000 122,279 1,000 36,382
” 26 ... 1,000 85,620 1,000 37,382
June 3 ... 1,000 101,821 1,000 38,382
” 10 ... 1,000 109,245 1,000 39,382
” 15 ... 1,000 122,991 1,000 40,382
” 24 ... 1,000 73,391 1,000 41,382
July 1 ... 1,000 106,751 1,000 42,382
” 8 ... 1,000 63,690 1,000 43,382
” 15 ... 1,000 101,830 1,000 44,382
” 22 ... 1,000 103,960 1,000 45,382
” 29 ... 1,000 75,486 1,000 46,382
August 5 ... 1,000 101,260 1,000 47,382
” 12 ... 1,000 112,230 1,000 48,382
” 19 ... 1,000 114,767 1,000 49,382
” 26 ... 1,000 117,390 1,000 50,382
Sept. 2 ... 1,000 126,425 1,000 51,382
” 7 ... 1,000 117,200 1,000 52,382
” 13 ... 1,000 115,095 1,000 53,382
” 21 ... 1,000 122,590 1,000 54,382
” 28 ... 1,000 120,050 1,000 55,382
Not only did the Government sell reverse councils on a large

scale, but it also sold gold for rupees for internal circulation
a thing which it seldom did before.
III. REDEMPTION IN 1920
TABLE XLVIII
SALE OF GOLD
Price of
Country
Minimum Average
No. Quantity Bar Gold
Rate of Rate
of Date of Sale sold in
accepted of accepted
Sale (in Tolas) the
Tenders Tenders
Bombay
Bazaar
Rs. A. p. Rs. A. P. Rs. A. P.
1 1919. September 3 25 8 0 26 12 1 3,29,130 28 10 0
2 ” 17 24 8 0 24 10 0 3,96,640 26 1 0
3 October 6 25 8 0 25 9 8 3,26,000 27 0 0
4 ” 20 26 15 3 27 0 2 3,34,000 28 0 0
5 November 3 27 14 6 27 15 6 3,25,000 28 5 0
6 ” 17 26 15 0 27 0 11 5,18,500 28 2 0
7 December 8 26 0 6 26 4 6 10,00,650 27 10 0
8 1920. January 5 26 4 3 26 7 9 7,63,300 27 3 0
g ” 19 26 13 3 26 14 7 8,00,000 27 5 0
10 February 5 25 2 3 25 9 7 7,56,450 25 6 0
11 ” 19 16 2 3 21 9 1 9,60,590 23 4 0
12 March 3 18 8 0 18 12 4 12,96,125 21 7 0
13 ” 17 21 6 0 21 7 7 12,53,325 22 13 0
14 April 7 22 7 3 22 9 4 12,46,200 24 0 0
15 ” 21 23 7 4 23 8 6 10,68,175 24 4 0
16 May 5 20 13 3 21 3 2 11,96,750 21 8 0
17 ” 19 21 0 3 21 1 7 12,46,050 21 12 0
18 June 9 21 8 9 21 9 8 11,32,350 22 2 6
19 ” 23 20 14 10 21 0 5 12,25,250 21 8 0
20 July 7 21 1 4 22 2 2 12,81,500 21 6 0
21 ” 21 22 0 1 22 0 11 12,42,000 22 5 0
22 August 4 22 5 6 22 6 3 12,78,950 22 7 0
23 ” 19 23 9 4 23 10 2 5,54,500 23 7 0
24 September 1 22 8 3 22 10 8 8,27,700 23 1 6
25 ” 14 23 9 4 23 12 11 2,30,500 23 8 0
Total 2,15,89,635
During 1920 no council bills were drawn by the Secretary

of State on the Government of India.
The success of this mechanism on the two previous occasions

had strengthened the belief that it had the virtue of restoring
the value of the rupee. But the failure of this mechanism in
the crisis of 1920 compels one to adopt an attitude of reserve
towards its general efficacy. It cannot be said that exchange
gave way because this mechanism was not brought into
operation. On the other hand, the view of the Government
regarding the sale of reverse councils in 1920 had undergone a
profound modification as compared with the view it held during
the crisis of 1907-8. In that crisis the Government behaved
like a miser, sitting tight on its gold reserve and refusing to
use it for the very purpose which it was designed to serve.
An Accountant-General had “to go on his knees” to persuade
the Government of India to, release its gold.* It was probably
because it was rebuked by the Chamberlain Commission for
failing to make use of its gold reserve in 1907 that in the crisis
of 1920 the policy of selling reverse councils was so boldly
conceived. There was a great deal of ignorant criticism of that
policy from the general public that it was an “organized loot.”
But the Finance Minister was undaunted, and argued†:—
“It is an essential feature of our exchange policy... that
we should not only provide for remittances from London
to India through council bills at approximately gold point,
but from India to London in time of exchange weakness
also at gold point, through the sale of sterling remittance
known as reverse councils. It is simply an alternative to
the export of gold. This is no new matter—we have been
selling reverse councils for years...... and unless we do
so the exchange policy does not become effective...... This
is the reason, and the only reason, why we have sold
reverse councils...... It is an effort in fact to maintain
exchange as near as posssible to the gold point.... What
would be the consequence if we yielded to the pressure
placed on us and ceased to sell reverse councils at all ?
I can understand a demand that reverse councils should
be sold by some different method, or at rates different
from those at present in force, but I must confess that
I cannot understand the demand that the facilities
* Evidence of Mr. F. C Harrison before the Chamberlain Commission, Q. 10,209.

† Speech on the resolution re “Reverse Councils,” March 10, 1920. S.L.C.P.
Vol. LVIII p. 1291.
for the exchange of rupees into external currency should

be entirely withdrawn. I see that in Bombay it is urged
that we should let exchange find its ‘natural level.’ That
is a catchword which does not impress me. Used in the
sense in which that phrase has been recently used,
there is no such thing as a ‘natural level’ in exchange,
for, when one translates the internal currency into
another currency, there must be some sort of common
denominator to which both currencies can be brought;
it may be gold, it may be silver, it may be sterling or
it may be Spanish pesetas, which we take as our basis.
The rupee must be linked on to something* and if it is
so linked, then it must be at some definite rate, and
this necessarily involves that we must sometimes be
prepared to sell reverse councils in order to maintain
that rate. If reverse councils be withdrawn entirely,
then we should have neither a gold standard, nor a
gold-exchange standard, nor any kind of standard at all.”
But that only raises the question: If the sale of reverse
councils is efficacious in righting the exchange, why was
its effect such a disastrous failure ? The Finance Minister
answered the point tersely and cogently when he said :—
“If we have failed in narrowing the gap between
the market price and the theoretical gold part of the
rupee...... it is not because we have sold too many
reverse councils ; it is because we have sold too few.
I put it to any member of the commercial community
here, and I put it without fear of contradiction, that if
our resources had enabled us...... to sell straight away
20, 30, or 40 millions of reverse councils, we should
probably have had no gap between the market price of
the rupee and the theoretical gold price of the rupee at
all. One of our difficulties has been, hot that we have
sold too many reverse councils, but that we have been
obliged to sell too few.”†
* By Ordinance III of June 21,1920, the gold coins referred to in Section 11 of

the Indian Coinage Act (III of 1906) ceased to be legal tender in payment or on
account, but provision was made for their acceptance by Government at the ratio
of Rs. 15 during a moratorium of twenty-one days. This Ordinance continued till
September 9, 1920, when by Act XXXVI of 1920 the sovereign was again made
legal tender. During this period gold had no legal status in India.
† Ibid., p. 1301.
There would have been some force in this argument if the

smount of reverse bills sold were “too few.” Not 20, 30, or 40
millions, but 55½ millions of reverse councils were sold, besides
the large issue of gold internally, and the complete stoppage
of council bills, and yet the rupee did not rise above 1s. 4d.
sterling, let alone reaching 2s. gold. Why did not the sale of
reverse councils suffice to rectify the exchange ? This leads us to
examine the whole question of the efficacy of this redemption.
It is necessary to premise at the outset that redemption
may result in mere substitution of one form of currency by
another, or it may result in the retirement of currency. In so
far as it results in substitution it is of no consequence at all,
for substitution of currency is not a shrinkage of currency.* To
the restoration of the value of a currency what is essential is
its shrinkage, i.e. its retirement, cancellation. The important
question with regard to this mechanism is not to what extent
the currency can be redeemed, but to what extent it can be
retired. In the prevalent view of this question it seems to be
accepted without question that this extent is determined by the
magnitude of the gold resources of the Government of India
and the Secretary of State. Let us first make it clear how these
gold resources are located and distributed. It will be recalled
that these gold resources are distributed between (1) the paper-
currency reserve, (2) the gold-standard reserve, and (3) the
cash balances of the Secretary of State. It has been the habit
to speak of these resources as being three “lines of defence” on
which the Government can safely rely when an exchange crisis
takes place. But are they ? They can be, for the purposes of
retirement, only if they were all “free” resources; in other words,
if they were not appropriated resources. To what extent are
they unappropriated ? Can the Secretary of State take gold from
the paper-currency reserve ? He can, but then he must replace
it by something else, or must cancel notes to that extent. Can
the Secretary of State take gold out of his cash balances ? He
can, but then he must either borrow to fill his Treasury or draw
upon the Government of India if there is anyone to buy his bills,
which is tantamount to issuing rupee currency. The gold in the
paper-currency reserve and that in the cash balances is of no
use at all, for it does not permit of the cancellation of the rupee
* The most notable example is that of Americal greenbacks. Under the law of
1875 they were by 1879 retired in sufficient numbers to restore parity with gold.
But by a counter-law of 1878, 347,000,000 of them have been kept in circulation.
As soon as redeemed, they must be reissued ; they cannot be retired.
currency, which is what is wanted in restoring its value when

it suffers a fall. It is therefore sheer nonsense to speak of
the effectiveness of redemption as being commensurate with
the gold resources of the Secretary of State. The matter is
important, and an illustration may not be out of place. Suppose
A, a holder of rupees, wants to get gold for them. He can go
to three counters; (1) that of the controller in charge of cash
balances ; (2) that of the controller of currency in charge of
the paper-currency reserve ; or (3) that of the custodian of the
gold-standard reserve. If A goes to the first, what is the result ?
The cash balance is pro tanto reduced. On the assumption
that the cash balance is at its minimum, as it should be, the
controller must reimburse himself immediately to maintain
his solvency by drawing a bill on India and thereby releasing
rupees received for gold again in circulation, so that in this case
there is no shrinkage of currency. If A goes to the controller
of currency, what happens ? The controller gives him gold,
but on the assumption that the paper-currency account is a
separate statutory account he must put the rupees received
from A in place of the gold issued from his reserve, so that
here again what happens is that the composition of the reserve
undergoes a change, but the total paper currency remains the
same. It must therefore be borne in mind that to the extent
the gold in the paper-currency reserve and the cash balances
are operated upon the result is not a retirement of currency.
To speak of them as “lines of defences,” as is so often done,
is to overlook the fact that these two are not free resources
but are appropriated resources.
What is, then, the resource left to the Government to retire
the rupee currency ? Only the gold-standard reserve. That is
the only reserve the amount of which is unappropriated for
any particular use. It is free cash, and only to that extent is it
possible for the Government to restore the rupee currency when
a fall in its gold value eventuates. Of course it is important to
bear in mind that this is the extent to which it can retire the
currency. Not that it will, for it may not, and there is no want of
cases in which it has not. Two instances will suffice. During the
first period of the Mint closure, 1893-98, it will be recalled how
a large number of rupees had accumulated in the hands of the
Government, and in the interest of raising the value of the rupee
they should have been locked away. Instead the Government of
India released that money in circulation in extending railways
and other public works, as though the spending of rupees

by itself producedd an effect different to what would have
been produced had they been spent by the public. Similarly
irresponsible conduct marked the sale of reverse councils in
1920. To meet these reverse councils the Secretary of State
took the gold from the paper-currency reserve. But instead of
cancelling notes to the extent of the gold that was taken out
of the reserve, the Government took powers under an Act XXI
of 1920 to fill the gap by manufacturing securities ad hoc, so
that although there was redemption there was no retirement,
and so much gold was merely wasted, for it produced no
effect on prices or the exchange. This Act, passed in March,
1920, was of temporary duration, and would have obliged the
Government to retire the currency by October, 1920, when it
was to expire. Rather than do this the Government altered
the paper-currency law, not temporarily but permanently (Act
XLV of 1920), changing the provisions in such a manner as to
require the Government to cancel the currency to the smallest
degree possible by retiring their “created securities.” Even this
was not done, owing to deficits in the Government Budget.
But even if such indiscretions were not repeated the fact
remains that Government cannot effect a greater retirement
than is permitted by the gold-standard reserve. If that reserve
fails Government has only two resources left: (1) to melt down
the rupees and sell them as bullion for gold and to go on
further contracting the currency, in this way till its value is
restored : or (2) to borrow gold. Both these are evidently costly
methods. To sell rupees as bullion is bound to result in loss
unless the bullion in the rupee fetched more at the time of sale
than what it cost when it was purchased for manufacturing it
into bullion. The second process, that of borrowing, cannot be
lightly resorted to for the purpose of creating a reserve fund
to retire the currency. Indeed, so costly are such methods,
and so complete would be the proof they would afford of the
instability of the exchange standard if they were resorted to,
that Government has never contemplated them as possible lines
of defence in an exchange crisis. It seems certain, however, that
Government does recognise that the gold-standard reserve by
itself cannot suffice for the imaintenance of exchange. For we
find that from the year 1907-8 dates a complete change in the
distribution of Government balances between London and India.
Up to that period it was the policy of the Secretary of State to
draw only as much as necessary to finance his Home Treasury.

After that date the practice was originated of drawing as
much as the Government of India could provide, and as the
Government of India has been supreme in financial matters it
provided large sums for council drawings by increased taxation
and budgeting for surpluses. The effect of this was to swell the
cash balances of the Secretary of State.* No official explanation
of a satisfactory character has ever been given for this novel
way of financing the Home Treasury† but we shall not be
very) far wrong if we say that the object in accumulating these
balances is to provide a second gold reserve to supplement the
true gold-standard reserve. Whatever strength the Government
may derive for the time being from this adventitious resource, it
is obvious that it cannot be permanent. Under a more popular
control of Government finances the cash balances will have to
be kept down to a minimum necessary to work the Treasury,
and the gold-standard reserve will be the only reserve on
which the Government will have to depend.
The gold-standard reserve is to the rupee what the paper-
currency reserve is to the notes. The purport of both is to prevent
the respective currencies they support from falling or going
to discount. But the treatment accorded by the Government
to the rupee and the paper in respect of reserve shows a
remarkable degree of contrast. In the case of the paper, as has
been previously noted, the reserve is a statutory reserve, and
even when the whole basis of Indian paper currency has been
changed the provisions as to reserve are none the less strict and
cannot be disregarded by the Government without infringing the
law. Now, the rupee is nothing but a note printed on silver.‡
As such, the provisions as to reserve should be analogous to
those governing the paper currency. Strange as it may seem,
any regulation is conspicuous by its absence in regard to the
gold-standard reserve.§ Not only is it not obligatory on the
* For figures, see Chap. VII.
† Cf. Memorandum on India Office Balances, Cd. 6619 of 1913.
‡ “We have virtually relegated our rupee currency to the position of a token
currency, and we are now practically in the position of bankers who have issued a
certain amount of fiduciary currency (whether paper or metal is immaterial), and
to maintain the value of this fiduciary currency we are bound to be in a position
to exchange it for gold when presented to meet legitimate trade requirements,”
said the Financial Statement for 1903-4, p. 14.
§The Chamberlain Commission said: “There are disadvantages in restricting the
freedom of the Government in a crisis, and it is undersirable that the disposition
and amount of the reserve should be stereotyped...... We therefore do not regard
that the gold-standard reserve should be regulated by statute.”—Report, Sec. 101.
Government to redeem the rupee, but it does not seem that

the Government is even bound to maintain the reserve. And
that it has maintained such a reserve is no guarantee that it
will replace it supposing that the reserve was dissipated.* Such
differences apart, is the gold-standard reserve an adequate
reserve ? Figures of the magnitude of the gold-standard reserve,
as usually given in official publications, are a meaningless array.
What is the use of displaying assets without at the same time
exhibiting the liabilities ? To be able to judge of the adequacy
of that reserve we must know what is the total circulation
of rupees. When, however, we compare the circulation of the
rupees with the reserve, the proportion between the two is not
sufficiently large so as to inspire confidence in the stability of
the system (see Table XLIX).
How can a reserve so small as this carry through the process
of retirement to any sufficient extent ? That it will not always
do it the crisis of 1920 gives abundant proof. But the supporters
of the exchange standard maintain that the smallness of the
reserve is a matter of no consequence, for the reserve is kept
only for the purpose of foreign remittances. That being the case,
it is said the reserve need not be large. Granting that it is so,
what must govern the magnitude of the reserve in order that it
may prove adequate in any and every case ? The only attempt
made to enunciate a rule of guidance is that by Prof. Keynes.
That rule he finds† in the possible variations in the balance of
trade of India.. Now, does this make the problem of regulating
the reserve more definite ? As has been explained previously,
the adverse balance of trade would be due to the depreciation of
the currency, so that Mr. Keynes’s statement amounts to this,
that the reserve should vary with the depth of the depreciation.
But how is a Government to do this ? Only by adverting to the
movement of the price level. But in all its currency management
the Government of India never pays any attention to the price
* In the course of his speech on the Indian Paper Currency (Temporary
Amendment) Bill, dated March 17, 1920, the Finance Minister observed :”......
from a practical point of view, it is desirable to leave the gold-standard reserve
until the paper-currency reserve has been re-transferred, in case... the Secretary
of State finds it impossible to keep himself in funds by Councils for his heavy
home liabilities. He will then be able to use the gold-standard reserve, and we
can credit the gold-standard reserve out here. There is a third point, and I think
a conclusive one. When you operate against the paper-currency reserve you have
to operate within the paper-currency reserve ; when you operate against the
gold-standard reserve it disappears ; it melts, and we are under no obligation
to replace it; whereas we are under a statutory obligation to replace the paper-
currency reserve.”—S.LC.P. Vol. LVIII, p. 1416.
† Op. cit., pp. 166-7.
TABLE XLIX
DISTRIBUTION OF THE GOLD-STANDARD RESERVE AND ITS PROPORTION TO RUPEE CIRCULATION (IN THOUSANDS OF
POUNDS STERLING)
In England. In India Percent-
Total Volume age of
March Purchase Tempor- Gold de- Out- Tempor-
Coined Reserve, of Rs. in Reserve
31 in Value of Cash at ary Loan posited standing ary Loan
Rupees England Circula- to Ra. in
each Sterling Short to the at the Total. Debt to Gold. Total.
in and tion in Circula-
Year. Securi- Notice. Home Bank of Treasury Treasury
India. India. Crores. tion
ties. Treasury. England. balances. Balances.

(£ = Rs. 15)*
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
MK
1901 — — — — — — 1,831 — 1,200 3,031 3,031 143 3.1

02 3,454 — — — 3,454 — — — — — 3,454 138 3.7
03 3,810 — — — 3,810 — 1 — — 1 3,811 136 3.4
04 6,377 — — — 6,377 — 167 — — 167 6,544 144 6.8
SJ+YS
05 8,377 — — — 8,377 — 152 — — 152 8,529 152 8.4

06 12,165 — — — 12,165 — 287 — — 287 12,452 164 10.7
07 12,519 — — — 12,519 4,000 301 — 22 4,323 16,842 178 10.6
08 13,187 — 1,131 — 14,318 4,000 — — — 4,000 18,318 191 11.2
09 7,414 — 470 — 7,884 10,587 — — — 10,587 18,471 187 7.1
10 13,219 3,011 — — 16,230 2,534 — — — 2,534 18,764 186 13.8
11 15,849 1,477 — — 17,326 1,934 — — — 1,934 19,260 184 14.8
12 16,748 1,074 — — 17,822 1,934 — — — 1,934 19,956 182 14.9
13 15,946 1,006 — 1,620 18,572 4,000 35 — — 4,035 22,607 191 14.8
25-9-2013/YS-11-11-2013
14 17,165 25 — 4,320 21,510 4,000 22 — — 4,022 25,532 187 17.2

15 12,149 8 — 1,250 13,407 — 70 7,000 5,238 13,308 25,715 204 18.9

16 16,219 5,792 — — 22,011 — 1 4,000 239 4,240 26,251 212 15.7
17 25,406 6,001 — — 31,407 — — — 103 103 31,510 227 20.8
18 28,453 6,000 — — 34,453 — — — — — 34,453 219 23.5
19 29,729 6,016 — — 35,745 — — — — — 35,745 228 23.5
* In striking the proportion the rupee portion of the reserve has been omitted.
549
549
problem. Indeed, as was pointed out above, its conception

of the underlying causes of the fall of exchange is totally at
variance with the only true conception, nothing but a firm
grasp of which can enable it to avert a crisis. Being ignorant
of the true conception it blindly goes on issuing currency until
there occurs what is called an adverse balance of trade. All it
aims at is to maintain a gold reserve, and so long as it has
that reserve it does not stop to think how much currency it
issues. The proportion of the issues and the reserve not being
correlated the stability of the exchange standard, in so far as
it depends upon the reserve, must always remain in the region
of vagueness, far too problematical to inspire confidence of the
system. Nay, the liability of redemption for foreign remittances,
small as it appears, may become so indefinite as entirely to
jeopardize the restoration of stability to the exchange standard.
But is a gold reserve such an important thing for the
maintenance of the value of a currency ? All supporters of
the exchange standard must be said to be believers in that
theory. But the view cannot stand a moment’s criticism. To
look upon a gold reserve as an efficient cause why all kinds
of money remain at par with gold is a gross fallacy.* To take
such a view is to invert the casual order. It is not the gold
reserve which maintains the value of the circulating medium,
but it is the limitation on its volume which not only suffices
to maintain its own value, but also makes possible the
accumulation and retention of whatever gold reserve there is in
the country. Remove the limit on the volume of currency, and
not only will it fail to maintain its value, but will prevent the
accumulation of any gold reserve whatever. So little indeed is
the importance of a gold reserve to the cause of the preservation
of the value of currency that provided there is a rigid limit
on its issue the gold reserve may be entirely done away with
without impairing in the least the value of the currency. The
Chamberlain Commission recommended that the Government of
India should accumulate a reserve to maintain the value of the
rupee because it was by means of their reserves that European
banks maintained the value of their currencies. Nothing can be
a greater perversion of the truth. What the European banks did
* Cf. in this connection the brilliant paper by F. A. Fetter, “The Gold Reserve:
its Function and its Maintenance,” in the Political Science Quarterly, 1896, Vol.
XI, No. 2.
was just the opposite of what the Commission recommended.

Whenever their gold tended to disappear they reduced their
currencies not only relatively but absolutely. It was by
limitation of their currencies that they protected the value of
the currencies and also their gold reserves.
The existence of a reserve, therefore cannot lend any
strength to the gold-exchange standard. On the other hand,
if we inquire into the genesis of the reserve, its existence is
an enormous source of weakness to that standard. For how
does the Government obtain its gold-standard reserve ? Does
it increase its reserve in the same way as the banks do, by
reducing their issues ? Quite the contrary. So peculiar is the
constitution of the Indian gold-standard reserve that in it the
assets, i.e., the reserve, and the liabilities, i.e., the rupee, are
dangerously concomitant. In other words, the reserve cannot
increase without an increase in the rupee currency. This
ominous situation arises from the fact that the reserve is built
out of the profits of rupee coinage. That being its origin, it
is obvious that the fund can grow only as a consequence of
increased rupee coinage. What profit the rupee coinage yields
depends upon how great is the difference between the cost
price of the rupee and its exchange value. Barring the minting
charges, which are more or less fixed, the most important
factor in the situation is the price of silver. Whether there
shall be any profit to be credited to the reserve depends upon
the price paid for the silver to be manufactured into rupees.*
Not only is the reserve an evil by the nature of its origin,
but having regard to its documentary character the reserve
cannot be said to be absolutely dependable in a time of crisis.
There is no doubt that the intention of the Government in
investing the reserve is to promote its increase by adding
to it the interest accruing from the securities in which it is
invested. The critics of the Government want a large and at
the same time a metallic reserve. But they do not realize that
having regard to the origin of the reserve the two demands
are incompatible. If the reserve needs to be large then it must
be invested. Indeed, if the reserve had not been invested it
would have remained distressingly meagre.‡ But is there no
danger in a reserve of this kind ?
* See footnote † page 552.
‡ From 1900-1 to 1920-21 the profits on coinage credited to the gold-standard
reserve amounted to £ 28,573,606 only ; while during the same period Interest
and Discount gave £ 13,306,847 or nearly one-half the profits on coinage, Cf. East
India: Accounts and Estimates, 1921-22, Cmd, 1517 of 1921, p. 20.
† In answer to Mr. M. L Reddi Garu, the following statement was laid on

the table :—
* Statement showing the average cost of silver purchased
by the—
Royal Mint
Average Cost India Office Average Cost for Financial
Year.
for Standard Standard Ounce. Year.
Ounce.
d. d.
1893 ... 365/16 No purchase 1893-94
94 ... 29¼ ” 1894-95
95 ... 303/8 ” 1895-96
96 ... 305/16 ” 18S6-97
97 ... 277/8 ” 1897-98
98 ... 27¼ ” 1898-99
99 ... 27½ 28 1899-1900
1900 ... 28¼ 29 1900-01
01 ... 27 15
/16 No purchase 1901-02
02 ... 245/16 22.80 1902-03
03 ... 2311/16 27.19 1903-04
04 ... 26 ½ 27.14 1904-05
05 ... 277/16 29.74 1905-06
06 ... 311/16 31.59 1906-07
07 ... 30 /16
9
31.27 1907-08
08 ... 24 7/16 No purchase 1908-09
09 ... 2311/16 ” 1909-10
10 ... 247/8 ” 1910-11
11 ... 2413/16 ” 1911-12
12 ... 2715/16 28.71 1912-1,3
13 ... 281/16 28.71 1913-14
14 ... 24 /85
No purchase 1914-15
15 ... 24¼ 33.96 1915-16
16 ... 305/8 33.96 1916-17
17 ... 39 /16
15
42.78 1917-18
18 ... 4715/16 48.20 1918-19
19 ... 495/8 52.04 1919-20
Silver purchased at special rates
from
20 ... 507/8 920-21
the Baldwin mines and the Perth
mint.
* Legislative Assembly Debates, Vol. II, No. 3. September, 10, 1921, p. 181.
In the absence of information whether the price is F.O.B. or C.I.F. it is difficult
to say that the Secretary of State has had to pay higher prices for silver than
were paid by the Master of the Royal Mint.
The source of a danger in a reserve such as this was well

pointed out by Jevons when he said*:
“...... good government funds and good bills can always
be sold at some price so that a banking firm with a strong
reserve of this kind might always maintain their solvency.
But the remedy might be worse for the community than
the disease, and the forced sale of the reserve might create
such a disturbance in the money market as would do more
harm than the suspension of payment......”
In the same manner, who can say that all the increase of
reserve from interest will not be wiped out by a slump in the
value of the securities if put upon the market for conversion
into gold at a time when there takes place an exchange
crisis ? Supposing, however, the full value of the securities,
is realized, the number of rupees the reserve will “sink”
when occasion for redemption arrives depends upon what is
the price at which the rupees are bought back. If the fall of
the rupee is small, it may help to retire a large volume of
currency and thus restore its value. On the other hand, if the
fall is great, it will suffice to retire only a small part of the
currency and may fail to restore its value as it did in 1920,
so that what may appear to be a big reserve may turn out
to be very inadequate. But, apart from considerations of the
relative magnitude of the reserve that can be built up, the
point that seems to have been entirely overlooked is that the
process of building up the reserves directly involves the process
of augmenting the currency. The Chamberlain Commission
was cognizant of the fact that the gold-standard reserve could
not be built up except by coining rupees. Indeed, it cautioned
those desirous of a gold currency to remember that if gold
took the place of “new rupees which it would be necessary
otherwise to mint, the effect is to diminish the strength of the
gold-standard reserve by the amount of the profit which would
have been made from new coinage.”† Rather than recommend
a policy which “would bring to an end the natural growth
of the gold-standard reserve,” the Committee permitted the
Government to coin rupees. But is there no danger involved
in such a reserve ? What is the use of a reserve which creates
the very evil which it is supposed afterwards to mitigate ?
Indeed, those who have been agitating for an increase in the
Indian gold-standard reserve cannot be said to have been alive
to the dangers involved in the existence of such a reserve.
* Money, p. 227. † Report, par. 63.
The smaller the gold-standard reserve the better it would be,

for there would be no inflation, no fall in the purchasing power
of the rupee, and no necessity for its retirement.
Having regard to its origin, the gold-standard reserve,
instead of acting as a brake upon reckless issue of rupee
currency, is the direct cause of it and tends to aggravate the
effects of an inconvertible currency rather than counteract them.
Perversity cannot go further. If the fact that a mechanism
like that of the gold-standard reserve, set up for the purpose
of limiting the currency, cannot be made to function without
adding to the currency, does not render the system an unsound
currency, one begins to wonder what would. Great names have
been invoked in support of the exchange standard. After trying
hard to find authoritative precedents for his plan,* Mr. Lindsay
claimed before the Fowler Committee that it was founded
upon the Report of the Parliamentary Committee on Irish
Exchange.† There he was on firm ground. Among other things,
the Committee did recommend that for stabilizing the exchange
between England and Ireland the Bank of Ireland should open
credit at the Bank of England and sell drafts on London at a
fixed price. In so far as the exchange standard rests on gold
reserve in London, Lindsay must be said to have faithfully copied
the plan of the Irish Committee on exchange. But he totally
* In 1876, when Mr. Lindsay first set out his scheme in the pages of his
Calcutta Review, he mentions no parallel at all. in 1892, in his Ricardo’s
Exchange Remedy, he uttered the name of Ricardo as an authority for his plan,
but in 1898 he shifted his ground, so much so that he blamed (Economic journal,
supra) Probyn for taking Ricardo’s gold bar plan as a basis. The reason why he
disavowed Ricardo as his authority most probably lies in the fact that Ricardo’s
general views of currency were rather damaging to his position. In view of the
fact that there are so many people who assert, no doubt, from the title of his
Proposals for an Economical and Secure Currency, that Ricardo wrote against
a metallic standard, it is worth while recording the following passage from his
Proposals, in which he says : “During the late discussion on the bullion questions,
it was almost justly contended that a currency, to be perfect, should be absolutely
invariable in value. But it was said, too, that ours had become such a currency,
by the Bank Restriction Bill; for by that bill we had wisely discarded gold and
silver as the standard of our money...... Those who supported this opinion did not
see that such a currency, instead of being variable, was subject to the greatest
variations— that the only use of a standard is to regulate the quantity, and by
the quantity the value of the currency—and that without a standard it would
be exposed to all the fluctuations to which the ignorance or the interests of the
issuers might subject it.”
† The Report, which is a masterly document, was eclipsed by the Bullion
Report, though both contain the same doctrine, by reason of its not being printed
till 1826. See Lords Paper 48 of 1826.
neglected to give prominence to another and the most vital

re commendation of the Committee, in which it is observed :*
“But all the benefits proposed by this Mode of Remedies
would be of little Avail and very limited Duration if it (i.e.
Bank of Ireland) did not promise at the same time to cure
the Depreciation of Paper in Ireland by diminishing its over
issue.” Indeed, so great was the stress laid on the limitation
of issue that when Parnell, in his resolution in the House
of Commons on the reform of the Irish currency, regretted
the non-adoption of the recommendations of the Committee,†
Thornton in his reply pointed out that nothing would help to
stabilize Irish exchange so long as the vital condition laid down
by the Committee was disregarded. The recent experience in
pegging the exchanges well illustrates the importance of that
vital condition. Pegging the exchange is primarily a device
to prevent the external value of the currency falling along
with its internal value. The way in which pegging effects this
divorce is important to note.‡ The primary effect of the peg is
to permit the purchases of foreign goods by procuring foreign
currency for home currency at a fixed price, which is higher
than would be the case if it were determined by the general
purchasing power parity of the two currencies. By enabling
people to buy foreign goods with foreign currency obtained at
a cheaper price the peg virtually raises foreign prices more to
the level of the home prices, so that if the exchange is stable
it is not because there is a peg, but because the price-levels in
the two countries have reached a new equilibrium. Essentially
the exchange is stable because it is an artificial purchasing-
power parity. Whether it will continue to be so depends upon
the movements in the home prices. If the home prices rise
more than the rise brought about by the peg in the foreign
prices the mechanism must break. It is from this point of
view that the condition laid down by the Irish Committee on
exchange regarding the limitation on issue must be held as
one of vital character. In omiting to advert to that condition
the Indian currency contradicts what is best in that Report
of the Irish Committee.
The reason why Mr. Lindsay paid no attention to the question
of limitation in setting up his exchange standard is largely
that, notwithstanding the great reputation he has achieved as
* Report, p. 16. Italics not in the original.
† See Hansard Parliamentary Debates, Vol. XIV, pp. 75-91.
‡ Cf. the succinct statement by T. E. Gregory, Foreign Exchanges, p. 85.
an author of a new system, he was profoundly ignorant of

the true doctrine regarding the value of a currency. Neither
he nor the hosts of currency-mongers who during the nineties
exercised their ingenuity to devise plans for remedying Indian
exchange troubles,* understood that to stabilize the exchange
was essentially a problem of stabilizing the purchasing power
of currency by controlling its volume.† The gold-exchange
standard ignores the fact that in the long run it is the general
purchasing power of a currency that will ultimately govern
its exchange value. Its aim is to stabilize exchange and allow
the problem of purchasing power to go hang. The true policy
should be to stabilize the purchasing power of the currency
and let exchange take care of itself. Had the Chamberlain
Commission considered the exchange standard from this point
of view it could not have called it a sound standard when in
its fundamentals it was the very reverse of it.
Now any one who remains unconvinced of this weakness of
the exchange standard may say that in examining its stability
we have taken only those occasions on which the standard
has broken down. Thinking such a treatment to be unfair,
he might say: How about the years during which stability
was maintained ? Is there nothing to be said in favour of a
system that maintained the gold value of the rupee from 1901
to 1907, or from 1909 to 1914 ? The question is a pertinent
one, and the position that underlies it is supposed to be so
strong that those who hold it have asked the opponents of the
exchange standard either to admit that it is a stable standard
or to show that under that standard the rupee has invariably
failed to maintain its gold value.‡
The validity of this position depends upon assumptions so
plausible and so widespread that the argument urged so far
against the exchange standard will not be of full effect until their
futility is fully demonstrated. The first assumption is that there
cannot be a depreciation of a currency unless it has depreciated
in terms of gold. In other words, if the excess has not produced
* See Chap. IV.

† Cf. evidence of Mr. Lindsay before the Fowler Committee, Q. 4,190-95,
where he asserted that exchange had nothing to do with the quantity of money
in circulation.
‡ Dodwell, “A Gold Currency for India,” Economic Journal, 1911; Report on
the Enquiry into the Rise of Prices in India, 1914, p. 94.
a fall in the value of a currency in terms of a particular

commodity such as gold, then there has been no excess at all
in terms of commodities in general. Now there was a time,
particularly during the discussion on the Bullion Report,
when the conception of a change in the value of the currency
in relation to things in general was not quite clear even to
the most informed minds,* and was even pronounced invalid
by high authorities.† In view of the absence of the system of
index numbers, this simple faith in the summary method of
ascertaining depreciation by some one typical article, gold for
instance, as a measure of value, was excusable. But the same
view is without any foundation to-day. No one now requires to
be shown that the price of each commodity has varied to the
same extent and in the same direction as prices of commodities
in general before admitting that there has been a change in the
value of a currency. Why assume a single commodity like gold
as a measure of depreciation ? It would be allowable, although
it is short-sighted to do so, if the depreciation of gold was an
accurate measure of the depreciation of a currency in terms of
all other commodities. But such is not the case. Commenting
upon the experience of the United States with the greenbacks
during the Civil War, Prof. W. C. Mitchell observes‡ :
“The fluctuations in the price of gold which attracted
so much attention were much more moderate than the
extreme fluctuations in the prices of commodities. The
gold quotations lay all the time well within the outer
limits of the field covered by the variations of commodity
prices....... During the war gold moved up or down in price
more quickly than the mass of commodities...... When
gold was rising in price the majority of the commodities
followed, but more slowly...... When gold was falling in
price the majority of commodities stood still or followed
more slowly...... This more sluggish movement of commodity
prices appears still more clearly after the war. Rapid
as was the fall of prices it was not so rapid as the fall
in gold. A more curious fact is that the price-level for
* Canning’s castigation of Lord Castlereagh’s definition of standard as “a
sense of value” during the Bullion debates must be attributed to his ignorance
on this matter.
† Ricardo, in his Proposals for an Economical and Secure Currency says :“It has
indeed been said that we might judge of the value of a currency by its relation
not to one but to the mass of the commodities...... Such a test would be of no
use whatever...... To determine the value of a currency by the test proposed......
is evidently impossible.”
‡ Gold Prices and Wages under the Greenback Standard, 1908, pp. 39-41.
commodities continued for ten years to be higher than the

price-level for gold.”
This shows that the test sought to be applied by the adherents
of the exchange standard is a false one and gives an inaccurate
reading of the value of a currency. There can be no doubt that
people who have urged its application to that standard would
not have pressed for it so much as they have done if they had
taken proper care to distinguish between specific depreciation of
a currency in terms of gold and its general depreciation in terms
of commodities.* The experience of the Bank of England during
the suspension period is a capital instance of the phenomenon
where a currency is generally depreciated, although it showed
no sign of specific depreciation :—
TABLE L
DEPRECIATION OF THE NOTES OF THE BANK OF ENGLAND†
Percentage Values of Bank Notes in Terms of
(1) Gold (2) Commodities
1797 ... ... ... 100.0 110
1798 ... ... ... 100.0 118
1799 ... ... ... ... 130
1800 ... ... ... 107.0 141
1801 ... ... ... 109.0 153
1802 ... ... ... ... 119
1803 ... ... ... ... 128
1804 ... ... ... 103.0 122
1805 ... ... ... 103.0 136
1806 ... ... ... ... 133
1807 ... ... ... ... 132
1808 ... ... ... ... 149
1809 ... ... ... ... 161
1810 ... ... ... ... 164
1811 ... ... ... 123.9 147
1812 ... ... ... 130.2 148
1813 ... ... ... 136.4 149
1814 ... ... ... 124.4 153
1815 ... ... ... 118.7 132
1816 ... ... ... 102.9 109
1817 ... ... ... 102.2 120
1818 ... ... ... 104.6 135
* Cf, Prof. Nicholson’s Principles of Political Economy (1897), Vol. II, Chap. XV,
§4 ; and Walker, F. A., Money, 1878, pp. 387-91.
† From Hawtrey’s Credit and Currency, p. 269. On the values of the notes in terms
of gold Prof. Foxwell says :” It is admitted by the severest critics of the bank that
there is no substantial ground for complaint as to its conduct during the restriction
until 1808-9. There does not seem, indeed, to have been any real depreciation of its
paper until that date. The price of £ 4 per ounce, which figures monotonously for the
years 1803-9, was really an arbitrary price, fixed by the bank itself as one at which
it would purchase foreign gold.” Preface to Andreades, p. xvi. Some people seem to
doubt that there was no specific depreciation of the inconvertible notes of the Bank of
England till 1810. Unfortunately data are not available to give direct evidence of the
fact. But circumstantial evidence there is. It is to be remembered that the premium
on gold was the only method then known of measuring depreciation and that Horner,
Ricardo and others were open enemies of the Bank of England. That being the case,
it does not seem probable that Horner would have waited to introduce his Resolution
in the House of Commons till 1810 if the bank notes had shown signs of specific
depreciation before that time.
Which kind of depreciation is the greater evil we will discuss

in the next chapter. Dealing for the present with this experience
of the Bank of England, we have the fact that there can be a
general depreciation without a specific depreciation. In view of
this, the upholders of the exchange standard have no reason
to be proud of the fact that the rupee has not shown signs
of specific depreciation over periods of long duration. That a
bank note absolutely inconvertible and unregulated as to issue
should have maintained its par for very nearly thirteen years
may speak far more in favour of the suspension system than
the experience of the rupee can in favour of the exchange
standard. There is a greater wonder in the former than there
is in the latter, for the value of the rupee is sustained, apart
from the fact that gold in terms of which it was measured
was itself undergoing a depreciation, as is evident from the
foregoing figures of general prices in England, and by a hope in
some kind of convertibility, however slight or however remote
but which had no place in the case of the Bank of England
notes. Yet no one is known to have admired or justified the
currency system of the suspension period, although it had not
given rise to a specific depreciation for a long time.
This mode of measuring depreciation in terms of gold
would be, relatively speaking, a harmless idea if it was
not made the basis of another assumption on which the
exchange standard is made to rest, that the general and
specific depreciations of a currency are unrelated phenomena.
As against this it is necessary to urge that the chief lesson
to be drawn from this experience of the Bank of England
for the benefit of the upholders of the exchange standard
consists in demonstrating that although their movements
are not perfectly harmonious, yet they are essentially inter-
related. That lesson may be summed up in the statement that
when the general depreciation of currency has taken place
the occurrence of a specific depreciation, other things being
equal, is only a matter of time, if the general depreciation
proceeds beyond a certain limit. What will be the interval
before specific depreciation will supervene upon general
depreciation depends upon a variety of circumstances. Like
the surface of a rising lake, general depreciation touches
different commodities at different times according as they are
located in the general scheme of things as determined by the
relative strength of demand for them. If there is no demand
for gold for currency purposes or for industrial purposes, the
depreciation of the currency in terms of gold may be delayed.

It is only to make foreign remittances that the demand for gold
first makes itself felt, and it is there that specific depreciation
primarily arises. But there again it need not, for everything
depends upon whether other commodities equally good, which
the foreigner would take as readily as gold, are forthcoming or
not. Now, in the case of India all these three factors tending
to postpone specific depreciation are more or less operative.
The rupee is a full legal-tender currency and can effectively
discharge debts without compelling resort to gold. The industrial
demand for gold in a poor country like India cannot be very
great.* Consequently, the generally depreciated rupee does not
show immediate signs of depreciation in the internal trade of
the country. As for foreign payments, the position of India is
equally strong, not because, as is absurdly supposed, she has
a favourable balance of trade, but because she has certain
essential commodities which a foreigner is obliged to
* The following table regarding the consumption of gold in different countries
is interesting:—
§ CONSUMPTION OF GOLD (MILLIONS OF POUNDS STERLING AT 85S.
PER FINE OUNCE)
1915 1916 1917 1918 1919 1920
Industrial Arts (Europe and America). 17.0 18.0 16.0 17.0 22.0 22.0
India (year to March 31 following. 1.4 5.1 19.6 —3.3 27.7 5.1
China ... —1.7 2.6 2.6 0.04 11.5 —3.7
Egypt ... —0.8 —0.2 —0.1 —0.0 —0.0 ?
Balance available as money (difference). 80.5 68.0 48.2 64.9 13.8 46.6
World ... 96.4 93.5 86.3 79.0 75.0 70.0
§ The figures are those of Mr. Joseph Kitchin in The Review of Economic
Statistics, Preliminary volume 3, No. 8 for August, 1921, p. 257. If figures previous
to 1914 are desired, see table ibid., p. 258).
Omitting the abnormal years of 1917 and 1919 and reducing the figures to
per capita basis the consumption of gold by India must be said to be remarkably
small. Besides, it is to be noted that figures for India include industrial as well
as monetary consumption. Further, in making comparison account must be
taken of the difference in the period taken as unit in the case of India and other
countries. Of course in these days when gold is so very greatly depreciated in
terms of commodities in general, neither is there any necessity to shed tears if
its production were to fall off, nor can it be anything but a welcome event if its
use were to be extended. It would therefore be unwise to resent an increase, if
it were to take place, in the importation and use of gold by India. The greater
the use of gold and the less the production of it, the better for the world as it
is circumstanced to-day. Cf. in this connection the remarks of Prof. Cannan on
Mr. Shirras’s Paper in the J.R.S.S. for July, 1920, pp. 623-24.
accept* in place of gold. Specific depreciation of the rupee will

occur chiefly when the general depreciation has overtaken
the commodities that enter into India’s foreign trade. That
the depreciation should extend to them is inevitable, for,
as is well said,†
“in a modern community the prices of different goods
constitute a completely organized system, in which the
various parts are continually being adjusted to each
other by intricate business process. Any marked change
in the price of important goods disturbs the equilibrium
of this system, and business processes at once set going
a series of readjustments in the prices of other goods
to restore it.”
It is true that in the case of India the interconnection
between production for internal trade and production for
external trade is not so closely knit as in the case of other
countries. The only difference that this can make in the
situation is to moderate the pace of general depreciation so
that it does not affect foreign trade commodities too soon.
But it cannot prevent its effect from ultimately raising their
price, and once their price is risen the foreigner will not
accept them, however essential. A demand for gold must
arise, resulting in the specific depreciation of the currency.
This statement of the case agrees closely with the experience
of the Bank of England and that of India as well. In the
case of the Bank of England the “great evil,” i.e. the specific
depreciation of the bank notes, of which Horner complained
so much, made its appearance in 1809, some thirteen years
after the suspension was declared. Similarly, we find in
the case of India specific depreciation tends to appeear at
different intervals, thereby completely demonstrating that,
even for the purpose of avoiding specific depreciation, it is
necessary to pay attention to the general depreciation of a
currency.
Having regard to these facts, supported as they are by theory
as well as history, the incident that the rupee has maintained
its gold value over periods of some duration need not frighten
* Evidence of Prof. Marshall, I.CC. 1898, Q. 11,793.
† Mitchell Ibid, p. 258.
anyone into an admission that the exchange standard is

therefore a stable standard. Indeed, a recognition of that fact
cannot in the least discredit what has been said above. For
our position is that in the long run general depreciation of a
currency will bring about its specific depreciation in terms of
gold. That being our position, even if we are confronted with
the absence of specific depreciation of the rupee, we are not
driven to retract from the opinion that the best currency system
is one which provides a brake on the general depreciation of
the unit of account. The exchange standard provides no such
controlling influence; indeed, its gold reserve, the instrument
which controls the depreciation, is the direct cause of such
depreciation. The absence of specific depreciation for the
time being is not more than a noteworthy and an interesting
incident. To read into it an evidence of the security of the
exchange standard is to expose oneself, sooner a later, to the
consequences that befall all those who choose to live in a
fool’s paradise.

CHAPTER VII
A RETURN TO THE GOLD STANDARD
We have examined the exchange standard in the light of
the claim made on behalf of it, that it is capable of maintaining
the gold parity of the rupee. This was the criterion laid down
by the Chamberlain Commission as a fitting one by which
to judge the merits or demerits of that standard. But is the
adequacy of that criterion beyond dispute ? In other words,
supposing the rupee has maintained its gold parity, which it
has only as often as not, does it follow that all the purposes
of a good monetary system are therefore subserved ?
In the exchange standard, “as the system is now operated,
the coinage is manipulated to keep it at par with gold”* as
though money is only important for the amount of gold it
will procure. But what really concerns those who use money
is not how much gold that money is worth, but how much of
things in general (of which gold is an infinitesimal part) that
money is worth. Everywhere, therefore, the attempt is to keep
money stable in terms of commodities in general, and that is
but proper, for what ministers to the welfare of people is not
so much the precious metals as commodities and services of
more direct utility. Stability of a currency in terms of gold
is of importance only to the dealers in gold, but its stability
in terms of commodities in general affects all, including the
bullion-dealers. Even Prof. Keynes, in his testimony before the
Indian Currency Committee of 1919, observed† :—
“I should aim always…… at keeping Indian prices
stable in relation to commodities rather than in relation
to any particular metallic or particular foreign currency.
That seems to me of far greater importance to India.”
It is, of course, a little difficult to understand how the remedy
of high exchange which he supported was calculated to achieve
that object. Raising the exchange was a futile project, in so far
*Fisher, Purchasing Power of Money, 1911, p. 340.

†Q. 2,690.
as it was not in keeping with the purchasing power of the

rupee. As an influence governing prices it could hardly be
said to possess the virtue he attributed to it. The existing
price-level it could affect in no way; nor could a high exchange
prevent a future rise of prices. It could only change the base
from which to measure prices. Future prices could vary as
easily from the new high base-line as prices did in the past
from the old baseline. In other words, Mr. Keynes seems to
have overlooked the fact that exchange was only an index of
the price-level, and to control it, it was necessary to control
the price-level and not merely give it another name which it
cannot bear and will not endure, as was proved in 1920 when
the rupee was given in law the value of 2s. (gold) when in
practice it could not fetch even 1s. 4d. sterling, with the result
that the rupee exchange sank to the level determined by its
purchasing power. But, apart from this question, we have the
admission of the ablest supporter of the exchange standard that
the real merit of a currency system lies in maintaining the
standard of value stable in terms of commodities in general.
Given that this is the proper criterion by which to judge
a currency system, we must ask what has been the course
of prices in India since the Mint closure in 1893 ? This is
a fundamental question, and yet not one among the many
who have praised the virtues of the exchange standard has
paid any attention to it. In vain may one search the pages of
Prof. Keynes, Prof. Kemmerer, or Mr. Shirras for what they
have to say of the exchange standard from this point of view.
The Chamberlain Commission or the Smith Committee on
Indian currency never troubled about the problem of prices
in India,* and yet without being satisfied on that score it is
really difficult to understand how anyone can give an opinion
of any value as to the soundness or otherwise of that standard.
In proceeding to consider the exchange standard from the
standpoint of prices, it is as well to premise that one of the
important reasons why the Indian Mints were closed to the free
coinage of silver was that the rupee was a depreciating currency
resulting in high prices.† The dosing of the Mints, therefore,
* Perhaps an exception may be made in the case of the latter Committee ; but
its object was only to make it a ground for high exchange.
† See supra, Chap. III.
A RETURN TO THE GOLD STANDARD 565
should have been followed by a fall of prices in India; for, to

adopt the phraseology of Prof. Fisher,* the pipe-connection
between the money reservoir and the silver-bullion reservoir
was owing to the Mint closure cut off or stopped, thereby
preventing the passage of silver from the bullion reservoir to
the money reservoir. In other words, the newly mined silver
could not become money after the Mint closure and lower the
purchasing power of the rupees in circulation. If this is so, then
how very disappointing has been the effect of the Mint closure !
From the standpoint of prices the rupee has become a problem
as it had never been before. The rise of prices in India since
the Mint closure (See Chart VI) has been quite unprecedented
in the history of the country. Indeed, the rise of prices in India
before the Mint closure, when the pipe-connection between the
silver-bullion reservoir and the rupee-currency reservoir was
intact, must be regarded as very trifling compared with the
rise of prices after the Mint closure when the pipe-connection
was cut off. From the standpoint of prices the Mint closure has
therefore turned out to be a curse rather than a blessing, and
literally so, for, under an ever-rising price-level, life in India
is rendered quite unbearable. No people have undergone so
much misery owing to high prices as the Indian people have
done. During the war period the price-level reached such a
giddy height that the reports of suicide by men and women
who were unable to buy food and clothing were in no way
few and far between, ft may, however, be argued that the
rise of prices in India would have been greater if the Mints
had not been closed and India had remained a purely silver-
standard country. A good deal, no doubt, can be said in favour
of this view. It is absolutely true that silver, being universally
discarded, has become unfit for functioning as a standard of
value. To that extent an exchange standard is better than a
pure-silver standard. But is it as good as a gold standard ?
On the basis of the doctrine of purchasing power parities
as an explanation of actual exchange rates, one may be led to
answer the question in the affirmative. For it may be argued
*Purchasing Power of Money, 1911, p. 128.

that if the gold value of the rupee was maintained it is because

gold prices and rupee prices were equal.* This, it may be
said, is all that the exchange standard aims at doing and can
be claimed to have done, for the fact that the gold-standard
reserve was seldom depleted is a proof that the general prices
inside India were on the same level as those ruling outside
India. On a priori considerations such as these, the exchange
standard may be deemed to be as good as a gold standard.
One may ask as to why Indian prices should have been kept
as high, if they were no higher than gold prices, and whether
it would not have been better to have kept Indian prices on a
lower level. But we shall not raise that question. We shall be
satisfied if Indian prices were only as high as gold prices. Now
did Indian prices rise only as much as gold prices ? A glance
at the chart reveals the surprising phenomenon that prices in
India not only rose as much as gold prices, but rose more than
gold prices. Of course in comparing Indian prices with gold
prices to test the efficacy of the exchange standard we must
necessarily eliminate the war period, for the reason that gold
had been abandoned as a standard of value by most of the
countries. And, even if we do take that period into account, it
does not materially affect the conclusion, for although India
was not a belligerent country, yet prices in India were not
very much lower than prices in countries with most inflated
currencies during the war, and barring a short period were
certainly higher than gold prices in U.S.A.
It is obvious that the facts do not agree with the a priori
assumption made in favour of the exchange standard. So
noticeable must be said to be the local rise in Indian prices
above the general price level in England that even Prof.
Keynes, not given to exaggerate the faults of the exchange
standard, was, as a result of his own independent investigation,
convinced that†
“a comparison with Sauerbeck’s index number for the
United Kingdom shows that the change in India is much
greater than can be accounted for by changes occuring
elsewhere.”
* It is, however, to be noted that neither Prof. Kemmerer nor Prof. Keynes
has set up this claim in favour of the exchange standard. If anything, both have
argued against the assumption of there being equality of all prices.
† “Recent Economic Events in India,” in The Economic Journal, March, 1909,
p. 54. Italic not in the original.
What is then the explanation of this discrepancy between

the a priori assumption and the facts of the case. The
explanation is that the actual exchange rates correspond
to the purchasing power parities of two currencies not with
regard to all commodities but with regard to some only. In this
connection it is better to re-state the doctrine of the relation
of the purchasing power parities to exchange rates with the
necessary qualification. A rigorously strict formulation of the
doctrine should require us to state that Englishmen and others
value Indian rupees inasmuch as and in so far as those rupees
will buy such Indian goods as Englishmen want; while Indians
value English pounds inasmuch as and in so far as those
pounds will buy such English goods as the Indians want. So
stated it follows that the actual exchange rates are related to
purchasing power parities of the two currencies with regard
to such commodities only as are internationally traded. To
assume that the actual exchange rate is an exact index of the
purchasing power parity of the two currencies with regard
to all the commodities is to suppose that the variations in
the purchasing power of a currency over commodities which
are traded and which are not traded are the same.* There is
certainly a tendency for movements in the prices of these two
classes of goods to influence one another in the long run; so
that it becomes possible to say that the exchange value of a
currency will be determined by its internal purchasing power.
The doctrine of purchasing power parity as an explanation
of exchange rates is valuable as an instrument of practical
utility for controlling the foreign exchanges and it is as such
that the doctrine was employed in an earlier portion of this
study to account for the fall in the gold value of the rupee.
But to proceed, on the basis of this relationship between the
purchasing power of a currency and its exchange value, to argue
that at any given time the exchange is more or less an exact
measure of general purchasing power of the two currencies,
is to assume what cannot always be true, namely, that the
prices of traded and non-traded goods move in sympathy. This
assumption is too large and can only be said to be more or
less true according to circumstances. Now as Prof. Kemmerer†
points out:—
*Prof. Cassel, the modern exponent of this old doctrine of the relation of
exchange rates to purchasing power parities, admits that the correspondence
between the two depends upon the fulfilment of this assumption, for he says :
“Our calculation of the purchasing power parity rests strictly on the proviso
that the rise in prices in the countries concerned has affected all commodities
in a like degree. If that proviso is not fulfilled, then the actual exchange rate
may deviate from the calculated purchasing power parities.”— Money and
Foreign Exchange after 1914, London, 1922, p. 154.
†Op. cit., p. 64.
“While India’s exports and imports in the absolute are

large, still, in the main, the people of India live on their
own products, and a large part of those products run their
life history from production to consumption in a very small
territory. They have only the remotest connection with
foreign trade, gold, and the gold exchanges. In time, of
course, any substantial disturbance in the equilibrium of
values in the country’s import and export trade will make
itself felt in these local prices, but allowing for exceptions,
it may be said that in a country like India the influences
of such disturbances travel very slowly and lose much of
their momentum in travelling.”
In consequence of the thinness of connection between the
two it is obvious that the prices of such Indian goods as do
enter into international trade cannot always be said to move in
more or less the same proportion as those which do not. Besides
this thinness of connection which permits of deviations of the
general purchasing power of a currency from the level indicated
by the actual exchange rate, it is to be noted that the prices
of Indian commodities which largely enter into international
trade are not governed by local influences. Such exports of
India as wheat, hides, rice and oil seeds are international
commodities, not solely amenable to influences originating
from changes that may be taking place in the prices of home
commodities and services. The combined effect of these two
circumstances, except in abnormal events such as the war, is
to militate against the prices of traded and non-traded goods
moving in quick sympathy.*
If this is true, then, although the maintenance of the
exchange standard does imply a purchasing power parity of the
rupee with gold, it is not a purchasing power parity of the two
currencies with respect to all the commodities. All that it implies
is that the purchasing power of the rupee over such commodities
as entered into international trade was on a par with gold, so
that there did not often arise the necessity of exhausting the
gold reserve. The preservation of the gold reserve only meant
that there was equality of prices so far as internationally traded
goods were concerned. Thus interpreted, the fact that the rupee
* This is merely re-stating what has previously been stated to explain why
specific depreciation of the rupee does not immediately follow upon its general
depreciation.
maintained its gold value does not preclude the possibility of

Indian prices being, on the whole, higher than gold prices,
thereby vitiating the a priori view that the exchange standard
is as good as the gold standard.
It should be pointed out* that all changes of prices affect
more or less the welfare of the individual. However, the
general flexibility of the modern economic organization, with
its mobility of capital and labour, free competition, power
of choice, inventive genius and intellectual resources of
enterpreneurs and merchants, takes care of the normal and
temporary fluctuations of prices. But when a change in the
price-level is general and persistent in one direction the case
is otherwise. Arrangements based on the expectation that
the price movement is only temporary, and that there will be
a return to the former normal position, constantly come to
naught. Suffering endured in holding on for the turn in the
movement cannot be offset by gains in another. In short, such a
persistent price movement in one direction is bound to confound
ordinary business sagacity and so vitiate all calculations for
the future as to result in unlimited dislocation or loss and
subject the individual to such powerful and at the same time
incalculable influences that his economic welfare cannot but
escape entirely from his control, and prudence, forethought,
and energy become of no avail in the struggle for existence.
Perfect stability of value in a monetary standard is as yet
only an ideal. ‘But the evil consequences of instability are so
great that Prof. Marshall, believing as he did that the general
prejudice against tampering with the monetary foundations
of economic life was a healthy prejudice, yet observed that
much may be done towards safeguarding the economic welfare
of communities by lessening its variability.† A depreciating
standard of value, as gold has been since 1896, is an evil. But
can a standard of value, undergoing a continuous depreciation
as has been the case with the exchange standard, and that
too of a greater depth than the gold standard—in other words,
causing a greater rise of prices—be regraded as a good standard
of value ?
* What follows is condensed from Mayo-Smith’s “Price Movements and Individual

Welfare,” in the Political Science Quarterly, Vol. XV, No. 1 (March, 1900), pp. 14-17.
† Cf.” Remedies for Fluctuations of General Prices,” in The Contemporary
Review, March, 1887, passim.
In the light of this it is strange that Prof. Keynes,

in his treatise on Indian Currency and Finance, should
have maintained that the exchange standard contained an
essential element in the ideal standard of the future*—a
view subsequently endorsed by the Chamberlain Commission.
If stability of purchasing power in terms of commodities in
general is the criterion for judging a system of currency, then
few students of economics will be found to agree with Prof.
Keynes. Perhaps it is not too sanguine to say that even the
Prof. Keynes of 1920 will prefer a gold standard to a gold-
exchange standard, for under the former prices have varied
much less than has been the case under the latter.
In this connection attention may be drawn to the prevalent
misconception that India is a gold-standard country. It will be
admitted that the best practical test whether any two countries
have the same standard of value is to be found in the character
of the movements in their price-levels. So sure is the test that
Prof. Mitchell, after a very careful and wise survey of the
price-level of different countries and the American price-level
during the greenback period, was led to observe† that
“when two countries have a similar monetary system
and important business relations with each other, the
movements of their price-levels as represented by index-
numbers are found to agree rather closely. This agreement
is so strong that similarity of movement is usually found
even when comparisons are made with material so crude
as index-numbers compiled from unlike lists of commodities
and computed on the basis of actual prices in different
years.” Now, we know that before the war England was
a gold-standard country, and we also know that there
was no close correpondence between the contemporary
movements of the price-levels of India and England. In
view of this, it is only a delusion to maintain that India
has been a gold-standard country. On the other hand,
it is better to recognise that India has yet to become
a gold-standard country unless we are to fall into the
same error that Prof. Fisher‡ must be said to have
* Op. cit., p. 36.

† Gold, Prices, and Wages under the Greenback Standard, 1908, p. 27.
‡ Purchasing Power, etc., 1911, p. 340.
committed in attributing the extraordinary rise of prices in

India to the existence of a gold standard, when, as a matter
of fact, it should have been attributed to the want of a gold
standard.
How can she become a gold-standard country ? The obvious
answer is, by introducing a gold currency. Prof. Kenyes scoffs
at the view that there cannot be a gold standard without a
gold currency as pure nonsense.* He seems to hold that a
currency and a standard of value are two different things.
Surely there he is wrong. Because a society needs a medium of
exchange, a standard of value, and a store of value to sustain
its economic life, it is positively erroneous to argue that these
three functions can be performed by different instrumentalities.
On the other hand, as Professor Davenport insists.†
“all the different uses of money are merely different
aspects or emphasis of the intermediate function. Deferred
payments …… are merely deferred payments of the
intermediate. So again of the standard aspect; whatever
is the general intermediate is by that fact the standard.
The functions are not two, but one ….., Clearly, also, the
intermediate may be a storehouse of purchasing power.
The second half of the barter may be deferred. The
intermediate is generalized purchasing power. Delay is
one of the privileges which especially the intermediate
function carries with it.”
Thus the rupee by reason of being the currency is also the
standard of value. If we wish to make gold the standard of
value in India we must introduce it into the currency of India.
But it may be asked what difference could it make to the price
level in India if gold were made a part of the Indian currency ?
To answer this question it is necessary to lay bare the nature
of the rupee currency. Now it will be granted that a standard
of value which is capable of expansion as well as contraction
is likely to be more stable than one which is incapable of
(such a manipulation. The rupee currency is capable of)‡ easy
expansion, but is not capable of easy contraction by reason of
the fact that it is neither exportable nor meltable, nor is it
* Op. cit., p. 29.
† Op. cit., pp. 255-56 ; cf. also F. A. Walker, Money in its Relation to Trade,
p. 27 ; and C M. Walsh, The Fundamental Problem in Monetary Science, p. 304.
‡The portion in the bracket is missing in the Evolution of Provincial Finance—Ed.
convertible at will. The effects of such a currency as compared

with those of an exportable currency were well brought out by
the late Hon. Mr. Gokhale in a speech in which he observed.*
“Now, what is the difference if you have an automatic
self-adjusting currency, such as we may have with gold or
we had with silver before the year 1893, and the kind of
artificial currency that we have at present ? Situated as
India is you will always require, to meet the demands of
trade, the coinage of a certain number of gold or silver
pieces, as the case may be, during the export season, that
is for six months in the year. When the export season is
brisk money has to be sent into the interior to purchase
commodities. That is a factor common to both situations,
whether you have an artificial currency, as now, or a
silver currency, as before 1893. But the difference is this.
During the remaining six months of the slack season there
is undoubtedly experienced a redundancy of currency,
and under a self-adjusting automatic system there are
three outlets for this redundancy to work itself off. The
coins that are superfluous may either come back to the
banks and to the coffers of Government, or they may be
exported, or they may be melted by people for purposes
of consumption for other wants. But where you have no
self-adjusting and automatic currency, where the coin
is an artificial token currency, such as our rupee is at
the present moment, two out of three of these outlets
are stopped. You cannot export the rupee without heavy
loss, you cannot melt the rupee without heavy loss, and
consequently the extra coins must return to the banks and
coffers of the government or they must be absorbed by the
people. In the latter case the situation is like that of a
soil which is water-logged, which has no efficient drainage,
and the moisture from which cannot be removed. In this
country the facilities for banking are very inadequate,
and therefore our money does not swiftly return back to
the banks or Government Treasuries. Consequently, the
extra money that is sent into the interior often gathers
here and there like pools of water turning the whole soil
into a marsh. I believe the fact cannot be gainsaid that
the stopping of two outlets out of the three tends to raise
prices by making the volume of currency redundant.”
Had gold formed a part of the Indian currency it would have
not only met the needs for expansion but would have permitted
* Supreme Legislative Council Proceedings, Vol. L. p. 642.

contraction of currency in a degree unknown to the rupee. Gold

would be superior to the rupee as a standard of value for the
reason that the former is expansible as well as contractible,
while the latter is only expansible but not contractible. This
is merely to state in different language what has already been
said previously, that the Indian monetary standard, instead of
being a gold or a gold-exchange standard, is in all essentials
an inconvertible rupee standard like the paper pound of the
Bank Suspension period, and the extra local rise of prices
which in itself an inconvertible proof of the identity of the
two systems, is characteristic of both, is, to use the language
of the Bullion Report*
“the effect of an excessive quantity of a circulating
medium in a country which has adopted a currency not
exportable to other countries, or not convertible at will
into a coin which is exportable.”
Therefore, if some mitigation of the rise in the Indian
price-level is desirable, then the most essential thing to do is
to permit some form of “exportable” currency such as gold to
be a counterpart of the Indian monetary system.
The Chamberlain Commission expended much ingenuity
in making out a case against a gold currency in India.† The
arguments it urged were : (1) Indian people will hoard gold
and will not make it available in a crisis: (2) that India is too
poor a country to maintain such an expensive money material
as gold ; (3) that the transactions of the Indian people are too
small to permit of a gold circulation ; and (4) paper convertible
into rupees is the best form of currency for the people of India
as being the most economical, and that the introduction of a gold
currency will militate against the popularity of notes as well as
of rupees. The bogy of hoarding is an old one, and would really
be an argument of some force if hoarding was something which
knew no law. But the case is quite otherwise. Money, being the
most saleable commodity and the least likely, in a well-ordered
monetary system, to deteriorate in value during short periods,
is hoarded continually by all people, i,e, treated as a store
of value. But in treating it as a store of value the possessor
* Prof. Cannan’s Reprint, p. 17.

† Report, pp. 15-19. The same arguments will be found in Chap. IV of
Mr. Keynes’s treatise.
of money is comparing the utilities he can get for the money,

by disposing of it now, with those he believes he can get for it
in the future, and if the highest present utility is not so great
as the highest future utility, discounted for risk and time, he
will hoard the money. On the other hand, he will not hoard
the money if the present use was greater than the future use.
That being so, it is difficult to understand why hoarding should
be an objection to a gold currency for the Indian people. If
they hoard gold that means they do not care to spend it on
current purchases or that they have another form of currency
which is inferior to gold and which they naturally like to
part with first. On the other hand, if they do wish to make
current purchases and have no other form of currency they
cannot hoard gold. There are instances when precious metals
have been exported from India, when occasion had called for
it,* showing that the hoarding habit of the Indian peoples is
not such an unknown quantity as is often supposed, and if
on some occasions† they hoarded an exportable currency when
they should have released it, it is not the fault of the people
but of the currency system in which the component parts of
the total stock of money are not equally good as a store of
value. The argument from hoarding, if it is an argument, can
be used aginst any people, and not particularly against the
Indian people.
The second argument against a gold currency in India
has no greater force than the first. If gold were to disappear
from circulation then the cause can be nothing else but the
over-issue of another kind of money. In the nineties, when the
question of establishing a gold standard in India was being
considered, some people used to point to the vain efforts made
by Italy and the Austrian Empire to promote the circulation
of gold. That their gold used to disappear is a fact, but it was
not due to their poverty. It was due to their paper issues.
Any country can maintain a gold currency provided it does
not issue a cheaper substitute.
Again, if gold will not circulate because transactions are too
small the proper conclusion is not that there should be no gold
circulation but that the unit of currency should be small enough
to meet the situation. The difficulties of circulation raises a
problem of coinage. But the considerations in respect of coinage
*See the Memorandum by Mr. Dalai to the Chamberlain Commission Appendices,
Vol. III, No. XXXIII, pp. 673-75, for this and other cognate topics.
† In the crisis of 1907-8 the Indian people were accused of this. Yet it must
be noted that in that crisis some gold was exported on private account.
cannot be allowed to rule the question as to what should be

the standard of value. If the sovereign does not circulate it
cannot follow that India should not have a gold currency. It
merely means that the sovereign is too large for circulation.
The case, if at all there is one, is against the sovereign as a
unit and not against the principle of a gold currency. If the
sovereign is not small enough the conclusion is we must find
some other coin to make the circulation of gold effective.
The fourth argument against a gold currency is one of
fact, and can be neither proved nor disproved except by an
appeal to evidence whether or not gold currency has the
tendency ascribed to it. But we may ask, is there no danger
in a system of currency composed of paper convertible into
rupees ? Will the paper have no effect on the value of the
rupee ? The Commission, if it at all considered that question,
which is very doubtful, was perhaps persuaded by the view
commonly held, that as the paper currency was convertible it
could not affect the value or the purchasing power of the rupee.
In holding this view it was wrong ; for, the convertibility of
paper currency to the extent it is uncovered does not prevent
it from lowering the value of the unit of account into which it
is convertible, because by competition it reduces the demand
for the unit of account and thus brings about a fall in its
value. Thus the paper, although economical as a currency,
is a danger to the value of the rupee. This danger would
have been of a limited character if the rupee had been freely
convertible into gold. But the danger of a convertible paper
currency to the value of a unit of account becomes as great
as that of an inconvertible paper currency if that unit is not
protected against being driven below the metal of ultimate
redemption by free convertibility into that metal.* The rupee
is not protected by such convertibility, and as the Commission
did not want that it should be so protected it should have
realized that it was as seriously jeopardizing the prospects
of the rupee being maintained at par with commodities in
general, and therefore with gold, by urging the extension of
a paper currency, be it ever so perfectly convertible, as it
could have done by making the paper altogether inconvertible.
But so observed was the Commission with considerations of
* For an illuminating discussion on this topic, cf. Money: Its Connection with
Rising and Falling Prices, by Prof. Cannan, 3rd ed., pp. 47-8.
economy and so reckless was it with considerations of stability

of value, that it actually proposed a change in the basis of the
Indian paper currency from a fixed issue system to that of a
fixed proportion system.* That, at the dictates of considerations
of economy, the Commission should have neglected to take
account of this aspect of the question, is only one more evidence
of the very perfunctory manner in which it has treated the
whole question of stability of purchasing power so far as the
Indian currency was concerned.
If there is any force in what has been urged above, then
surely a gold currency is not a mere mattter of “sentiment”
and a “costly luxury,” but a necessity dictated by the supreme
interest of steadying the Indian standard of value, and thereby
to some extent, however slight, safeguarding the welfare of
the Indian people from the untoward consequences of a rising
price-level.
We now see how very wrong the Chamberlain Commission
was from every point of view in upholding the departure
from the plan originally outlined by the Government of India
and sanctioned by the Fowler Committee. But that raises
the question : How did that ideal come to be so ruthlessly
defeated ? If the Fowler Committee had proposed that gold
should be the currency of India, how is it that gold ceased
to be the currency ? It cannot be said that the door is closed
against the entry of gold, for it has been declared legal tender.
Speaking in the language of Prof. Fisher, the movement of
gold in the money reservoir of India is allowed a much greater
freedom so far as law is concerned than can be said of silver.
Silver, in the form of rupees, is admitted by a very narrow
valve which gives it an inlet into that reservoir, but there is
no outlet provided for it. On the other hand, gold is admitted
into the same reservoir by a pipe-connection which gives it an
inlet as well as an outlet. Why, then, does not gold flow into
the currency reservoir of India ? A proper understanding on
this question is the first step towards a return to the sound
system proposed in 1898.
On an examination of the literature which attempts to
deal with this aspect of the question, it will be found that two
explanations are usually advanced to account for the non-entry
of gold into the currency system of India. One of them is the
sale of council bills by the Secretary of State. The effect of the
sale of council bills, it is said, is to prevent gold from going to
India. Mr. Subhedar, said to be an authority on Indian currency,
* Report, Sec. 112.
in his evidence before the Smith Committee (Q. 3,502),

observed:—
“Since 1905 it has been the deliberate attempt of
those who control our currency policy to prevent gold
going to India and into circulation.”
The council bill has a history which goes back to the
days of the East India Company.* The peculiar position
of the Government of India, arising from the fact that
it receives its revenues in India and is obliged to make
payments in England, imposes upon it the necessity of
making remittances from India to England. Ever since
the days of the East India Company the policy has been
to arrange for the remittance in such a way as to avoid
the transmission of bullion. Three modes of making the
remittance were open to the Directors of the East India
Company: (1) sending bullion from India to England;
(2) receiving money in England in return for bills on
the Government of India; and (3) making advances to
merchants in India for the purchase of goods consigned
to the United Kingdom and repayable in England to the
Court of Directors of the Company to whom the goods were
hypothecated. Out of these it was on the last two that
greater reliance was placed by them. In time the mode of
remittance through hypothecation of goods was dropped”
as introducing a vicious system of credit, and interfering
with the ordinary course of trade.” The selling of bills on
India survived as the fittest of all the three alternatives,†
and was continuned by the Secretary of State in Council—
hence the name, council bill—when the Government of
India was taken over by the Crown from the Company.
In the hands of the Secretary of State the council bill has
undergone some modifications. The sales as now effected are
* Cf. the Memorandum by Sir Henry Waterfield relating to the system of
effecting remittances from India, Appendix to the Fowler Committee’s Report,
p. 24 ; also memorandum by F. W. Newmarch on the Sale of Council Bills and
Telegraphic Transfers. Appendices to the Interim Report of the Royal Commission
on Indian Finance and Currency, Vol. I, No. VIII, p. 217.
† There was a fourth one, viz., the Government of India purchasing sterling
bills in India on London and sending them to the Secretary of State for collection.
It was employed for a short period of time in 1877, but was afterwards dropped.
weekly sales,* and are managed through the Bank of England,

which issues an advertisement on every Wednesday on behalf
of the Secretary of State for India, inviting tenders to be
submitted on the following Wednesday for bills payable on
demand by the Government of India either at Bombay, Madras,
or Calcutta. The minimum fraction of a penny in the price at
which tenders of bills are received has now† been fixed at 1 32
nd of a penny. The council bill is no longer of one species as it
used to be. On the other hand there are four classes of bills:
(1) ordinary bills of exchange, sold every Wednesday, known
as “Councils”; (2) telegraphic transfers, sold on Wednesdays,
called shortly “Transfers”; ‡ (3) ordinary bills of exchange,
sold on any day in the week excepting Wednesday, called
“Intermediates”; and (4) telegraphic transfers, sold on any day
excepting Wednesday, named “Specials.” Now, in what way
does the Secretary of State use his machinery of council bills
to prevent gold from going to India ? It is said that the price
and the magnitude of the sale are so arranged that gold does
not go to India. Before we examine to what extent this has
defeated the policy of the Fowler Committee, the following
figures (Tables LI and LII, pp. 579 and 582) are presented
for purposes of elucidation.
From an examination of these tables two facts at once
become clear. One is the enormous amount of council bills
the Secretary of State sells. Before the closing of the Mints
the sales of council bills moved closely with the magnitude of
the home charges, and the actual drawings did not materially
deviate from the amount estimated in the Budget. Since the
closure of the Mints the drawings of the Secretary of State have
not been governed purely by the needs of the Home Treasury.
Since the closure, the Secretary of State has endeavoured§ :—
“(1) To draw from the Treasuries of the Government
of India during the financial year the amount that is laid
down in the Budget as necessary to carry out the Ways
and Means programme of the year.
* From January 22, 1862, when the Sale of Council Bills under the authority
of the Secretary of State first took place, up to November, 1862, the sales were
effected monthly. From November, 1862, the sales were effected fortnightly ; and
in August, 1876, they were made weekly.
† From January to march, 1862, the minimum fraction was a farthing ; it was
reduced to 1/8 th of a penny in March 1862, to 1/16th in January 1875, and to
1/32nd in 1882, at which fraction it has continued since then.
‡ First introduced in 1876.
§ Cf. Memorandum on the Sale of Council Bills, by F. W. Newmarch, to the
Chamberlain Commission, App. Vol. I, No. VII. p. 222.
TABLE LI
BALANCE OF TRADE, COUNCIL DRAWINGS AND IMPORTS OP GOLD BEFORE 1893
Net Imports of Excess ( +) or
Balance of Cash
Treasure. Deficiency (—) Minimum
Trade (Mer- Amount of Balances
of Bills drawn Home Rate for
Years. chandise : Council-Bills in the
as compared Charges. Council
Private Gold. Silver. drawn. Home
with Budget Bills.
Account). Treasury.
Estimate.
(1) (2) (3) (4) (5) (6) (7) (8) (9)
£ £ 000,000 £ 000,000 £ £ £ £ s. d.
1870-71 20,863,000 2.13 .9 — — 10,031,261 3,305,972 1
1 10 4
1871-72 31,094,000 3.43 6.3 — — 9,703,235 2,821,091 3
1 10
1872-73 23,376,000 2.41 .7 13,939,095 + 939,095 10,248,605 2,998,444 3

1 10 8
1873-74 21,160,000 1.29 2.3 13,285,678 - 214,322 9,310,926 2,013,638 1
MK
1 9 2
1874-75 20,137,000 1.73 4.3 10,841,615 + 841,615 9,490,391 2,796,370 3
1 9 4
1875-76 19,204,000 1.40 1.4 12,389,613 -1,910,387 9,155,050 919,899 1 9
1876-77 23,573,000 .8 6.1 12,695,800 - 964,200 13,851,296 2,713,967 1
1 6 2
3
1877-78 23,758,000 .1 12.7 10,134,455 -2,115,545 14,048,350 1,076,657 1 8 16
SJ+YS
1878-79 23,167,000 .4 3.3 13,948,565 -3,051,435 13,851,296 1,117,925 5

1 6 8
1879-80 26,046,000 1.45 6.5 15,261,810 + 261,810 14,547,664 2,270,107 1 7
1880-81 21,464,000 3.03 3.2 15,239,677 -1,660,323 14,418,986 4,127,749 1
1 7 2
1881-82 32,855,000 4.02 4.5 18,412,429 + 1,212,429 14,399,083 2,620,909 3
1 7 8
1882-83 31,389,000 4.01 6.1 15,120,521 - 221,479 14,101,262 3,429,874 1 7

1883-84 23,611,600 4.44 5.2 17,599,805 + 1,299,805 15,030,195 4,113,221 7
1 7 8
1884-85 20,034,100 3.76 5.8 13,758,909 -2,741,091 14,100,982 2,249,378 3
1 6 4
A RETURN TO THE GOLD STANDARD
1885-86 21,344,200 2.10 8.8 10,292,692 -3,481,008 14,014,733 4,726,58 7

1 5 8
25-9-2013/YS-11-11-2013
1886-87 19,844,800 1.58 5.2 12,136,279 -1,195,121 14,409,949 5,280,829 1

1 4 8
1887-88 18,724,400 2.10 6.5 15,358,577 - 891,423 15,389,065 5,900,697 3
1 4 8
1888-89 20,271,900 1.92 6.3 14,262,859 + 262,859 14,983,221 3,259,933 1 4

1889-90 24,557,800 318 7.6 15,474,496 + 784,596 14,848,923 5,402,873 1 4
1890-91 20,733,800 4.25 10.7 15,969,034 + 980,034 15,568,875 3,885,050 15
1 4 16
1891-92 27,632,400 1.68 6.3 16,093,854 + 93,854 15,874,699 4,122,626 1
13 16
1892-93 29,287,300 1.75 8.0 16,532,215 - 467,785 16,334,541 12,268,388
579
579
5
12 8
“(2) To draw such further amounts as may be

required to pay for purchases of silver bought for coinage
purposes.
“(3) To draw such further amounts as an unexpectedly
prosperous season may enable the Government to spare,
to be used towards the reduction or avoidance of debt
in England.
“(4) To sell additional bills and transfers to meet
the convenience of trade.
“(5) To issue telegraphic transfers on India in
payment for sovereigns which the Secretary of State
has purchased in transit from Australia or from Egypt
to India.”
The result of such drawings is that the councils are
made to play an enormous part in the adjustment of the
trade balance of India and the swelling of balances in
the Home Treasury and the locking up of Indian funds
in London. The second point to note in comparing the
preceding tables is with regard to the price at which the
Secretary of State makes his sales. Before the closure
of the Mints the price of the council bills was beyond
the control of the Secretary of State, who had therefore
to accept the price offered by the highest bidder at the
weekly sale of his bills. But it is objected that there
is no reason why the Secretary of State should have
continued the old practice of auctioning the rupee to the
highest bidder when the closing of the Mints had given
him the sole right of manufacturing it. Availing himself
of his monopoly position, it is insisted, the Secretary of
State should not have sold his bills below 1s. 4 1/8d. or
1s. 4 3/32d., which, under the ratio of 15 rupees to the
sovereign, was for India the gold-import point. In practice
the Secretary of State has willed away the benefit of his
position, and has accepted tenders at rates below gold-
import point, as may be seen from the minimum rates he
has accepted for his bills.
It is said that if the council bills were sold in
amounts required strictly for the purposes of the Home
Treasury, and sold at a price not below gold-import
point, gold would tend to be imported into India and
would thus become part of the Indian currency media.
As it is, the combined effect of the operations of the
Secretary of State is said to be to lock up Indian gold in London.

With the use or misuse of the Indian gold in London we are
not here concerned. But those who are inclined to justify the
India Office scandals in the management of Indian funds in
London, and have offered their services to place them on a
scientific footing, may be reminded that a practice on one side
of Downing Street which Bagehot said could not be carried
on on the other side of it without raising a storm of criticism,
would require more ingenuity than has been displayed in their
briefs. This much seems to have been admitted on both sides
that the operations of the Secretary of State do prevent the
importation of gold into India, not altogether, but to the extent
covered by their magnitude. Now, those who have held that
the ideal of the Fowler Committee has been defeated are no
doubt right in their view that the narrowing of the Secretary
of State’s operation would lead to the importation of gold
into India. But what justification is there for assuming that
the imported gold would become a part of the currency of
India ? The assumption that the abolition of the Secretary of
State’s financial dealings would automatically make gold the
currency of India is simply a gratuitious assumption. Whether
the imported gold would become current depends on quite a
different circumstance.
The other explanation offered to explain the failure of the
ideal of the Fowler Committee is the want of a Mint in India
open to the free coinage of gold. The opening of the Mints to
the free coinage of gold has been regarded as the most vital
recommendation of the Fowler Committee ; indeed, so much
so that the frustration of its ideal has been attributed to the
omission by the Government to carry it out. The consent given
by the Government in 1900 to drop the proposal under the
rather truculent attitude of the Treasury has ever since been
resented by the advocates of a gold currency. A resolution was
moved in 1911 by Sir V. Thackersay, in the Supreme Legislative
Council, urging upon the Government the desirability of opening
a gold Mint for the coinage of the sovereign if the Treasury
consented, and if not for the coinage of some other gold coin.
In deference to the united voice of the Council, the Government
TABLE LII
582
BALANCE OF TRADE, COUNCIL DRAWINGS AND IMPORTS OF GOLD AFTER 1893

Net Imports of Treasure. Excess (+) or De-
Balance of Trade ficiency (—) of Cash Balances Minimum
Amount of Coun-
Years. (Merchandise: Bills drawn as Home Charges. in the Home Rate for
Gold. Silver. cil Bills drawn.
Private Account). compared with Treasury. Council Bills.
Budget Estimate.
(1) (2) (3) (4) (5) (6) (7) (8) (9)
£ £ 000,000 £ 000,000 £ £ £ £ s. d.
1893-94 21,660,500 – .39 8.3 9,530,235 – 9,169,765 15,826,815 1,300,564 1 1.500
1894-95 25,765,000 – 2.7 3.4 16,905,102 – 94,898 15,707,367 1,503,124 1 0.000

1895-96 29,963,800 1.5 3.7 17,664,492 + 664,492 15,603,370 3,393,798 1 1.000
MK
1896-97 21,333,100 1.4 3.5 15,526,547 – 973,453 15,795,836 2,832,354 1 1.781

1897-98 18,847,000 3.2 5.4 9,506,077 – 3,493,923 16,198,263 2,534,244 1 2.250
1898-99 29,560,700 4.3 2.6 18,692,377 + 2,692,377 16,303,197 3,145,768 1 3.094
1899-1900 25,509,600 6.3 2.4 19,067,022 + 2,067,022 16,392,846 3,330,943 1 3.875
1900-01 20,727,400 .5 6.3 13,300,277 - 3,139,723 17,200,957 4,091,926 1 3.875
SJ+YS
1901-02 28,630,600 1.3 4.8 18,539,071 + 2,039,071 17,368,655 6,693,137 1 3.875

1902-03 33,352,600 5.8 4.6 18,499,946 + 1,999,946 18,361,821 5,767,787 1 3.875
1903-04 45,424,100 6.6 9.1 23,859,303 + 6,859,303 18,146,474 7,294,782 1 3.875
1904-05 40,548,200 6.5 8.9 24,425,558 + 7,925,558 19,463,757 10,262,581 1 3.969
1905-06 39,086,700 .3 10.5 32,166,973 + 14,333,973 18,617,465 8,436,519 1 3.938
1906-07 45,506,600 9.9 16.0 33,157,196 + 15,357,196 19,208,408 5,606,812 1 3.969
1907-08 31,640,000 11.6 13.0 16,232,062 – 1,867,938 18,487,267 5,738,489 1 3.906
1908-09 21,173,300 2.9 8.0 13,915,426 – 4,584,574 18,925,159 8,453,715 1 3.906
1909-10 47,213,000 14.5 6.3 27,096,586 + 10,896,586 19,122,916 15,809,618 1 3.906
1910-11 53,685,300 16.0 5.8 26,783,303 + 11,283,303 19,581,563 18,174,349 1 3.906
25-9-2013/YS-11-11-2013
1911-12 59,512,900 25.1 3.6 27,058,550 + 9,900,250 19,957,657 19,463,723 1 3.937

1912-13 57,020,900 22.6 11.5 25,759,706 + 10,259,706 20,279,572 9,789,634 1 3.969
1913-14 43,753,900 15.6 8.7 31,200,827 + 10,000,827 20,311,673 3,157,732 1 3.937
1914-15 29,108,500 5.1 5.9 7,748,111 — 12,251,889 20,208,598 7,913,236 1 3.937
1915-16 44,026,600 – .7 3.2 20,354,517 + 13,354,517 20,109,094 12,803,348 1 3.937

1916-17 60,843,200 8.82 12.5 32,998,095 + 29,093,095 21,145,627 11,391,993 1 4.031
1917-18 61,420,000 16.8 12.7 34,880,682 + 34,880,682 26,065,057 16,625,416 1 4.156
1918-19 56,540,000 – 3.7 45.3 20,946,314 + 20,946,314 23,629,495 14,715,827 1 4.906
582
of India again asked the Secretary of State to approach the

Treasury for its sanction.* The Treasury on this occasion
presented the Secretary of State† with two alternatives :
(1) That a branch of the Royal Mint be established at Bombay
solely for the purpose of coining gold into sovereigns, and
exclusively under its control; or (2) that the control of the
Mint at Bombay should be entirely transferred to it. Neither
of the two alternatives was acceptable to the Government of
India ; and the Secretary of State, as a concession to Indian
sentiment, sanctioned the issue of a ten-rupee gold coin from the
Indian Mint. The Government of India preferred this solution
to that suggested by the Treasury, but desired that the matter
be dealt with afresh by the Chamberlain Commission then
sitting. That Commission did not recommend a gold Mint,‡
but saw no objection to its establishment provided the coin
issued was a sovereign, and if the coinage of it was desired
by Indian sentiment and if the Government did not mind the
expense of coinage.§ This view of the Commission carried the
proposition no further than where it was in 1900, until the
war compelled the Government to open the Bombay Mint for
the coinage of gold as a branch of the Royal Mint. But it was
again closed in 1919. Its reopening was recommended by the
Currency Committee of 1919,¶ and so enthusiastically was the
project received that an Honourable Member of the Supreme
Council took the unique step of tempting the Government
into adopting that recommendation by an offer to increase the
Budget Estimates under “Mint” to enable the Government to
bear the cost of it. The Government, however, declined the offer
with thanks so we have in India the singular spectacle of a
country in which there was a Gold Mint even when Gold was
not legal tender, as was the case between 1835-93, while there
is no gold Mint, when gold is legal tender, as has been the
case since 1893. Just what an open Mint can do in the matter
of promoting the ideal of the Fowler Committee it is difficult
to imagine; but the following extracts from the evidence of a
witness (Mr. Webb), than whom there was no greater advocate
of an open gold Mint before the Chamberlain Commission, help
to indicate just what is expected from a gold Mint.
*See Commons Paper 495, of 1913 ; p. 57.
†Ibid, p. 64.
‡Report, sees. 69-71.
§ The Commission recommended that if a gold Mint was not established in
India Government should renew the notification withdrawn in 1906 to receive
refined gold on suitable terms.—Report, sec. 72.
¶ Report, par. 67.
“The principal advantage which you would expect to

derive from a gold Mint is that you would increase the
amount of gold coin in circulation ?—That would be one
of the tendencies.
“Is there any other advantage ?—The advantage is
that the country would be fitted with what I regard as
an essential part of its monetary mechanism. I regard it
as an essential part of its currency mechanism that it
should have a Mint at which money could be coined at
the requisition of the public.
“I want to get exactly at your reason why that is
essential. Am I right in thinking that you consider it
essential to a proper currency system that there should
be a gold currency ?— Yes.
“And essential to a gold currency that there should
be a gold Mint?—Yes, on the spot in India itself…… It
would do away, in a measure, with the management by
the Secretary of State of the Foreign Exchanges, in that
there would be always the Mint at which the public could
convert their gold into legal-tender coins in the event of
the Secretary of State taking any action of which the
public did not approve. It is a safeguard, so to speak, an
additional safeguard, that the people of India can on the
spot obtain their own money on presentation of the metal.”
Here, again, the assumption that a gold Mint is a guarantee
that there will be a gold currency seems to be one as gratuitous
as the former assumption that if gold were allowed to be freely
imported it would on that account become part of the currency.
On the other hand, there are cases where Mints were open,
yet there was neither gold coinage nor gold currency. Instances
may be cited from the history of the coinage at the Royal Mint
in London. The magnitude of gold coinage during the bank
suspension period, 1797-1821, or the late war, 1914-18, is
instructive from this point of view. The Mint was open in both
cases, but what was the total coinage of gold ?Throughout the
suspension period the gold coined was negligible, and during
the years 1807, 1812, and 1814-16 no gold was coined at all
at the Royal Mint.* Again, during the late war the coinage of
gold fell off from 1915, and from 1917 it ceased altogether.†
* See G. R. Porter, Progress of the Nation (Ed. Hirst) p. 568.

† See Report of the Deputy Master of the Royal Mint, 1921.
These instances conclusively show that although a Mint is

useful institution, yet there is no magic in a Mint to attract
gold to it. The historical instances adduced above leave no
doubt that the circulation of gold is governed by factors quite
independent of the existence or non-existence of a Mint open
to the free coinage thereof.
Now, it is an established proposition of political economy
that when two kinds of media are employed for currency
purposes the bad one drives out the good one from circulation.
Applying this principle to the situation in India, it should be
evident that so long as there is an unlimited issue of rupees
gold cannot circulate in India. This important principle has
been so completely overlooked by those who have insisted on
the introduction of a gold currency that they have not raised
a finger against the unlimited issue of rupees. Mr. Webb, the
fiercest opponent of the India Office malpractices, and the
staunchest supporter of the view that if only the Secretary of
State could be made to contract his drawings gold would flow
and be a part of the currency in India, recommended to the
Chamberlain Commission that—
“The sales of Council Drafts should be strictly limited
to the sum required to meet the Home Charges, and no
allotments should in any circumstances be made below, say,
1s. 4 1/8d. to 1s. 43/32d.—i.e. about the present equivalent of
specie point for gold imports into India. The sum required
in London for Home Charges having been realized, no
further sales of Council Drafts should be made except
for the express purpose—duly notified to the public—of
purchasing metal for the manufacture of further token
coinage. Such special sales of Council Drafts should not
be made at anything below specie point for gold imports.”†
Again, Sir V. Thackersay, in the course of his speech on
March 22, 1912, moving a resolution in the Legislative Council,
asking the Government to open the Mint for the coinage of
gold in India, observed :—
“Let me make myself clear on one point. I do not suggest
that Government should give up the right to coin rupees or
refuse to give rupees when people demand the same. I do
* See Report of thc Deputy Master of the Royal Mint, 1921.

† Italics not in the original.
not propose to touch the gold-standard reserve, which must

remain as it is as the ultimate guarantee of our currency
policy. My proposal does not interfere with the existing
arrangements in any way, but is merely supplementary to
them …… Let the Government of India accumulate gold
to the maximum limit of its capacity, but let the surplus
gold which it cannot absorb be coined and circulated if
the public chooses to do so. With our expanding trade
and the balance in our favour, gold will continue to be
imported in ordinary time, and if the facilities of minting
are provided in India, it will go into circulation.”*
These are surely not the ways of promoting a gold currency.
Indeed, they run counter to it. So long as the coinage of rupees
goes on gold will not enter into currency. Indeed, to cry out on
the one hand against the huge drawings of the Secretary of
State and the consequent transfer of Indian funds to London
and their mismanagement by the Secretary of State, and
on the other hand to permit him to manufacture additional
token coinage of rupees, is to display not only a lamentable
ignorance of a fundamental principle of currency, but also to
show a complete failure to understand the precise source from
which the whole trouble arises. It is true that the Government
of India cannot bind the Secetary of State to any particular
course of action,† and he often does override the provisions
of the Annual Budget. But the question remains. How is it
that he is able to draw so much more after 1893 than he
ever did before ? It must be remenbered that whatever the
Secretary of State does with the funds in London he must
pay for his drawings in India. Before 1893 he drew less
because his means of payment were less ; after 1893 he drew
more because his means of payment were greater. And why
were his means of payment greater ? Simply because he had
been able to coin rupees. Indeed, the amount of drawings
are limited by the demand for them and by his capacity to
coin rupees. It is therefore foolish to blame the Secretary of
State for betraying the interests of India and at the same
time to permit him to coin rupees, the very means by which
* S.L.C.P., Vol. L, pp. 637-38. Italics not in the original.

† The legal position of the Secretary of State and the extent to which he can
be bound by the provisions of any law passed by the Government of India were
well explained by Sir James Westland in his speech on the Indian Paper Currency
(Amendment) Bill, which afterwards became Act II of 1898 ; compare also the
peculiar wording of that Act.
he is able to betray. If a gold currency is wanted, and it is

wanted because the rupee is a bad standard of value, then
what is necessary is not to put a limit on the drawings of the
Secretary of State or the opening of a gold Mint, but a short
enactment stopping the coinage of rupees. Then only gold—
made legal tender, at a suitable ratio with the rupee—will
become a part of Indian currency.
That the stoppage of rupee coinage is a sufficient remedy
is amply corroborated by the now forgotten episode in the
history of Indian currency during the years 1898-1902. Within
the short space of a year and a half after gold had been made
legal tender the Hon. C. E. Dawkins, notwithstanding the fact
that there was no gold Mint, was able, in his Budget speech
in March, 1901, to observe :—
“India has at length emerged from a period of transition
in her currency, has reached the goal to which she has
been struggling for years, has established a gold standard
and a gold currency, and has attained that practical fixity
in exchange which has brought a relief alike to the private
individual and to the Government finances.”*
So great was the plethora of gold that Mr. Dawkins further
remarked †:—
“ …… We have been nearly swamped …… by gold …….”
The transformation in the currency position which then took
place was graphically described by Lord Curzon, the then
Viceroy, in the following words‡ :—
“Mr. Dawkins …… has successfully inaugurated the
new era under which the sovereign has become legal
tender in India, and stability in exchange has assumed
what we hope may be a stereotyped form. This great
change has been introduced in defiance of the vaticinations
of all the prophets of evil, and more especially of the
particular prophecy that we could not get gold to come
to India, that we could not keep it in our hands if we
got it here, but that it would slip so quickly through
our fingers that we should have even to borrow to
maintain the necessary supply. As a matter of fact, we
are almost in the position of the mythological king, who

† Ibid., p. 19.
‡ Ibid, p. 167.
prayed that all he touched might be turned into gold,

and was then rather painfully surprised when he found
that his food had been converted into the same somewhat
indigestible material. So much gold, indeed, have we got,
that we are now giving gold for rupees as well as rupees
for gold, i.e. we are really in the enjoyment of complete
convertibility—a state of affairs which would have been
derided as impossible by the experts a year ago.”
Compare this state of affairs in 1900-1 with that found
to exist in 1910-11, for instance. Speaking of the currency
situation as it was in that year, the Hon. Sir James (now
Lord) Meston, observed*:—
“We have passed through many changes in currency
policy and made not a few mistakables. but 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 Committee 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. That, I have every hope, will come in
time……”
Leaving aside for the moment the extenuatory remarks of
the speaker, the fact remains that in 1900 India had a gold
currency. But, taking stock of the position at the end of 1910,
it had ceased to have it. What is it that made this difference ?
Nothing but the fact that between 1893-1900 no rupees were
coined, but between 1900-1910 the number of rupees coined
was enormous. During the first period the inducement to coin
rupees was very great indeed. The exchange was not quite
stable, and the Government had still to find an increasing
number of rupees to pay for the “Home Charges.” And an
Honourable Member† of the Supreme Legislative Council
actually asked :—
“Is there any objection to the Government working the
Mints on their own account ? Considering the low value of
† This was no other than the Hon. Fazulbhai Vishram, the well-known financier
of Bombay. Cf. his spech in the Financial Statement, 1894-95, p. 96
silver and the great margin between the respective prices

of bullion and the rupee, would not Government by
manufacturing rupees for itself make sufficient profit to
meet at least a substantial portion of the present deficit ?
It seems to me to be a legitimate source of revenue and
one capable of materially easing our finances.”
But Sir James Westland, who was then in charge of the
finances of India, replied*:—I
“I must confess to a little surprise in finding the
proposal put forward by one of the commercial members of
your Excellency’s Council that we should buy silver at its
present low price, and coin it for issue at the appreciated
value of the rupee …… I shall certainly refuse myself to
fall into this temptation.”
Again, 1898, when some of the followers of Mr. Lindsay
desired that Government should coin rupees to relieve the
monetary stringency, Sir James Westland remarked†:—
“ ……in our opinion the silver standard is now a
question of the past. It is a case of vestigia nulla retrorsum.
The only question before us is how best to attain the
gold standard. We cannot go back to the position of the
open Mints. There j are only two ways in which we can
go back to that position, We can either open the Mints to
the public generally, or we can open them to coinage by
ourselves. In either case what it means is that the value
of the rupee will go down to something approaching the
value of silver. If the case is that of opening the Mints
to the public, the descent of the rupee will be rapid. If
it is that of opening only to coinage by the Government,
the descent of the rupee, may be slow but it will be no
less inevitable.”
The Hon. C. E. Dawkins was equally emphatic in his
denunciation of the project of Government coining rupees.
When he was tempted to acquiesce in the proposal by holding
out the prospects of a profit from coinage, he replied‡:—
“I think I ought ….. to beg my hon. friend not to dangle
* Financial Statement, 1894-95, p. 123. † Ibid., 1898-9, p. 169.

‡ Ibid., 1900-1, p. 163.
the profits on silver too conspicuously before the eyes

even of a most virtuous government. Once let these
profits become a determining factor in your action, then
good-bye stability.”
Another instance of the Government’s determination not
to coin rupees is furnished by inquiring into the reasons as
to why it is that the Government has never assumed the
responsibility of selling council bills in indefinite amount and
at a fixed rate. The Chamberlain Commission argued that the
Government cannot undertake such a responsibility because
it cannot hold out for a fixed rate, and may have to sell at
any rate even lower than par. This is true so far as it is a
confession of a position weakened by the Government’s folly of
indulging in excessive rupee coinage. But this was certainly not
the explanation which the Government gave in 1900 when it
was first asked to assume that responsibility. The Government
knew perfectly well that to keep on selling bills indefinitely
was to keep on coining rupees indefinitely. They refused to
assume that responsibility because they did not want to coin
rupees. That this was the original reason was made quite plain
by the Hon. Mr. Dawkins,* who reminded those who asked
Government to undertake such a responsibility that
“the silver coin reserve of Government in consequence
rapidly neared a point at which it was impossible to
continue to meet unlimited transfers [i.e. council bills].
Therefore the Secretary of State decided to limit the
demands by gradually raising the rate, thus meeting the
most urgent demands, and weeding out the less urgent,
while warning those whose demands were not so urgent
to ship gold to India. No other course was practicable.
The liability of the Secretary of State to keep the tap
turned on indefinitely at 1s. 4 5/32d. has been asserted.
But I cannot see that any positive liability exists, and
I wonder if those who assert its existence would have
preferred that the stability of our currency (whose situation
they are well able to appreciate and follow) should have
been affected by the reserve of rupees being dangerously
reduced ?” [and which could not be augmented except by
coining more rupees].
Just at the nick of time, when the ideal of a gold standard
with a gold currency was about to be realized, there came on
* Cf. his Budget speech, Financial Statement, 1900-1, p. 27.

the scene Sir Edward Law as the Finance Minister of India

and tore the whole structure of the new currency to pieces with
a piratical nonchalance that was as stupid as it was wanton.
His was the Minute of June 28, 1900, which changed the
whole course of events.* In that Minute coccurs the following
important passage ;—
“15. As a result of these considerations it must, I
think, be admitted that the amount of gold which can
safely be held in the currency reserve must for the
present be regulated by the same rules as would guide
the consideration of the amount by which the proportion
invested in government securities could be safely increased.
Pending an increase in the note circulation …… or some
other change in existing conditions, I am of opinion that
a maximum sum of approximately £ 7,000,000 in gold
may now be safely held in the currency reserve. I should
not, however, wish to be bound absolutely to this figure,
which is necessarily an arbitrary one, and particularly
I should not wish any public announcement to be made
which might seem to tie the hands of the Government
in the event of circumstances, at present unforeseen,
rendering its reduction hereafter desirable.”
In outlining this Minute, which with modifications in the
maximum gold to be held in the currency reserve, remains
the foundation of the currency system in India, the author of
it never seems to have asked for one moment what was to
happen to the ideal of a gold standard and a gold currency ?
Was he assisting the consummation of the gold standard or
was he projecting the abandonment of the gold standard in
thus putting a limit on the holding of gold ? Before the policy
of this Minute was put into execution the Indian currency
system was approximating to that of the Bank Charter Act of
1844, in which the issue of rupees was limited and that of gold
unlimited. This Minute proposed that the issue of gold should
be limited and that of rupees unlimited—an exact reversal to
the system of the Bank Suspension period. In this lies the
great significance of the Minute, which deliberately outlined
a policy of substituting rupees for gold in Indian currency and
thereby defeating the ideal held out since 1893 and well-nigh
accomplished in 1900.
* For a copy of the Minute and the correspondence thereon, see Appendix V
to the Interim Report of the Chamberlain Commission, Cd. 7070 of 1913.
If Sir Edward Law had realized that this meant an

abandonment of the gold standard, perhaps he would not
have recorded the Minute, but what were the considerations
alluded to in the Minute which led him thus to subvert the
policy of a gold standard and a gold currency and put a limit
on the gold part of the currency rather than on the rupee
part of the currency ? They are to be found in a despatch,
No. 302, dated September 6, 1900, from the Government of
India, which says :—
“2. …… the receipts of gold continued and increased
after December last. For more than eight months the gold
in the currency reserve has exceeded, and the silver has
been less, than the limits suggested in the despatch of
June 18. By the middle of January the stock of gold in
the currency reserve in India reached £5,000,000. The
proposal made in that despatch was at once brought
into operation ; later on we sent supplies of sovereigns
to the larger District Treasuries, with instructions that
they should be issued to anyone who desired to receive
them in payments due or in exchange for rupees ; and in
March we directed the Post Office to make in sovereigns
all payments of money orders in the Presidency towns
and Rangoon, and we requested the Presidency Banks
to make in the Presidency towns and Rangoon payments
on Government account as far as possible in sovereigns.
These measures were taken, not so much in the expectation
that they would in the early future relieve us of any
large part of our surplus gold, but in the hope that they
would accustom the people to gold, would hasten the time
when it will pass into general circulation in considerable
quantities, and by so doing, would mitigate in future
years the difficulties that we were experiencing from the
magnitude of our stock of gold and the depletion of our
stock of rupees.
“3. In order to meet these difficulties and to secure, if
possible, that we should have enough rupees for payment
to presenters of currency notes and tenderers of gold, we
began to coin additional rupees ……
* * * * *
“14. We may mention that we have closely watched the
result of the measures described in paragraph 2. The issues
of gold have been considerable; but much has come back
to us through the Currency Department and the Presidency

banks. The Comptroller-General estimated the amount
remaining in circulation at the end of June at over a
million and a quarter out of nearly two millions issued
up to that time ; but there are many uncertain data in
the calculation. We are not yet able to say that gold has
passed into use as money to any appreciable extent.
“15. It is very desirable that we should feel assured
of being able to meet the public demand for rupees,
as indicated by the presentation of currency notes and
gold. We therefore strongly press on your Lordship the
expediency of sanctioning the above proposal for further
coinage [of rupees];...
* * * * *
“17. But we do not wish our proposal to be considered
as dependent on such arguments as those just stated.
We make it primarily on the practical ground that we
consider it necessary in order to enable us to fulfil an
obligation which, though we are not, and do not propose
to be, legally committed thereto, we think it desirable
to undertake so long as we can do it without excessive
inconvenience ; namely, to pay rupees to all tenderers of
gold and to give rupees in encashment of currency notes
to all who prefer rupees to sovereigns.”
The arguments advanced in this statement of the case for
coining rupees are a motley lot. At the outset it is something
unheard of that a Government which was proceeding to
establish a gold standard and a gold currency should have been
so very alarmed at the sight of increased gold when it should
have thanked its stars for such an early consummation of its
idea. Leaving aside the psychological aspect of the question,
the government, according to its own statement, undertook to
coin rupees for two reasons : (1) because it felt itself obliged
to give rupees whenever asked for, and (2) because people
did not want gold. What force is there in these arguments ?
Respecting the first argument it is difficult to understand
why Government should feel itself obliged to give rupees. The
obligation of a debtor is to pay the legal-tender money of the
country. Gold had been made legal tender, and the Government
could have discharged its obligations by paying out without
shame or apology. Secondly, what is the proof that people did
not want gold ? It is said that the fact that the gold paid out
by Government returned to it is evidence enough that people
did not want it. But this is a fallacy. In a country like India
Government dues form a large part of the people’s expenditure,
and if people used that gold to meet those dues—this is
what is meant by the return of gold to Government—then
it is an evidence in support of the contention that people
were prepared to use gold as currency. But if it is true that
people do not want gold, how does it accord with the fact that
Government refuses to give gold when people make a demand
for it ? Does not the standing refusal imply that there is a
standing demand ? There is no consistency in this mode of
reasoning. The fact is, all this confused advocacy is employed
to divert attention from the truth that the Government was
anxious to coin rupees not because people did not want gold,
but because Government was anxious to build a gold reserve
out of the profits of additional coinage of rupees. That this
was the underlying motive is manifest from the minute of
Sir Edward Law. That the argument about people disliking
gold, and so forth, and so forth, was only a cover for the true
motive comes out prominently from that part of the Minute
in which its author had argued that:—
“16. If it be accepted that £ 7,000,000 is the maximum
sum which, under existing conditions, can be held in
gold in the currency reserve, in addition to the 10 crores
already invested, it is evident that such assistance as can
be obtained from manipulating the reserve will fail to
provide the sum in gold which it is considered advisable
to hold in connection with the maintenance of a steady
exchange. So far no authority has ventured to name a
definite sum which should suffice for this purpose, but
there is a general consensus of opinion, in which I fully
concur, that a very considerable sum is required. The
most ready way of obtaining such a large sum is by gold
borrowings, but the opinion of the Currency Commission
was strongly hostile to such a course, and the question
therefore remains unanswered : How is the necessary
stock of gold to be obtained ?
“17. I do not presume to offer any cut-and-dried
solution of this difficult problem, but I venture to offer
certain suggestions which, if adopted, would, I believe, go
a considerable way towards meeting the difficulty.

I propose to create a special ‘Gold Exchange Fund,’
independent of, but in case of extraordinary requirements
for exchange purposes to be used in conjunction with the
gold resources of the currency reserve. The foundation of
this fund would be the profit to be realized by converting
into rupees the excess above £ 7,000,000 now held in gold
in the currency reserve.”
Can there be any doubt now as to the true cause for coining
rupees ? Writers who have broadcasted that rupees were coined
because people did not want gold cannot be said to have read
correctly the history of the genesis of the exchange standard
in India.
But was Sir Edward Law the evil genius who turned a sound
system of currency into an unsound one by his disastrous policy
of coining rupees ? Opponents of the Government as well as
its supporters are all agreed* that this was a departure from
the ideal of the Fowler Committee. In what precise respect
the Government has departed from the recommendations of
the Fowler Committee has, however, never been made clear
anywhere in the official or non-official literature on the subject
of Indian currency. What were the recommendations of the
Fowler Committee ? It is usually pointed out, to the shame
of the Government of India, that the Fowler Committee had
said (it is as well to repeat it):—
“We are in favour of making the British sovereign a
legal tender and a current coin in India. We also consider
that, at the same time, the Indian Mints should be thrown
open to the unrestricted coinage of gold …… Looking
forward as we do to the effective establishment of a gold
standard and currency based on the principles of the free
inflow and outflow of gold, we recommend these measures
for adoption.”
That is true. But those who have blamed the Government
have forgotten that same Committee also recommended that—
“The exclusive right to coin fresh rupees must remain
vested in the Government of India; and though the existing
stock of rupees may suffice for some time, regulations will
ultimatedly be needed for providing such additions to the
* Even the Chamberlain Commission said that the Government had denarted
from the ideal of the Fowler Committee.
silver currency as may prove necessary. The Government

should continue to give rupees for gold, but fresh rupees
should not be coined until the proportion of gold in the
currency is found to exceed the requirements of the public.
We also recommend that any profit on the coinage of
rupees should not be credited to the revenue or held as
a portion of the ordinary balance of the Government of
India, but should be kept in gold as a special reserve,
entirely apart from the paper-currency reserve and the
ordinary Treasury balances” [and be made freely available
for foreign remittances whenever the exchange falls below
specie point.]
Taking the two recommendations of the Committee together,
where is the departure ? What the Government has done is
precisely what the Committee had recommended. That the
Government of India or the Chamberlain Commission should
have admitted for a moment that there was a departure is
not a little odd, for the very despatch which conveyed the
Minute of Sir Edward Law to the Secretary of State opens with
remarks which show that Government was earnestly following
the recommendations of the Fowler Committee. It runs:—
“In our despatch No. 301 of August 24, 1899, we wrote
with reference to paragraph 60 of the Report of the Indian
Currency Committee [i.e. the Fowler Committee], that any
profit made on rupee coinage should be held in gold as
a special reserve, has not escaped our attention ; but the
need for the coinage of additional rupees is not likely to
occur for some time, and a decision on this point may be
conveninently deferred.”
What Sir Edward Law did was to carry that recommendation
into effect when the occasion arrived. In view of this it is
useless to belabour the Government of India if the ideal of a
gold standard with a gold currency was defeated by the coinage
of rupees. But, even though the Government has in ignorance
taken the blame on itself, it cannot be rightly thrown at its
door. If the project has been defeated by the coinage of rupees,
the question must be referred to the Fowler Committe. Why
did the Committee permit the coinage of rupees ? There is no
direct answer, but it may be guessed. It seems the Committee
first decided that there should be a gold standard and a gold
currency as desired by the Government of India. But then they
seemed to have been worried by the question whether in the
ideal they had sketched they had made enough provision for
the maintenance of the gold value of the rupee. In the view
of the opponents of the Government of India the rupee ought
to have been made either convertible as a bank note or a
limited legal tender as a shilling. The Committee rejected both
these demands as being unnecessary. Stating their ground for
refusing to reduce the rupee to the status of a shilling, the
Committee argued*:—
“It is true that in the United Kingdom the silver
currency has a fixed limit of 40s., beyond which it cannot
be used to pay a debt …… While it cannot be denied
that 40s. limitation tends to emphasize and maintain the
subsidiary character of our silver coinage, yet the essential
factor in maintaining those tokens at their representative
nominal value is not the statutory limit on the amount
for which they are a legal tender in any one payment,
but the limitation of their total issue. Provided the latter
restriction is adequate, there is no essential reason why
there need be any limit on the amount for which tokens
are a tender by law.”
Regarding the necessity for convertibility the Committee
observed†:—
“Outside the United Kingdom there are two principal
instances of countries with a gold standard and currency,
which admit silver coins to unlimited tender. These
countries are France and the United States of Amercia.
In France the five-franc piece is an unlimited tender and
for all internal purposes is equivalent to gold. The same
remark applies in the United States to the silver dollar
…… Both in France and the United States the Mints
are now closed to the coinage of silver coins of ultimated
tender. In neither country are such coins convertible by law
into gold ; in both countries alike they are equivalent to
gold for all internal purposes. For international payments,
so far as specie is concerned, France and the United
States depend ultimately on the international medium of
exchange, which is gold. In the last resort, it is their gold
which, acting through the foreign exchanges, maintains
the whole mass of their currency at its nominal value for
internal purposes.
* Report, par. 56.
† Report, pars. 57-60.
“The position of the currency question in India being

such as we have explained in the preceding paragraph,
we do not consider it necessary to recommend a different
policy in the case of that country from that which is found
sufficient in France and the United States, by imposing a
legal obligation on the Government of India to give gold
for rupees, or, in other words, to substitute the former for
the latter on the demand of the holders. This obligation
would impose on the Government of India a liability to
find gold at a moment’s notice to an amount which cannot
be defined beforehand, and the liability is one which, in
our opinion, ought not to be accepted.”
Although confident of its opinions, the Committee was
considerably impressed by those who, owing to the large
quantity of rupees in circulation, entertained doubts
“whether the mere closing of the Indian Mints to silver
would in practice be attended with such a restriction of
the rupee currency as would make the rupee permanently
exchangeable for gold at a fixed rate.”
So much was the Committee shaken by these doubts that
it admitted that*
“the forces which affect the gold value of the rupee
are complicated and obscure in their mode of operation,
and we are unable, therefore, to say positively that the
mere closing of the Mints to silver will, in practice, lead
to such a limitation of the rupee currency, relatively to
the demands for it, as will make the rupee permanently
exchangeable for gold at a fixed rate.”
As a remedy against such a contingency the Committee
thought that the Government of India should accept the obligation
of convertibility of the rupee into gold for foreign remittances
whenever the rupee fell below specie point. Having hit upon
such a simple solution the next question was how was the
Government to get its gold reserve ? Borrowing for the purposes
of such a gold reserve was one way of doing it. But that project
was somehow unpalatable to the Committee. Perhaps because
* Report, par. 58.

it had admonished the Government, in another part of its

Report,* to
“husband the resources at their command, exercise a
resolute economy, and restrict the growth of their gold
obligations,”
or because it was a vicious principle to borrow
“for the establishment or the maintenance of a gold
standard,”†
the Committee was averse to the proposal for gold borrowing.
But if a gold reserve was not to be built up by borrowing,
how could it be built up otherwise ? The Committee seems to
have been considerably troubled over the problem of finding
an alternative mode of raising a reserve until some member of
it, probably at a moment when his intellect was rather weak,
proposed ‘Well, why not allow the Governments to coin rupees ?
If that were allowed it could easily build up a gold reserve
without having to borrow, and can then discharge the obligation
of convertibility for foreign remittances.’ So innocuous seemed
the proposal that the Committee wholeheartedly adopted and
incorporated it into its Report with a certain sigh of relief
that is unmistakable from the firm language in which it was
expressed.
This may or may not be a correct interpretation of
the reasoning employed by the Committee in permitting
the Government to coin rupees. But the fact remains that
the Committee did not realize what was involved in that
recommendation. First of all, what was to happen to the gold
standard and currency if the coinage of rupees was to go
on ? In this regard is it possible to have more respect for a
Committee which lays down on the one hand the ideal of a
gold standard and currency, and permits on the other hand
the coinage of rupees, than Bagehot felt for the Directors of
the Bank of England, who on March 25, 1819, passed that
notorious resolution :—
“That the Court cannot refrain from adverting to an
opinion, strongly insisted upon by some, that the Bank
has only to reduce its issues to obtain a favourable turn
in the Exchanges, and a consequent influx of the precious
metals; the Court conceives it to be its duty to declare
that it is unable to discover any solid foundation for such
a sentiment.”
* Report, par. 70.
† See the Reservations to the Report by Campbell Holland and Muir Report, p. 27.
If the opinions of the Directors were classical for their

nonsense, are those of the Fowler Committee less so ? Is there
any difference between them ? Bagehot, in commenting upon
the sentiments embodied in the resolution, not dissimilar to
the recommendations of the Fowler Committee, urged some
extenuating circumstances which compel us to forgive the Bank
Directors their nonsense. The Directors lived in an age when
economic reasoning was in a confused state ; nor were they
anxious for the “influx of gold,” being perfectly satisfied with
paper. None of these circumstances can excuse the nonsense
of the Fowler Committee. They framed their recommendations
at a time when the contrary of what the Bank Directors had
held was an established axiom. Besides, it cannot be said that
they were not anxious for the influx of gold into the Indian
currency. On the other hand, that was just the thing they were
looking forward to. Consequently, they should have carefully
weighed their words and allowed nothing that was inconsistent
with their main object. In not paying sufficient heed to that
elementary principle known as Gresham’s Law, the Committee
not only made a fool of itself but defeated the principal object
it had set forth in the earlier part of its Report.
Secondly, was it necessary to endow the Government with a
power to coin rupees ? What was the nature of the problem the
Committee was called upon to decide ? Let us re-state it. The
Herschell Committee,* by way of modifying the proposals of the
Government of India, submitted to it in 1892, had introduced
a proviso by which the Mints, although closed to the public,
were to remain open to the Government for the coinage of
rupees—a proviso which, by the way, reveals that after all that
imposing survey the Committee remained supremely ignorant
of the secret why, in the monetary systems it investigated,
the currency maintained its parity with gold with little or
no gold. If it had understood that it was limitation of issue
which maintained this parity it would not have introduced
the proviso which it did. However pernicious the proviso, the
Committee must be excused for that indiscretion, for it was
afraid that owing to the Mint closure there might be a sudden
contraction of currency, and as it had not made gold general
* See Chap. IV, supra, p. 471.

legal tender it had to provide for the necessary addition

to the currency, and this it thought could best be done by
Government having the power to coin rupees. Fortunately for
the Government the occasion for an addition did not arise for
some time, till 1898,and there was therefore no necessity to
exercise, that power. But when such an occasion did arise the
Government, as was pointed out before, refused to exercise
that power—and held to the view that the additions to Indian
currency, instead of being made by further coinage of rupees,
should be made by an influx of gold. The government was the
strongest opponent of Mr. Lindsay, who was then agitating
that it was safe and economical to compel it to make the
necessary additions by under taking to coin rupees. It was to
adjudicate in the dispute between the Government of India
on the one hand and Mr. Lindsay on the other, the former
desiring additions by gold coinage and the latter by rupee
coinage, that the Fowler Committee was called into being. If
the Government was anxious to add to the currency by coining
more rupees rather than by the influx of gold, there was no
necessity to appoint the Fowler Committee, Such a power
had already been given to it by the Hershell Committee. It
was because the Government did not want to exercise that
ill-charged power that an appeal to a new Committee became
necessary. Faced with this immediate problem of how best
to expand the currency in relief of monetary stringency, the
Committee had solved it in one part of its Report by prescribing
that gold should be made legal tender, so that any debtor who
was unable to find rupees could have the option of paying his
creditors in gold. If gold was allowed to be the general medium
of exchange, was not the proposal to coin rupees a superfluous
one, quite uncalled for?
Thirdly, could the proposal to coin rupees as a means
of building up a gold reserve be justified as calculated to
maintain the value of the rupee ? The one thing essential to
the maintenance of the value of the rupee was a limitation
on its issue. The, Committee talked in a very learned manner
about the shilling as being maintained in value in consequence
of a limitation in its issue. But did it understand how the
shilling was maintained limited in quantity ? If it is true
that it is not the limit on legal tender, but the limit on
the total volume, that maintains the value of the shilling,
why is not the shilling issued in unlimited quantities ?
The manufacture of the shilling is profitable in the same
way as is the manufacture of the rupee. Why does not
the British Government coin it in unlimited quantities ? Only

because shillings cannot be paid out in unlimited quantities ?
If the Government could pay its Chancellors of Exchequer,
Cabinet Ministers, and the hosts of officials and clerks, and
if they in turn could pay their grocers, milkmen, brewers,
and butchers in shillings, there could be nothing to prevent
the over-issue of shillings. But it is because nobody can pay
out shillings in unlimited quantities that nobody will have
them in unlimited quantities. It is the absence of a wholesale
market, so to say, due to a limit on legal tender, that stops
the Government from indulging in the over-issue of shillings.
The Committee was therefore wrong in arguing that the limit
on legal tender had nothing to do with the maintenance of
the value of the shilling. On the other hand, if limitation of
issue is the prime condition which maintains the value of a
token coin, one means of making such a limit effective is to
put a limit on its legal tender.
With regard to its views on convertibility, its reasoning
was equally confused. To say what was sufficient for France
and America should be sufficient for India, was like the blind
leading the blind. It was entirely erroneous to argue that it
was not convertibility but their gold
“which acting through the foreign exchanges, maintains
the whole mass of their currency at its nominal value for
internal purposes.”
Quite the contrary. France and America did not need
convertibility to protect their currency because the silver franc
and the silver dollar were absolutely limited in quantity. Indeed,
far from being protected by the influx of gold, the limitation
of isue not only maintained their value, but permitted the
retention of whatever gold there was in those countries. Now, the
Committee, instead of venturing into long-winded and pointless
disquisitions, should have insisted that there was no necessity
either to prescribe a limit of tender or convertibility with regard
to the rupee, so long as there were other ways of restricting its
over-issue. Limitation of legal tender or convertibility can be
said to be essential only because they are the means of bringing
about a limitation of issue, and if the requisite limitation of
issue was provided for in other ways, the purpose for which
convertibility or limitation of legal tender were asked for was
accomplished. Now, was not the closing of the Mints a sufficient

limitation on the volume of rupees ? Indeed, if the closing of the
Mints was not an effective limitation on the issue of rupees,
what else could have been ? Was not the closing of the Mints
the same thing as regulating the currency on the principle of
a fixed-issue system so well known in the matter of regulating
paper currencies ? That it was, could hardly be denied. That
being so, the only question was whether the volume of rupees
already in circulation was distinctly less than the minimum
amount of legal-tender money ever necessary for the internal
circulation of the country. The Government of India had
forseen the volume of rupees in circulation becoming in excess
of such a minimum and had accordingly provided against it.
In their despatch of March 3, 1898, outlining their plans, the
Government observed:—
“9………. We know now that one of the main reasons of
this failure [to maintain the exchange value of the rupee]
is that our rupee circulation had before the closing of the
Mints been increased to such an extent that it fully, and
more than fully, supplied all the demands of trade, and
allowed no room for any further addition in the form of
gold…… The necessary condition of a fixed rate of exchange
between two countries is that, when the currency of one
of them becomes redundant as compared with that of the
other, the redundancy may be relieved by the withdrawal,
for a time, of the excess coin, and we wish, therefore, to
reach the condition in which our circulating medium...
is not composed wholly of silver coin which has no equal
value outside the country, but contains also a margin of
gold which is capable of being used elsewhere as coin, and
will therefore in natural course flow to where it is most
wanted. Our total rupee currency is estimated to be at
present somewhere about 120 crores, to which we have to
add 10 crores of fiduciary circulation of currency notes.
“10. It is impossible with any exactness to say, and
it can only be ascertained by actual experience, by
how much this rupee circulation has to be decreased
in order to remove its redundancy. ……But some
considerations point to the amount being within quite
manageable limits. For example, there are twenty-four
crores, more or less, of currency notes in circulation,
including the amounts held in our Treasuries. If we
could imagine that amount of circulation at present
existing in the form of currency notes suddenly converted

into £16,000,000 in gold, it seems impossible that Indian
trade should be able to get on without having part at least
of that amount held in actual circulation, in other words,
it would not be possible for that amount of gold coin to
be remitted out of the country without the value of the
rupee being forced up to a point which would arrest the
stream of export. If this is the case, twenty-four crores
of rupees is the outside limit of the amount it might be
necessary to convert into gold coin in order to introduce a
stable exchange of 16d., accompanied by an actual (active
or inactive) circulation of gold at that comparative value:
and it is more than probable that the amount required
may really fall far short of this.
“11. The mere reduction of circulation might be carried
out in the same way in which it was effected in 1893,
namely, by abstaining from withdrawing council bills,
until we have an accumulation of, say, twenty crores in
excess of our ordinary balances. But this procedure would
be both costly and, as we believe, ineffective ; in the first
place the permanent locking up of twenty crores would
cost us the interest on that amount, or on the amount
of gold borrowed in England during the suspension of
drawings, and in the second place the existence of this
acumulation of silver coin would be a perpetual menace
to the exchange market, and would entirely prevent any
confidence in the future of the rupee. We must not only
withdraw the amount from circulation, but we must show
by the method we adopt that our intention is that it should
cease to exist in the form of coin, and that its place, as
coin, is to be taken by gold. Our proposal is therefore to
melt down existing rupees, having first provided a reserve
of gold [by borrowing] both for the practical purpose of
taking the place of the silver and in order to establish
confidence in the issue of our measures.”
At the time the Committee reported the volume of rupees in
circulation was not redundant, as was proved by the fact that
exchange was rising and gold was flowing in. That the closing
of the Mints had therefore brought about an effective limit is
beyond dispute, and was even admitted by the Committee.* But
* Report, p. 17.
supposing that the closing of the Mints did not constitute an

effective limitation on the volume of rupees in circulation, what
was the remedy ? Was the plan of a gold reserve to assure
convertibility for foreign remittances calculated to promote
that object if the gold reserve was to be got by coining more
rupees ? If the limitation of rupees was going to maintain their
value, as it did the value of the shilling, was the permission
to add to the volume of rupees which the Committee feared
was overabundant if not redundant, for the sake of a gold
reserve, designed to limit their volume ?
It is difficult to read the report of the Fowler Committee
without exasperation. The permission to coin rupees was
mischievous in every way. It was destructive of a true gold
standard ; it was not wanted as a relief against monetary
stringency, and was calculated to lower the value of the
rupee. If it was anxious for a gold standard and currency,
as it undoubtedly was, it should have absolutely stopped the
coinage of rupees and suppressed the notification holding the
government ready to give rupees for gold. In failing to do that
it not only deprived the country of a sound system, but actually,
albeit unwittingly, helped to place the entire Indian currency,
including paper currency, on the basis- of an inconvertible
rupee. Few people seem to be alive to the precise significance of
that pernicious proviso introduced by the Herschell Committee,
and remorselessly upheld by the Fowler Committee, that the
government shall always be ready to give rupees for gold, but
there can be no doubt that in the absence of a counter-proviso,
requiring Government to give gold for rupees, the proviso is
simply a cover for an authority to the Indian Government to
issue inconvertible rupee currency of unlimited legal tender in
the same way as the bank restriction was for an authority to
the bank of England to issue inconvertible notes in unlimited
quantities. The first step in the right direction would be to
scrap that Report and make a speedy return to the safe and
sound proposals of the Government of India as outlined in
the despatch referred to above. The primary condition is to
stop the coinage of rupees and not merely close the Mints to
the public. Whether it would be necessary to melt a portion
of the rupees depends upon what gold value it is desired the
rupee should have. Once the total contraction of the rupee is
settled upon and all further coinage is stopped, India will be

in a position to have an effective gold standard based on a free
inflow and outflow of gold. There will be no necessity to reduce
the rupee in legal tender and provide for its convertibility. Its
value would be maintained intact by sheer force of its quantity
being limited, provided the quantity in circulation has been
reduced so far as to be always below the minimum demand.
Supporters of the existing system of rupee currency have
ever since its inauguration held out that the currency is
economical and secure. Its claim for security, both in terms
of gold and commodities, has been tested, and the grounds
of it have been analysed in the course of this and previous
chapters, wherein is demonstrated how very much wanting
it is in the essentials that go to make up a secure currency.
We must now endeavour to assess whether it is economical,
for if it were really so, then that might be a point of some
value against its opponents. We must therefore scrutinize the
economy effected by the rupee currency.
Kemmerer says,*
“ A convertible money finds its raison d’etre largely
in the fact that it economizes the precious metals, and
makes possible a saving to the community. If paper money
or token money are substituted for primary money, their
substitution ruduces the demand for the precious metals
by the difference between the amount of metal used in
the token money introduced plus that contained in the
primary money required for the redemption fund. This
economy of the precious metals results in an increased
supply being thrown upon the market” [which supply goes
abroad and into the arts and increases the non-monetary
wealth of the country by an equivalent amount: the gold
obtained for the metal economized represents a net gain
to the community].
The same kind of gain, says Kemmerer, attaches to the
use of inconvertible money, and even on a larger scale,
because there is no necessity to use primary money even for
a redemption fund, as there is when the money is convertible.
Such views as these have led Prof. Keynes to opine that the
Indian currency system is a marvel of economy, and that other
* Money and Credit Instruments in Relation to Prices, p. 63.

more advanced countries might usefully follow the lead. We

will; not draw from this the uncharitable conclusion that
either Prof. Kemmerer of Prof. Keynes would recommend that
because an inconvertible paper currency is the most economical
currency a country should adopt it without remorse. What we
are concerned with is to find out whether the rupee currency is
really economical. When the process by which the rupee comes
into being is carefully analysed it becomes impossible to take
seriously the plea that the Indian currency is economical. First
of all, gold is tendered to the Secretary of State in London
for his council bills, or gold is tendered to the Government of
India in India in payment of taxes or otherwise. Out of this
gold the Secretary of State buys silver and coins rupees. As
the price of silver is below the ratio, there arises a difference
between the cost price of the rupee and its selling price in gold.
To the extent of this difference there is, of course, a gain. But
this gain or profit on coinage, as it is called, is no benefit to
society. It is a hoard, and to that extent represents a useless
abstraction of wealth. If the profit is not to be used for any
current purposes of society it is as well not to coin rupees.
It is therefore obvious that so long as the profits are merely
held apart from the revenue resources of India there is no
economy in the rupee currency worth naming. From another
standpoint the currency of India is a wasteful asset to society.
Metallic currency is primarily a capital good representing a
form of social investment. Consequently it is necessary to
see that the capital value of the currency is maintained. It is
a happy circumstance to note that the Government of India
is not dead to this aspect of the question with regard to its
paper-currency reserve, and has very recently instituted a
depreciation fund for the preservation of its capital value.*
Now, the considerations that apply to the paper currency
should apply also to the rupee currency. Has the rupee currency
maintained its capital value ? The gold part of it, called the
gold-standard reserve, is invested in interest-bearing securities.
Interest is no doubt an additional source of gain, but have
the securities maintained their capital value ? Far from it.
Turn to the rupee half of the currency. Has the bullion in the
rupee maintained its capital value ? There have been endless
* Cf. the Speech of the Finance Minister, Mr. Hailey, on the Indian Paper
Currency (Amendment) Bill, dated September 16, 1920, S.L.C.P., Vol. LIX, pp. 308-9.
charts and diagrams drawn by playful economists in which

the black line, showing the nominal value of the rupee, has
remained up while the red line, showing the bullion value of
the rupee, has gone down with the falling gold value of silver.
But what does that mean ? Simply that the rupee is a wasting
asset and is not worth at a later date what it cost to society
when it was manufactured. Surely there was more economy
in the project of the mad Chinaman who burnt his house to
roast his pig than there is in the Indian rupee currency? The
Chinaman’s house must have been very old and uninhabitable.
The same cannot, however, be said of this converting of gold
money into silver money, because we know that silver is an
inferior kind of investment to gold. Thus viewed, the currency
is not in the least economical. It appears to be so because
people look only to the rupee. But, adding the cost of the
rupee currency to that of the gold-standard reserve, can it be
said that India would have required more gold if she had a
gold currency in place of a rupee currency ? Bearing in mind
that with a fixed limit on the issue of rupees there can be
no reason for a gold reserve, the only result of a stoppage of
rupee coinage would be that gold, instead of being, as now,
part reserved as a sinking fund and part transmuted into a
rupee currency, would enter into circulation without being
subjected to this baneful and wasteful process.
No more gold would be required in the one case than in
the other. We can therefore conclude without fear of challenge
that with a complete stoppage of rupee coinage Indian currency
would be truly economical, prices would be more stable, and
exchange secure, in the only way in which it can really be said
to be secure, and the rupee, although inconvertible, will cease
to be a problem, which it has been ever since 1873.
But will that be all the advantage to the country ? By no
means. In drawing a moral from his comparison of the paper
pound of 1797 with the paper pound of 1914, Prof. Cannan*
points out that—
“there can in these days be no doubt that the experiment
of entrusting what no community should entrust to any
institution, the power of creating money without limit, to the
* The Paper Pound 0/1797—1821, Introduction, p. xxxix.

Bank of England, compares very favourably with the

modern plan of entrusting it to the Government itself
or to a State bank completely under the control of the
Government. In the comparatively short war of 1914-18
currencies ‘not convertible at will into a coin which is
exportable’ were issued by Governments and Government
banks in amounts compared with which the 100 per
cent, increase in thirteen years, which made the Bullion
Committee complain so vigorously in 1810,look absolutely
trifling.”
There was a time when it could have been said that this
indictment did not apply to the Government of India. Few
Governments could be said to have been so very anxious
to wash their hands of the responsibilities involved in the
management of a currency as the Government of India once
was. In 1861, when the Government first undertook the
issue of paper money in India, the anxiety it displayed was
laudable. An impecunious Government, made prostrate by
the heavy burdens of the Mutiny, should have welcomed the
project of a paper currency as a source of profit. But so great
was its sense of responsibility that the Government refused
to be content with convertibility as a check on over-issue. One
of the principal reasons why the desperate paper-currency
scheme, which that straitened financier Mr. Wilson had devised
in 1860 to find ways and means for improving the finances
of India, was rejected was so well stated by his successor,
Mr. Laing, that in these days of frenzied finance his remarks
may as well be reproduced in full. He said* :—
“There was another important reason why he
(Mr. Laing) thought that Sir Charles Wood’s principle
was the soundest. All parties were agreed that a paper
currency ought to be identical with the metallic currency
which it displaced. But the system of issuing against
two-thirds of securities and one-third of specie, as was
proposed by Mr. Wilson, would not always ensure this
identity, and there was considerable risk that in times of
buoyancy and speculation the circulation would be unduly
extended. He thought that that was a point of considerable
importance, because if we looked at what had taken place
in India during the last three years, we should find a
great increase in the wages of labour and the prices
of commodities, which should warn us as to what the
* His speech on the Paper Currency Bill dated February 16, 1861, S.L.C.P.,
Vol. VII, pp. 66—7.
consequences might be if we were to accelerate the

process already going on so rapidly by any artificial
inflation of the currency. If you unnaturally stimulated
the rise of prices by an over-issue of paper circulation
you ran considerable risk of changing the healthy action
of commerce into a feverish excitement which was sure
to bring about a reaction. If we continued to go on as
we had done for the last two or three years, the result
would be that many articles of Indian produce might
be driven out of the market by the competition of other
countries, and he therefore thought that the Government
ought to be exceedingly cautious how it took any step
that might unduly accelerate the tendency to a general
advance, as might be the case under the system of paper
currency which to any considerable extent represented
securities and not bullion. Such an advance might even
reach a point seriously embarrassing to the Government
if the general rise in the rate of wages and cost of living
made the present scale of salaries and the pay of troops
no longer adequate.* For these reasons he thought it by
far the wisest course to adhere to the principle of paper
currency adopted in England as laid down in Sir Charles
Wood’s despatch.”
Not only was the Government anxious to put a limit on
the issue over and above making it convertible, but it did not
want to be vested with the legal authority to issue notes. In a
despatch dated April 27,1859,† to the Secretary of State, the
Government of the day observed :—
“ We believe that the convertibility of the notes on
demand would not be a sufficient guarantee against
over-issue. When once the paper currency is established
in public confidence, the temptation to take dangerous
advantage of this confidence will be very great in a time
of difficulty, if the power of doing so is left in the hands
of the Government of India alone. Restriction by law,
either to a certain amount of issue absolutely, or to any
amount relative to the balances in India, will, in our
opinion, be necessary. We think that such a law ought
to be passed by Parliament, and not by the Legislative
Council of India.”
*During the bank suspension period in England it is to be noted that the Army
and the Navy were paid in gold, for fear of causing discontent.
†For a copy of it, see Commons Paper 183, of 1860, p. 1.
Equally sane was the view of the Government in 1876

with regard to the rupee currency. The Bengal Chamber of
Commerce, it will be recalled, had urged upon the Government
of India to close the Mints to the free coinage of silver, without
opening them to the free coinage of gold—a project which
practically meant that the Government should undertake
the management of the rupee currency. The reply of the
Government of India was a sharp rebuke. It declared*:—
“8. . …the Chamber invite the Government to take
a measure calculated to enhance indenfinitely the value
of the rupee by suspending the long-established legal
right of all comers to have silver bullion manufactured
upon uniform conditions under State supervision into
legal-tender coin, and temporarily substituting a system
of coinage at the discretion of the State……
* * * * *
“11. It is essential to a sound system of currency that
it be automatic. No man or body of men can ascertain
whether at any particular moment the interests of the
community as a whole require an increase or diminution
of the currency; still less, how much increase or how
much decrease is, at any moment, exactly needed. No
Government which aspires to keep its currency in a sound
condition would be justified in attempting that impossible
task, or in leaving the community, even for a short interval,
without a fixed metallic standard of value. Under an ‘open
coinage system’ these things regulate themselves without
official interference.”
Now, compare with this the later pronouncements of the
government with regard to the principles governing the paper
and rupee currency respectively. During the war, when the
Government of India resorted to the enlargement of paper
issues, Honourable Members of the Supreme Legislative
Council pointed out the effects it would produce on prices in
India. But the late Hon. Sir Wm. Meyer, who as a Finance
* Resolution of the Government of India, relating to the Depreciation in the

Value of Silver, dated September 22, 1870, Commons Paper 449 of 1893.
Minister piloted the Indian finances during the last war, in the
course of a speech on the Indian Paper Currency (Amendment)
Bill, dated September 5, 1917, replied*:—
“ The note circulation was sixty crores before the
war and is now about a hundred crores. But the Hon.
Mr. Sarma shivered at the idea of inflation. I may remind
him that one of the accepted (!) doctrines of economists
is that artificial inflation of paper currency only exists
when the note circulation is not fully covered. Now we
have covered every rupee of our note circulation. …… in
securities……” [How could there be an inflation ?]
The change in the Government’s view with regard to the
rupee currency is equally noteworthy. In 1908, when the
exchange value of the rupee fell below par, the Government
was reminded that it was the result of the excessive coinage
of rupees. But although in 1876 the Government did not think
it was possible for it to so increase and decrease the currency
to suit the needs of commerce, yet in 1908 the Government
advanced the opposite view. The Finance Minister, the Hon.
Mr. Baker, in his reply, went on to argue†:—
“ In the first place the whole of the new coinage that
we have undertaken during this period has been under-
taken solely to meet the demands of trade. Not one single
rupee has been added to the circulation except to enable
us to meet these demands……”
Now, if it is dangerous to entrust a Government with the
power to manage currency, how very dangerous is it to entrust it
to the Government of India, which professes to carry out its trust
on the basis of doctrines such as these ! No one is so ill-instructed
in these days as to suppose that these are sound maxims. If
security is enough, what need is there for convertibility ? If
currency is issued only in response to trade demand, what
fear is there of over-issue ? A Government acting on such a
principle may well go on indefinitely increasing the currency
without remorse. History abounds with instances of ruin caused
by the management of currencies on such naive principles as
these. ‡ Happily for the country, the paper currency profoundly
* S.L.C.P., Vol. LVI, p. 35.

† Cf. Financial Statement for 1908-9, p. 229.
‡ Cf. E. R. A. Seligman, Currency Inflation and Public Debts, New York,
1922, passim.
altered in its basis—one might almost say, tampered with—

in 1920 by the Government is yet far away from currencies
regulated on the theory enunciated by the Finance Minister.
It is the rupee currency which has been, ever since the Mint
closure, the chief source of danger to the welfare of the
Indian people, particularly because of the principle governing
its issue. Because that principle has the support, in itself a
surprising thing, of such eminent authorities as Prof. Keynes,*
Mr. Shirras.† and the Chamberlain Commission. ‡ it cannot
alter the case for depriving the Government of this power of
managing the rupee currency, for the principle is essentially
unsound. The reason why the fallacy in the reasoning, that
there could be no excess of rupees because of their being issued
in response to trade demand, does not appear on the surface
is due to the peculiar nature of money. Money is said to be
wanted only because money has a purchasing power. That is
no doubt true, but that does not quite explain why people so
incessantly want money, even when they know that the value of
money is so unstable. Indeed, if purchasing power was the only
consideration we should not find such a desire for the current
means of purchase. That desire can only be accounted for by the
fact that money has a differential advantage over other goods, in
that it has in the highest degree what Menger called the quality
of saleability. That one can more often buy at a bargain than
sell at a bargain is simply another way of stating that every
one desires to hold his resources in the most saleable form of
money. In this sense it is absolutely true that no more money
can be issued than there is demand for. But from that it does
not follow that there can be no over-issue of money purely for
the currency needs at any given time. All money is acquired
in response to trade or services, but all money is not retained
in currency. Indeed, all commodities are exchanged for money,
because money is supposed to bear the option of being used for
non-monetary purposes. In the case of the rupee the option-of-
use quality is non-existent. Consequently, although issued in
response to trade demand, it remains in currency whether it is
* Op. Cit., p. 111. † Op. cit., p. 39. ‡ Report, par. 66.

wanted or not, and thus tends to bring about its depreciation.

That such a depreciation is possible cannot be denied even by
those who maintain that rupees are issued only in response to
trade demand, otherwise why should they be so very anxious
for an increase of the gold reserves of the country. But the
danger to the rupee currency does not merely arise from the
possibility of indiscretion on the part of the Government.
Besides the Government there have been statesmen in India so
interested in the welfare of their fellow-subjects that they have
rebuked the Government on several occasions for not making
the profits on rupee coinage available for the advancement of
the moral and material progress of the country.* and in 1907
the profits on rupees were actually employed in the extension
of railways. It must fill every one with horror and despair
to contemplate the consequences sure to emanate from the
manipulation of currency for such ends. Is it not time this
source of danger and temptation be removed by depriving the
Government of this power to manage the rupee currency ? But
what is the means of bringing this about ? If it is desirable
to do away with the management then convertibility is an
insufficient measure; for with convertibility the rupee will
still remain a managed rupee. Only the complete stoppage of
rupee coinage will remove the governmental interference in
the management of Indian currency; and it is this that we
must therefore ask for.
Queer as it may seem, SAFETY LIES IN AN
INCONVERTIBLE Rupee with a fixed limit of Issue.

* Such a sober politician as the late Mr. Gokhale took the lead in this matter.
Cf. his speech in the Financial Statement for 1907-8, pp. 203-4 ; and the same
indiscretion is repeated by Prof. V. G. Kale in his Currency Reform in India,
1919, p. 65.
INDEX
Administration : Coinage and Mint Act, 1870 :378 et seq.,
Changes in 1833 : 353 471
Civil Service reforms, 1853 : 417, 418, Coinage under the Moghul Empire : 437
425 Cotton trade, development in India : 429,
Table of costs : 420 432
Agricultural exports : 430, 431 Council Bills:
Althorpe, Lord : 485 note Drawings, 1893-94 : 509
History of: 577
Babington Smith, Sir Henry. See Smith Reserve Councils : 489, 255 et seq.
Committee on Currency Sales of: 457, 489, 509, 531, 578 et seq.
Bagehot, Walter: 456, 457 Cromer, Lord: 441
Baker, Hon., Mr. : 612 Currency. See Indian Currency
Bank Charter Act, 1884 : 591 Currency Act, 1835 : 354, 366
Bank of England Notes, depreciation, Curzon, Lord: 587
1797-1818:558,562
Banks of India, table : 367 Dalai, Mr.: 574 note
Barbour, D.: 505 note Datta, Mr. : 528 note
Belgium, Bimetallic system in : 355 Davenport, Prof. : 571
Bengal : Dawkins, Hon. C. E. : 587, 590
Double standard, experiments 1766- Demonetization of gold, 1833 : 351
93:346
Demonetization of silver: 399 et seq.
Reform of currency : 350
Discount rates, chart: 394
Bimetallism:
Dislocation of silver standard parity : 378
Abrogation in India : 354 et seq. et seq.
Drawbacks of: 462, 463
Gold of silver ratio : 410 East India Company:
Indian Government’s position : 465, 466 Double standard experiments, 1766-93:
Market and Mint ratio divergences: 346, et seq.
411,412 Silver standard prescribed, 342, 343
Monetary conferences, discussions at: English currency, early history : 335,339,
459, 460 355, 356
Bombay, currency reforms : 348, 350 European countries, money stocks
Brown, Hon. Claud : 374 note distribution, table: 461
Exchange :
Cairnes, Prof. J. E., 377 : note, 410 Fall of, economic effects : 415 et seq.
Cannan, Prof. Edwin : 229 note, 575 High exchange policy, 1920 : 527
note, 608 “ Natural level” fallacy : 542, 543
Cassel, Prof. G. : 567 note Stabilization of: 522
Cassels, Mr. : 365, 371 Exchange rate :
Castlereagh, Lord : 528, 557 note Gold value of rupee in terms of: 516
Chamberlain Currency Commission : 1913: London on Calcutta, 1914, 1915, table:
487, 489, 493, 512, 542, 547 note, 512
549, 550, 553, 564, 573, 585, 590, 591
London on India, 1907-8, table : 511
note, 613
Purchasing power parity, 567 et seq.
Cheque system, failure of: 391
Exchange standard, stability of: 502 et seq.
China, trade with India, 1889-1908,
table : 504
Civil Service, economies in : 417, 418, 425 Falkner, Prof. R. P. : 389 note
Fetter, F. A. : 550 note
Finances, Imperial and Provincial, Gresham’s Law: 463

separation between: 526 Gupta, Mr. : 528 note
Fisher, Prof. : 411,565, 571
Fowler, Sir Henry, Indian Currency Halifax, Lord: 446
Committee, 1898-99 : 479, 554, 576, Hamilton, Lord George : 482
581,595,600
Herschell Committee on Indian currency,
Foxwell, Prof. H. S.: 400 note, 407 note
1893-94: 472 et seq., 600
France:
Huskisson : 358
Bimetallic system : 355
English and French currency systems
Inchcape, Lord : 531
compared : 484
Gold and silver mintage, 1803-69, Indian currency:
table: 462 Additions to coinage, 1893-1920 :531,
532, 533 et seq.
Germany, currency difficulties in : 458 Army establishment, effect on : 361
Giffen, Sir Robert: 455 Banks, table of: 367
Gokhale, Hon. Mr.: 572, 614 note Barter, trade reduced to : 339
Gold: Chamberlain Commission, 1913 : 487,
Consumption in various countries, 489, 493, 542, 547 note, 550, 553,
table : 560 564, 573, 585, 590, 591, 613 note
Discoveries, effect of: 355, 356 Coinage and Mint Act, 1870, provisions
Issue, 1917:535 of: 378 et seq.
Notes, value in terms of, table : 558
Convertibility of: 496, 497
Price-levels compared with other
commodities: 557 Credit currency, lack of, 1859 : 366
Silver and gold, value and production, Currency circulation, tables : 518, 519
404 et seq.: 407 Dislocation of parity of exchange :
Gold currency for India : 396, 397
Arguments in favour : 571 et seq. East India Company Units, table : 344
Commission of 1868 : 376 Expansion measures, 1898 : 476, 477,
Imports of gold, 1863-64 : 372 478
Legal tender notification, 1864 : 375 Fowler Committee, 1898-99: 479,
Proposals, 1864-66 : 374 et seq. 554,576, 581,595,600
Gold exchanges standard : Gold currency. See that title
Chamberlain Commission, 1913 :487, Gold exchange standard. See that title
489, 493
Herschell Committee, 1893-94: 472 et.
Mints, closing for silver: 490, 491
seq., 601
Objections to : 489, 490
Gold payments: Imperial and Provincial finances,
separation: 526
Army remittances: 424
Civil Service remittances : 425 Mint for gold coinage : 481, 482
Rupee, cost of: 415,416 Mints, opening to silver: 473, 474
Gold standard for India : Moghul Empire : 336 et seq.
Bengal Chamber of Commerce support, Money market fluctuations, causes of:
1876 : 449 391 et seq.
Currency Committee, 1886 : 455 Monopoly of issue by Government:
Currency Committee, 1898 : 456 492 et seq.
English fiscal difficulties : 357, 358 Paper currency. See that title
Government scheme, 1878 : 451 Precious metals imports : 362, 363, 365
Monetary Conferences : 460 et seq.
Redemption : 538, 539, 540, 541 et seq.
Movement towards : 445 et seq.
Reforms, 1833 : 351, 352, 353
Proposals, 1859 : 368, 369
Smith, Col. J. T., plan of: 447 Rupee. See that title
Temple, Sir R., plan of: 445, 446 Silver standard. See that title
Gold standard reserve: Smith Committee, 1919: 513, 520, 563,
Danger of : 564 et. seq. 564, 577
Maintenance and distribution : 546 Trade currency, 1860-70, table : 373
et seq. Trade expansion, 1842, effect of: 361,
Gregory, Dr. T. E.: 555 note 362, 363
INDEX 617
Industrial pursuits, England and India, Money market, Indian, causes of
tables : 427, 428 fluctuation : 388 et seq.
International coinage, uniformity in : 399, Monometallism, see Silver standard.
400 et seq. Muir, Sir William : 449
International Exchange, American
Commission, 1898 : 459, 460 Newmarch, F. W. : 577 note
International Monetary Conferences. See Nicholson, Professor: 102 note
Monetary Conferences
Nickel coinage: 536
Investments, Indian, Price-movements
of: 422
Overstone, Lord: 486
Italy, Bimetallic system of: 355 note
Paper currency in India :
Jevons : 391, 409, 458 Banks of issue : 382, 383, 384
Jute industry in India, development: 430 Department for: 383, 384
Encashment regulations: 385
Kemmerer, Prof. : 494, 564, 566 note, 567, Establishment of: 378
606, 607 Fiduciary issue, extending : 533 etseq.
Keynes, J. M. : 492 note, 494, 505 note, Independent Treasury system : 393, 395
520,532,548, 563,564,566 note, 570,
571,606,613 Notes, issue of, 1915-19, table : 534
Kitchin, Joseph : 560 note Paper pound, 1797 and 1914, compared:
608
Laing, Mr. : 370, 609 Reserve distribution, 1862-91, table:
Latin Currency Union, 1865 : 356, 401 384 note
Laughlin, Prof. J. L : 401 note, 402 note, Values, table : 370
403 note Paper Currency Acts: 371, 391, 472, 533
Law, Sir Edward : 591,592,594,595, 596 Parnell, C. S.: 555
Legal tender: Peel, Sir Robert: 358, 361
Limitation of, 597 : 601, 602 Pierson, Professor: 484
Rupee as legal tender in U. K.: 469, 470 Pittman Acts, U.S.A. : 536
Lewis, Prof. W.: 25 note Prices:
Lindsay, A. M.: 477, 498, 554, 555, 587, Gold exchange standard in relation
588, 589 note, 600 to : 564, 565
Liverpool, Lord : 358, 359
Indian and foreign price-levels, chart:
Londan, A. C. B.: 366 note
566, 567
Inflation during War : 564, 565, 566
McCulloch, J. R. : 377 note
Madras, currency reforms : 347,350,351 Movements of prices as standard of
value : 570
Mansfield, Sir Willam : 457 note
Marshall, Professor: 434, 457 note, 463, Rupee and sterling securities, 1873 :
507 note, 522 422
Meston, Sir james : 588 Wages and Prices in England and
Meyer, Hon. Sir Wm.: 611 India: 437, 439
Mint and Coinage Committee, 1803 :346 Wages, silver and prices, table : 435
Mint regulations under Coinage Act, Probyn, Mr.: 477, 498 note, 554 note
1870:380 Public works in India, development: 419,
Mints, opening to silver : 473, 474, 581 421
Mitchell, Professor: 557, 570 Reddi Garu, M. L.: 552
Moghul Empire, economic system under: Revenue and expenditure in India : 415
336, 337 et seq., 419
Mohur: “ Reverse Councils,” sale of: 489, 537 et. sec.
Currency unit: 446 Ricardo, David : 359, 554 note, 558 note
Issues of: 346, 535 Ripon, Lord: 421
Monetary Conferences : 1878, 1881 and Ross, H. M.: 531 note
1892:460,473 Rupee:
Money and stocks distribution table : 461 Alteration of par, 1917-9, table: 513
Rupee (continued)— Smith, Colonel J. T.: 447, 468

Coinage additions : 532, 533, 536 Smith Committee on Indian Currency,
Convertibility : 496 1919 : 513, 514, 520, 563, 564, 577
Subedhar, Mr. : 576
Cost of fall of, 1894-97:510
Switzerland, bimetallic system : 355, 356
Depreciation, 1914-19: 524
note
East India Company’s rupee : 342,343 Taussig, F. W.: 484 note
Economy of rupee currency : 606, 607 Taxation, increases in : 415 et seq.
Gold payments, cost of, table : 416 Temple, Sir Richard: 384 note, 387 note,
Gold standard reserve and rupee 395 note, 445, 446
circulation : 550 Thackersay, Sir V.: 581, 585
Gold, value, 1892-1922, tables : 508, Trade :
514,515,516,517 Adverse balance and fall of exchange :
Imperial bimetallic: 469 527, 528, 560
Legal tender in United Kingdom : 470 Agricultural exports : 430
Moghul Empire : 338, 339 Bounties and the fall of silver: 434
et. seq.
Monthly fluctuations, chart: 442
China and India, 1889-1908, table : 504
Purchasing power : 517 et seq.
Cotton trade development: 428, 429,
Rupee-sterling exchange, fall of: 399
432
Stability, general survey : 509
Distribution of, tables : 432
Standard of value : 571
Falling exchange, general effect of :
Uniform coinage, 1833, table : 351 425 et seq.
Weight, increasing : 469 Imports and exports, tables : 426, 427
Russell, H. B.: 377 note, 400 note India and U. K. before and after
Scone, Hon. Mr.: 386 note, 387 note
Mint closure: 503
Seignorage, levy of: 356
Jute industry development: 429, 430
Shirras, Mr. : 520, 528 note, 564, 613
Speculation caused by exchange
Silver:
fluctuations : 441
Bounties and the fall of: 434 et seq.
Treasury Notes, Indian, interest bearing :
Cost of purchases, 1893-1920 : 552
366
Depreciation, attempts to prevent: 455, Trevelyan, Sir Charles : 372, 374 note
456, 457, 458
Gold and silver, relative production and United States, currency difficulties : 459,
value : 403, et seq., 407 467
Indian Government purchases, 1915- Units of currency, tables : 344
20:536
Limited legal tender: 597 Van Den Berg, Mr. : 387, 390
Price movements of: 511, 512, 523 Vishram, Hon. Fazulbhai: 588 note
Silver standard for India :
East India Company’s decree: 342, 343 Walker, Prof. F. A. : 468 note
Evolution of: 353 et seq. Waterfield, Sir Henry : 510 note
Demonetization of silver, effect of: 399 Wastland, Sir James : 589
et seq. Whitaker, A. C. : 484 note
Dislocation of parity of exchange, Wood, Sir Charles : 390 note, 395 note, 609
1873:401 et seq.
General nature of: 378 et seq.
Instability : 415 et. seq.
Book 4
BLANK
MISCELLANEOUS
ESSAYS
Statement, Evidence,
Reviews, Forewords etc.
BLANK
NOTE
The Royal Commission on Indian Currency and Finance visited
India in 1924-25 to examine the financial system and to suggest
the Reform of the Indian currency. The commission was comprised
of the following members.
E. HILTON YOUNG, Chairman

R. N. MOOKERJEE
NORCOT WARREN
R. A. MANT
M. B. DADABHOY
HENRY STRAKOSCH
ALEX R. MURRAY
PURSHOTAMDAS THAKURDAS
J. C. COYAJEE
W. E. PRESTON
G. H. BAXTER
Secretaries
A. AYANGAR
Dr. Ambedkar explained his views in the statement submitted

in reply to the questionnaire issued by the Commission. The
statement and his evidence before the Commission are reproduced
here along with the questionnaire.
BLANK
1
STATEMENT OF EVIDENCE*
Submitted by Dr. B. R. Ambedkar, Bar-at-Law to
the Royal Commission on Indian Currency
1. In reply to the questionnaire issued by the Commission I
beg to submit the following statement of my views. In dealing
with the questionnaire issued by the Commission I will begin
with question No. 4 because I believe that is the principal issue
on which the Commission is asked to give a definite finding.
2. I am emphatic in my opinion that the Gold Exchange
Standard cannot be continued with any advantage to India
and for the following reasons :—
(1) It has not the native stability of the Gold Standard.— A
pure Gold Standard is stable because the value of gold
in circulation is so large and the new additions to the
supply are so small that the stability of the standard is
not thereby appreciably affected. But in the case of the
Exchange Standard the new additions are dependent
upon the will of the issuer and can be augmented to
such an extent that the stability of the standard can
be appreciably affected thereby.
(2) It is discretionary in issue without there being anything
in it to regulate the discretion.—It is sometimes said
that the Gold Standard is a hard standard which keeps
the changing affairs of mankind tied to the wheel of
nature over which human agency can exercise no control
and that the Exchange Standard affords an escape
from this frigidity. In reply to this it must be said that
though a discretionary currency, it is so only when the
currency is provided with some means which enables this
discretion to be properly exercised. There must be some
regulator by which the discretion left to the issuer is
regulated. From this point of view an Exchange Standard
is inferior to a Convertible Standard. A Convertible
Standard and an Exchange Standard are alike in
*Report of the Royal Commission on Indian Currency and Finance, Vol. II,
Appendix 29, His Majesty s Stationery Office, London, 1926, pp. 235-39.
this that they both allow the use of discretion in the

issue of currency. But a Convertible Standard is superior
to the Exchange standard because the discretion of the
issuer in the former is regulated white the discretion
of the issuer in the latter is unregulated. It is true
that in the Exchange Standard there is what is called
regulation by foreign Exchanges. But such a regulation,
though it is better than no regulation at all, is only a
loose and indirect way of reaching the end and cannot
be depended upon in all circumstances of reaching it.
(3) It is economical. But for that very reason it is insecure.—
There are many writers who are enamoured of the
Exchange Standard, because it effects a certain degree of
economy in the use of gold. But is the plan secure ? Any
plan of currency to be sound must be both economical
and secure. It will do if it is not economical; but it will
certainly not do if it is not secure. Now I submit that
the proposition that to economise gold as a currency is
to impair its utility as a standard of value is as simple
and self-evident as the proposition that to use paper
or rupee as a medium is more economical than to use
gold. For what does this discarding of gold from currency
use mean ? It simply means this : that by economising
the use of gold you thereby directly increase its supply
and by increasing its supply you lower its value, i.e.,
gold by reason of this economy in its use becomes a
depreciating commodity and, therefore, unfit to that
extent to function as a standard of value. You cannot
therefore both economise gold and also use it as a
standard. If you want to economise gold, then you must
abandon gold as a standard of value, in other words
the economy of the Exchange Standard is incompatible
with its security.
3. The choice therefore can never be between a Gold
Standard and an Exchange Standard. If we do not want a
Gold Standard we must either go over to a Compensating
Standard of Prof. Fisher or to a Tabular Standard of Prof.
Jevons. The choice is really between either of them and the
Gold Standard. There is no doubt that the Compensating
Standard or the Tabular Standard would be better
than a Gold Standard. But mankind must become more
philosophical than it is before they can be made workable, and
STATEMENT OF EVIDENCE 627
until that happens I think the Gold Standard must be

accepted as the only system of currency which is “knave
proof” and “fool proof.”
4. The next important question is that of the Gold Reserve.
Before discussing matters such as location, composition, etc.,
of the reserve, it is necessary to determine whether we want
it. That question in its turn depends upon another question
pertaining to the mode in which the Gold Standard is to be
introduced. In this connection I do want to say that there
are many people who are under the impression that the
introduction of a Gold Standard means merely the starting
of a mint and the issuing of a gold coin. Nothing can be
more erroneous than this. Gold Standard means not the
starting of a gold mint but making provision whereby gold
will become current. For currency is the standard. Now in
order that gold may be current, it is necessary that other
forms of currency must be limited in their volume. There
are two ways by which currency may be limited. One way
is to make it convertible and the other is to fix a positive
limit on its issue. If you choose to adopt convertibility as a
method of limitation then there is reason for maintaining
a gold reserve. If you choose fixity of issue as a method of
limitation then there is no reason for maintaining a gold
reserve. As between the two systems I prefer the fixity of
issue system. My reasons are two :—
(1) One of the evils of the Exchange Standard is that it
is subject to management. Now a convertible system
is also a managed system. Therefore by adopting the
convertible system we do not get rid of the evil of
management which is really the bane of the present
system. Besides a managed currency is to be altogether
avoided when the management is to be in the hands of
the Government. When the management is by a bank
there is less chance of mismanagement. For the penalty
for imprudent issue, or mismanagement is visited by
disaster directly upon the property of the issuer. But
the chance of mismanagement is greater when it is
issued by Government because the issue of government
money is authorized and conducted by men who are
never under any present responsibility for private
loss in case of bad judgment or mismanagement.
(2) A fixed issue system besides eliminating management

will make provision for a larger use of gold in currency.
The use of gold is an important matter. The whole
world is suffering from a continuous rise of prices
owing to the depreciation of gold. Anything therefore
that will tend to appreciate gold will be to the good;
and if gold is to appreciate there must be a larger
use of gold as currency. Besides at the present time
there is no necessity to economise gold, because there
is all over the world such a great plethora of money
that the less we economise gold the better. From this
point of view the Exchange Standard once a boon, is
now a curse. It served a useful purpose for some time.
From 1873 the production of gold had fallen off and
the economy effected by the Exchange Standard was
indeed very welcome because it helped in a period of
contraction to expand the money of the countries of
the world and thereby maintain the stability of the
international price system by preventing the rapid fall
in prices, which would have been inevitable if all the
countries which based themselves on gold had also
adopted gold as a currency. But after 1910 conditions
changed and the production of gold increased, with the
result that the continuance of the Exchange Standard
thereafter not only did not help the countries to check
the rise of prices but became a direct cause of the rise
of prices. For the economy in the use of gold rendered
gold which was already overproduced redundant. During
the war the use of paper money on an unprecedented
scale led to a still greater depreciation in the value of
gold all of which was practically due to the economy of
gold in its use as currency. Consequently as observed
by Prof. Cannan “in the immediate future gold is not
a commodity the use of whch it is desirable either
to restrict or to economise. From the closing years of
last century it has been produced in quantities much
too large to enable it to retain its purchasing power
and thus be a stable standard of value unless it can
constantly be finding existing holders willing to hold
larger stocks or fresh holders to hold new stocks of it.
Before the war the various central banks in Europe took
off a large part of the new supplies and prevented the
actual rise of general prices being anything like what it
should otherwise have been, though it was serious

enough.” In the absence of that demand the next
best thing would be the introduction of gold currency
in India and the East. This introduction of a gold
currency can be better accomplished by adopting the
fixed issue system rather than the convertible system.
For the former will leave a larger margin for the use
of gold in actual currency than will the latter.
5. That being my view of the solution of the problem I am
necessarily in favour of the abolition of the Gold Standard
Reserve as being of no practical use for maintaining the
stability of the currency. There is also another reason why I
think the Gold Standard Reserve ought to be abolished. The
Gold Standard Reserve is peculiar in one respect, namely
this; the assets, i.e., the reserve and the liabilities, i.e.,
the rupees are dangerously correlated by reason of the fact
that the reserve cannot increase without an increase in the
rupee currency. This ominous situation arises from the fact
that the reserve is built out of the profits of rupee coinage.
That being its origin, it is obvious that the fund can grow
only as a consequence of an increase in the volume of rupee
coinage. Now as Prof. Cannan remarks “ the percentage
of administrators and legislators who understand the Gold
Standard is painfully small, but it is and is likely to remain
ten or twenty times as great as the percentage which
understands the Gold Exchange System. The possibility of
a Gold Exchange System being perverted by ignorance or
corruption is very considerably greater than the possibility
of the simple standard being so perverted. Unfortunately
there is abundant proof of such perversion in the history of
the currency system in India. Already we have had foolish
administrators who had been obsessed with the idea that a
reserve was a very essential thing and who had therefore
gone in issuing currency without any other consideration
but that of augmenting the reserve. Nor has the country
been wanting in innumerable foolish business men who have
condemned the Exchange Standard without ever knowing
anything of currency on the sole ground that Government
is not allowing them to use the reserve as though to boom
up business was the proper function of a currency reserve.
Similarly we have amongst us equally foolish politicians
desiring to advertise themselves as friends of the people who

want the reserve to be utilised for educating the masses.
Any of these three may easily bring about a calamity in
{he guise of a blessing, and all this in sheer ignorance of
the principles of currency. It is therefore much better to
introduce a currency system which will do away with the
Exchange Standard and also the Gold Standard Reserve the
maintenance of which may any day be a source of mischief.
6. The following then are the requirements of my plan
for the reform of the Indian currency :—
(1) Stop the coinage of rupees by absolutely closing the
mints to the Government as they are to the public.
(2) Open a gold mint for the coinage of a suitable gold
coin.
(3) Fix a ratio between the gold coin and the rupee.
(4) Rupee not to be convertible in gold and gold not to be
convertible in rupees, but both to circulate as unlimited
legal tender at the ratio fixed by law.
7. What is to become of the existing amount of reserve
if it is not wanted for currency purposes ? I myself would
like it to be utilized by Government as ordinary revenue
surplus for any public purpose that may seem to be urgent.
But there will remain sources of weakness in the reformed
currency which it is wise to recognise. Unlike the Fowler
Committee, I am firm in my belief that the rupee currency
once effectively limited will maintain its value without the
necessity of any reserve. But there is just this chance that
the existing volume of the rupee currency is so large that
when there is a trade depression it may become redundant
and may by reason of its excess lose its value. As a safeguard
against such a contingency I propose that the Government
should use part of the Gold Standard Reserve for reducing
the rupee currency by a susbstantial margin so that even
in times of severe depression it may remain limited to the
needs of the occasion. The second source of weakness in the
currency arises from the peculiar composition of the Paper
Currency Reserve. That weakness lies in the existence of
what are called “Created Securities.” I should like this
portion of the Paper Currency Reserve extinguished as
early as possible. For unless this is done the paper currency
cannot with safety be made as elastic as it should be. I

would therefore recommend that the remainder of the Gold
Standard Reserve be utilised in the cancellation of the
“Created Securities” in the Paper Currency Reserve.
8. Having given my views on the nature and form of the
change I will now discuss the question next in importance,
namely, “the ratio between gold and rupee.” As a result of
war operations there is not a single country with a Gold
Standard which was able to keep its pre-war gold parity.
Some of them have erred from it by such a large margin
that it is now beyond the capacity of many to approach it
with any degree of certainty. But howsoever impossible and
impolitic the task, the hankering for a return to the prewar
parity seems to be universal. There is but this difference
between India and the other countries. The other countries
have yet to reach the pre-war parity. India, on the other
hand, has in fact overreached the pre-war parity. As a
result of the difference the problems before India and the
other countries are different. In European countries the
problem is one of deflating the currency, i.e., appreciating
it; in other words of bringing about a fall in prices. In India
the problem becomes one of inflating the currency, i.e.,
depreciating it; in other words of bringing about a rise in
prices. For a change from 1s 6d. gold to 1s. 4d. gold means
this and nothing else. Should the currency be inflated to
reach back the pre-war parity ? There are some people who
are under the impression that the restoration of pre-war
parity would give justice and would also give us the old
price level to which we were so long accustomed. Both these
views are fallacious. First : the restoration of pre-war parity
is not a restoration of the pre-war price level. For it is to be
remembered that 1s. 4d. gold in 1925 is not the same thing
as 1s. 4d. gold in 1914 if measured in terms of purchasing
power. The same ratio of exchange does not necessarily mean
the same level of purchasing power. The ratio between two
currencies may remain the same though their respective
volumes have undergone enormous changes, provided the
variations in volumes are equal and in the same sense.
This is exactly the result of a mere nominal restoration
of the pre-war parity. If by restoring pre-war parity is
meant the restoration of the pre-war level of prices then
the ratio instead of being lowered from 1s. 6d. in the direction
of 1s. 4d. must be raised in the direction of 2s. gold. In
other words instead of an inflation there must be a further
deflation of the currency. Second : the restoration of pre-war
parity even nominally would be unjust. As a standard of
deferred payment a currency should not disturb monetary
contracts. If all debts now existing had been contracted
in 1914 before the war, ideal justice would clearly require
the restoration of the pre-war ratio. On the other hand
if all existing contracts had been entered into in 1925
justice would require us to keep to the ratio of 1925. Two
things must be borne in mind in this connection. Existing
contracts include those made at every stage of preceding
depreciations and appreciations and to deal fairly with all
would demand that each one should be treated separately—a
task impossible by reason of its complexity and enormity.
Existing contracts are no doubt of various ages. But the
great bulk of them are of very recent date and probably
not more than one year old; so that it may be said that
the centre of gravity of the total contractual obligations is
always near the present. Given these two facts the best
solution would be to strike an average between 1s. 4d. and
1s. 6d., and to see that it is nearer 1s. 6d. and away from
1s. 4d. This is substantially the view of Prof. Fisher, who
observes: “The problem of a just standard of money looks
forward rather than backward : it must take its starting
point from the business now current, and not from imaginary
pars before the war. One might as well talk of restoring the
original silver pound or returning to the monetary standards
of Greece and Rome.” In short, in matters of currency the
real is the normal and therefore just.
9. As regards the effects of a rising and falling rupee
on trade and industry the point often sought to be made is
that low exchange confers a bounty on trade and industry.
But this is not the important point. The more important
point is, supposing that there is a gain arising from low
exchange, whence does this gain arise ? It is held out by most
business men that it is a gain to the export trade and so
many people have blindly believed in it that it must be said
to have become an article of faith common to all that a low
exchange is a source of gain to the nation as a whole. Now
if it is realised that low exchange means high internal prices,

it will at once become clear that this gain is not a gain to the
nation coming from outside, but is a gain from one class at
the cost of another class in the country. Now the class that
suffers is the poor labouring class, which pays the bounty to
the richer or the business class. Such a transference of wealth
from the poor to the rich can never be in the general interest
of the country. I am therefore strongly opposed to high prices
and low exchange, and no righteous Government should be
party to such clandestine picking of the pockets of the poorer
classes in the country.
10. I now come to the question of providing for the seasonal
needs of the money markets in India. A currency system should
be stable and elastic, and it is for this reason more than any
other that the currency in many countries is a compound of
metal and paper. The former is intended to give steadiness and
stability and the latter elasticity. Unfortunately in India the
plan of the paper currency is not contrived to give it elasticity.
In England under a similar paper currency the inelasticity is
made good by the development of what is called deposit currency
which is issued against good commercial paper. Owing to a
variety of causes deposit currency has failed to take root in
India and there has been consequently no mitigation of the
inelasticity of the paper currency of India. We should therefore
make greater provision in our paper currency reserve whereby
it could be made possible to convert good commercial paper
into currency best suited to the needs of seasonal demands.

2
Copy of the Memorandum* circulated to
Witnesses in India by the Commission
The following memorandum, indicating the main questions
which will come under the consideration of the Royal
Commission on Indian Currency and Finance under its terms
of reference, is published in order to assist intending witnesses
in the preparation of their evidence. It is not to be regarded
as exhaustive, nor is it desired that each witness should
necessarily attempt to deal with all the questions raised :—
(1) Is the time ripe for a solution of the problems of Indian
Currency and Exchange by measures for stabilisation
of the rupee or otherwise ?
What is the comparative importance of stability in
internal prices and in foreign exchanges ?
What are the effects of a rising and a falling rupee, and
of a stable high or low rupee, on trade and industry
(including agriculture) on national finance ?
(2) In relation to what standard and what rate should the
rupee be stabilised, if at all ?
When should any decision as to stabilisation take effect ?
(3) If the rate selected differs materially from the present
rate, how should the transition be achieved ?
(4) What measures should be adopted to maintain the rupee
at the rate selected ?
Should the Gold Exchange Standard system in force
before the war be continued, and with what modifications,
if any ?
What should be the composition, size, location, and
employment of a Gold Standard Reserve ?
(5) Who should be charged with the control of the note issue,
and on what principles ? Should control or management be
*Report of the Royal Commission on Indian Currency and Finance, Vol. III,
Appendix 95A, p. 612.
COPY OF A MEMORANDUM 635
transferred to the Imperial Banks of India, and, if so,

what should be the general terms of the transfer ?
(6) What should be the policy as to the minting of gold in
India and the use of gold as currency ?
Should the obligation be undertaken to give gold for
rupees ?
(7) By what method should the remittance operations of
the Government of India be conducted ?
Should they be managed by the Imperial Bank ?
(8) Are any, and, if so, what, measures desirable to secure
greater elasticity in meeting seasonal demands for
currency ?
Should any, and, if so, what, conditions be prescribed
with regard to the issue of currency against hundis ?
(9) Should any change be made in existing methods for the
purchase of silver ?
Note.—The above questions were circulated to witnesses in
India. As the result of the oral and written evidence
received in India, the relative emphasis to be laid on
the various matters dealt with has become clearer,
and accordingly the attached memorandum and
supplementary list of “Questions to be asked by the
Chairman” have been prepared for the information
of witnesses.

3
EVIDENCE*
Before the Royal Commission on Indian Currency
and Finance on 15th December 1925
Dr. B. R. Ambedkar, Barrister-at-Law, called and examined.
6047. (Chairman.) Dr. Ambedkar, you are a Barrister-at-law,
and you have been kind enough to furnish the Commission
with a memorandum in which your recommendations as regards
the Indian currency system are set forth in detail. I think you
have also been nominated as one of the representatives of the
Institute of Social and Political Science ?—Yes.
6048. Whose opinions have been set forth in another
memorandum ?—Yes, that is so.
6049. I understand that you are a close student of these
questions ?—I was 2 years before, but since I have been
practising of course I have not been able to give sufficient
attention to the very recent developments in currency and
so probably my facts and figures might sometimes be rather
out of date, but I should be able to tackle any point from the
theoretical side of the subject, I presume.
6050. You have been a student of political science ?—I was
a Professor at the Sydenham College of Science for two years
and I have written a book on the Problem of the Rupee.
6051. I should like to ask you a few questions to elucidate
a few individual contributions which you make to the subject
in the course of your memorandum. In sub-paragraph(i) of
paragraph 2 you commence with the statement : “A pure gold
standard is stable because the value of gold in circulation is
so large” and so on. What are you referring to as “a pure gold
standard” in that connection ?—A pure gold standard means
a gold currency as the standard of value.
6052. A currency consisting of gold ?—Largely.
6053. Supplemented by some form of token currency ?— By
some form of token currency, yes.
*Report of the Royal Commission on Indian Currency and Finance, Vol. IV,
Minutes of Evidence, pp. 313-22.
MINUTES OF EVIDENCE 637
6054. In so far as your opinion is based upon experience,

can you refer to any instance in which a country has had
a gold standard system with a large proportion of the
circulation consisting of gold coins ?—I may refer for instance
to a country like Germany, and barring for instance the
deposit of currency in England I should also cite the case
of England.
6055. In both those cases we must recognise that the
actual proportion of the circulating medium which consisted
of gold was comparatively small ?—May I say just one thing ?
What I want to emphasise there is that the new additions
to the supply are so small in comparison with the existing
volume in circulation that the new supply does not make
much difference to the price level. That is what I really
want to say there in that paragraph : but when you have a
currency which is merely regulated by the will of the issuer,
the issuer may add a new supply to the existing stock of
such an amount that he may disturb the price level once
established.
6056. The new conditions there referred to are, I take it,
the increment of currency rendered necessary by the regular
expansion ?—No; I simply say productions of the mines when
I talk of new additions to the gold supply.
6057. Then you are dwelling there upon the feature that
the annual additions to the quantity of gold in the world
are so small ?—That it does not cause any upheaval in the
price level to any appreciable extent.
6058. In what respect does that serve to distinguish
between any form of currency where the internal unit is
related in stability to gold ?—I do not quite follow.
6059. In what respect does the circumstance as to
the small proportionate annual addition to the world’s
gold supply to which you refer serve to distinguish, as
regards this matter of stability, between a currency based
upon gold in circulation, and a currency based upon the
gold exchange standard ? That is the second part of your
paragraph ?—There I say that when you start with a
certain given price level and if your issue of new currency
is entirely dependent upon the will of the issuer, then he
may add such a volume of currency to the existing stock
that he may disturb the price level materially. There is nothing

to prevent him from doing that. May I give, for instance, an
illustration : suppose a government was bankrupt government
and it wanted to finance certain of its departments, then it
can very easily issue for instance, a token currency of any
sort and add to the existing volume of currency as almost
all the belligerent countries have done.
6060. Now let us assume a country with a currency of
a certain amount of gold in circulation, supplemented by
notes in circulation; that is one proposal, I understand, in
regard to the point to which you are leading up ?—Yes, in
a certain way.
6061. And, on the other hand, a currency based upon a
gold exchange standard. Will you expand your recommendation
by helping the Commission on this point : why this possibility
of what is really inflation is more impossible when you have
gold in circulation than when you have a pure exchange
standard ?— It is this : the fact that you have the liability
of converting your paper currency into gold under a gold
currency with paper in circulation is a means whereby the
paper currency is kept within limits. You cannot add more
paper currency to your circulation than what your reserves
for convertibility would permit. But where under the gold
exchange standard, as we have had in India, there is no
liability upon you to convert your circulating media into gold
you are free to issue as much as you like.
6062. Supposing (I start with a supposition) that you
were to accept an obligation to convert your internal currency
under an exchange standard into gold or the equivalent
of gold in a foreign currency, would that, in your opinion,
put the two systems in the same position as regards their
capacity for resisting inflation?—It depends upon what kind
of convertibility you adopt.
6063. I am supposing the acceptance by the currency
authority, whatever it was, of a legal obligation to convert
the internal currency on presentation into gold or the means
of obtaining gold in a foreign currency in a gold standard
country ?—If your obligation is to accept to pay gold on tender
without question then I think that would be sufficient. If I may
say so, I mean that convertibility is like conscience and it might
be of various degrees; and its efficacy to control the volume

of currency would depend upon what kind of convertibility
you have. If your convertibility is only for the purpose of
foreign exchange then my submission is that that would not
be a sufficient limitation on the issue of currency.
6064. If the obligation is such as that to which you have
just referred, an obligation to convert the internal currency
into a means of international payment, either gold or foreign
currencies based on gold, why, in your opinion is that not
an adequate means of preventing this danger of the inflation
of currency with which we are dealing ?—Because a foreign
exchange is not necessarily an indication of internal inflation.
For instance, in our own experience in India it has been
found out, and it has been found out I think by Professor
Keynes, that although the rupee remained at the ratio of 1s.
4d. for a long time, the level of prices in India and the level
of prices in England were very different. Exchange cannot
be said to be in complete harmony with the whole of the
price level of a country. Exchange affects only such things as
enter into international trade, and everything would really
depend upon what is the volume and what is the ratio of
the goods that enter into international trade and goods that
did not enter. If the country is so situated that its internal
trade is much larger than its external trade, in fact, if its
external trade is insignificant …………
6065. What do you mean by the internal trade being
larger than its external trade ?—I mean that all the goods
or all the transactions of a country are not meant for the
purpose of foreign trade. In fact a country may have very
little foreign trade and consequently the valuation of goods
that do enter into foreign trade may not affect the valuation
of goods that do not enter; the relations between them may
not be very close.
6066. Let me generalise the question somewhat and
put it in this way : whether you have a gold standard
with notes and gold in circulation, or whether you have
an exchange standard by which the internal currency
is converted into external, is not the volume of internal
currency in both cases controlled by the preservation
of a certain ratio between the reserves and the
internal token currency outstanding, and is it any easier to

ensure the maintenance of that due relation in the one case
than in the other ?—I have been thinking more of prices rather
than of exchange ratios. I quite admit that the exchange
ratio between two currencies might remain the same and
yet the internal price levels in the two countries may differ.
6067. Which two countries ?—Any two countries; take
for instance England and India; the ratio between gold and
the rupee or sterling and the rupee taking the sterling as
equivalent to gold, may remain the same; in fact it did remain
the same for a long time; but taking into consideration the
price level in the two countries, they did differ; although I
admit that after some time the internal price level will assert
itself and bring the fofeign exchange ratio in line with itself.
6068. I think you are going a little in advance of the
actual point with which I was dealing in my question,
although no doubt you are referring to matters which are
very relevant. Now let me put it from another point of view.
As a matter of fact, if we consider countries in which there
has been a currency system more approximate to that which
you recommended than India has ever seen, have those
countries under the stress of necessity ever felt the slightest
difficulty in inflating when they felt the need to do so ? Let
me instance what occurred in gold standard countries in the
war ? No; as I say, gold itself may be subject to inflation.
It was as we found in America itself, subjected to inflation
on account of the enormous quantity of gold in circulation
then. Might I put it in this way ? That convertibility for
the purposes of foreign exchange is insufficient; that is the
point I am driving at. Convertibility, if it is to be an effective
convertibility, must be convertibility without question; it must
be convertibility for all purposes, although if I may just say
so I am not in favour of a convertible currency, as you will
see from my memorandum.
6069. Possibly a certain confusion may be introduced by the
analysis of convertibility into internal and external convertibility.
What is essential, is it not, in a sound system of currency, now
that gold is to be once more apparently accepted as the world’s
international payment, is that the unit of internal currency

should be stably related to a definite gold value ?—I do
not quite accept that; it may be stable for international
purposes ; it might not be stable for internal purposes.
6070. I do not think I managed to make my question
quite clear. I understand what is desired by you in your
recommendations is that the unit of currency which is used
internally should be stably related to a gold value ?—I am
really more for the use of gold. I am opposed to any kind
of system which will economise gold under the present
circumstances. Because I think that economy of gold is
incompatible with security of price. My standpoint is very
different from the standpoint of other people. I may be a
little barbarous in my view.
6071. Not at all. Let us examine what your real idea
is. What is your ideal to be attained in the organisation
of the currency of a country ? It is not that the internal
unit should be stable in relation to gold ?—Oh yes, it
should be stable—not in relation to gold but stable in
terms of commodities.
6072. By what methods do you recommend that India’s
internal currency should be stabilised, that is, in relation
to what, and, secondly, by what methods ?—It should be
stabilised more in relation to commodities rather than to
gold, which is used only for purposes of internal trade.
And I say it should be done by stopping the coinage of
rupees altogether, and prescribing the use of gold.
6073. If we reject gold as a standard of reference for
the internal currency, what other standard of reference
are we to adopt ?—That I have given here. That we should
either go to the Compensating Standard of Professor
Fisher or to the Tabular Standard of Professor Jevons.
If you do not want to use gold and economise gold, then
my submission is that you should go to one or other of
those two.
6074. I am not sure that I am very intimately
acquainted with Professor Fisher’s standard, but are
these both the same sort of proposals ?—They are
very much the same except that Professor Fisher’s
Compensating Standard—they are really what I
should say, I mean, the two sides of the same medal,
so to say. Professor Fisher would, for instance, alter the

metal in the gold unit according to a certain index number,
and Professor Jevons would allow more units to be given or
less units to be given according to a certain index number.
But I think those two are too complicated. I personally
believe that a gold standard for all practical purposes is
sufficient.
6075. Returning to what is practically possible, you are
of opinion that the value of India’s currency unit should be
determined in reference to a certain quantity of gold ?—No,
my submission is that India should have gold in currency.
Gold should not only act as a unit of reference.
6076. Let me pass from that and ask you another
question. Let me now deal with the view which you advance,
which I understand is best expressed in paragraph 4 of
your memorandum, sub-paragraph (2), where you say : “The
whole world is suffering from a continuous rise of prices
owing to the depreciation of gold. Anything, therefore, that
will tend to appreciate gold will be to the good ; and if
gold is to appreciate there must be a larger use of gold as
currency.” If I understand the precise force of that opinion,
it is that the gold exchange standard tends to economise
the use of gold, and that what is prudent and advisable is
not that the use of gold should be economised and therefore
that the gold exchange standard is bad?—Yes.
6077. And that is based upon the view which you take
as to the future relation between the demand and the
supply of gold in the world ?—Yes.
6078. You are of opinion that the future supply of gold
is likely to grow in relation to the demand ?—No, not grow ;
it will remain large because other people are not using
gold, they are using paper, they are not in a position to
use gold, so gold, even if it is not used, will remain large
in quantity.
6079. First of all, a preliminary question in regard to
that. Are you considering here the interests of India, or
are you considering the service which India might render
to the rest of the world ?—I have both in view.
6080. You think that, by doing that, India will be serving her
own interests and the interests of the rest of the world at

the same time. Do you agree with the not uncommonly held
opinion that a gold currency is an expensive system ?—Yes,
it is.
6081. So that we have to consider, in the first place, the
possible disadvantage to India of the expense involved. What
are the advantages to India to set against that expense ?—It
is that you get a more stable standard, which as Professor
Cannan says is knave-proof and fool-proof.
6082. Now, as regards the prospect. The force of this
contention would depend, would it not, upon the realisation
of your anticipations as regards the supply of gold in the
world at large ?—Yes.
6083. Would you agree that, supposing on the other hand
there was to be a relative decrease in the world’s gold supply
such as might tend to a general rise in world prices, that then
it would be to the advantage of India, as of other countries,
to economise in the use of gold ?—Well, my reply is that we
need not be afraid of an indefinite contraction. We have always
got methods for increasing currency. We must guard against
indefinite expansion which is always possible.
6084. If you have pegged the Indian currency definitely
to gold through the gold standard and there is a relative
diminution in the world’s gold supplies, then any general fall
in prices which must result would make itself felt in India
also ?—Yes, but that could be guarded against by increasing
our paper currency or otherwise by manipulating the paper
currency.
6085. Is not that sacrifice very characteristic of the gold
currency system, for which you yourself have selected that
system ?—No, I am making gold the currency simply because
I want to avoid the possibilities of indefinite expansion. As I
say, you can always guard against an indefinite contraction.
Falling prices can always be prevented.
6086. Now let me ask you a question as to the opinion you
have formed that anything that would tend to appreciate gold
would be to the good. Have you been able to arrive at any
statistical estimates as to what the future of the relation between
the supply and the demand of gold will be in the course of years
to come ?—Well, in my investigations I did some of them in

1923, when I was writing the book I had occasion to read some
articles which appeared in the Harvard Business Barometer
Series and I rather get the impression that there was no
likelihood of any fall in the production of gold. And besides,
my point is this, that the countries of the world are using so
much paper that whatever gold supply we have is really very
large. Those countries therefore that can avoid economising
gold might as well do it to their own benefit and to the benefit
of the rest of the world.
6087. I am not quite sure that I follow the latter part of
your reply ?—What I say is that although the production of
gold may not be increased physically from the mines, yet the
use of substitutes for gold in modern days is on such a vast
scale that the quantity of gold in the present circulation might
appear to be large enough for a long period for the transactions
of the world even without new additions from the mines.
6088. You have no more statistical calculations which you
would care to put before the Commission as to your estimate
of the future supply of gold ?—No, I have made no estimates.
6089. This is a matter, of course, which is of great
importance for the consideration of the Commission, so let
me put to you one or two estimates that I have been supplied
with from other sources. These are estimates as to the effect
upon general gold prices of the movement of the relation
between the demand for gold and the supply of gold for a
period of years. They are forecasts made at various dates by
authorities, and they are referred to the year 1930. What is
done is to measure the effect of the gold supply upon prices
by trying to forecast the general level of prices in 1930 by
reference to 1913 as the 100 standard, and thus to see what the
future of the world in this regard is. I have here an estimate
of Sir James Wilson, made in 1921, who estimates that the
result of these factors will be that the general price level in
1930 will be stable at 115. That is a substantial fall, you
see from the present figure which is round about 158. Then
there is that estimate to which you have already referred,
the Harvard Business Barometer, in 1922, which estimates
that in 1930 the general price level should stand about
150, and should be stable at that figure. Then there is

Professor Gregory, who makes an estimate in the near past,
May, 1925, who estimates that the general price level will
stand about 162 in 1930 and should be rising at that figure.
So he is the one who is most of your opinion. And, finally,
there is Mr. Joseph Kitchen, an eminent authority, who in
July, 1925, made a forecast that in 1930 the general price
level should be expressed by a figure of 120 and should be
falling at that figure. Of these four attempts to forecast
the position, three anticipate that the prices will have
fallen at that time ; two believe that they will be stable at
that lower level; one, Mr. Kitchen, believes that they will
be falling at that lower level, and only one believes that
they will be higher than they are now and rising. I will
put it in this way. In view of these very careful attempts
to estimate the situation does it not teach us the necessity
of exercising great caution in making the assumption that
it is unnecessary, in order to maintain prices stable, to
economise the use of gold ?—I am rather in favour of falling
prices rather than rising prices, and I am glad if they do
fall and fall rapidly too. I think it is good for the nation
that there should be a fall in prices rather than a rise
in prices. So these estimates do not really deter me from
making my proposal.
6090. Nevertheless, there is some different basis for
your opinion ?—I take those opinions for what they are
worth. I am not in a position to contradict them because I
have never made any estimates. But somehow this is my
belief that already the existing amount of gold is so large
and the capacity of the countries of the world to use that
currency, any currency, is so small that the supply of gold
is likely to remain larger for a long period, and there is,
in my opinion, not much chance of prices falling.
6091. Then there is a further question. I should preface
it by saying that you are dealing here with the abolition
of the exchange standard ?—Yes.
6092. In paragraph 5 you say, “The gold standard reserve
is peculiar in one respect, namely, this : the assets, i.e., the
reserve and the liabilities, i.e., the rupees are dangerously
correlated by reason of the fact that the reserve cannot

increase without an increase in the rupee currency.” I am
going to ask you to expand that a little, and in order to
show you what I think needs expansion, I would put these
possible questions by a critic. Might not a critic say : you
say that the reserve cannot increase without an increase in
the rupee currency, and this critic might say, why should
it ? He would say, if the rupee currency cannot increase
without an increase in the reserve, would that not be a
most desirable state of affairs ? Have you followed my
point ?—I will explain in this way : for instance, there
are the bank issues and the reserves of a bank. If you
compare, for instance, the bank reserves with the bank
issues and the currency and the gold standard reserves
of the Government of India with the rupee issues, you
will see this : that when the bank issues are limited, the
reserves increase, and vice versa. But here you cannot, for
instance, reduce the rupee currency without also reducing
your reserve.
6093. My point is this. I say, all right, but look at it
from the other point of view. However that may be, what
appeals to me is that you cannot reduce your reserves
without reducing your rupee currency, and that is what
I desire to effect ?—Quite true, I admit that. But my
submission is this. What is the use of a reserve, really ?
Suppose you have an enormous reserve and you have also
an enormous rupee circulation. Does the fact that you
have a large reserve in store in some safe in any way
affect the value of the rupee ? It does not. The value of
the rupee will be affected simply by its quantity and the
volume of circulation. Its value has nothing to do with
the reserve at all. Backing absolutely has no effect on
the value of currency except, of course, in times in which
it is disorganised. It may lead to some confidence in that
currency, but I submit that when currency has come to
such a pass that people have to have some confidence, I
say that currency has been absolutely inflated.
6094. Accepting no doubt, the proposition that the value of
the currency will be ultimately decided by its total volume in
relation to the business ?—What I say is this, that this relation
is so dangerously correlated, and I am sure you cannot

indefinitely go on coining rupees simply because there is a gold
reserve. If you go historically into this matter, my submission
is that such has really been the case. In the history of India
people who have had to deal with currency were so much
infatuated by the idea that they must have some reserve that
the coinage of rupees was really initiated for that purpose.
The coinage of rupees in India in 1893 and 1898 when the
Fowler Committee’s Report was brought into operation and
reforms were introduced is a point, Sir Edward Law was so
much obsessed by the volume of rupees in circulation that
he felt that there must be some reserve, and it was on this
ground that he proposed to the Secretary of State that the
Government should be allowed to coin rupees. If he knew
properly that the value of rupees would maintain themselves
if they were limited in volume, then he would certainly not
have gone on increasing the currency. I am recommending
simply what the Government of India recommended to the
Secretary of State in 1893.
6095. To turn to the immediate point : the function of a
reserve under these conditions is to maintain stability, is it
not ?— I think a reserve ought not to be there. A currency
is something like any commodity which maintains its value
simply because of the law of supply and demand.
6096. Do you reject the proposition that the function of a
reserve is to maintain stability ?—Yes, I do. I do not think a
reserve has anything to do ; in fact, a reserve maintains itself
when the currency is limited ; it does not maintain the currency.
6097. Let us now consider your practical proposals for
the reform of the currency. You say :—“The following, then,
are the requirements of my plan for the reform of the Indian
currency :—
(1) Stop the coinage of rupees by absolutely closing the
mints to the Government as they are to the public. (2) Open
a gold mint for the coinage of a suitable gold coin. (3) Fix a
ratio between the gold coin and the rupee. (4) Rupees not to be
convertible in gold and gold not to be convertible in rupees, but
both to circulate as unlimited legal tender at the ratio fixed by
law.” A question which does suggest itself to a practical man
there is, under those circumstances, how are you to maintain

the ratio between the gold coin and the rupee, and how
are you to prevent one going to a discount or a premium
in comparison with the fall in accordance with the balance
of the country’s trade ?—Well, the rupee will maintain its
value by reason of the fact that it will be limited in volume ;
no more issues of rupees are to be issued.
6098. What is to prevent it going to a premium ?—It
cannot at once go to a premium because it has a substitute
in gold. Rupees are not to be convertible in gold. The rupee
cannot go to a discount because it is limited in volume.
No more rupees are to be coined. The rupee cannot go to
a premium because there is the alternative of a gold coin
functioning as currency.
6099. Then you say :—“But there is just this chance :
that the existing volume of the rupee currency is so large
that when there is a trade depression it may become
redundant and may by reason of its excess lose its value.
As a safeguard against such a contingency, I propose that
the Government should use part of the gold standard
reserve for reducing the rupee currency by a substantial
margin so that even in times of severe depression it may
remain limited to the needs of the occasion.’ How would
that operation take place ?—You simply call in rupees and
not issue them again—by the process of calling in rupees
up to a certain limit.
6100. So that the rupees would not, to that extent, be
convertible into gold ?—It will never be convertible into
gold, until the limit is reached, so that it will never be in
excess even in times of depression—the rupee will not be
convertible into gold and gold will not be convertible into
rupees. Even as it is, I am not very much afraid that the
rupee will go to a discount, but there is just this chance
that it might and I therefore propose that safeguard.
6101. Coming then to the question of the ratio, you say :
“In European countries the problem is one of deflating the
currency, i.e., appreciating it; in other words, of bringing about
a fall in prices. In India the problem becomes one of inflating
the currency, i.e., depreciating it; in other words, of bringing
about a rise in prices. For a change from 1s. 6d. gold to 1s

4d. gold means this and nothing else. Should the currency
be inflated to reach back the pre-war parity ?” Then you
point out that the restoration of the pre-war parity is not
a restoration of the pre-war price level because there is a
change in gold prices ?—Yes.
6102. Further, you point out that : “Two things must be
borne in mind in this connection. Existing contracts include
those made at every stage of preceding depreciations and
appreciations, and to deal fairly with all would demand that
each one should be treated separately—a task impossible
by reason of its complexity and enormity.” I understand
that the opinion which you emphasise there is that we have
been passing through a period of violent fluctuations in the
value of the rupee, that at every stage contracts have been
entered into, and that it is impossible, as it were, to fix upon
any, definite ratio which will do justice as between all these
contracts made at the varying levels ?—Yes.
6103. Then you say that the great bulk of the contracts
have been of recent date ?—Well, my information is really
based upon a small note made by Professor Cannan in one
of his articles in the “Statistical Journal.”
6104. Are there any statistics available which would give
us a correct estimate of the number of contracts ?—I think it
is a guess for what it is worth ; a question of commonsense.
6105. Then you say, “It may be said that the centre of
gravity of the total contractual obligations is always near the
present.” Those premises lead you to the following conclusion,
that, given these two facts, the best solution would be to strike
an average between 1s. 4d. and 1s. 6d. and say that it is
nearer 1s. 6d. than 1s. 4d. I am not sure that I quite follow
that. Your trend of reasoning would rather have led me to
suppose that you would finally turn out to be a supporter of
the 1s. 6d. rate ?—I say it may be nearer 1s. 6d. and away
from 1s. 4d.
6106. What ratio would you suggest ?—It is difficult. Of
course, I think 1s. 6d. would be just as good. It could not
inflict any very great hardship.
6107. Then, finally, as regards the question of a rising and

falling rupee ratio, your opinion is summarised in paragraph
9. You say : “Now if it is realised that a low exchange means
high internal price, it will at once become clear that this
gain is not a gain from one class at the cost of another
class in the country.” Which class gains and which class
loses ?—The business class gains ; the labouring class does
not. The price of all factors of production does not change.
Wages do not change as rapidly as price and these are the
classes who suffer.
6108. Have you any suggestion to make, either from
the theoretical or practical point of view, as regards the
important provisions as to the currency arrangements to
provide elasticity to meet seasonal demands ?—As I hinted,
of course, very briefly, if we want to make our currency
elastic for seasonal proposes, we must some how see that the
commercial paper which has given rise for trade transactions
is converted to currency. So that commercial paper should
be made more a basis for the issue of the currency than
Government bonds. I think it would be to the good of India if
we adopt the proposals in the German Imperial Bank. They
adopted, of course, more or less the English Banking Act of
1894 with variations so as to suit the seasonal demands.
6109. That is a provision for the extension ?—For the
extension for the time being of paper issues under certain
regulations.
6110. That is a provision, is it not, for the extension of
the fiduciary issue ?—Exactly.
6111. In return for the payment of a proportional tax ?—
Yes, I think it is a sufficient safeguard for both.
6112. (Professor Coyajee.) The chief merit of the gold
standard is, according to you, that it places certain definite
limitations against possible fluctuations ?—Exactly.
6113. But, of course, there are certain things, for
example, the provision from the mines is not based
on how much currency is required by a country ?—
Yes ; I may say that I am in favour of a gold standard
simply because compensating systems are not workable.
If they are workable, I would at once reject the
gold standard. I am not in love with it at all.

6114. Nor does the gold standard ameliorate the
consequences of a trade cycle ?—No.
6115. Then there is only one point. In paragraph 5
you observe “I am necessarily in favour of the abolition of
the gold standard reserve as being of no practical use for
maintaining the stability of the currency.” By analogy why
not abolish the paper currency reserve also because the
value of the paper depends upon its limitations ?—Quite.
6116. Would you abolish that ?—No, for this reason.
Because we are not placing a fixed limit on the issue of
paper. Under the scheme where I say we should abolish
gold standard I am placing a definite limit on the issue of
the rupees. In the case of paper currency, we have allowed
the Government the discretion.
6117. Do you think that possible ? I will tell you why.
Because with limited incomes and things like that, there
is more scope as population increases for the use of rupee.
Could you say for ever and for ever, we shall be coining
gold and no rupees until possibility the quantity of gold in
circulation will be ten times that of the rupee ? Would that
be convenient to the country ?— I should think it would be.
I would rather say that instead of using gold we use notes
backed by gold. I do not mean that we should use gold from
hand to hand.
6118. (Sir Norcot Warren.) Am I to understand from the
latter part of paragraph 8 of your memorandum that you
are inclined to the rate of 1s. 6d. rather than 1s. 4d. ?—I
confess prediliction in favour of 1s. 6d.
6119. (Sir Alexander Murray.) There is one point,
Dr. Ambedkar, which you referred to in answer to some
questions put to you by the Chairman; you seem to
suggest that the Government of India were somehow or
other prepared to go on coining rupees simply in order
that they may make profit between the bullion value
and token value of the rupee. I want to know what you
are referring to actually ?—I am referring to this : It is
a historical bit of thing. When the Government of India,
for instance, introduced reforms suggested by the Fowler
Committee, they felt that for a large circulation of the rupee

they had not any reserve and the Fowler Committee in
paragraph 60 of their Report suggested that if the Government
coined rupees and keep profit to itself, that profit should
be utilised as a reserve. Sir Edward Law who came on the
scene in 1901, the period from which the coinage of rupees
commenced, also felt that the volume of rupees was so large
that some amount of reserve was necessary ; and I think
he went on coining rupees sheerly because he felt that the
reserve was wanted and the reserve could not be had in any
other way except by coining rupees.
6120. You only think that ?—No, my point is this : I have
read the despatch very closely and I feel that if Sir Edward
Law had disclosed there that the rupee was coined to a
premium because people did not want gold or any other thing
to use in currency, then I could have understood that the
rupee was coined in answer to the demand of the people. But
there is not a single thing to that effect to be found in the
despatch. He simply says that when we introduced reforms
we did not take into account paragraph 60 of the Fowler
Committee’s Report.
6121. But he also, I think, in that despatch to which you
refer laid down that there ought to be a gold reserve which
estimated at 7 millions or something like that. Against this
you say that he was issuing rupees ?—Quite so. Gold standard
reserve is kept in gold. I say no reserve was wanted.
6122. You make a general statement here, Dr. Ambedkar,
“Unfortunately there is abundant proof of such perversion
in the history of the currency system in India. Already we
have had foolish administrators who had been obsessed with
the idea that a reserve was a very essential thing and who
had therefore gone on issuing currency without any other
consideration but that of augmenting the reserve” and you
are now repeating it to the Chairman ?—I have used a much
milder expression than that used by Professor Cannan himself
in his book.
6123. But is it not the case that in 1895 that was actually
suggested by a well-known Bombay financier and turned down by
the Finance Member at the time ?—I find that in the despatch.
6124. One moment. In your book you actually give the

name of the Bombay financier who suggested it and you
give the name of the Finance Minister of the Government
of India who turned it down ?—Yes.
6125. Then in your book you also give the name of a well-
known politician who as recently as 1907-08 suggested the
same thing and again it was turned down by the Government
of India and as recently as 1919, you give a reference to
another well-known economist. Then why do you repeat the
statement to the Chairman that the administrators of the
Government of India have not thrown overboard or turned
down the suggestion when as a matter of fact you know that
the administrators of the Government of India have turned
it down repeatedly when it has been put forward by well-
known Indian financiers ?—My reply to that is this : that
somehow if you read the speeches in the budget delivered
by every Finance Minister, for instance, I forget the names
now, gentlemen who preceded Sir Edward Law; I think I
can cite instances.
6126. Sir James Westland and Sir Clinton Dawkins ?—But
they never agreed with that.
6127. No; it was suggested by an Indian to Westland
who turned it down and again to Dawkins who turned it
down ?— With due respect to your interpretation, Sir Edward
Law did say that there should be gold standard sufficient
to back all the rupees and the notes. I do not deny that.
But I simply say this ; that other financiers stated that no
reserve was wanted and the rupee would maintain itself
and Sir Edward Law stated that the reserve was wanted
and he coined rupees because he wanted the reserve. In
fact, I have paid sufficient compliments to the training and
the notions of Westland and Dawkins for turning down the
proposals. I say they were right and Sir Edward Law was
certainly wrong.
6128. Sir Edward Law did not say that he coined rupees
in order to provide the reserve. He said that he should hold
it as a backing against the issue. It is you that put in the
interpretation that he did coin rupees for the other purpose ?—
He says that in the despatch. Before the Fowler Committee there
were sufficient proposals of having a gold reserve and the

Committee found that they were very costly, but slightly
hinted that if a reserve was wanted, it might be had by
coining rupees. The two gentlemen who preceded Sir Edward
Law did not think it was necessary. But Sir Edward Law
said it was necessary and coined rupees. I am not making
a general charge. I have given praise where it is due. I can
give you also the reference.
6129. I can verify all your references. What do you
want to find there ?—That although the recommendation
of the Fowler Committee was there that the Government
of India could provide itself with gold reserve by coining
rupees, Westland and Dawkins refused to pay any heed
to that proposition, because they firmly believed that gold
reserve was not necessary and that the rupee being limited
in quantity it could maintain itself. But Sir Edward Law
when he became Finance Minister felt that a reserve was
necessary.
6130. Westland was the Finance Member before ever the
Fowler Committee reported. I think he was away when the
recommendations were brought into operation and Dawkins
was the member in office when the Fowler Committee
reported. But both of them turned down the suggestion
which came from Indian politicians ?—There is no difference
of opinion on that point.
6131. The only difference is that you are imputing to
Sir Edward Law that he coined rupees in order to create a
reserve. I say that he did not; that in the actual despatch he
said that there was a gold reserve, I think, of 7 millions ?—If
so, there is a difference between us.
6132. (Chairman.) I cannot see what conceivable
advantage it can be to anybody to increase a reserve for the
fun of the thing ?—Exactly, and people are under very big
notions that a reserve is wanted and without a reserve a
currency cannot work. I think it a very common superstition.
It is there.
6133. (Sir Alexnder Murray.) I will give you the reference,
pages 276 to 278 of your book, “The Problem of the Rupee” ?—
Yes, Westland was there when the reforms were brought
into being, page 276.
6135. What date was that ?—It is the Budget speech of

1898-99 after the reforms were introduced.
6136. It was in 1894-95.—No ; Dawkins comes on the next
page. My reference is to the Financial Statement for 1898-99
at page 276. Then the passage from Sir Edward Law occurs
on page 278.
6137. Will you excuse me for correcting you. You said your
reference was to the Budget speech of 1898-99. As a matter of
fact the reference you have made is from the speech of 1894-
95 ?— He was also Finance Minister in 1899.
6138. He turned it down in 1894-95 ?—I mean there was
no material difference between the Herschell Committee and
the Fowler Committee and I am sorry if you think I have
made any vile allegation against the gentleman.
6139. (Sir Alexander Murray.)—All I am doing is quoting
what you say in paragraph 5 of your statement. All I say is
there is danger of anybody falling into that trap.
6140. (Chairman.) And you maintain that in your book you
have vindicated these eminent statesmen ?—Yes.
6141. (Sir Purshotamdas Thakurdas.) In paragraph 8 you
refer to various countries of the world as “hankering for a return
to the pre-war parity” and you say it seems to be universal.
Then you go on “There is but this difference between India
and the other countries. The other countries have yet to reach
the pre-war parity. India on the other hand has in fact over-
reached the pre-war parity.” Those other countries to which
you refer have had their currency very severely depreciated
during the war ?—Absolutely.
6142. Not the solvent countries ?—I think these countries
also which are very near their old parity find it difficult to
go back.
6143. For instance, which countries have you in your
mind ?—Well, I am talking of the proceedings of the Genoa
Conference, which I do not carry in my mind, but I think for
instance a country like Italy. France was at one time within
measurable distance of pre-war parity.
6144. France now is perhaps worst off of all; therefore you are
there remarking a difference between India and other countries
whose currency was severely dislocated during the war period
and who have not yet been able to bring it round ?—My point
is,even if we were in a position to go back within a measurable
distance it would not be always wise or advisable to go back
supposing we could.
6145. I will come to that later on ; I am only trying to
point out to you that it may be said the comparison you are
stating here between India and the other countries is one
which cannot stand as far as currency problems and conditions
are concerned. So far as the “could” is concerned, I mean the
difference between whether we should and whether we could
even if they (those countries with depreciated currencies)
wanted to they could not go back ?—Very good; you have put
it much better than I could have.
6146. Therefore if you compare India with the countries
which got back to pre-war parity you find that those who
could did go back to the pre-war parity ?—Yes, for instance
England ; but there was also a strong current of opinion even
in England that they should not.
6147. I mean in spite of the strong current of opinion you
refer to they have reconciled themselves to the pre-war parity
and you do not hear much complaint now about having gone
back ?—I could not tell.
6148. You do not know, I see ; unless it can be said that
those who went back made a mistake, there won’t be anything
particularly objectionable aganist those in India who want
to return to the pre-war parity ?—No, I don’t say that. I am
really raising the question whether it is desirable.
6149. Now regarding the desirability of it, lower down you
say the view is wrong ; you say both these views are fallacious.
You say the restoration of pre-war parity is not a restoration
of the prewar price level. Now do you think that exchange
should be used as a lever for attaining price levels ?—No.
6150. Then, it does not appear to me very fallacious ?—No,
I say this, although you cannot always say exchange and price
level move together, yet ………
6151. Excuse me, my question was, do you suggest that
exchange should be used as a lever for adjusting price levels ?—
No, I do not say that.
6152. Therefore a change of ratio from that point of view

was not desirable, as a lever for the adjustment of prices ?—
Yes, it was not.
6153. No country has done it unless you can show that it was
particularly desirable in the case of India as an exception ?—
But it has happened in all countries.
6154. Which countries ?—All countries.
6155. If I may make my question clearer ……….. ?—I do
not think your question was put very clearly.
6156. I sometimes do put my questions not very clearly,
admit. Which countries which could attain to pre-war parity
did voluntarily go past it in order to adjust their internal price
levels ?— No, of course they did not do that.
6157. Therefore where is the fallacy ?—Fallacy in this sense ;
some people in doing this imagine they are going back to the
old price level. That is a fallacy, because 1s. 4d. in 1914 is
not the same as 1s. 4d. in 1925.
6158. But I mean those who do not base the demand for
1s. 4d. on the question of prices at all, they would not be
making that fallacy ?—No.
6159. Then lower down you mention another point, I think.
“If by restoring pre-wa r parity is meant the restoration of
the pre-war level of prices, then the ratio instead of being
lowered from 1s. 6d. inthe direcction of 1s. 4d. must be raised
in the direction of 2s. gold.” Then you say “the restoration of
pre-war parity even nominally would be unjust.” What have
you in your mind by the words “even nominally” ?—Without
looking to the price level.
6160. I thought you yourself agreed.......?—Supposing now,
in 1925,1s. 4d. is the ratio as compared to 1914, that would be
only a nominal change because prices have certainly changed.
6161. Where is the nominalness in regard to those who
ask for 1s. 4d. as being the pre-war rate ?—You are asking
for a definite change from 1s. 6d. to 1s. 4d. I take my starting
point, as I have stated at the end of the statement from what
we find actually there. I say, “In short, in matters of currency
the real is the normal.” I therefore start from 1s. 6d. as the
normal.
6162. Now supposing the exchange to-day, when we are

discussing the thing, was 1s. 8d., I take it you would urge the
same ground for 1s. 8d. being confirmed as you have for 1s.
6d. being confirmed ?—Yes.
6163. So whether exchange had gone up to 1s. 6d. or not
the ground would prevail irrespective of what other countries
have done ; and irrespective further of how that point was
reached ?— May I just explain it in my own way ?
6164. If you please.—The way in which I look upon this
problem is this. To-day we have 1s. 6d. That to my mind means
a certain price level. If you want us to go back to 1s. 4d., it
seems to me we have to raise our prices. Without increasing
the volume of currency we certainly cannot reach 1s. 4d., it
seems to me we have to raise our prices. Without increasing
the volume of currency we certainly cannot reach 1s. 4d. gold.
Therefore the complete question to my mind is, shall we raise
our prices from what they are today, so that we can go back
to 1s. 4d. ? Now I being a member of the labouring community,
feel that falling prices are better. That is my view of the matter.
6165. Let me take it the other way. You say, as you put it,
that, being a member of the labouring community, that means
from the point of view of the labouring class it is undesirable ?—
Yes, and I may go further and say that from the national point
of view too falling prices are better than rising prices.
6166. Now I suppose you heard the arguments that are being
advanced that a high exchange, an exchange which is worked
up to a higher point than where it has been 15 or 20 years at
a stretch is undersirable in the interests of the producer. What
would you say to that ?—All that it means is a depression of
profits. I do want to make a distinction,—I do not know how
far people will appreciate that,—between depression of industry
and depression of profits. I think that distinction was made by
Professor Marshal in his evidence before the Gold and Silver
Commission. There might be a depression of profits, that is
to say, the enterprising class may not get all that they would
get if prices were to rise ; but it does not necessarily follow.
6167. Excuse me ; cannot I refer to the producer ? We will

come to the investor later if you don’t mind. But what about
the producer : in his case the higher the exchange the less the
number of rupees available to him ?—It does not matter to
him at all, because he supends it. His cost of production also
falls ; therefore it makes no difference. If he got 15 rupees,
and if the 15 rupees purchased a certain amount of goods,
and if five years hence he got 10 rupees, and that 10 rupees
purchased as much as 15 rupees before, the change is only a
change of counters.
6168. When the adjustment is complete ? But until then
there is disturbance ?—Yes.
6169. Now let us look at it as far as the present goes. You
think that the average Indian cultivator rarely employs any
labour and cultivates with his own hands ?—Well, I suppose
he does employ a certain amount of labour.
6170. In the ordinary course, for the adjustment to be
complete, you would expect that the wages he pays to his
labourers also go down ?—Yes. I mean if he wants to get the
same amount of profit, I would say yes.
6171. Very well, if the wages of the farmer’s labourer have
not gone down you would admit that to that extent the farmer
has a smaller profit ?—Smaller profit, yes, I admit that.
6172. And in cases where the farmer is just able to make
both ends meet he loses ?—No. He does not get profits, but he
does not lose. Profit is something else ; it is surplus.
6173. Where a farmer or a class of farmers in a district
make just enough to make both ends meet they would be
losing, inasmuch as the labour charges have not gone down
in proportion ?—I do not know how you define profit. I define
profit as surplus income.
6174. After paying all charges of production ?—Yes.
6175. If in 1921 a farmer made both ends meet and in 1924
when exchange was stabilised at 1s. 6d. as far as his produce
is concerned and his labour charges have not gone down, he
would certainly make less ?—He would lose part of his profits.
6176. He will save so much less ?—I would stick to the
word “profit.”
6177. He will make less profit ?—Yes; there would be a

depression of profit.
6178. To that extent of course the producer will be a
loser ?— If you think that he had a legitimate right to that
profit, then of course you would be right in saying that he
loses ; but not if it was a merely differential gain.
6179. As 1s. 4d. it was merely a differential gain ?—Yes.
6180. Lasting for a period of 25 or 23 years ?—As I say it
all depends upon how you define it.
6181. How would you define it yourself ? So long as he is
able to recover all that he has spent in production I do not
think that he would be a loser.
6182. And you would apply that test to every person ?—I
would say that he has made both ends meet.
6183. Do you think that would be the maximum which the
average citizen would like to apply in his own ease ?—I can
give no opinion upon that, I am afraid.
6184. Now, you mention in paragraph 8 : “Two things must
be borne in mind in this connection,” and lower down you say :
“Existing contracts are no doubt of various ages.” What sort
of contracts have you in mind there ?—Leases for instance :
and other contracts also, such as building contracts and so on.
6185. How would they come in with the question of
exchange ?—They are money contracts just the same ; they
are all money contracts.
6186. Every contracts, then, you mean ?—Yes.
6187. If a man was putting up a house in a mofussil rural
place for 4,000 rupees, that also would come under this ?—Of
course ; it is investment of money.
6188. You have in mind everything that involves investment
of money in the country ?—Yes ; it has purchasing power.
6189. Then you say : “Given these two facts, the best solution
would be to strike an average between 1s. 4d. and 1s. 6d.” Why
did you mention an average instead of 1s. 6d. ?—I say so because
in 1925 there may be some contracts which were made when the
ratio was 1s. 4d. Some contracts may be still subsisting made at
that period when the purchasing power was at the rate of 1s. 4d.,
and therefore to give justice to all I think that is the best way
it could be done.
6190. What about contracts in the shape of debts incurred
before 1914 ?—I do not suppose there are many existing now.
6191. You think that all these debts payable by agriculturists
to sowers are paid within a certain period ?—My personal opinion
is that no commercial contract extends for more than five years,
and the proportion of those is very very small. There is no
statistical information on this. Professor Fisher has made in his
book certain calculations to that effect. He writes there that the
rate of interest varies sympathetically with the prices ; so that
the rate of interest bears a certain relation to the rise or fall of
prices. He then comes to the conclusion that most contracts are
very very recent commercially.
6192. You mean about India ?—I mean generally ; I do not
know about India in particular; there may be something peculiar
in India, but I do not know why it should be so.
6193. Do you think things in India may be different ?—I
should not think so unless there was some evidence forthcoming
that that was so.
6194. You think that the problems in India are the same as
in the West ?—I do not see why they are not.
6195. It would surprise you if they happened to have been
admitted to be otherwise ?—It would surprise me.
6196. Regarding the adjustment of price levels, do you think
that the adjustment is anything near complete now, owing to the
disturbance in the exchange rate from 1s. 4d. to 1s. 6d.?—There
would be some disturbance; that would be detrimental to the
wage-earners if we went back from 1s. 6d. to 1s. 4d.
6197. The disturbance from the lower to the higher rate from
1s. 4d. to 1s. 6d.......?—Has been favourable to the labouring classes.
6198. Is that adjustment complete, or is there still any
mal— adjustment of that ?—I could not say ; that is a matter
of statistical investigation which I have not entered into ; but
I suppose exchange has been stable at 1s. 6d. for a long time.
6199. How long do you think it has been stable ?—I cannot
exactly say ; but certainly it shows signs of stability.
6200. How long ; have you any idea ? Some witnesses

have said six months, some eight months.......?—I think
somewhere there.
6201. Do you think that six or eight months is a sufficient
period for judging this stability ?—I say due weight should
be given to it, and therefore you should strike an average.
6202. But I think you have said in the course of your
oral examination that you would be prepared to agree to
1s. 6d. ?— Yes, because it is nationally better; it would
not inflate. That is what I say. If, even after 1s. 6d., the
process of adjustment was not complete so as to enable us
to say 1s. 6d. was really the level needed, I say we should
establish it at that.
6203. Regarding the adjustment in the industries here,
have you any idea at all ? Can you give us any opinion ?—
None whatever.
6204. (Mr. Preston) : In case there should be any
misunderstanding with regard to some of the answers which
you gave to Sir Alexander Murray, in connection with that
unfortunate reserve, the gold standard reserve, it may be
well if we put on record some actual facts: the gold standard
reserve came into being in the year 1901 and it resulted from
profits earned from the previous April in 1900. The balance
in the reserve to-day is 40 millions sterling, is it not ?—Yes ;
I think it is about that.
6204A. The Finance Minister when he made his report on
currency last year made the following statement: “As will be
seen from the statement, the bonds and stock purchased are
due for repayment within the next few years. Of the amount
now standing at the credit of the reserve, £ 27,449,950
represents profits on coinage and the remainder represents
accumulated interest on securities held in the reserve.” You
say that this reserve cannot increase unless there is more
rupee coinage. How has that increase of one-third in the
last three years come about ?—By interest on investments.
6205. Then if the interest on that reserve is kept being
added to it, you are increasing that reserve for a useful
purpose without having to adopt those methods which you
so very strongly deprecate ?—Yes, undoubtedly.
6206. Just one more point as to the usefulness of that

reserve. It will be within your knowledge that in the period
of the world’s depression in 1908 that had it not been for that
very reserve we could never have maintained our external
parity; you admit that ?—Yes.
6207. Thank you ?—Although, of course, something has gone
in to which I ought to take exception—by saying that I am in
favour of increasing the gold standard reserve by investments.
If a reserve is invested there is no reserve at all.
6208. (Sir Reginald Mant.) I understand your chief
desideratum is stability of internal prices ?—Quite.
6209. And you hold that that stability will then be linked
to gold prices, will they not ? They will vary with the gold
prices ?—Yes.
6210. Internal prices will then be linked to gold prices, will
they not ? They will vary with the gold prices ?—Yes.
6211. Now a gold exchange standard without a gold currency
has been recommended by several people with the same object
in view ; but I understand you to hold that it will not achieve
that object ?—I think it has not, so far as India is concerned.
6212. I was not speaking of what has been done in the past;
it has been represented to us that if a gold exchange standard
were made automatic it could secure those objects ?—I do not
know ; there may be some people who hold that view, but I
cannot see how it could be held.
6213. I want you to explain why a gold currency would
achieve it and the gold exchange standard would not ?—My
first ground is this : that the exchange standard depreciates
gold and makes it therefore useless as a standard of value.
A gold exchange standard causes a redundancy of gold by its
economy.
6214. Ought you not to put it the other way, and say
that if we introduce a gold currency here we shall appreciate
gold ; would not that be a more correct way of putting it ?—
You might put it that way, yes. Therefore under the present
circumstances gold would behave as a better standard of value.
My next submission is this, are we really effecting economy
by the exchange standard ?
6215. I was not raising the question of economy. I was trying
to get at the reason for your holding that nothing but a gold
currency would effect your object of keeping internal prices

linked with gold ?—Stabler than they would be otherwise is
what I said. If we adopted a gold standard our prices would be
more stable than they would be under an exchange standard. I
did not say that under a gold standard they would be perfectly
stable because gold itself is not a perfectly stable standard of
value ; but certainly it would be more stable than under an
exchange standard.
6216. Because simply we should be using more gold ?—Yes.
6217. That is your only reason for differentiation ?—Yes.
6218. (Sir Maneckji Dadabhoy.) Let me proceed a step further
with regard to the answers you gave to Sir Purshotamdas
Thakurdas : in paragraph 8 you say “Existing contracts are
no doubt of various ages ; but the great bulk of them are of
very recent date and probably not more than one year old ;
so that it may be said that the centre of gravity of the total
contractual obligations is always near the present.” When you
are referring to this matter, I understand you are speaking
without any definite statistics ?—Yes ; I simply say there has
been a calculation made by Professor Fisher.
6219. You state this as a sort of generalisation ?—Yes. I
said I had no definite information.
6220. When you speak of a centre of gravity of the total
contractual obligations being near the present, it is not a very
definite term. Would not that centre of gravity come within
the circumference of twelve months ?—Yes, somewhere about
that; because I have said one year old.
6221. So that, if a certain ratio prevailed twelve months ago,
we would be, according to your reasoning, as much justified
in taking that as 1s. 6d. ?—Quite ; yes.
6222. So you would be as much justified in taking that ?—
Yes.
6223. Then when discussing this matter and when you
expressed your election in favour of the 1s. 6d. ratio. I
understand you founded your opinion on the dictum of Professor
Fisher ?— Yes.
6224. Now we have got this dictum of Professor Fisher before
us ; the words used are :— “The problem of a just standard of
money looks forward rather than backward ; it must take its
starting point from the business now current, and not from
imaginary pars before the war.” ?—Exactly.
6226. Don’t you think that Professor Fisher when he
laid down that dictum had European conditions before him
only ?—Yes, but that would apply almost to any country. It
is a general proposition.
6226. My question is did he not have European conditions
in view only when he said that ?—I cannot say.
6227. (Chairman.) The witness replied that he thought it
would apply to any conditions ?—Yes, it is a genera! proposition.
6228. (Sir Maneckji Dadabhoy.) Is that conclusion justified
by these expressed words ?—I should think it is.
6228A. YOU think it is ?—He says further, he does not
only refer to the war,—he says : “One might as well talk of
restoring the original silver pound or returning the monetary
standards of Greece and Rome.”
6229. Now, you know very well that this ratio of 1s. 6d.
has continued in India for the last 16 months only. Now, if
we take this period 16 months in Indian conditions, what
would you say when you think of any imaginary pars before
the war ? Do you think in India a period of 16 months would
make any substantial difference in coming to a conclusion ? He
is referring to the imaginary pars before the war; he takes a
longer period ?—No, no. He is simply referring back to 1914,
to the parity which existed in 1914. I say, if according to
information 1s. 6d., has been in existence for 16 months, then
I say it ought to be confirmed.
6230. Yes. But if previous to that, with a brief interval of
some years, it has ranged equally for 20 years at 1s. 4d. you
would brush aside all those considerations ?—Yes, because
there are no contracts now existing that were made 20 years
ago. And therefore we need not be concerned about it.
6231. This is your argument ? And you would also brush
aside its economic effect both on agriculture and on the
industries of the country ?—I say they will be very good.
By bringing the ratio to 1s. 6d. I say there might be some
depression of profits, but there won’t be depression of industry.
6232. Yes. So you don’t attach great value to those
factors. You think on the whole it will be for the good of the
country ?—Yes.
6233. I will put you another question, a little bit imaginary.

We will take 6 months to write out our report. Within the next
6 months if the ratio becomes 1s. 8d. I suppose you would be
justified in taking that according to you as the basis of your
calculation ?— Then I would again say, you should strike an
average.
6234. Between 1s. 8d. and 1s. 6d. or 1s. 4d ?—Between 1s.
8d. and 1s. 6d.
6235. And you think that would be a sound financial polity ?—
Well I don’t know. You have to strike some sort of average. You
can’t do justice to each individual contract. For instance, if you
take the example of the American War of Independence and the
monetary fluctuations that took place then, all that the Americans
could do was of course to do this kind of thing.—to strike an
average and to dissolve all contracts on that basis. They could
not do justice to each individual contract. It is impossible.
6236. (Sir Henry Strakosch.) Dr. Ambedkar, I want to refer
back to some statements which you made in regard to the
undesirability of introducing a gold exchange standard. At one
period of your evidence you stated that the convertibility into
exchange would not limit the issue of the currency and would
therefore not produce stability of internal prices. That was one of
the objections you raised and then at another point you said that
the gold exchange standard is not a desirable standard because
prices would be less stable under it than under a full-fledged
gold standard ?—Yes.
6237. Now, you are a student of economic affairs and you have
no doubt followed the proceedings of the Genoa Conference ?—Well,
I did when I was in London. Recently of course I have not. But
I know that the gold exchange standard was proposed.
6238. Well, you will remember that the Genoa Conference
an International Conference adopted unanimously a proposal
enjoining the countries to adopt the gold exchange standard
with a view to stabilising the purchasing power of gold and that
they recommended for that purpose the co-operation of central
banks ?—I don’t suppose they did it with a view to stabilising the
purchasing power of gold ; they did it to stabilise their own currency.
6239. They stated definitely it was to stabilise the

purchasing power of gold. Anyway, you can take it from me
that it is so. Now, that is an international body and they
have come to that conclusion and they apparently do not
share your view that the gold exchange standard does not
produce, as great a measure of stability internally as the gold
standard ?—Oh no. My submission is that we are comparing
the gold exchange standard to a purely inconvertible standard.
The belligerent countries had during the war an absolutely
inconvertible currency and certainly an inconvertible currency
is much worse than an exchange standard because it has some
convertibility. As I have stated myself in sub-paragraph (2)
to paragraph 2. They were not comparing the gold standard
to the gold exchange standard ; they were comparing the gold
exchange standard with the paper currency they had.
6240. But I submit they did not compare at all. They made
a recommendation ?—But in reference to the circumstances
that existed then—I should limit it that way.
6241. Well, anyway, that is a fact. Now, quite apart from
that, I am not quite sure what makes you think, apart from
a change in the purchasing power of gold itself, why the
gold exchange standard should not be as stable as the gold
standard. I don’t quite follow that, and, before you answer,
I should like just to define what I understand by a gold
exchange standard. A gold exchange standard is a standard
where there is circulating within the country a currency which
is not convertible internally, but which is freely convertible
externally, and you could make that currency convertible into
gold for export purchases. Now, taking that standard, I should
be very glad if you would tell us why such a standard is less
able to maintain stability than a gold standard ?—I follow
your question, Sir. And my reply is this. Convertibility is a
means of limiting the volume of currency to the needs of a
country. A convertibility which is intended only for external
purposes is not of sufficient efficacy to limit the volume of
that currency. Consequently you cannot have stable internal
prices to such a currency.
6242. Why do you say that it is less efficacious than
convertibility for internal purposes ?—Because convertibility
to be effective must be absolute.
6243. But it is absolute ?—It is not.

6244. But obviously it is. It is absolute. The difference is
only that in the one case you convert into international money
for international purposes, and in the other case you convert
for either international money which is used internationally or
international money which circulates within the country ?—No,
no. The point is this. When your obligations to convertibility
are imperfect as in the case of the exchange standard you are
likely to issue more currency without fear.
6245. But you just said that the obligation to convert
limits the issue in both cases ?—Yes, but converting depends
upon the efficacy of the means of convertibility. If your
convertibility is absolute, that is to say, if an issuer is bound
to convert whenever he is presented with his currency, then
that convertibility is absolute.
6246. But my proposition was that the gold exchange
standard binds the issuing authority to convert the internal
token currency into gold for external purposes ?—And not for
all purposes.
6247. Now, I want to know why the obligation to convert
the token currency for internal purposes should increase the
stability of the purchasing power of that money ?—Because
the principle is that any commodity, and currency included,
maintains itself by the fact that it is limited in volume, in
supply. That is the first elementary proposition of political
economy ; that any commodity maintains itself by reason of
the fact that the supply is limited. If the commodity supplied
is not limited, it is bound to depreciate.
6248. Do you then contemplate that in your gold standard
with gold currency, there should be nothing but gold coin
circulating ?—No, I say that the rupee shall circulate.
6249. And no bank notes ?—Yes, there will be bank notes :
why not ?
6250. Then, I don’t see how you are limiting more effectively
the internal issue in the one case than in the other ?—Because
am saying that the mint shall be closed.
6251. What about the issue of bank notes?—They are
covered. A covered note issued is not an addition to currency.
Supposing you deposit a certain amount of gold in the bank

and you issue so much currency to cover it, that currency is
not an addition to the currency.
6252. Oh, you want to have notes covered by 100 per cent,
gold ?—Well, I don’t say 100 per cent gold.
6253. Then how will you limit it ?—I mean convertibility
is a method of limitation. I will have paper currency which is
fully, absolutely convertible and not merely for the purposes
of external trade. And I will have the rupee absolutely fixed
in limit. So that it will maintain its value by reason of the
fact that it is limited. The paper currency will maintain its
value by reason of the fact that it is convertible.
6254. And how will you manage the seasonal requirements
of currency ?—Well, I say you can expand the fiduciary portion
of the currency so as to allow for currency being issued against
paper during seasonal demand.
6255. Do you not put it here at the discretion and will
of the issuer ?—Yes, but there is this convertibility which
regulates the discretion. Convertibility is a means by which
the will of the issuer is regulated. There will be no danger.
Although I admit that even under the gold standard, the
gold may absolutely pass out and the country may only be
inundated with paper notes.
6256. Would you say that the obligation to convert into an
international currency at two given gold points is sufficient
to ensure the stability of money, because, if you over-issue
internally, your money will depreciate in relation to gold ?—
Yes, I admit it, but it will be long after. There will be a long
interval before that thing may happen and in the case of some
countries, it may not happen.
6257. How was the gold standard worked before the war
in Europe and other countries ?—It worked on the basis of
convertibility, not only convertibility for external purposes.
6258. But was that standard not in the main worked, by
the central banks not converting into gold but holding foreign
exchange, and only in the last resort was gold flowing from one
centre to another ?—But their arrangements as to convertibility
were perfect and absolute.
6259. You also know that a great many of the countries on

the Continent of Europe who had perfectly stable currencies
had practically no gold in circulation ?—Yes that was so.
6260. (Chairman.) We are much obliged to you Doctor, for
your very full assistance to-day.
(The witness withdrew.)

THE PRESENT PROBLEM IN INDIAN CURRENCY-I*

2 Shillings Versus 1s. 4d. Ratio
The Great European War was the most abnormal event
within living memory. During its disastrous course it touched
nothing which it did not upset. But of all the things it touched
none received a more violent shock than did the currency system
that today one finds that the German mark, the Austrian
crown, the Russian rouble, the French franc and the Italian
lira, to mention only a few of the world’s chief units of account,
have lost their moorings and travelled far and wide from their
original parity. Even the British pound succumbed and the
rupee which was never in the thick of the war escaped the
fasteners contrived by its guardian to keep it steady.
In the course of reconstruction which has followed the
close of the War it is natural to find people desirous of a
return to the prewar conditions of currency. In sympathy
with this universal demand there has arisen to India a party
with a definite programme in that behalf. In the opinion of
this party Indian currency should be stabilized at the ratio
of 1s. 4d. to the rupee which was the pre-war ratio of Indian
currency. To this demand the Government of India seems to
be opposed, not because that ratio is not good but because in
its opinion it is not better. It wants or rather aims at having
a 2 shilling ratio for the Indian currency. As every one is
aware many Governments in Europe, apart from the wisdom
of doing so, would indeed be thankful if they could only restore
their currencies to their pre-war ratios—so far are they away
from them.Indian currency on the other hand has already
reached its pre-war ratio. In view of this the attitude of the
Government of India in not being satisfied with a return to
the pre-war conditions seems to be that of a naughty child
always asking for more.
*The Servant of India — April 1, 1925

It is this controversy that I wish to make the subject

matter of this paper. At the outset it is necessary to realise
that this controversy involves two distinct questions :
(i) Should we stabilize our exchange and (ii) What should be
the ratio at which we should stabilise ? These two questions
are distinct questions. But when one reads what the two
parties have to say one sees that neither the Government nor
its opponents have made it clear whether their aim is to alter
the worth of our unit of account, i.e. to put a new value on it
or to stabilise it at its existing value. I am afraid there can
be very little advance in the direction of rehabilitation of our
currency until these two questions are completely separated.
For, not only is the aim of altering the worth of a currency
distinct from that of stabilising true that those who want to
alter the worth of the currency wish in the end to stabilise
it when the worth desired is attained.
But so far as the transit period is concerned, to say that we
are stabilising the currency when we are altering its worth is
to create confusion. For, the latter involves a deliberate policy
of changing the ratio ; while the former means a deliberate
policy of keeping it steady.
Before I enter upon the discussion of these two-distinct
questions it is, I think, necessary to make sure that we
understand exactly how an exchange ratio is determined.
For unless we grasp this, we can never intelligently follow
the bearings and implications of the two questions that
arise out of this controversy. To put it simply, an exchange
ratio between two currencies or units of account means the
value of one in terms of the other. Now, a unit of account
is value in terms of another unit of account not for its own
sake, unless it is wanted as a curio, but for what it will
buy ; so that we can say, for the purpose of introducing
the subject in a concrete form, that Englishmen will value
Indian rupees in as much as and in so far as those rupees
will buy Indian goods. On the other hand, Indians will value
English pounds in as much as and in so far as those pounds
will buy English goods. It, therefore, follows that if rupees
in India rise in purchasing power or remain stationary or
rise less rapidly while pounds in England fall in purchasing
power (i.e. if the Indian price level falls relatively to the
THE PRESENT PROBLEM IN INDIAN CURRENCY 673
English price level) fewer rupees would be worth as much as

a pound. In other words when rupee prices in India will fall
the exchange value of the rupee in terms of the pound will
rise. Contrariwise if rupees in India fall in purchasing power
while pounds in England rise in purchasing power or remain
stationary or fall less rapidly (i.e. if the Indian price level rises
relatively to the English price level) fewer pounds would be
worth as much a rupee. In other words, when rupee prices
in India will rise the exchange value of the rupee will fall.
From this we can lay down as a general proposition that the
exchange ratio of two units of account is on a par with the
exchange ratio of their purchasing powers. This is in short the
doctrine of Purchasing Power Parity as an explanation of a
particular exchange ratio between two currencies or units of
account. I insist upon a firm grasp of this doctrine because I
find some of our leading lights seem to hold that a particular
exchange ratio is the result of the balance of trade. This view
is somewhat difficult to understand. For as a matter of fact, in
international trade, wherein exports pay for imports, there is
never such a thing left as an unpaid balance. It is true that
a part of the trade dues are paid for by money; but there is
no reason why the part liquidated by money should be spoken
of as a balance. All that it means is that money enters into
international trade just as other commodities do. There is
nothing peculiar about money in that. Nor is there anything
peculiar in the variation in the extent to which money enters
into international transactions. The extent to which money
enters into trading transactions of a country is governed by
the same law of relative value as is the case with any other
commodity. The commodity which is relatively the cheapest
tends most to go out of the country. At one time it may be
cutlery and at another it may be oranges and at a third time
it may be money. If no one speaks, as one may very well do,
of a balance of trade in terms of cutlery or oranges when
after a stage of normal equilibrium more of them go out of
the country than they did before, there is neither rhyme nor
reason in speaking of a balance of trade in terms of money
when after a stage of normal equilibrium more money goes
out of the country than it did before. This usage is, however,
pardonable as being a harmless survival of the mercantilist days.
But what is grossly absurd and foolish is the view that the
exchange ratio of a unit of account is determined not by its
purchasing power but by the balance of trade. This view is
a pure inversion of cause and effect. It is true that a fall in
the exchange value is accompanied by an adverse balance of
trade and a rise in the exchange value by a favourable balance
of trade. But an adverse balance of trade in the sense that
commodity exports are falling off while commodity imports
are rising evidently means that the particular country has
become a market which is good to sell in but bad to buy
from. Similarly, a favourable balance of trade in the sense
that commodity exports are rising while commodity imports
are falling off evidently means that the particular country has
become a market which is good to buy from but bad to sell in.
Now a market is good to sell in but bad to buy from (typified
by the case of a fall in the exchange value accompanied by an
adverse balance of trade) when the level or prices ruling in
that market is higher than the level of prices ruling outside
it. In the same way a market is good to buy from but bad to
sell in (typified by the case of a rise in the exchange value
accompanied by a favourable balance of trade) when the level
of prices ruling in that market is lower than the level of prices
ruling outside. This simply is another way of stating that lower
prices means a high exchange value and a favourable balance
of trade and that higher prices mean low exchange value and
adverse balance of trade. The balance of trade is thus the result
of the changes in the exchange value and not vice versa, and
exchanges in the exchange value are the result of changes in
the price level, i.e. changes in the purchasing power of units
of account. This is the most fundamental fact and although
some might resent the digression as feeding the baby I think it
was necessary. For many people talk hopeless nonsense about
stabilization of exchange and fixing the exchange at choice
ratios as though it had nothing to do with the question of
prices. On the other hand changes in exchange are ultimately
changes in the price level and as much have profound bearing
upon the economic welfare of the people. Remembering then
that regulating exchange is the same thing as regulating the
purchasing power of the currency, we may proceed to discuss
the two questions that arise out of this controversy.
Firstly, should we stabilize the exchange value of our

unit of account ? As I have said above, foreign exchanges
compare in value of the currency of one country with that of
others. It follows that exchange values of two currencies are
important only to merchants who do not buy and sell in the
same country. Again, it is of no consequence to them what
the exchange value is, i.e. whether the rupee is worth 1s.
or 2s. provided the figure is always the same and is known
in advance. It is only changes or fluctuations in the given
exchange value that is of any moment to the merchant. What
he wants is this invariability of exchange ; to ensure this
invariability is the problem of stabilization. Under the present
circumstances can we guarantee this invariability of exchange
ratio to our merchants ? To answer this question we must
recall the basic conception of the purchasing power parity as
an explanation of the exchange ratio. From that doctrine it is
clear that if you want to stabilize exchange you must control
the purchasing powers of the two currencies concerned so that
their movements will be alike in depth as well as in direction.
To stabilize exchange we must have therefore some controlling
instrument which would act as a common regulator bringing
about proportionate changes in the two currencies in the same
direction. Hitherto one such good instrument had been found
and that was a common gold standard. That standard has
now been destroyed all over the world except in the United
States. Consequently an automatic stable exchange on the
basis of a gold standard is impossible for the present, except
with the United States.
Hitherto one such good instrument had been found and
that was a common gold standard. That standard has now
been destroyed all over the world except in the United
States. Consequently an automatic stable exchange on
the basis of a gold standard is impossible for the present,
except with the United States. As regards countries which
are on a paper basis, stabilisation of exchange can be
secured only on two terms (i) Since we cannot control
the currencies of other countries we must be prepared to
manipulate our currency in sympathy with theirs and be
ready to appreciate it when they depreciate theirs, (ii) Without
manipulating the whole of our currency we should be prepared
to sell and buy foreign exchange at a fixed ratio. Both these

projects for securing invariability of exchange must, I think,
be rejected as injurious as well as hazardous. There is no
doubt that stabilisation will promote, as nothing else can, the
revival of international credit and the movement of capital to
where it is most required. One of the most vital parts of pre-
war organisation would thereby be restored and an element
of uncertainty would vanish. Markets given up as lost would
be again nursed, which would give an impetus to trade and
industry. But there is no doubt that the benefit to be derived
will not be worth the cost involved. Our external transactions
are infinitesimal as compared to our internal transactions. To
dislocate our internal arrangements by constant changes in
our price level to preserve external parity is too big a price
for a gain which is after all paltry. For, our merchants must
remember that though fixity is a great advantage, yet its
absence is not an absolute bar to the carrying on of international
trade. We have an instance of this in the history of our own
currency. For two full decades between 1872-1892 there were
the greatest oscillations in Indian currency. Then as now our
merchants did clamour against the instability of exchange
being an hindrance to trade. But our history shows that even
under fluctuating exchange they did thrive and prosper and it
may be hoped that their sons may instinctively know how to
do the same. Should this fail to carry consolidation, one would
recommend the movement of our price level even if it involved
the management of our currency, had the Governments of the
European countries not been in such an impecunious condition.
As it is, by conseting to move our price level in sympathy
with theirs we would be committing our welfare to the care
of bankrupt governments and their desperate ministers. A
currency which is managed on a basis approved by science
would no doubt do the best. To be linked up with a currency
which is managed solely to meet the exigencies of trade would
be tolerable. But it would be an intolerable management of
our currency to join hands with a partner who is living on
his currency to keep himself going.

5
THE PRESENT PROBLEM IN INDIAN CURRENCY*
2 Shillings Versus 1s. 4d. Ratio
So far for the first question. Now I turn to the another
question arising out of this controversy, namely, at what
rate should we stabilize our currency ? Interpreted in terms
of purchasing power, the question reduces itself to this :
Shall we bring about a fall in the existing price level, i.e.
raise the purchasing power and thereby the exchange value
of the rupee ? Now, changes in the value of money, if they
affect all transactions and all classes equally, would be of no
consequence and such questions as the above would not be
worth any discussion. But as we all know, when the value of
money changes it does not change in a uniform proportion for
all purposes so as to affect a man’s incomes and outgoings to
the same extent. Consequently before we fix upon the direction
in which to move our price level we must make sure whether
the incidence on the welfare of the different classes of our
society would be such as would be just and proper.
In the present organisation of society a triple classification
into the Investing Class, the Business Class and the Earning
Class corresponds to a real social cleavage and an actual
divergence of interest. As it is, the business class is the
centre of all economic activity; on the one hand it borrows
money from the investing class and on the other it employs
the earning class. There are money contracts, agreements
to pay so much money. If after these money contracts have
been entered into, the value of money changes one way or
the other, it is obvious that the contracts will be falsified.
If the value of money decreases, i.e. if prices rise then the
investing and the earning classes are injured and the business
class is benefited. The investing class and the earning
class, it is true, do get from the business class the amount
* The Servant of India, April 16, 1925.
of money contracted for, But it will be seen that when owing

to the rise of prices the business man is getting more money
for his product than he would have got if the value of money
had remained stable, he is not only paying to the other
classes, the same amount of money but he also is payable
them in money of smaller worth. In the same way if the
value of money increases i.e. if prices fall then the business
class is injured and the investing and the earning classes
are benefited. As before the business man no doubt pays
to the investing and earning classes the same amount of
money contracted with them. But it will be seen that when
owing to the fall of prices the businessman is getting less
money for his product than he would have got if the value
of money had remained stable, he is not only paying to the
other two classes the same amount of money but he is also
paying them in money of greater worth.
Clearly then if we move down towards 2s. ratio, i.e.
bring about a fall in our prices we shall be favouring the
investing and the earning classes of our society. On the
other hand if we move up towards 1s. 4d. ratio we shall
be favouring the business class of our society. To be just,
an exhaustive estimate ought therefore to be made of the
volume of outstanding money contracts entered into by the
business class including the Governments with the investing
and earning classes classified according to their age. It will
then be found that the contracts outstanding at any given
time include those made at any and every stage of preceding
depreciations and appreciations for the last 100 years. To do
justice to each and every one of them it would be necessary to
fix upon different standards according to the value of money
prevailing at the time when they were made. But it would
be a physical impossibility to make separate standards, for
separate contracts. If all contracts now existing had been
entered into in 1914, then ideal justice would clearly require
us to restore the pre-war par of currencies by such deflations
as would reduce the general level of prices to exactly that of
1914. If, on the other hand, it was found that all contracts
now existing happened to have been entered into in 1924,
justice would require that we should retain the level of 1924.
Undoubtedly the best we can do is to move between these two
extremes. Now the two extremes of the exchange value of our

rupee during the period are 1s. 3 7/8d. and 1s. 6d. This may
be surprising to some. For it is well-known that at one time
the rupee had gone to 3 shillings and our statute recognizes
the rupee as equivalent to 2s. gold. But in my opinion we
must disregard that together. It may at once be said that
among the reports published by the various committees, that
were appointed from time to time to investigate into Indian
currency none was so stupid as the report of the Babington
Smith Committee on whose recommendations the statute was
framed. It was such an ignorant Committee that it could not
understand the problem it was appointed to investigate and
consequently it ended by making a mess of things. As is well-
known the Committee reported that the value of the rupee
should be raised to 2s. gold. That was tantamount to saying
that the rupee had appreciated ; that in other words prices
in India had fallen. How did the facts stand ? The following
table conveniently sums up the whole story.
Index
Price of Bar Gold Price of silver number for
Date in India (Bombay) per in India (Bombay) prices in
tola of 180 gr. per 100 tolas India
1913=100
… Rs. As. Rs. As.
1914 … 24—10 65—11 …
1915 … 24—14 61— 2 112
1916 … 27— 2 78—10 125
1917 … 27—11 94—10 142
1918 (July) … 34— 0 117—2 178
“ (August) … 30— 0 … …
(September) … 32— 4 … …
1919 (March) … 32— 3 113—0 200
From the table it is evident that, far from having

appreciated, the rupee had tremendously depreciated. The
price of silver had no doubt risen beyond conception and
the Committee adopted without much ado the conclusion
that the rupee had therefore risen in value. As a matter
of fact this very circumstance was proof positive that
the rupee had gone down in value : in terms of silver
as well as in terms of commidities in general. If in 1920 more

rupees were wanted to purchase the same amount of silver
than in 1913 it meant that the rupee had fallen in value.
The Committee blundered because it failed to separate the
rupee as a currency and measure of value from the rupee as
an ingot of silver. The 2s. gold exchange value of the rupee
as a measure of value was never a fact and we are therefore
perfectly justified in not taking that limit into account in the
solution of our present problem. The only justification if it can
be held to be a valid justification, that could be urged in favour
of 2s. gold ratio consists in this. Some of those who ask for
1s. 4d. ratio do so because in their opinion it means a return
to the pre-war conditions. Now if it is a return to the pre-war
conditions that is desired then Government may well say that
measured in terms of prices 1s. 4d. in 1924 is not the same
thing as 1s. 4d. in 1914. Many people do not seem to realize
this. But it is an incontrovertible fact. Both in 1924 as well
as in 1914 exchange was 1 s. 4d. But the index number of
sale prices in India was 176 in December 1924 while in July
1914 it was only 100. It therefore follows that if we want a
return to the pre-war conditions then it will not do to have
1s. 4d. as the exchange value of the rupee. For a return to
the pre-war conditions, meaning thereby pre-war price, we
must reduce our existing prices by 76% i.e. raising the value
of the rupee by 76%. This of course ultimately means a ratio
of 2s. But it may well be asked why should we return to the
pre-war conditions ? There is no necessity to do that. It must
be remembered that old contracts are no longer in force. Most
of them have been executed and whatever wrong was done
to them in their execution cannot now be remedied. Besides,
it must not be forgotten that though the monetary contracts
outstanding at any given time are of various ages,—some are
a day old, some a month old, some a few years old, some a
decade old and some even a century old—yet most are of a
very recent date. That being so, we must choose our starting
point for a new standard from the level of current business
and not from the levels operative before the war. To do
otherwise simply because it would give us a low level of prices
is to dislocate our trade and industry and thereby jeopardise
our prosperity. To raise the value of our money by 76%
above its present value will mean to every merchant and

every manufacturer not only that his product will fetch
76% less, but that he will have to give 76% more to the
investing class from whom he borrowed and to the earning
class whom he employed. The burden thus imposed upon the
active and working elements of society would be intolerable.
I must however guard against a possible misunderstanding.
No one should imagine that because I am against lower
prices I am for higher prices. All I insist upon is that we
must not complain against high prices once that level is
established. For things having adjusted themselves they are
our normal level. A pre-war level would be abnormal and
must therefore be rejected.
We must therefore choose between 1s. 3 7/8d. and 1s. 6d.
As for choosing one or the other of the two we should be
guided by what is fair and just. We want that enterprise be
helped against accumulation and we probably wish that the
rich should go richer. But I am sure none of us wants that
the instinct of having, which is the foundation of capital,
should be discounted or that poor should go poorer. But this
would exactly be the result of a swing towards 1 s. 6d. On
the other hand, though we want capital to grow and the
poor to fare better yet none of us wants that industry be
set at naught. And yet this would be the result of keeping
to 1s. 6d.
I for myself would choose 1s. 6d. as the ratio at which
we should stabilize if we can and for the following reasons.
(I) It will conserve the position of the investing and the
earning classes ; (2) It does not jeopardize our trade and
prosperity by putting any extra burden upon the business
class ; and (3) being the most recent in point of time, it
is likely to give greater justice to the greatest number of
monetary contracts most of which must be recent in time.
Fortunately for us we are not dependent upon other
countries for the stabilisation of our price level, as we
must necessarily be for the stabilization of our exchange.
In exchange stabilization we could not even if we would.
But in the stabilisation of our prices we could if we would.
It would indeed be better if we can stabilize our prices as
well as our exchange. But because .other countries cannot,
stabilise their price levels there is no reason why we
should not adopt measures that will give us stable prices at

home which is really the most that is to be got out of a currency
medium. In my opinion we should stabilize our prices forthwith
by linking the rupee to gold at 1s. 6d. sterling. European
countries will soon realize that it is insane to reach back to
pre-war parities with gold and will learn that in matters of
currency the real at any given time is the natural and normal.
If they learn this earlier than we expect, we would find them
stabilizing their currencies in terms of gold at the existing
levels. In that case gold will again begin to function as an
international standard of value and we shall have a stable
exchange. But if before that we have stable prices in terms
of gold it certainly cannot do us any harm.
During the course of this controversy there has arisen a
new standpoint which would want us to do nothing in the
matter of rehabilitation of our currency until we first took
measures which should substitute the prevalent system of
managed currency by a new system of automatic currency. I
have great sympathy with this standpoint, not because I am
sure that an automatic currency will always be more stable
than a managed currency but because it reminds us that the
question ‘ how can we most nearly maintain stability after we
have attained it’ is more worthy of our consideration than the
question of attaining stability. But to suggest that we must
do nothing to stabilize our price level till we have decided
between a managed system and an automatic one, is to make
hell of the earth because the angels do not consent to make
a heaven of it. That was the reason why I thought it was a
different matter altogether. Some comments on that might be
useful at another time. But not now.

6
REVIEW
CURRENCY AND EXCHANGES*
INDIAN CURRENCY AND EXCHANGE, By H. L
CHABLANI, M.A. (Oxford University Press, Bombay) 1925.
8 y 2 x 5 y 2 pp. 184 Rs. 4-8-0
THIS brochure is a poor production. Within the small
compass of 180 pages devoted by the author to a hurried
treatment of a somewhat complicated subject, there is neither
sufficiency of information nor sufficiency of illumination.
Methodology is conspicuous by its absence. There are so
many contradictions and compromises in his book that it is
difficult to know what is the exact position of the author. In
one place he says gold cannot be circulated in India because
India is poor. In another place he says gold does not circulate
in India because there are rupees. After devoting one whole
chapter to the discussion of the quantity theory of money—
in itself the simplest and the most obvious proposition in
Political Economy—he says the rise of the Rupee after 1893
was not altogether due to the limitation of its issue ! Similar
contradiction appears in his chapter on Foreign Exchanges.
There he contrasts the two theories—namely, the Theory of
Purchasing Power Parity and the theory of the Balance of
Trade—and gives his judgment in favour of the former as
being the true theory. Yet throughout the book he argues on
the basis of the wrong theory, namely, the Balance of Trade.
Again, in his opening chapter he says that there is nothing
absurd in reverting back to the silver standard ! Management
of currency is according to the findings of the author, one of
the greatest defects in our currency. Yet he recommends a
convertible Rupee as the remedy for this evil!
* The Servant of India; June 25, 1925
The compromises which the auhtor makes are witnessed

by the fact that he agrees with almost every proposal made
for the reconstruction of Indian Currency. He sees good in
Dr. Fisher’s plan, in reverting back to the silver standard,
and also in an universalised Gold Exchange Standard.
Nevertheless, the author has his own pet plan and that is
to have a ‘Convertible Rupee’, convertible not in gold coins
but in gold bullion only. The author does not disclose it,
but it is the plan suggested by Ricardo in his “Proposals
for an Economical and Secure Currency”. Fortunately for
England it was not adopted. The reasons were simple. To
legislate that notes shall be converted into gold bars of
certain weight meant that only those who had notes of
the value of the gold bars, could convert. The rest could
not. In other words, it was felt that such a system would
considerably weaken the effect of convertibility and would
thereby give an opening to inflation. The proposal was not
therefore deemed to be secure enough. The point whether
the proposal was economical was not debated upon at the
time, and may here be conveniently dealt with ; since there
are so many writers in India—and our author is one of
them—who, in order to show themselves civilized, indulge in
vituperations against what they call the barbarity of using
gold as currency. All these civilized writers on currency spend
their energy in demonstrating the self-evident proposition
which no one disputes that to use paper as a medium of
exchange is more economical than to use gold. But these
same writers never care to prove that such a plan besides
being economical will also be secure in the sense of ensuring
stability of prices. A merely economical plan which does not
guarantee security is of no use. The plan to be acceptable
must be both economical and secure. It will do, if it is not
economical; but it will certainly not do, if it is not secure.
Now I submit that the proposition that to economize gold as
a currency is to impair its utility as a standard of value is
as self-evident as the proposition of the civilized writers that
to use paper as a medium is more economical than to use
gold. For what does this discarding of gold from currency use
mean ? It simply means this; that by economising the use of
REVIEW 685
gold you thereby increase its supply, and by increasing

its supply you lower its value i.e. gold by reason of this
economy in its use becomes a depreciating commodity and
therefore unfit to that extent to function as a standard of
value. It cannot be denied that issues of paper money, or
any other substitute for that matter, affect the demand
for metallic money. There are no doubt some who make
the reservation that the demand for metallic money
will or will not be affected by a paper issue according
as the paper money is convertible or inconvertible. But
this is an error. The test is whether the paper issues
are covered or uncovered by a metallic reserve. If they
are covered then they will not affect the demand for
metallic money. But if they are uncovered, then they
will affect the demand for metallic money whether they
are convertible or inconvertible. The reason is : covered
notes merely represent metallic money ; but uncovered
notes add to the stock of value. Therefore you cannot
both economize gold and also use it as a standard. If
you want to economise gold, you must abandon gold as
a standard of value. Besides, in the present day there is
no necessity to economise gold, because there is all over
the world such a great plethora of money that the less
we economise gold the better. From this point of view the
Gold Exchange Standard, once a boon, is now a curse. It
served a very useful purpose for some time. From 1873
the production of gold had fallen off and the economy
effected by the Gold Exchange Standard was indeed very
welcome ; because it helped in a period of contraction
to expand the money of the countries of the world and
thereby maintain the stability of the international price
system by preventing the rapid fall in prices, which would
have been inevitable if all the countries which established
the gold standard had also adopted gold as currency.
But after 1910 conditions changed and the production
of gold increased, with the result that the continuance
of the Gold Exchange Standard thereafter not only did
not help the countries to check the rise of prices but
actually helped to raise them by causing as a result of
the economy in its use a redundancy of the already over-
produced gold. The author approvingly quotes Prof. Fisher
and others who blame the Gold Standard for the rise of
prices after 1911. But Prof. Fisher forgets to take note
of the fact that gold became a bad standard of value
because of continuance elsewhere of the Gold Exchange
Standard. For if after 1911 the Gold Exchange Standard
has been abandoned and countries had used gold instead
of economising it, there would have been no redundancy
of gold and the rise of prices consequent on it would have
been arrested. The Gold Exchange Standard from this point
of view has outlived its purpose and is now doing positive
harm. In the light of these considerations it is not possible
to have any sympathy with projects that economise the use
of gold and yet maintain it as a standard of value.
These points must have entirely escaped the author
when he conceived his project of a Rupee convertible
into gold bullion. But convertibility into gold bars does
not embody the whole plan of the author. Along with
convertibility he says a limit must be placed on the issue
of rupees and small notes, even when they are legally
convertible into gold bullion. The currency in India should
be allowed to expand annually by only a certain small
percentage representing its normal rate of progress in
business. Beyond that percentage Government should have
no power to increase the currency…… In giving reasons
for this fluctuating limit on the issue of rupees and small
notes, the author says, “A ‘convertible rupee’ being small
in its denomination, is not adequate safeguard against
inflation ; for, as the older economists clearly showed, the
de facto suspended convertibility of the small notes makes
it practically inconvertible, and its over-issue, is just as
likely as that of inconvertible paper.” All this is fantastic if
not strange. It is strange because the author in one place
says “convertibility is the best safety-valve for redundancy
of currency: it provides the easiest automatic danger signal
to Government which is inflating the currency.” Now, if
this is so, why is a convertible Rupee not sufficient for
the purpose the author has in view ? The author is quite
wrong when he says that the older economists believed that
convertibility of small notes was not a sufficient safeguard
REVIEW 687
against over-issue. What the older economists feared was

not that convertibility was not enough to maintain gold in
circulation if the Banks were allowed to issue notes of small
denomination—a view which is quite different from the one
ascribed by the author to the older economists. Again to
realize their aim the older economists did not urge, as our
author represents them to have done, the placing of a limit
on their issue. What they urged was a total prohibition of
the notes of small denomination. That is why we find the
Bank of England prevented by the Charter Act from issuing
notes of lesser denomination than £ 5. To be consistent,
the author should have recommended that the Government
of India should not issue Rupees or silver notes of lesser
denomination than Rs. 5. Instead of this he recommends
a haphazard and an unworkable plan. Supposing it were
possible to fix this percentage—the author has not told
us how to do it—is the percentage to be maintained at
all times ? Or will it be sufficient if it were found at the
end of the financial year that the percentage has not been
exceeded ? If the latter is all that the plan demands, then
there may be . no limits to the increase and decrease in
the volume of currency that may be issued in the course
of the year, provided care is taken that at the end of the
year the balance errs on the side of an increase equal to
the given percentage over the normal. Again, is the normal
to be a figure fixed for ever or is it to be revised ? If it is
revisable then how is it to be revised and what authority
is to revise that normal ? These are some of the questions
that have to be answered before the plan can be accepted.
But one wonders whether instead of indulging in such
ingenuities it would not have been better if the author
had played the common role and recommended either a
convertible Rupee or an inconvertible Rupee with a fixed
limit of issue.
The book consists of lectures delivered by the
author in his capacity as a Professor to his students at
the Elphinstone College, Bombay, and at the Central
Hindu College, Benares, and is divided into two
parts. Part I which is mostly informative, the author
says, is “ intended for candidates preparing for the
pass degree in economics.” Part II is mainly critical” and “is

meant primarily for the candidates for the Hons. degree.” As
an examiner in Economics I always wondered why the answers
of most of the pass students in Political Economy read like
children’s recitation of nursery tales and those of the Hons.
like garbled versions of borrowed comments. It is now evident
that this is due, as the author naively suggests, to the fact
that the two sets of students are fed on two different kinds
of fare—neither of which is supplied to them in plentitude or
certitude.

7
REVIEW
REPORT OF THE TAXATION ENQUIRY
COMMITTEE, 1926*
Report of the Taxation Inquiry Committee 1926-1
COMMISSIONS to report and committees to enquire are a
peculiar feature of the English system of government. It is
a cardinal principle of English Parliamentary action that in
the matter of social and economic legislation it never takes a
leap in the dark. Committees and commissions are necessary
preliminaries of an Act of Parliament. In this it follows the
well known maxim that knowledge is power. One is happy to
find that this principle of English Parliamentary action has
been followed in India and our politicians, who so often oppose
the appointment of Commissions and Committees, cannot be
said to be acting in the best interests of the country.
In the case of the Taxation Enquiry Committee, however, it
was the Government which was trying to shut it out and when
it did institute an enquiry, it was not the one demanded by the
Assembly. What the Assembly wanted was an Enquiry into the
taxable capacity of the people and this the Government did not
want to face for fear that such an enquiry might reveal that
the burden of taxation upon the people was disproportionate
to their taxable capacity. But when public opinion insisted
upon the institution of such an enquiry, it, by a species of
circumvention, split the enquiry into two parts : (1) The taxation
Enquiry Committee and (2) The Economic Enquiry Committee,
with the result that the utility of either committee’s report
has been considerably diminished.
The terms of reference to the Taxation Enquiry Committee
directed it (1) to examine the manner in which the burden of
taxation is distributed at present between the different classes of
* The Servant of India. Vol IX, No. 13, April 29, 1926 pp. 163-64.
the population; (2) to consider whether the whole scheme

of taxation is equitable and in accordance with economic
principles, and, if not, in what respects it is defective ; and
(3) to report on the suitability of alternative sources of
taxation. In making its Report, the Committee has not been
very judicious in the allotment of space to the consideration
of these three questions. The first was evidently the most
important of the three heads comprized in the whole charge.
Yet the space devoted to the consideration of it barely covers
13 pages in a volume of 447 pages. Besides the treatment of
the subject is far from satisfactory. The Committee without
giving any reason whatsoever divided the population of the
country in 11 classes and has discussed the burden they bear
in 10 pages and a half without at all touching upon the most
important of all questions, viz., the incidence of the individual
taxes imposed under the Indian fiscal system. Now one would
have liked to know why did the Committee think that 11
was an exhaustive classification ? If it is just a question of
may be, then why not 13 ? Again, how can the Committee
at all say what is the burden that a merchant bears ? If
they had examined the incidence of individual taxes, they
would have perhaps found that he bore none ! Take again,
another specific instance, that of the Cotton Excise Duty.
The Committee has no difficulty in saying that its abolition
will benefit the working classes. But is the Committee quite
certain that it was shifted on to the consumer ? I do not at all
wish to be unfair to the Committee. But I am bound to say
that in this respect the Report of the Committee is a most
disappointing document. The Committee has devoted a great
deal of space to the detailed history of the various sources
of taxation in India. So far so good. But it would have been
far better if the Committee had devoted half of that space in
discussing the incidence of each tax separately. But this the
Committee has entirely omitted to do. If that was done, the
Committee would have been in a better position to deal with
the question of the distribution of the burden of taxation and
of the elimination of the iniquitious taxes. That it has not been
able to do as well as was to be expected from a Committee
which has cost the country nearly Rs. 41/2 lacs exclusive
of printing is due to the fact that it forgot to consider the
REVIEW 691
question of incidence, which, after all, was the most important

part of its enquiry.
This failure of the Committee to tackle the main problem is
to be attributed primarily to the personnel of the Committee,
which was largely of inexpert people, most of whom, if rumur
be true, began to learn the A.B.C. of Punjab Finance after
they found themselves nominated on the Committee. There
is no wonder if the report emanating from such a body falls
flat upon students of the subject. One thing, however, can be
said in favour of the Report. It is a document full of common-
sense, neatly arranged. If it can not satisfy the student, it
will certainly serve as a base for his intellectual operations.
Some of the proposals of the Committee I hope to examine
in subsequent articles. For the present I propose to stop with
this statement of my view on the Report in general.

8
FOREWORD*
I am glad to respond to the request of Mr. SALVI to write a
few words by way of introduction to his book on the Commodity
Exchanges in India. It is obvious that his work if it is not a
pioneering work is a more exhaustive piece of work than any
that has so far appeared in the field. In nine chapters, he has
examined the commodity exchanges in all their aspects and
has thrown great light on an obscure subject. The subject of
commodity exchanges is closely related to agriculture. India
is an agricultural country and yet very little attention is paid
to that subject. Those who are interested in the betterment of
the agriculturists of India cannot but welcome the appearance
of this comprehensive and instructive study.
Bombay, 29th December 1946
—B. R. AMBEDKAR

* COMMODITY EXCHANGE
BY
P.G. SALVI, M.A.
THE CO-OPERATOR’S BOOK DEPOT, 9, BAKEHOUSE LAND, FORT,
BOMBAY
1947
9
FOREWORD*
Mr. M. R. IDGUNJI’s book on Social Insurance and India is
a well planned treatise.
It is divided into two parts. Part-I is general and deals
with two main topics (I) the two principal branches of social
insurance, viz., (i) Workmen’s Compensation (ii) the different
Financial aspects of Social insurance such as the Financial
resources, the actuarial technique and financial administration.
The discussion of the financial aspects of social insurance is
aimed to explain the various problems connected with the
financial resources required for the working of social insurance
schemes, the various systems according to which the resources
can be organised so as to have social insurance schemes working
on sound lines and the problems of Administration connected
with the financial side of social insurance.
Part-II deals with the problem of social insurance in relation
to conditions prevalent in India. In this part the provision
of the Indian Workmen’s Compensation Act 1923, and of
sickness Insurance are subjected to critical examination. In
addition to this, there is a discussion of the Beveridge plan of
Social Security and of the scheme of social security adopted
in New Zealand. The discussion ends by an exploration of the
possibilities for social security measures in India. The author
holds the view that sound social insurance measures are
not feasible in India unless certain fundamental difficulties
are removed, and the country makes a substantial advance
economically and is rid of the stark poverty that prevails in
it today. The reasons in support of the stand he has taken
are set out clearly and fearlessly. Realizing that India is
predominantly an agriculture country and that the agriculture
*SOCIAL INSURANCE AND INDIA

BY
Manohar R. Idgunji
Thacker & Co. Ltd., Bombay
First published, 1948
population sadly needs protection, the author has suggested

a scheme of crop insurance based on the principles of social
insurance. If indeed a scheme of crop insurance be evolved on
the lines suggested by the author, it should go a long way in
bettering the conditions of the rural masses in our country
and lessening the terrors of famines.
Social insurance is a new thing in India. The Indian
contribution to the literature on the subject is naturally
meagre. In the circumstances, Mr. Idgunji’s book is sure to be
welcomed by all students of the subject both as an addition to
the scanty literature thereon and also as a critical examination
of the problems arising out of it. His style is lucid and his
exposition is very clear.
—B. R. AMBEDKAR

BIBLIOGRAPHY
The books, reports and journals listed here include the works cited by the author in the Texts.
BOOK 2 : The Evolution of Provincial Finance in British India
Austin : Jurisprudence, Vol. 1 (4th Ed.).
Bryce, James : The American Commonwealth; 1910.
Buchanan, Dr. Francis : Journey from Madras Vol. II.
Burke, Sir Edmund : Reflections on the Revolution in France.
Calcutta Review, Vol. XVI, 1851.
Cowell, Herbert: The History of the Constitution of Courts and Legislative Authorities in
India, Calcutta.
Dicey, A. V.: Law of the Constitution, (8th Ed.), 1915.
Fisher, H. A. L.: The Empire and the Future, 1916.
Frere Sir B.: Minutes Papers etc. on the extension of Financial Powers to Local Governments,
186C.
Ghose, N.: Comparative Administrative Law, 1918.
Halsbury : Laws of England.
Haughton, Benard : Bureaucratic Government.
Hearn : The Government of England.
Hendricks: Parliamentary Committee on trade, 1821.
Hunter W. W.: Life of Mayo, Vol. 1.
Kelkar N. C.: The case for Indian Home Rule.
Low, Sir Sidney : The Governance of England, 1914
Mansfield, Sir W. R.: Minutes—Papers etc. on the extension of financial Powers to Local
Governments, 1967.
Martin M.: Eastern India, 3 Vols.
Raghuvaiyangar: Progress of the Madras Presidency, 1893.
Redlich J.: Parliamentary Proccedure.
Seligman, Prof. E. R. A.: Essays in Taxation, (8th Edition), 1913.
Strachey Hon. John : The Adm. of the Earl of Mayo as Voceroy and Governor General of
India; Govt. Printing Press, Calcutta, 1872.
Strachey, Col. R.: Note—in Finley’s History of Provincial Financial Arrangements, 1867.
Sykes, Colonel: Past, Present and Prospective Financial Condition of British India, Journal
of the Royal Statistical Society, Vol. XXIII, 1859.
Temple, Sir Richard: Papers etc. on the extension of Financial Powers to Local Governments,
1867
Thornton : (Ed.)—Statistical papers relative to British India, 1953.
Travelyan : System of transit and town duties in the Bengal Presidency.
Venkatramaiah, Y.: Accountant’s Manual, Madras 1866.
Vineberg : Separation of State and Local Revenues in Canada.
Webb, S.: Grants-in-aid, 1911.
West: Sir Charles Woods’ Administration.
Report of the Civil Finance Committee on Native Establishment at the three Presidencies, 1830.
Report of the Royal Commission on Decentralisation in British India, 1909.
Report of the Committee on the affairs of the East India Company, 1852.
Report of the Committee on Indian Constitutional Reforms, 1918.
Report of the Joint Select Committee on the Government of India Bill, 1919.
Report of the Committee appointed by Secretary of State for India to advise on the question
of the Financial Relations between the Central and Provincial Governments in India.
Report and Evidence of the Committee on East India Produce, 1846.
Royal Commission on Local Taxation in England, Vol. 1, Minutes of evidence, 1898.
Second Report of the Joint Committee appointed to revise the rules made under the
Government of India Act, 1920.
Report of Major General Hancock, on the reorganisation of the Indian Army.
Report of the Civil Finance Committee on Native Establishment at the three Presidences.
House of Commons ; Return 33 of 1860, 307 of 1861, 326 of 1874, 202 of 1919.
Hansard’s Parliamentary Debates, 1868.
Annual Financial Statements for the official years 1860-1 to 1873-4, Calcutta, 1873.
Financial Statements of Government of India, 1879-80, 1902-03
Annual Finance and Revenue Accounts of Government of India
Legislative Assembly Debates, Vol. III
Madras Manual: Vol.1.
Civil Account Code.
Moral and Material Progress report for 1882-3.
Parliamentary Papers 1859 : Report of Major-General Hancock on the Reorganization of the
Indian Army.
BOOK 3 : The Problem of the Rupee
Andreades : History of the Bank of England.
Atkinson, F.: The Indian Currency Question, 1894.
Bagehot, Walter: Articles on the Depriciation of Silver, London, 1877.
Barbour, Sir David : Standard of Value, 1912
Cannan, Prof. : Bullion Report-Money—Its connection with Rising and Falling Prices, 3rd ed.
The Paper Pound of 1797, 1821.
Cassel: Money and Foreign Exchange after 1914, London 1922.
Chalmers, Robert: History of Colonial Currency, 1893.
Dalrymple A : Observations on the Copper Coinage wanted in Circars, London, 1794.
Davenpart: The Economics of Enterprise, 1913.
Dodwell, H. : Substitution of Silver for Gold in South India ; India Journal of Economics, 1921.
A Gold Currency for India, Economic Journal, 1911.
Report on the Enquiry into the Rise of Prices in India, 1914.
Doraiswami, S. V.: Indian Currency, Madras, 1915.
Dunning, H. M. : Indian Currency, 1898
Falkner, R. P.: A Discussion of the Introgatories of the Monetary Commission of the Indianapolis
Convention : University of Pennsylvania, 1898.
Fetter F. A. : The Gold Reserve : Its Function and its Maintenance, Political Science Quarterly,
1896.
Fisher, Prof. : Purchasing Power of Money, 1911.
Purchasing Power of Money, 1911
Elementary Principles of Economics, 1912.
Forbes, F. B. :The Bimetaliist, 1897.
Foxwell (Ed.): Investigations in Currency and finance, 1884.
Bimetallism : Its Meaning and Aims
The (Oxford) Economic Review, 1893.
Gibbs : A Colloquy on Currency, 1894.
Gregiory, T. E.: Foreign Exchanges.
Harris : An Essay upon Money and Coins.
Harrison, F. C.: The Past action of the Indian Government with regard to Gold; Economic
Journal, Vol. III.
Harton, Dana : The Silver Pound, 1887
Hauft, Ottomar: Distribution of stock of Money in different countries, Effingham, Wilson
and Co., London, 1892.
Hawtrey, R. G. : Credit and Currency, 1919
Huges-Hallett Col.: The Depreciation of the Rupee, London 1887.
Jevons H. S. : Money and Mechanism of Exchange, 1890.
Theory of Political Economy, 1911.
Future of Exchange and Indian Currency, 1922.
Jervis, Captain : Analytical Review of the Weights, Measures, and Coins of India, Bombay, 1836.
Kaye (Ed.): Memorials of Indian Government, 1853.
Kelly, Dr. P.: The Universal Cambist, 1811.
BIBLIOGRAPHY 697
Kemmerer, E. W.: Modern Currency Reforms, 1916.
Seasonal Variations in the New York Money Market, American
Economic Review, 1911.
Money—Its connection with Rising and Falling Prices, 3rd Ed.
Keynes, Prof.: Indian Currency and Finance.
Recent Economic Events in India, Economic Journal, 1909.
Kirkady : British War Finance, 1921.
Kitchin, Joseph : Review of Economic Statistics, 1921.
Laughlin J. L.: History of Bimetallism, New York, 1886.
Lexix, Prof. W.: The Present Monetary Situation, Economic Studies of the American Eco. Associate,
1896.
The Agio on Gold and International Trade, The Economic Journal, 1895.
Liverpool Lord : Treatise on the coins of Realm, Reprint of 1880.
London A. C. B.: How to meet the Financial Difficulties in India, London 1859.
Madan : Indian Journal of Economics, Vol. III.
Marshall: Contenperary Review, 1887.
Remedies for Fluctnation of General Prices, Contemparory Review, 1887.
Martin, R. M.: The Indian Empire, Vol. I, 1856.
Mayo : Price Movements and Individual welfare, Political Science Quarterly, 1900.
Mitchell, W. C. : The Rationality of Economic Activity; Journal of Political Economy, Vol. XVIII, 1910.
The Role of Money in Economic Theory : American Economic Review (Supplement), Vol. VI, 1916.
Gold Prices and Wages under the Greenback Standard, 1908.
Muller, John : Indian Tables, Calcutta, 1836.
Nicholson, Prof. : Money and Monetary Problem, 1895.
Principles of Political Economy, 1897.
Paul, Kegan : Money and the Mechanism of Exchange, London, 1890.
Pierson, Prof. : Principles of Economics.
Porter, G. R.: Progress of the Nation.
Princep, J.: Useful Tables, Calcutta, 1834.
Probyn, Mr.: Indian Coinage and Currency, Effingham Wilson, London, 1897.
Ranade, M. G.: Essays on Indian Economics.
Ricardo David : High Price of Bullion.
Proposals for an Economical and Secure Currency.
Ross, H. M. : The Triumph of the Standard, Calcutta, 1909.
Ruding : Annals of Coinage 3rd Ed. Vol. 1.
Russell H. B.: International Monetary Conference, 1898.
Seligman, E. R. A.: Currency Inflation and Public Debts, New York, 1922.
Shirras : Indian Finance and Banking.
Shore, Sir John : A Treatise on the Coinage of the Realm.
Smith, Col. J. T. : Silver and the India Exchanges, Effingham Wilson, London, 1876.
Summner, Prof.: A History of American Currency, New York, 1874.
Taussig, F. W.: Principles, 1918.
Temple, Sir Richard : General Monetary Practice in India, Journal of the Institute of Bankers.
India in 1880.
Sir Charles Wood’s Administration of Indian Affairs.
The Indian Statesman, 1884.
Venkateshwara, Prof. S. V. : Moghul Currency and Coinage, Indian Journal of Economics, 1918.
Violet, Thomas : An Appeal to Caesar, London, 1660.
Walker F. A. : The Free Coinage of Silver, The Journal of Political Economy, Chicago.
Money in its relation to Trade.
Walsh, C. M. : Fundamental Problem in Monetary Science.
Whitakar, A. C. : Foreign Exchange, Appleton, New York, 1920.
Wieser, F. : Resumption of Specie payment in Austria-Hungary, Journal of Political Economy, Vol. I.
Willis, H. P.: History of the Latin Monetary Union, Chicago, 1910.
The Vienna Monetary Treaty of 1857, Journal of Political Economy, Vol. IV.
Wilson, James : Capital Currency and Banking, 1847.
Report of the Famine Commission of 1880.

Report of the Royal Commission on Agricultural Depression in England, 1897.
Report of the Royal Commission on Gold and Silver.
Commons Paper C. 4868 of 1886, 495 of 1913, 449 of 1893.
44th Congress, 2nd Session, Senate Document No. 703.
Lords Paper 178 of 1876 ; 7 of 1894.
Report of the Select Committee on Depreciation of Silver, 1876.
Report of the Gold and Silver Commission, 1886.
Report of the Monetary Commission of the Indianapolis Convention, Chicago, 1898.
Report of the Delegates of the United States, Cincimati to the International Monetary
Conference, 1881.
Report of the Commission on International Exchange, House of Representative Document,
Washington, 1903.
Report of the India Delegation to the International Monetary Conference, 1882.
Report of the (First) of the Royal Commission on Gold and Silver, 1886.
Senate Executive Documents, 45th Congress, Washington, 1879.
Report of the American Delegates to the International Monetary Conference, Washington, 1893.
Report of the Committee to enquire into Indian Currency, 1899.
Report of the Chamberlain Commission.
Report of the Fowler Committee.
Report of the Price Inquiry Committee, Calcutta, 1914.
Memorandum on Currency, by League of Nations, 1922.
Imperial Gazetteer of India, Vol. IV.
Oriental Repertory, 2 Vols. London, 1808.
H. of C. Return, 127 of 1898, 254 of 1860, 31 of 1830,109 of 505 of 1864, 735 of 1931-32,
495 of 1913.
Report of the U. S. Silver Commission of 1876.
Calcutta Review, 1892, 1878.
Bombay Quarterly Review, April 1857.
Asiatic Journal and Monthly Register for British and Foreign—India, China and Australia,
London, 1842.
Home Miscellaneous Series, Vol. 456, India Office Records.
Report of the Bombay Chamber of Commerce, 1863-4.
Papers relating to the Introduction of a Gold Currency in India, Calcutta, 1866.
Hansard Parliamentary Debates LXXIV.
Report of the Royal Commission on Agricultural Depression in England, 1892 (400).
Report of the Depreciation of Silver, 1876 (401).
Report of the Directors of the Mint, Washington, 1893.
Report of the India Currency Committee, 1893.
Report of the Public Service Commission, 1887.
Report of the Civil Finance Commission, 1887.
Report of the Calcutta Civil Finance Committee, 1886.
Supreme Legislative Council Proceedings LVII, Vol. L, LVI
Report of the Price Inquiry Committee in 5 Vols ; 1914.
East India—Accounts and Estimates, 1921.
Legislative Assembly Debates, 1921.
Journal of the Royal Statistical Society, 1920.
Report of the Deputy Master of the Royal Mint, 1921.
Financial Statements 1900-1, 1908-9, 1910-1, 1894-5, 1898-9.
Intrim Report of the Chamberlain Commission, 1913.
Report by Campbell Holland and Miner.
Report of Smith Currency Committee of 1919.

INDEX
Original Index of the Evolution of Provincial Finance and that of the Problem
of the Rupee are printed along with the texts. Index of the remaining portion
is given below.
BOOK 1 : Administration and Finance of the East
India Company
Abkaree: 20 Land Customs: 20
Abdul Fazal: 32 Land Tax : 29
Adam Smith: 32
Adams, Prof.: 25 Macbeth: 13
Adiscombe Academy : 13 Magna Charta: 47
Akbar: 32 Malcolms: 13
Albuquerques: 13 Marine Revenue: 22
Martin : 31
Ballootah : 21 Military Board: 26
Bentham : 32 Mills, J. S.: 32, 38, 39
Blacks tone : 32 Mint Revenue: 22
Board of Control Mrs. Stowe’s Legree : 39
Powers of: 9 Munro : 31
Briggs, Colonel: 29
Bright, John : 26, 44, 45
Busseys: 13 Palmerston, Lord : 39, 40
Percentage Ratio: 25
Clive, Lord: 13, 31 Pitt, William : 29
Conte: 39 Portuguese: 19
Cornwallis: 14 Public Works : 25, 27
Crimean War: 37
Derby, Lord : 39, 44, 46, 47

Disraeli, Benjamin : 39, 40 Ricardo David: 32
Dutt, R. C.: 29, 34, 45 Ryotwar System : 17, 18, 30
East India Company— Salt Tax: 19,20

Court of Directors of: 8 Sayer duties : 20, 21
Court of Proprietors of: 7, 38 Sea Customs : 20
Shakespeare: 13
Fullerton: 30 Spray, Dr.: 26
Stamp duties: 21
Gladstone: 46 Stanley : 46
Sullivan: 31
Haileburg College: 13
Hendricks : 27
Home Bond Debt: 35 Victoria, Queen : 47
House of commons : 19 Village Republics : 16
Indian Debt: 34, 35 West-Indian Slaves : 41

Indian Mutiny: 37 Wheel Tax : 20
Wingate:40, 41, 42
Jomini: 32
Judicial Fees : 21 Zamindari Settlement: 14
BOOK 4 : Miscellaneous Essays

American War of Independence : 666 Gold Standard Reserve : 629, 630, 631,
Austrian Crown : 671 634, 645, 646, 652
Gregory, Prof.: 645
Babington Smith Committee : 679
Harward Business Barometer: 644
Cannan, Prof. Edwin : 629, 643, 649, 652 Herschell Committee : 655
Convertibility : 638, 639, 640, 647, 657,
669, 684 Jevons, Prof. H.S.: 641, 642
Coyajee, Prof. : 650
Created Securities : 630 Kitchen, Joseph : 645
Dawkins, Clinton : 653, 654, 655 Law, Edward : 647, 652, 653, 654, 655
Paper Currency Reserve : 630
English Banking Act of 1894 : 650 Preston, Mr. : 662
European War: 671 Purchasing Power Parity : 673, 683
Purushottamdas Thakurdas : 655, 664
Fisher, Prof. : 632, 641, 642, 661, 664,
665, 684 Ricardo : 684
Fowler Committee : 630, 647, 651, 652, Rouble: 671
654, 655 Royal Commission on Indian Currency :
Fowler Committee Report: 647, 652 634
Statistical Journal: 649

Genoa Conference : 666 Strakosch, Sir Henry : 666
German Imperial Bank : 650 Sydenham College, Bombay : 656
German Mark: 671
Gold Currency: 663 Warren, Sir Narcot: 651
Gold Exchange Standard : 629,630, 634, Westland, James : 653, 654
636, 650, 651, 684 Wilson, James : 644

A Aaaaaaaaaa

Uploaded by

Copyright:

Available Formats

A Aaaaaaaaaa

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

A Aaaaaaaaaa

Uploaded by

Copyright:

Available Formats

.

Babasaheb Dr. B.R. Ambedkar

First Edition by Education Department, Govt. of Maharashtra : 10 October, 1989

ISBN (Set) : 978-93-5109-064-9

Courtesy : Monogram used on the Cover page is taken from

Price : One Set of 1 to 17 Volumes (20 Books) : Rs. 3000/-

The Education Department Government of Maharashtra, Bombay-400032

Shri Manikrao Hodlya Gavit

Shri P. Balram Naik

Shri Sudhir Bhargav

Shri Sanjeev Kumar

Shri Viney Kumar Paul

Shri Kumar Anupam

Shri Jagdish Prasad ‘Bharti’

Shri Sudhir Hilsayan

28 SHRI V. W. MOON, O.S.D. … … MEMBER

advocates. But he hits some nails very squarely on the

view. But from another point of view, if India’s tribute cannot

3 EVIDENCE ... 636

Submitted in partial fulfilment of the requirements of

Administration and Finance of

W ITHOUT going into the historical development of it, the

8 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

(3) To frame, alter, or repeal such of the by-laws as hinder

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 9

All appointments such as writers, cadets, and assistant

10 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

such orders and directions as they shall, from

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 11

The appointment of the Governor-General was made by

12 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 13

For Civil and Military recruitment, the East India Company

14 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

revenue returns were merged together without any attempt at

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 15

1831 C. 3114, 3115, 3215.] On the East India Company

16 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

neighbouring village, while certain portions and certain rights

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 17

neighbouring villages who are invited to attend. The exact

18 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

liable when sufficiently improved to pay the higher assessment,

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 19

monopoly policy was given up in favour of the transit duties

20 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

In Bombay the salt manufacture was handed over to the

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 21

etc.: the other ballootah,* which “comprehended” taxes upon

Besides this the exhibits filed, summons, answers,

22 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

“The stamp vendors receive their supply from the

ADMINISTRATION AND FINANCE OF THE EAST INDIA COMPANY 23

The Opium Revenue : its yield and ratio to the entire

1792-93 to 1855-56 … 1,667,000 8.71

1792-93 to 1796-97 … 1,207,000 14.93

1792-93 to 1855-56 … 2,118,000 11.07

24 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

Customs Revenue : its yield and ratio to the entire

1792-93 to 1855-56 … 1,190,000 6.22