Trying to figure different monetary standards in India using data from Paper Currency Reserve (1861-1935)…

Monetary history despite being highly fascinating, is confusing as well. There are so many terms/standards which one does not understand. If there is one thing positive from India’s demonetisation and rise of digital currency, it is to understand history well. The basics keep coming back and haunting you for your ignorance.

Chandravarkar (1985) in his essay in Second Cambridge Economic History of India said:

India witnessed practically every variety of monetary standard, passing successively from a silver standard to a managed inconvertible silver currency, then almost fortuitously to the gold exchange standard; thereafter, to a paper standard, a gold bullion  standard, and after 1931, to a sterling exchange standard. India also played a pivotal role in the days of the international gold standard, 1890-1914, insofar as her merchandise surplus with the rest of the world and her merchandise deficit with England helped England to square her international payments on current account.

 Keynes in his Indian Currency and Finance Report (1913) too had marvelled over India’s Gold Exchange Standard.

But then whenever you try and figure these different monetary systems you struggle to understand. The dates of transition from once system to another are confusing and difficult to remember.

One useful way to figure all this is to analyse the data. In historical matters, time-series data helps one understand and remember things like no other. The next question is where is the data? Which data should we look at?

Interestingly, British colonists were highly efficient at collecting data especially on monetary and financial matters. We have some useful data which is not used by scholars for analysing Indian monetary history from various lenses.

One such data is that of Paper Currency Reserve, which was instituted by the British in 1861. Before 1861, the Presidency Banks (and other banks) issued their own paper currency. These notes circulated in their respective areas. Post -1857, as powers to run India moved from East India Company to the British Government there were talks of issuing a Government Paper currency. James Wilson the first Finance Member (today’s Finance Minister) had started proposed a Government currency in 1859 but passed away before the idea could be executed.

In 1861, the British authorities set up Paper Currency Reserve which was to issue government paper notes. The power of Presidency Banks to issue banknotes was taken away. Despite suggestions to let the banknotes being universally accepted across the country, the government let them be legal tender only in their respective areas.  These areas were called as circles. Initially they were just three circles which were expanded later to many more over time.

This Paper Currency Reserve is key to figuring the different monetary systems mentioned by Chandravarkar.

The Currency Reserve balance sheet had following heads:

Paper Currency Reserve (in lakhs of rupees)
Liabilities Assets
Total notes issued Coin and Bullion
   In India
         Gold Coin and Bullion
         Silver Coin
         Silver bullion
  Abroad and in transit
      Gold Coin and Bullion
      Silver Coin and Bullion
Securities
   In India
        Rupee Securities
       Treasury Bills
        Internal Bills of Exchange
   In England
       Sterling Securities

As we can see, Liabilities comprise just the currency notes. On the other hand, Assets are divided into two broad categories: Coin/ Bullion and Securities. These two categories are further divided into two sub-categories: Assets held in India and Assets held in England. So, we have Coin/Bullion in India and in England and same with Securities. Basically, in 1905 the British decided to hold assets both in India and in England. More on this later.

Next is we see distinctions in silver coin and bullion. We also see three type of Securities in India. These are very specific and to understand things better, we have a simplified balance sheet:

Paper Currency Reserve (in lakhs of rupees)
Liabilities Assets
Total notes issued Silver
    In India
    In England
Gold
    In India
    In England
Securities
    In India
    In England

We first see the liabilities as there is just one head there. The notes increased from Rs 3.6 cr in 1862 to 186.1 cr in 1935. The graph below shows the growth over the years. As we can see, the growth of banknotes is stagnant till about 1915 and then suddenly jumps till 1920 and then again stagnates. In 1928, the issuance was Rs 184 cr which declined to Rs 161 cr in 1931 due to Great Depression.

 

 

 

 

 

 

 

 

The few economists which have studied India’s monetary growth during this period, point the weak growth of note issues in the country.

 

 

 

 

 

 

One major reason was the denomination of notes which was way too high given the low income of most Indians. Rs. 1 notes only came in 1918 and Rs 2 only in 1943. In 1873, the total circulation is 12.68 crore of which highest circulation is of Rs 1000 notes worth 5.76 cr.

Now, we go to the assets side. Instead of looking at absolute figures, we see the composition of assets.

  • Till 1898, we see notes mainly backed by Silver and Rupee securities. The share of silver in PCR was 60% and rest 40% was domestic securities. There were initial plans to keep a fixed percentage for Rupee securities. However, instead they just kept fixed amounts for Rupee securities. They kept raising the amount as and when. The initial limit was Rs.4 crores in 1862 to Rs. 120 crores in 1919.
  • Then from 1898-1905, the share of silver declines to around 35% and rupee securities to 25%. The share of Gold rises to 40%.
  • In 1905, a provision was made to allow investment in Sterling Securities. Act III of 1905 provided for the inclusion of securities of the “United Kingdom of Great Britain, and Ireland.” Even Gold was allowed to be held in England.
  • After a dip, share of silver again rises to 55-60% for most part of the remaining period. Share of gold is around 15-20%. Rupee Securities is around 20-30%. Share of Sterling Securities rises to 50% and then declines to 0-10%. Thus, there are quite a few variations in the data with most assets held in India only.
Silver Gold Securities
In India In England In India In England Rupee Securities Sterling Securities
1862 100.0 0.0 0.0 0.0 0.0 0.0
1863 86.0 0.0 0.0 0.0 13.8 0.0
1864 53.5 0.0 0.0 0.0 46.5 0.0
1865 49.1 0.0 2.7 0.0 48.0 0.0
1866 42.3 0.0 0.0 0.0 57.7 0.0
1867 59.7 0.0 0.1 0.0 40.2 0.0
1868 64.1 0.0 0.1 0.0 35.8 0.0
1869 60.3 0.0 0.3 0.0 39.3 0.0
1870 65.2 0.0 0.3 0.0 34.4 0.0
1871 67.2 0.0 0.1 0.0 30.9 0.0
1872 55.0 0.0 0.1 0.0 44.9 0.0
1873 48.8 0.0 0.1 0.0 51.1 0.0
1874 38.4 0.0 0.1 0.0 61.5 0.0
1875 49.3 0.0 0.1 0.0 50.6 0.0
1876 48.3 0.0 0.0 0.0 51.7 0.0
1877 48.4 0.0 0.0 0.0 51.6 0.0
1878 58.1 0.0 0.0 0.0 41.9 0.0
1879 47.5 0.0 0.0 0.0 52.5 0.0
1880 51.5 0.0 0.0 0.0 48.5 0.0
1881 55.3 0.0 0.0 0.0 44.7 0.0
1882 56.9 0.0 0.0 0.0 43.1 0.0
1883 58.6 0.0 0.0 0.0 41.4 0.0
1884 53.0 0.0 0.0 0.0 47.0 0.0
1885 58.8 0.0 0.0 0.0 41.2 0.0
1886 57.7 0.0 0.0 0.0 42.3 0.0
1887 56.8 0.0 0.0 0.0 43.2 0.0
1888 63.5 0.0 0.0 0.0 36.5 0.0
1889 62.0 0.0 0.0 0.0 38.0 0.0
1890 62.0 0.0 0.0 0.0 38.0 0.0
1891 72.8 0.0 0.0 0.0 27.2 0.0
1892 66.8 0.0 0.0 0.0 33.2 0.0
1893 69.7 0.0 0.0 0.0 30.3 0.0
1894 73.7 0.0 0.0 0.0 26.3 0.0
1895 73.9 0.0 0.0 0.0 26.1 0.0
1896 69.2 0.0 0.0 0.0 30.8 0.0
1897 57.9 0.0 0.0 0.0 42.1 0.0
1898 58.6 0.0 1.1 0.0 40.4 0.0
1899 53.7 0.0 10.8 0.0 35.5 0.0
1900 18.2 0.0 47.0 0.0 34.8 0.0
1901 37.5 0.0 29.0 0.0 33.5 0.0
1902 35.1 0.0 33.3 0.0 31.6 0.0
1903 30.6 0.0 41.4 0.0 28.0 0.0
1904 31.5 0.0 42.3 0.0 26.2 0.0
1905 33.4 0.0 41.1 0.0 25.5 0.0
1906 32.5 4.1 12.9 23.7 22.4 4.5
1907 35.7 4.6 11.7 22.4 21.3 4.3
1908 53.9 0.0 8.7 11.9 21.3 4.3
1909 68.6 0.0 0.1 4.9 22.0 4.4
1910 54.0 0.0 17.1 6.9 18.4 3.7
1911 47.5 0.0 16.9 13.8 18.2 3.6
1912 25.2 0.0 38.0 13.9 16.3 6.5
1913 23.8 0.0 42.6 13.3 14.5 5.8
1914 31.0 0.0 33.9 13.8 15.1 6.0
1915 52.5 0.0 12.4 12.4 16.2 6.5
1916 34.0 0.8 18.1 17.6 14.8 14.8
1917 22.1 0.2 13.9 7.7 11.6 44.6
1918 10.8 0.0 26.9 0.7 10.0 51.6
1919 21.1 3.3 11.3 0.1 10.5 53.8
1920 22.8 0.0 25.4 2.0 11.2 38.5
1921 39.5 0.0 14.5 0.0 41.0 5.0
1922 44.4 0.0 13.9 0.0 38.4 3.3
1923 49.8 0.0 13.9 0.0 32.9 3.3
1924 43.0 0.0 12.0 0.0 37.4 7.5
1925 41.7 0.0 12.1 0.0 35.4 10.9
1926 43.9 0.0 11.5 0.0 29.5 15.0
1927 56.7 0.0 12.1 0.0 28.1 3.0
1928 57.5 0.0 16.1 0.0 24.3 2.0
1929 53.1 0.0 17.1 0.0 24.1 5.7
1930 62.6 0.0 18.2 0.0 19.1 0.1
1931 77.6 0.0 16.1 0.0 6.3 0.0
1932 62.4 0.0 3.0 0.0 34.6 0.0
1933 63.2 0.0 14.7 0.0 22.1 0.0
1934 55.3 0.0 23.4 0.0 16.6 4.7
1935 48.6 0.0 22.3 0.0 19.3 9.8

How do we sum this data? RBI History Volume has a nice summary:

The ‘effective establishment in India of a gold standard and currency based on the principles of the free inflow and outflow of gold’ envisaged by the Fowler Committee in 1899 did not materialise.

 Government’s efforts to popularise circulation of gold coins were largely infructuous. Perhaps, the public demand for a gold standard in India was motivated more by the  desire to ensure free availability of gold for investment of savings and a stable exchange rate for safeguarding its commercial interests than by the desire to have gold coins in circulation.

With sterling on a gold basis and the maintenance of the rupee at 1S. 4d. for a fairly long period, the system, which emerged in due course, operated as a gold exchange standard. Of course, gold could be procured freely through imports which were at no time, except during the war, subjected to restrictions.

However, the price of silver continued to be the dominant factor in determining the external value of the rupee as was clearly demonstrated during the First World War.

Although the Hilton Young Commission (1926) recommended a full-fledged gold bullion standard, it was whittled down in the Currency Act of 1927 by freeing the currency authority from the obligation to sell gold without limit.

Since Government had the option of giving gold or sterling against rupees, in terms of that Act, and since sterling was on a gold basis, the system continued to work, in effect, as a gold exchange standard, until September 1931. With the departure of sterling from gold, only the link with sterling remained and the currency system came to be on a sterling exchange standard.

 This is what is precisely stated by Chandravarkar and trends reflected in the PCR data: there were just multiple monetary standards making India a great experiment to study.

Eventually this PCR becomes part of RBI Issue Department balance sheet as well. I will try and figure this transition and blog about this later.

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