Front Page Titles (by Subject) XIII.: THE EFFECT OF THE COUNCIL BILLS ON THE INDIAN EXCHANGES. - The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver)
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XIII.: THE EFFECT OF THE “COUNCIL BILLS” ON THE INDIAN EXCHANGES. - Walter Bagehot, The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver) 
The Works and Life of Walter Bagehot, ed. Mrs. Russell Barrington. The Works in Nine Volumes. The Life in One Volume. (London: Longmans, Green, and Co., 1915). Vol. 6.
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THE EFFECT OF THE “COUNCIL BILLS” ON THE INDIAN EXCHANGES.
We proved last week that the effect of the augmentation of the political payment from India to England, shown by the recent increase of the bills drawn by the Indian Council upon India, will have no permanent effect whatever on the export of silver to India. The great influence which it has had in that respect will be transitory only. We have now to see whether the equally great effect which that increase has had on the Indian exchange will be equally temporary.
To simplify the subject, which is complex, let us first take the simple case of a dominant and a subject country, which have the same currency, whose trade exports usually balance each other, and neither of which produces the precious metals, or depends on the other for the supply of the precious metals. In this case, there being only one currency in the two countries, the quotations of exchange will be always made in their most intelligible form, that is, by the premium or discount on the bills which each country draws on the other. In this case, bills on the dominant country in the dependent, and bills on the dependent in the dominant, will, as a rule, be equally often at a premium. The trade exports from the ruler to the subject exactly equal those from the subject to the ruler; the bills generated by them will, therefore, be equal, and also the demand for means of remittance. There is no indebtedness between the countries to be settled, and so, on the average, everything will be even between them.
If this state of things is disturbed by the imposition of a tribute, the first effect is that bills in the dependency on its superior rise to a premium; that tribute has to be paid, and these bills are inquired for as the best means of payment. It becomes more difficult (as Indians would say) to “remit home,” because there is more to be remitted, and no increase in the means of remittance. The premium will probably rise above the specie point, and coin or bullion will be temporarily sent to the dominant country in consequence. But it can only be so sent temporarily, for the dependency we are considering does not produce the precious metals. In time, therefore, some other means of payment must be found; the tribute must be paid not in gold or silver, but in other commodities. These commodities will begin to be exported as soon as that export becomes profitable; and that profit will consist of two elements—first, of the difference between the price of the commodities in the dominant country and the price in the dependency; and secondly, of the premium at which the merchant in the dependency can sell his bill. The imposition of the tribute will have caused both elements of profit. By producing an export of specie from the dependency, it will have lowered prices there; and by creating a demand for the means of remittance, it will have raised the price of the bills. There will, so to say, be a bounty on export caused by the state of the exchange, and the export will be made when the price-profit, plus that bounty, are together up to the rate which the capitalist wants. Before that the export will not take place, but after that it immediately will.
And this state of prices and of the exchange will, except other causes interfere with it, tend to be permanent. There is nothing in the relation of the dominant and inferior country to alter either. Till the whole tribute is paid both will, as a rule, continue in this condition, and if the tribute is an annual payment, every year the same causes will be at work, and the same consequences will happen. The profit on the sale of the bill will more or less help the price-profit, and cause the operation to be made earlier than it would if the price-profit only could be obtained.
The effect of this is to enable the dependency to “get off,” so to speak, and pay its tribute with a less alteration in the level of its prices than would otherwise have been necessary. In so far as the payment of the tribute is aided by the state of the exchange, it is in fact aided by a loan. The seller of the bill gains funds from the money market, which return to that market when that bill is paid. As the transaction is a continual one, always being renewed, the final result is that the dependency pays a part of its annual tribute by a chronic floating debt, which the exporters of its commodities borrow, and from which it derives the benefit. And it will make no matter if the exports are shipped not directly to the dominant country, but to some third country, to which the dominant country owes money. In the latter case, the country which receives the exports from the dependency pays for them by a draft on the dominant country, and that draft is taken as a payment of the tribute. The dependency pays the debt of the ruling country, and this is quite as good as the direct export of value to it.
And no part of this will in the least be altered by the fact that the two countries, the dominant and the dependent, use different currencies, if these currencies are both of the same metal, whether gold or silver. The mode of expressing the exchange by the equation between the coins is only a complex way of expressing the premium and the discount on bills at the moment. Two calculations have in such a case necessarily to be made in buying and selling a bill; the currency of one country has to be turned into that of the other, and the premium or discount of the bill to be ascertained. And for convenience’ sake, in the common mode of quoting the exchange, the two computations are put together, and their joint effect told. But there may be a real temporary difference, if the currencies are of different metals. If the metal of the currency in which the relative tribute is fixed falls in value, the tribute is lightened, and if it rises, the tribute is made heavier. And this will affect prices and the exchange, just as an increase or decrease of the tribute in any other way. But the principle of the argument is unaffected.
Nor is that principle really changed if the dependency, like India, receives its supplies of the precious metals, that is, of money, from the dominant country. In that case, before the tribute is enforced, the exports from the dependency to or on account of the dominant country will be greater than its imports from it. Bills in the dependency drawn on the dominant country will be in general at a discount, and those drawn in the dominant country at a premium. There will be a greater facility of remitting money from the inferior to the superior country than, vice versâ, from the superior to the inferior. And therefore, when the tribute is imposed, the new demand for remittance, so created in the inferior country, will have “some lee-way” to make up. Finding bills at a discount, it will have to go on till it makes them at a premium. It will have to stop the flow of specie to the dependency, and if this is not enough to reduce prices, it must go on till it turns the tide the other way, and sends bullion, contrary to its natural course, back from the dependent to the dominant country. But it cannot permanently have this effect because, as we have seen, the supplies of bullion will in the long run be the same after the imposition of the tribute as before it. The exchange will settle down so that the usual amount of bullion will pass. But subject to this, the consequences will be the same as before. Bills in the dependencies will not be so often or so much at a discount as they would otherwise have been, or bills in the dominant country so often or so much at a premium. And the exports from the dependency, which used to be depressed by that discount, will be less depressed, and the exports from the superior country, which used to be encouraged by that premium, will be less encouraged. But the final effect will be the same; the adjustment of prices and the adjustment of the average exchange taken together will be such as to cause the imports from the dependency to the dominant country to exceed, by the extent of the tribute, those from the dominant country to the dependency (specie included). The tribute will be paid in an excess of value consigned from the dependency to or on account of the dominant country above that consigned the contrary way. In so far as that result is attained by a change in the premium on bills, and not by a change of prices, the dependency is enabled, in this case as before, to pay its tribute by an exportation of fewer commodities than it would otherwise have to export. It obtains a loan to that extent from the money market, just in the same way and just with the same effect as before.
The last case we have been considering is that of India exactly, and it therefore appears that though the increase of the “Council bills” will have no permanent effect on the export of silver to the East, yet it will have a considerable effect on the value of the rupee as quoted for exchange, and that it will tend to make remittances from England to India easier, and from India to England less easy, as long as it continues.