REVIEWS

Indian Currency and Finance. By JOHN MAYNARD KEYNES, Fellow of King's College, Cambridge. (London: Macmillan and Co. 1913. Pp. 263.)

THE purpose of this work is to give a critical exposition of the Indian currency and banking system. The time of its appearance may have been determined by the very energetic but ill-considered attack on the Indian monetary administration made last autumn, but the phrasing of some passages rather suggests that they were originally written as a memorandum or report for official use. In any case, the book is clearly the result of prolonged and detailed study by one who has had access to the best sources of information.

Mr. Keynes has undertaken a task of no ordinary difficulty. What he says in speaking of the Indian reserves is applicable to the whole Indian system :-"The outcome partly of historical origins, it has no logical basis, is exceedingly difficult to understand, and has often led in consequence to a good deal of misunderstanding" (p. 172); and again, "the objects to be attained are simple, but the methods of the Government are, largely for historical reasons, exceedingly complicated" (p. 124). It may be said at once that Mr. Keynes has unravelled the complication with perfect mastery; that he has given a thoroughly lucid account of the whole question, or rather series of questions, at issue; and that whether or not his judgments on these questions are accepted, as I think they must be, the book itself is, and is likely long to remain, the standard work on its subject. It is, so far as I know, the first complete account of the Indian banking and currency system which has yet appeared; it contrives, while explaining all the important details of the system, to make its essential factors and principles stand out in clear relief; the baling throughout shows remarkable ability, and the style is beyond praise.

The exposition is so thoroughly logical and consecutive that

the critic cannot do better than follow the author's order in dealing with the various topics treated.

In chapter i. Mr. Keynes gives a very terse sketch of the existing currency position in India, including a useful list of the legislative or administrative Acts, never systematically set forth by authority, on which the system rests. It leaves the present position perfectly clear. But incidentally, in explaining how the present position came about, Mr. Keynes is led to refer to the "broad historical facts." On these he says that he does not intend to spend time; but he has allowed himself to make some very disputable statements. When a book is so thoroughly sound in its main contentions, it may seem ungenerous to take exception to obiter dicta on matters lying outside its selected province; but one or two passages seem to call for remark. Mr. Keynes represents "the silver interests"-by which phrase I suppose he denotes those who favoured the re-monetisation of silver, though it is not usual to speak of their opponents as "the gold interests" -as holding that "a depreciating currency is advantageous to a country's foreign trade." This is hardly the kind of view which à priori one would expect to be held by the many able Governors of the Bank of England who were active leaders in the movement, or by Sir David Barbour, and many others who might be named. It would better represent the misunderstanding of bi-metallist views common on the part of the "sound currency men who opposed them, and whose principles Mr. Keynes elsewhere rates at their proper value. The bi-metallist position can be briefly stated. They conceived the facts to be broadly that since 1873 gold had steadily appreciated, while the Indian currency down to 1888 had fairly maintained its value, slightly depreciating from 1888 to 1893. Their essential principle was that the persistent appreciation of a monetary standard was injurious to the country concerned, and should be checked; everything else logically followed from this, though in point of fact it was the break in Eastern exchange which first arrested the attention of the business world. As far as foreign trade was concerned, their position was that a country whose currency was stable, like India, would have an advantage in dealing with a country like England, whose currency was appreciating. Their arguments always implied that the rupee practically maintained its purchasing power. If the rupee had really been depreciating, the argument would have been deprived of its main premiss. They also held that for choice a depreciating standard is more stimulating to national production than one which appreciates.

But this contention related to the national output, and had no special application to the movement of foreign trade. Now, their cardinal doctrine that a continued fall of prices is a drag on progress may be, and is, disputed. But when, after 1896, the bi-metallist aim was realised in a quite unexpected way, by the nearly fivefold increase in the production of gold, there were few of their opponents who did not welcome the even excessive reaction in the price movement. Post hoc, non propter hoc. But bi-metallists may, at any rate, congratulate themselves that the price-reaction has been accompanied by just the remarkable expansion of trade, and especially of trade with the undeveloped and borrowing countries, which they had expected and predicted in that event.

Chapter ii. deals with the gold exchange standard system. It is one of the ablest chapters in the book, and I shall be surprised if it does not have a marked effect on currency views in this country. Mr. Keynes contrives in twenty-two pages to make a survey of the world's currency systems, showing an intimate knowledge of their really vital or pivotal features; and yet the exposition is perfectly lucid, and the broad results stand out unmistakably. There is no doubt that to the ordinary Englishman, whose ideas on currency matters are not appreciably advanced beyond those of Lord Liverpool, the Indian currency system appears artificial and exceptional. Mr. Keynes easily shows that the English system, or rather the English theory, is the exception; and that the world to-day, England included, is really working more or less on the Indian principle. What is this principle? It is, in Mr. Keynes's words, "the use of a cheap local currency, artificially maintained at par with the international currency or standard of value" (p. 36). As the most usual method of maintaining parity is by selling gold exchange on international banking centres, this system is usually known as the gold exchange standard. Mr. Conant and other writers speak as if this gold exchange system were ideal; and Mr. Keynes, "speaking as a theorist," holds that "it contains one essential element in the ideal system of the future" (ibid.).

But the system is, of course, exposed to two great dangers. If the local currency is too "cheap," it invites illicit issue; and this, if extensive, will destroy the parity. On the other hand, if the local currency is issued with a content-value near to its face. or exchange value, then a slight rise in the value of the metal will leave the seigniorage on the coin negative, and the currency will instantly disappear in the melting pot. This latter difficulty No. 92.-VOL. XXIII. Q Q

But

would, of course, not occur if the local currency were paper. as things are, the Indian Government has found illicit coinage rampant; while in Mexico, the Philippines, and the Straits Settlements, a sudden rise in silver caused the disappearance of whole currencies. It follows that all Governments adopting this system on a silver currency basis must be greatly concerned in steadying the price of silver. Yet, curiously enough, as was pointed out by the American Commission on International Exchange, the Indian Government, by its extremely irregular appearances in the silver market, is the principal cause of the fluctuations in the value of that metal. The system has another serious consequence, predicted by bi-metallists before its introduction into India. It tends to replace silver by gold in the native hoards. Just as a Frenchman buys and sells small parcels of Rentes instead of opening a banking account, so the Indian uses ornaments. When the rupee contained its face value of silver, silver might be used for this purpose. Now that the rupee circulates at an artificially appreciated value, there would be a heavy loss on turning silver ornaments into rupees. He therefore now uses either gold ornaments or sovereigns; and this is the main cause of the increased absorption of gold by India. These are points which Mr. Keynes may have omitted for purposes of compression; but they deserve notice in some future edition.

The interesting sketch of the origin of the exchange system (p. 31) calls for a word. Mr. Keynes finds this origin, so far as practice is concerned, in the method adopted during the second half of the eighteenth century for regulating the exchange between London and Edinburgh. It was also shown, in the celebrated Report of 1804 on Irish Exchange, that the same system was in use in Ireland. But it was, in fact, the general system on which English country banking was carried on in those times. When the country banker discounted bills for his clients, "cash" meant either the banker's own notes or a draft on his London agent; and the draft was preferred in the larger operations, and came to be regarded, like a credit with the Bank to-day, as the highest form of "cash." We might, indeed, go back to the Middle Age, and find in the European national currencies, all silver kept at parity with the gold besants of the Byzantine Empire, an anticipation on a larger scale of the system which appears to many as the latest novelty.

As regards the recent revival of the system, it was undoubtedly the example of Holland, both at home and in Java, which established the practice. (Why, by the way, does Mr.

Keynes describe the Dutch system as "crude " (p. 31)? The holding of foreign bills would seem to be as effective as the keeping of foreign credits, especially as these bills were largely on London.) Among the writers who have contributed to the modern vogue of the system, of whom Col. J. T. Smith was one of the earliest and ablest, Mr. Lindsay deserves the place of honour, and it is satisfactory to find him at last coming to his own in this book. But the series of able papers written by Dr. Van den Berg, some of them for the information of the Indian Government, also deserve to be put on record; and with the later developments of the system, the name of Mr. Conant will always be associated. Mr. Keynes claims for India that it was the first country to adopt the system in its complete form. But this seems to many persons, and especially to foreign critics, exactly whe the Indian Government has not done. Neither the upper nor the lower limits of parity are secured by a definite systematic Act. Fifteen rupees are obtainable for a sovereign in India (and generally in London) only "so long as a Notification of 1893 is not withdrawn" (p. 6). Mr. Keynes himself notes (p. 7) that the Government have given no binding undertaking to sell gold exchange at a fixed price. This is the keystone of the whole system; to leave it as a vague understanding is to invite distrust.

In chapter iii. the Indian paper currency is considered. Here, again, Mr. Keynes goes straight to the root of the matter. The characteristic advantage of paper as contrasted with metallic currency is that under a suitable system of issue the note may be used to give elasticity to the circulation, and thus to prevent stringency due to seasonal and other causes, a pressing need in India. Needless to say, the English note issue is absolutely deprived of this advantage by the Act of 1844, almost as absurd in this respect as the United States reserve law. "What would be thought," says Mr. Keynes, "in France or Germany, or in any other European country, if an expansion of the note issue could not be made against the discount of home bills, but only against a corresponding deposit in cash, cent. per cent.? Yet this is the position in India" (p. 180). And in England, it may be added, on whose unhappy model the Indian system has been planned. When, in 1902, Spain was proposing to introduce the English system of issue, M. Théry well said that but for our use of cheques the system would have been impossible in England, and that it was quite out of the question for any other country. Spain took M. Théry's advice; it is to be hoped that the Indian administration will weigh Mr. Keynes's suggestions. For India