Front Page Titles (by Subject) XV.: A PROPOSED REMEDY FOR THE DEPRECIATION OF THE SILVER COINAGE OF INDIA. - The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver)
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XV.: A PROPOSED REMEDY FOR THE DEPRECIATION OF THE SILVER COINAGE OF INDIA. - 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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A PROPOSED REMEDY FOR THE DEPRECIATION OF THE SILVER COINAGE OF INDIA.
It has been suggested that the coinage of rupees should be suspended in India; that their importation should be prohibited; that gold should be coined for any one who will take it to the mint at a fixed rate (say at 2s. the rupee); that both rupees and gold should be legal tender, which every one must accept, but that for the present, at least, no one should be able to demand gold. And in this way it is hoped that a gold standard would be introduced into India, without the Indian Government having to buy gold to exchange for silver, the cost of which would be more than it could afford.
But when examined, it will be seen that this is a plan not for introducing into India a gold standard, but a double standard of a peculiar sort. Though the coinage of rupees is suspended, they are still to be legal tender, and their value will therefore continually rise; they will be “monopoly coins,” so to speak, circulating at a scarcity value, and they will so circulate concurrently with gold. And this is to be the perpetual currency of India, for the only motive for thinking of it is that silver is already about to fall greatly in value—its very adoption would for a very long time cause such a fall, because it would close the Indian market against silver—and therefore the cost of buying gold to exchange for the rupee currency of India will be, years hence, more insuperable than it is now.
But to this plan there are the gravest objections. First—a currency of “monopoly coins,” circulating much above their cost-value, is sure to cause their forgery. This is as certain as that a high tariff will cause smuggling. If silver should fall enough to make this scheme worth thinking of, the gain by coining rupees in India, or importing them into India, would be very great, and we may depend upon it capital would go into the business. Some of the shrewdest people in the world—the American producers of silver—would have an interest in managing it, and we may be sure they would manage it. The case must not be confounded with that of a “token coinage” of silver such as we have in this country, because our silver coins are only legal tender for small sums, and therefore great masses of them are useless. But in the plan supposed, “monopoly coins,” would be the main currency of India, and any quantity of them could be got rid of. India would seem to have most unusual facilities for the operation, for there are native States embedded in our territory where we hardly know what happens, and there is a rich monetary class of shroffs and bankers who would feel no effectual moral scruple against disposing of illicit rupees. The moral objection to such a currency as one of perpetual use is very great, for it is an incessant temptation to diffused fraud, and this evil would be fastened on India for ever.
Secondly—the confusion in trade it would cause would be extreme. Suppose it were now enacted that no more rupees should be coined, and that gold should be coined at 2s. the rupee, the export trade from India, now stimulated by the low exchange, would be stopped, for the exchange would gradually rise; nor for a time at least would the import trade into India find a corresponding gain, for a great uncertainty would be produced, in which no new business would be created, though old business would be stopped.
Thirdly—this would deprive India of the great advantage she will gain, if the present state of things continue, as the entrepôt through which silver is introduced into the East. This is always the effect of a lowered value of the currency-metals. The first persons who get them from the mines gain much; those who buy them from the mining people gain much too; and so on, till the depreciation is effected. In the case of India, the importation of silver will gradually raise silver prices; this will bring imports into India from other countries where they have not risen. For very many years England has, in this way, derived the greatest advantage from being the first country to which the Australian gold was sent, and from which it was diffused. The Indian Finance Minister is no doubt troubled by the fall of silver, because he has to buy gold in London, but India itself will probably be benefited by it, for it would give her an easy money market and an extending trade for exports and imports, which the suggested scheme would spoil.
Fourthly—the currency so introduced would be a very bad one. There would be one currency fit for foreign payments—the gold—and another not so fit. The “monopoly coins” would be unexportable, and so, when any one wanted to make a foreign payment, he would have to get gold, which, as a rule, would make gold at a premium. The effect would be just like that of a plan, often discussed formerly in England, viz., making the notes issued on securities by the Bank of England (the £15,000,000) inconvertible—the rest remaining convertible. The “monopoly” rupees would be of limited number and artificial value, just like the security, or Government notes, we used to discuss, and their effect would be exactly what Lord Overstone predicted, in 1857, in his evidence on Bank Acts: “Our affairs would then go on very much in the way that a man would walk with one of his legs six inches shorter than the other. One set of notes would circulate at a depreciation compared with the other set of notes; hence great inconvenience and confusion would arise.
“4050. What would be the real effect of it?—The effect would be, that you would have paper money of two different characters in the country, not of equivalent value; not circulating indiscriminately each for all purposes, but some useful for one purpose and some useful for the other, and that there would be intolerable confusion. A man would have Government notes, and he would present them to another man in payment; that man would say, “I do not want Government notes; I want to make a remittance abroad; I cannot get bullion for those Government notes; I will not take them.”
“4051. Are they both to be a legal tender?—They would both be a legal tender as far as the Government is concerned, but the Government note would not be a legal tender between individuals.—Then what is that individual to do?—The other man says to him, “You must go and get me the other notes. Either you or I must pay a premium for them.”
“4052. What would be the harm of that?—The harm would be, enormous injustice and intolerable confusion.”
In the plan now suggested—monopoly coins being compulsory tender—gold not being demandable—it would be settled which party should pay the “premium”. Everybody would be obliged to take the purely domestic medium of exchange, and to buy with it the medium which is also of foreign use. But in other respects the evil would be exactly what Lord Overstone describes. There would be two currencies in the country with different values, and prices in one would, as far as the discrepancy went, be different from those in the other.
For a short time, and during a period of transition, we can quite imagine that this inconvenience might be endured. But the present plan is by its essence a permanent plan—a plan for making a currency for India for all time; and then an inherent effect of great magnitude such as this becomes a most grave objection. As Lord Overstone said of the old plan—“Then, you would have a certain proportion of the monetary system of the country circulating at a discount; I cannot conceive a greater state of monetary disorganisation than that”.
No doubt, it is said, that the Indian Government may “regulate” the currency; that it may withdraw rupees from circulation; that it may add to the gold in circulation, and so equalise the value of rupees and gold. But to succeed in such an attempt, the Indian Government would want to know the amount of currency required for foreign payments, which is that which causes the difference between silver and gold; and this they never could know. And American experience of “gold sales” and greenback withdrawals is a great warning against giving any Government the power of arranging the currency. It is sure to injure the good repute if not the real good faith of the Government (for it necessarily creates pecuniary secrets of great value), and, nevertheless, it is not at all sure to attain its end, and to equalise, as is intended, the two kinds of currency.
For these reasons, we cannot think that the suggested plan for a new Indian currency would be a good one, even if it could be shown that silver was sure to be permanently excessively depreciated. And as the preponderating probability seems at present to be, that it will not be so depreciated, we are still more of opinion that it would be unwise to begin a policy on the face of it, and almost admittedly, so anomalous.