indias failed transition to a gold currency in the 1860s

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JANUARY 24, 2015 vol l no 4 EPW Economic & Political Weekly48

Indias Failed Transition to a Gold Currency in the 1860s

Sashi Sivramkrishna

Recent historical research on the emergence of the

classical gold standard tends to omit Indias failed

attempt at moving to a gold currency in the 1860s.

Though this was extensively deliberated upon in

contemporary studies and in the works of the late 19th

and early 20th century economists and historians, it

finds almost no mention in the more recent debate.

Revisiting this episode from history, this paper aims to

draw attention anew to the important role India played

in the evolution of the world monetary system.

The original version of this paper was presented at the Annual Economic History Society Conference held at the University of York in April 2013. I benefi ted greatly from the questions raised there and the discussion that followed. The comments of the EPW referee were also very useful. I am, however, solely responsible for the contents of the paper.

Sashi Sivramkrishna ([email protected]) is with the Narsee Monjee Institute for Management Studies, Bengaluru.

Introduction

Perhaps the most signifi cant event in the monetary history of the 19th century was the decline of bimetallism and the shift of many European countries from a silver or bimetallic standard to a monometallic gold currency. England was the fi rst to adopt the gold standard in 1821, and European changeovers began with Portugal in 1854, followed by a few smaller states in 1867. The move gathered momentum only after 1872. Many recent studies in monetary history have sought to fi nd reasons for the emergence of the classical gold standard (1870-1914). Surveys of the different viewpoints can be found in Meissner (2002) and Redish (2006). A later sur-vey by Morys (2012) aptly points out that recent research has overlooked the distinction between emergence and diffusion theories in understanding this monetary phenomenon. The one commonality, however, among these perspectives is their almost exclusive focus on the adoption of the gold standard in Europe. Japan and the United States (US) do fi gure in the dis-cussion occasionally, their offi cial transition to gold took place only later, 1897 and 1900, respectively. Surprisingly, all the recent studies make no reference to a movement that be-gan in India at about the same time (if not earlier) as Europes shift to gold.

Beginning with a contextualisation of the movement for a gold currency, this paper attempts to fi rst highlight that many of the reasons advanced in recent emergence theories were clearly articulated by Indian lobbyists in the 19th century. The gold lobbyists were even successful in getting the (gold) sovereign and half sovereign accepted at Indian treasuries, but the scheme failed for an obvious but often repeated prac-tice the legal ratio of the sovereign and rupee was not set in accordance with the market price ratio of their bullion con-tent. Why was the government attempt half-hearted in spite of the benefi ts that would accrue to trade and capital fl ows in both Britain and India? While apprehension over India ab-sorbing and hoarding precious metals, including gold, and the adverse impact this would have had on the worlds money markets may be considered the most obvious answer (Ambi-rajan 1984; Bagchi 1997),1 it does not seem adequate when we consider the larger macroeconomic context of the period. In the early 1860s, gold was abundant; its market price relative to silver more often than not remained below the French legal ratio of 15.5:1.

Britains other colonies, including Australia and Canada, had moved to gold while many of the bigger European

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Economic & Political Weekly EPW JANUARY 24, 2015 vol l no 4 49

countries had still not offi cially transited to it. Like Morys (2012), we emphasise the need to differentiate between emer-gence and diffusion theories. The movement that arose in India in the early 1860s was before the gold standard had been adopted in Europe (particularly in Germany and France). It cannot be equated with the debate for a gold currency in India from the late 1870s to the 1890s since Europe had by then offi -cially transited to gold.

A more plausible answer to the question of the 1860s could simply have been Britains ambivalent policy on India rather than a concerted strategy to keep it away from gold, as may have been the case in the 1890s. Some important factors would, however, have shaped its stance on Indias demand for a gold currency. Britains share of trade, in particular imports from its colonies, declined signifi cantly in the 19th century even though the colonies continued to depend on it for their imports and their exports. British and Indian merchants in India obviously saw the benefi ts of a common gold currency, al-though the view in Britain may not have been quite the same. A sudden spike in the fl ow of precious metals in India during the years of the cotton famine caused apprehension over shor-tages of gold in the London money market, reminiscent of gold outfl ows from England during the commercial crisis of 1847-48. These realities, combined with the political uncertainties in India post-mutiny, would have played a role in Britains luke-warm response to the Indian movement. Meanwhile, there were signifi cant changes taking place in Europe with the industrial revolution spreading to other parts of the continent (Ambirajan 1978: 54) and the growing desire in Europe for monetary union based on the ideas of Flix Esquirou de Parieu (Einaudi 2000). The unusual demand for silver in India that arose from cotton shortages gave Europe an opportunity to drain excess silver, thereby allowing gold to smoothly fi ll the void. But this de facto transition to gold in Europe was only a prelude to the offi cial transition that began in the 1870s. In the intermittent period, bimetallism returned to Europe as soon as Indian demand for gold and silver waned with the end of the civil war in the US.

Indian Currency System, 1835-53

By Act XVII of 1835 of the imperial government, a common cur-rency was introduced for the whole of British India a silver rupee weighing 180 grains troy and containing 165 grains fi ne was the sole legal tender. Copper coins were accepted as legal tender, but only for fractions of a rupee. The year marked the culmination of a long and arduous process of monetary reform that had begun soon after the rise of the East India Company as a merchant-ruler, placing India on a silver monometallic basis with the rupee as legal tender and standard coin. Some commentators like Naoroji (1870: 16) argued that an artifi cial increased demand was created for silver by the Act of the Indian government which prohibited gold as legal tender, and by the demand for China. Silver worth some 75 million had been exported between 1847 and 1867 by Britain to India and an additional 41 million had gone to China. India, Naoroji claimed, had purposefully been put on a silver currency so that its buoyant demand for silver prevented silver prices

from falling and causing possible instability in international gold-silver parity.

The view that the 1835 proclamation for a monometallic sil-ver currency was to keep India away from gold and at the same time sustain the price of silver was, however, not endorsed by others such as B R Ambedkar (1947: 24-26), who pointed out that the gold standard, at that time, had not found universal acceptance even in England. After the commercial crisis of 1825, questions were raised on whether the gold standard was too narrow a basis for a currency system. Again in 1844 Robert Peel even contemplated the possibility of abandoning gold and moving to silver or a bimetallic standard. In the light of these arguments, it is inappropriate to see the adoption of a monometallic silver standard in 1835 as a step that had the ulterior motive of keeping India away from gold.

Ambedkars line of argument was supported by the procla-mation of 13 January 1841 whereby Indian treasuries were instructed to also accept gold coins in settlement of dues. The reason for this policy was not surprising the market gold- silver ratio remained above the legal ratio of 1:15 between 1840 and 1850.2 Gold had even appreciated a few basis points from 1:15.62 in 1840 to 1:15.70 in 1850 (Statistical Abstract 1955: 432). In spite of this legal undervaluation of gold, which should have been a disincentive to make payments in gold, there were instances when treasuries received locally available (gold) currency. This was primarily because silver coins were some-times in short supply, and the rates charged by local money-changers for converting gold to silver were exorbitant.

Tremors that shook confi dence in the stability of the par rate between gold and silver began with the gold discoveries in California in the late 1840s. However, the full effect of these disturbances in the market for precious metals reached India only with news of gold discoveries in New South Wales, Australia. Such a supply shock was expected to be followed by a fall in the silver price of gold and consequently golds over-valuation as coin at the statutory rate of 1:15. Under the procla-mation of 1841, a fl ood of overvalued gold coins could have fl owed into the treasury, a fearsome situation for the govern-ment. On 1 January 1853, Lord Dalhousie, Governor General of India, withdrew and cancelled the amendment made in the proclamation of 1841. The Act of 1835 was reinstituted. Although gold would continue to be minted by the government, the gold mohur was demonetised and no longer accepted in discharge of the publics liabilities in the Indian territories of the East India Company. India transited from silver to a bimetallic and back to a monometallic silver standard at the beginning of the second half of the 19th century.3 Holland had preceded India by suspending the circulation of gold Guillaumes in 1850 out of the same fear that a fall in the silver price of gold would lead to an overvaluation of gold coin and settlement of government dues in this lower valued coin. By the end of the fi rst half of 1851, some 5 million equivalent of gold coins had fl owed into the bullion markets of France, Germany, and Britain from Holland (Faucher 1853: 37). Holland was soon followed by Belgium. What is critical to note here is that the demonetisation of gold by Dalhousie was not because of shortages in gold

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supplies, but due to fear of a possible glut of gold in the market and a fall in the silver price of gold.

Indias Increased Currency Needs in the 1860s

The movement for a gold currency in India originated from the coincidence of two important events. First, the gold supply shocks triggered by gold discoveries in California and New South Wales in the mid-1800s, and second, the growth in Indias internal and external commerce because of cotton trade between the late 1850sand early 1860s. Let us begin with the latter. As can be seen in Figure 1, there was a steep increase in Indian imports of cloth from the Lancashire cotton mills in 1857-58. A few years later, there was a massive surge in export of raw cotton from India because of the Cotton Famine that followed the outbreak of the US civil war, which cut off Lancashires main source of raw material. These events led to enormous growth in the overall trade and commerce of India, both exter-nal and domestic. A greater quantum of currency was therefore required to support circu-lation of a larger volume of goods and services. As evident from Table 1 and Figure 2, the import of bullion along with coinage of silver rupees at the mints of the presidencies indicate the growing currency needs of the Indian economy at that time.

The demonetisation of gold in 1853 had, however, rendered silver the only metal available for coinage. The silver infl ow in itself was inadequate for meeting the growing require-ments of trade, which led to an acute scarcity of coins in circulation. Dickens (1864: 174) eloquently captured the situa-tion in India at that time with his remark, People are making more money than there is money to make. Meanwhile, gold infl ows had increased substantially and gold was abundantly available in India. Ad hoc arrangements were

soon adopted to put this gold into circulation. The Bombay Chamber of Commerce (1864: 5) reported gold bars stamped by Bombay banks circulating in the market. In another instance, Cassels (1864: 15) reported that in north-west India

people exchanged mysteriously sealed bags, each sup-posedly containing Rs 1,000, entirely on faith in the mer-chants. In Ambala, the government found counterfeit gold coins circulating extensively and the more trusted Jaipur gold mohurs were acknowledged to have widespread acceptance in many parts of the country (Trevelyan 1864: 77). In south India, silver became so scarce in 1858 that the government was compelled to once again accept gold sovereigns coming from Ceylon and Australia in settlement of taxes. The simul-taneous increase in currency needs and the inability to utilise the abundant metal for coinage set off a movement in India for a gold currency and a subsequent transition to a gold standard.

Reasons Cited for a Gold Currency in India

One of the earliest among the recent studies on the origins of the gold standard was by Bordo and Rockoff (1996: 389) in which they argue that it was the possibility of accessing capital on better terms by having a good housekeeping seal of approval that motivated countries in the periphery (net capi-tal importers) to change to gold. Convertibility of the currency into a fi xed amount of gold signalled to the world that prudent fi scal and monetary policies would henceforth be pursued, thereby minimising currency risks that could emanate from infl ation. This explanation is supported by Sussman and Yafeh (2000: 465) in their study of Japan where the gold standard acted as a symbol of sound economic policy and creditworthi-ness, lowering Japanese borrowing costs in London. They argue that in spite of Japans increasing debt, adoption of the gold standard served to keep yields on government bonds low.

India, as a colony of Britain, may not have needed such a seal of approval. Nonetheless, the adoption of gold was consi-dered favourable to enhancing capital fl ows. With political rule passing from the East India Company to the Crown in 1858 after the sepoy mutiny, India attracted a massive amount of British capital to fund the building of the railways, irrigation works, and the telegraph. Figure 3 (p 51) shows Indias growing debt in England. Between 1856 and 1862, the railways alone absorbed British capital of some 50 million (Lees 1864: 49). With silver production slowing down at that time, along with a relative abundance of gold, expectations were that the gold price of silver would increase. Given its relative scarcity then, silver would have been an inconvenient currency (Naoroji 1870: 13). More importantly, an appreciation of silver, and

Table 1: Indias Gold and Silver Imports (1850-65, )Year Gold Imports Silver Imports

1850 1,159,548 2,235,792

1851 1,205,310 2,656,548

1852 1,338,778 3,713,280

1853 1,332,106 4,490,227

1854 1,078,708 3,770,643

1855 882,721 1,145,137

1856 2,508,353 8,792,793

1857 2,176,002 12,237,695

1858 2,823,484 12,985,332

1859 4,437,339 8,379,692

1860 4,378,037 12,068,926

1861 4,242,441 6,434,636

1862 5,190,432 9,761,545

1863 6,881,569 13,627,400

1864 8,920,440 13,974,400

1865 9,875,032 11,488,320

Source: Ambedkar (1947: 31, 40).

Figure 1: India's Growing Cotton Trade (1849-64, )4,00,00,000

3,50,00,000

3,00,00,000

2,50,00,000

2,00,00,000

1,50,00,000

1,00,00,000

50,00,000

0 1849 1851 1853 1855 1856 1858 1860 1862 1864Source: DSAL.

Raw cotton exports

Cotton good imports

Figure 2: Coinage of Silver (1841-65, )

1,40,00,000

1,20,00,000

1,00,00,000

80,00,000

60,00,000

40,00,000

20,00,000

0 1841 1843 1845 1847 1849 1851 1853 1855 1857 1859 1861 1863 1865

Source: DSAL.

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consequently of the rupee, could dampen capital infl ows to India. At the same time, moving to gold would bring down the costs of raising loans for India, enabling it to raise a greater amount of capital for its development needs. The process has been succinctly described by Hendriks,

The result would be an increased holding of Indian registered debt in London, and the loss arising from the fl uctuating, and, on the average, losing price of the interest bills, and from the liability to have the capi-tal of the loan repaid in silver rupees, which, to the holder here (Eng-land), are bullion only, and not money, would be avoided (1870: 18).

In quite the same vein as capital fl ows, common gold standard-based currencies were also expected to bring down the tran-saction costs of trade, particularly hedging costs. Whether this was a reason for switching to gold in the 1870s has been exa-mined in a cross-country study by Meissner (2002: 33), which fi nds that countries converted to gold when trade with other gold standard countries made up a large proportion of na-tional income and when they traded relatively little with countries on other commodity stan-dards. This logic applied unequivocally to India and Britain. As evident in Table 2, which shows tonnage-wise shares of Indias import sources and export destinations, Britain was by far its chief trading partner and a common currency like the sovereign would eliminate uncertainties in fl uctuations of gold-silver parity.

There was another advantage that supporters of a gold cur-rency drew attention to, the convenient and cheaper access to gold from Australia. The adoption of a uniform currency in India and Australia would induce an opening up of trade between the countries, which until then had been negligible. Cotton cloth for Australia from England could be manufactured in India and shipped there at a much lower cost, apart from signifi cant savings on transport. These network externalities (Flandreau 2004) of larger capital and trade fl ows emanating from a common currency, which were then cited by Indian gold lobbyists are now considered an important reason for Europe adopting the gold standard.

One of the principal advantages of gold was its higher density compared to silver, which meant it had more value for a given weight. Rupees worth 1,00,000 weighed about 11 tonnes at that time, but in gold it was just about 700 kilograms. The cost of transporting silver was high and it also meant a great amount of time expended in counting, weighing, and examining a large number of coins. This was akin to doing large business transactions with small change. The protection of government silver during transport required employing 30,000 troops (Cassels 1869: 102). The inconvenience and costs incurred in transport of silver made the government retain large and unprofi table balances in its various treasuries, resulting in a loss of interest and restricting business operations. In Europe, as we will see later, it was increasing volumes of trade and a simultaneous increase in the value of transactions that lent support to calls for gold as a more appropriate currency. Although the average value of transactions in India may have been much lower than in Europe, the commercial centres of Bombay, Madras, and Calcutta witnessed rapid growth in the latter half of the 19th century. This obviously would have made them eager to replace silver with gold.

The gold lobby also believed that the adoption of a gold currency would dissuade people from hoarding precious metals; a habit which Indians were customarily infamous for. Gold could be obtained at a much lower cost directly from Australia rather than being shipped half way across the world to England where it had then to be converted into silver before being shipped back to India in settlement of claims. This made the silver received in India so expensive that it was unable to fi nd a market elsewhere when it was re-exported. Indians were in a sense forced to hoard silver. Transiting to gold would mean a signifi cant saving in transport costs, and also funda-mentally change Indias position as a recipient of precious metals. The Bombay Chamber of Commerce (1864: 8) in a memorandum to the Viceroy and Governor General of India claimed, Instead of being the last recipients and absorbers of silver, we (India) might become the fi rst importers and the distributors of gold.

As fi rst importers of gold from Australia and given the pos-sible gains from its export there would have been little incen-tive in hoarding it. India would be placed on the highway by which gold would travel to Europe (Cassels 1864: 18) giving it the opportunity to become the largest distributor of gold, which at the same time would release vast amounts of its hoar-dings for productive use.

Arguments against a Gold Currency in India

Perhaps the most important anti-gold (or pro-silver) voices were of British government employees in India who received their salaries in silver.4 Appreciating silver meant that each rupee would fetch them a greater number of sovereigns back home. However, the arguments raised against gold went beyond this purely selfi sh motive, and were sound and logical in their own right. Giving them due consideration provides a more complete understanding of the transition to a gold standard, in parti-cular, the arguments that had to be addressed in the process.

Table 2: Countrywise Tonnage Shares of Indias Imports and Exports (in %)Country Share of Share of Imports Exports

United Kingdom 36 43

Ceylon 15 16

China 7 11

Straits settlements 11 8

Mauritius and Bourbon 5 6

Arabian and Persian Gulfs 5 5

France 2 3

Suez 3 3

Others 11 6

Total tonnage 21,17,371 21,51,295

Source: DSAL.

Figure 3: Indias Debt in England (1840-64, )4,00,00,000

3,50,00,000

3,00,00,000

2,50,00,000

2,00,00,000

1,50,00,000

1,00,00,000

50,00,000

0

Debt in England

1842 1842 1844 1846 1848 1850 1852 1854 1856 1858 1860 1862 1864

Source: DSAL.

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Anti-gold commentators strongly contended that the masses in India did not favour gold and that its high value would not be suitable for the needs of a poor country. In a place where cowrie shells still circulated as currency at the rate of approxi-mately 6,000 per rupee, it was argued that silver was more commensurate with the prevalent wage levels, prices of goods, and general standard of living. The currency shortage in the 1860s was mainly because of the mint (Boycott 1870: 212), not because of the non-availability of silver. Concerns were there-fore raised whether this was adequate reason for a change in the currency standard itself.

Another argument against a change, which attracted intense debate, was the breach of faith it would be to public creditors. The monetisation of gold (and the fall in demand for silver as currency) would have raised the silver price of gold (or reduced the gold price of silver). The British government had accumulated a large amount of debt, and repaying its creditors with depreciated silver (for debt contracted in silver) would mean using a relatively cheaper metal. However, the pro-gold lobby argued that if public creditors were to be protected from repayment of debt in a cheaper currency, the government and the public at large would have to be protected from the repay-ment of debt in a currency of greatly appreciated value (that is, repayment in silver that had appreciated relative to gold) because of adhering to a monometallic silver standard.

Apart from these arguments, several other criticisms against a change in the monetary standard can be found in contempo-rary discussions of that period. More than currency shortage, some commentators believe that there may well have been a glut of currency in India. A true indicator of this was the price level. The silver price of gold was increasing and even the gen-eral silver price of all other commodities showed an upward trend, which clearly indicates that precious metals were abun-dant and cheap in India (Trevelyan 1864: 73-74). It was also argued that Indias imports of silver (and gold) were not indic-ative of a dearth of currency, but of the peoples preference for these metals and low demand for other goods manufactured in the west. As far as stability in the exchange rate between India and Britain under a gold standard was concerned, this was considered to be inadequate. Trade with other countries did matter. China, which was on a silver standard, accounted for about 10% of Indias foreign trade in tonnage terms (Table 1). Objections against the costs of exchange fl uctuations were also dismissed. This, it was argued, not only generated activity and intelligence, but also gave jobs to many people. This point may have actually been one of the key factors for the banking sector in Europe resisting the transition to a gold standard (Russell 1898: 43; Einaudi 2000: 294). The more mundane contentions against silver such as the cost of escorting it dur-ing transport were also considered fl awed If the mass in one case had been lighter to carry, it would also have been lighter for robbers to carry off (Campbell 1870: 12).

Finally, many contemporary authorities felt that a change of this kind could prove disruptive, especially if silver was driven out of circulation too abruptly. The poor whose savings were predominantly held in silver would face an erosion of their

capital on account of a fall in its price. There was also a fear that a change in the currency standard would disrupt established commercial norms the reputation of the tola weight must not be done away with, if we wish to keep up our reputation as honest traders (Boycott 1870: 212). The British Indian govern-ment was struggling for political legitimacy post-mutiny and was concerned that a breakdown in the monetary system of the country could have dangerous political implications. On the other hand, silver was available in abundance and people were used to it. Paper was also beginning to gain acceptance in India, although slowly. In all, the benefi ts of a gold currency did not unequivocally outweigh the potential costs of a transition.

Proposed Strategy for Introduction of a Gold Currency

In spite of opposition by the anti-gold lobby, by 1864, the argu-ments put forth for a gold currency in India were overwhelm-ing not just among urban Anglo-Indians, but among people from every part of India (Ballard 1868: 3). The only question that remained to be resolved was when and how. Even the pro-gold lobby was against any attempt to impose a sudden change in the currency of India. If gold were made legal tender and silver demonetised, the shortage of gold coins would drive up its price with a severe defl ationary effect on the economy. Given this possibility, it was felt that the transition to gold could only be made after a period of a parallel standard with gold and silver as legal tender, their exchange rate varying with the market rate. But a parallel standard even with silver as the unit of account would have meant utter confusion with a fl uctuating gold-silver ratio. Nascent expansion in Indias trade and commerce would have been disrupted. This was unacceptable and the only viable option was a transitory phase of bimetallism.

The critical issue that had to be settled under a bimetallic currency standard was the legal ratio between gold (sovereign) and silver (rupee). A scheme proposed by Charles Trevelyan (Finance Member) in 1864 was accepted by the Secretary of State for India in which gold would not be made legal tender but accepted at the treasuries of the British Indian government. This was a return to the situation before Dalhousies directive in 1853. But Trevelyan overestimated the peoples willingness to switch to gold. He fi xed the legal ratio of the sovereign at Rs 10 when it could not be brought to Bombay from Australia for less than Rs 10, 2 annas, and 9 paise. Why did he think that a legally undervalued gold coin would come into circulation? Based on the experience of the Indian gov-ernment between 1841 and 1853, Trevelyan felt a discount on sovereigns would be acceptable to people transacting large sums of money (given the inconvenience of silver) and also assumed that Australia would reduce export duties to meet the Indian demand. The action should have lowered the market price of gold in India, bringing it closer to the legal ratio. Neither of it happened. Almost no payments were made in gold, only silver fl owed into the treasury. The small amount of gold that accumulated in the governments treasury was used as a reserve against the issue of notes or sent to England. Very little, if at all, came into circulation in India. Without

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possessing adequate reserves to push gold into circulation, the government should have overvalued gold legally. In 1866, the government, on the recommendation of Lt General Mansfi eld, altered the rate from Rs 10 to Rs 10 and 4 annas. But by then the market rate for gold was Rs 10 and 7 annas. Once again, the same question can be asked: why did the government not take decisive steps to bridge the difference between the legal and market rates? Mansfi eld had observed the rate for gold had been falling steadily from Rs 10 and 12 annas to Rs 10 and 7 annas. He simply assumed that it would fall further and touch the proposed legal rate of Rs 10 and 4 annas. Once again, that did not happen. The fear of overvaluing gold and driving out silver made Mansfi eld conservative in fi xing the legal rate. Unfortunately, the market rate never reached the legal rate and gold never entered circulation. Meanwhile, the demand for money in India slowly abated with the end of the US civil war and a decline in cotton exports.

Contemporary commentators saw the persistent legal undervaluation of gold as a refl ection of the governments indifference and disinterest in India successfully transiting to a gold currency.

Notwithstanding the unanimous decisions of the repeated commis-sions of inquiry in India, in favour of the speediest practicable intro-duction of a gold currency [referring to the reports of 1864, 1866 and 1869] the questions has, more or less persistently, been put upon the shelf. It has, apparently, been placed aside for the advent of some more auspicious occasion, as was formerly the case with the well- conceived intentions in favour of a gold currency...No more seems likely to come of it than reference to the secretary of State for India in Council, who, in turn, may probably relegate it again to India, and thus the matter may, for an indefi nite term, be handed backwards and forwards, until the pressure of circumstances brings itself to bear upon it in England as well as in India. The proportion of 15 to 1 which that government has used in its calcu-lation is unreal, imaginary, and infected with error at the outset in-stead of having been 15 to 1, it may be clearly shown to have been, and still to be, in the practical working, 15.15306 silver to 1 gold (emphasis added, Hendriks 1869: 103-05).

But why would Britain be against what seemed a mutually benefi cial proposal, logically articulated, and reasoned out on the basis of expected changes by the Indian pro-gold lobby? We make some propositions to answer this question.

Britains Concern Over Indias Absorption of Precious Metals

In the 1860s, Britains concern would have been the quantum and rate at which India was absorbing precious metals. Figure 4 illustrates the narrowing gap between world output and Indias growing imports of silver and gold. More interestingly, Figure 5 shows gold output was inadequate (in spite of in-creased production) if India were to (hypothetically speaking) fully substitute silver with gold.

It was not merely the Indian import of precious metals that was the issue. The problem was that once imported, gold and silver were hardly exported or put into circulation. In India, they were literally consumed (Faucher 1853: 99). In a world that was experiencing rapid economic growth, there was obvi-ously the danger of an inadequate supply of coin dampening

the trend. A well-cited work by Lees (1864: 12) stoked this fear while the accumulated hoarding of precious metals was esti-mated at a whopping 300 to 400 million, India, given the rate at which it was growing since the early 1860s, required another 400 to 500 million to meet its currency needs.5 It is not surprising that India moving to a gold currency would have had a major impact in the money markets of Europe, if a large quantity of gold were suddenly required to carry out such a change (Wood 1864: 4). Britain, being on a gold stand-ard, would have been most concerned by this.

The gold remains in the Bank of England until the Indian demand sets in, and then it is suddenly withdrawn to sweep the Continent of silver for transmission to India. In order to protect themselves, the Banks of England and France raise their rates of discount, and by their so doing, and by the violent oscillations on the foreign exchanges, every description of business is deranged (Trevelyan 1864: 74).

Although concerns may have existed over Indias absorp-tion of precious metals, there is little evidence of a scarcity of gold in international markets. As can be seen from Figure 6 (p 54), almost all through the period 1853-66, the silver price of gold remai ned below the legal ratio of 15.5:1. The major nations of Europe had still not taken defi nitive steps towards a gold standard.

Given depressed gold prices internationally, Indian gold lobbyists argued that Indias demand for gold was a positive development and opportune (Ambirajan 1984: 89-90) as it would steady its falling price.

If annual production of gold were now, as it was a short time ago, only about fi ve millions, the adoption of a gold standard and currency for India might have been unwise and objectionable, but now that the

Source: DSAL and Ambedkar (1947: 31, 40).

Figure 4: World Output and Indian Imports of Gold and Silver (1850-65, )4,00,00,000

3,50,00,000

3,00,00,000

2,50,00,000

2,00,00,000

1,50,00,000

1,00,00,000

50,00,000

0 1849 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865

Gold imports Silver imports

Gold output

Silver output

Figure 5: World Output of Gold and Indian Imports of Gold and Silver (1850-64, )4,00,00,000

3,50,00,000

3,00,00,000

2,50,00,000

2,00,00,000

1,50,00,000

1,00,00,000

50,00,000

0

1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864

Gold output

Total imports (gold + silver)

Source: Constructed from Table 4.

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production has been so largely and suddenly increased, and is still increasing, the introduction of a gold standard could not be but advan-tageous, steadying the price of gold on the one hand, and of silver on the other (Cassels 1864: 17).

As we have seen, the British Indian government did not dismiss these claims outright and even went ahead with allowing gold coins to be accepted at its treasuries. However, its lackadaisical efforts in fi xing the bimetallic ratio in accord-ance with the market rate did not allow a successful transi-tion to gold.

Europes Changeover to Gold Gathers Momentum

While Britain remained nonchalant to Indias currency needs, a new chapter was unfolding in Europe the preference of gold over silver for currency. In France, from the beginning of the second half of the 19th century, the increase in supply of gold caused the silver price of gold to fall below the legal ratio of 15.5:1. As predicted by Greshams Law, with gold (silver) overvalued (undervalued) legally, silver francs began to disappear from circulation. They were replaced by silver coins with a lower fi neness from Italy and Switzerland. To prevent a race to the bottom (as silver remained undervalued as coin), the Latin Monetary Union (LMU) was conceived.6

Addressing the problem with its silver coinage was only one part of the LMU agenda its members, including France, were already strategising their transition to a monometallic gold standard.

As a matter of fact, France did not defend the principle of the double standard at all on this occasion it was premature in Napoleons programme. He preferred to let matters wait till he had assembled all the nations in a monetary conference, and then, in the face of a probable demand for the gold standard, seem to yield the double standard in consideration of the adoption of the French coinage as a basis for monetary unity. One prerequisite of success in negotia-tions is to have something to yield ...The French delegates were at heart partisans of the gold standard. Parieu was one of the strongest gold monometallists that France ever had, and, as has been said, was the diplomatic manager of Napoleons programme7

(Russell 1898: 30).

In 1866, the LMU came into effect as silver outfl ows from Europe to the East reached their peak. In 1867, although the demand for Indian exports abated and with it outfl ows of silver,

representatives from Europe and the US over-whelmingly voted in favour of moving towards gold monometallism at the International Mone-tary Conference held in Paris. The west had overtly planted the seeds of a gold standard. This was possible only because Europe (France, in particular) had by then drained its excess silver off to India, replacing it with gold from the US. In other words, Indias absorption of silver was a necessary condition for Frances and the USs de facto tran sition to gold.

Although the Western states often pursued confl icting monetary strategies and were plagued by divisions, there was a discernible economic and political crystallisation taking place in Europe.

The French proposal that all civilised nations should adopt a common coinage cannot be dismissed as merely a form of political expansion-ism, even if it was partly that. The initiative was also the result of purely economic factors, linked to free trade and to the embryonic development of European federalist ideas (emphasis added; Einaudi 2000: 285).

Gold was the metal chosen for a common coinage on the basis of several economic reasons its effi ciency in higher value transactions; its abundant availability that could meet the demands of growing economies; the modernisation of European industry; growing volumes of internal trade; and the success of Britain. There was an ideological and political angle too. As can be noted in Einaudis remark, gold was considered the currency of superior or civilised nations. These civilised nations were not restricted to Europe. They included the US, South America, and even perhaps Australia and Canada (the latter does not fi nd explicit mention). The lines of demarcation for monetary standards were not drawn in just economic terms. The International Monetary Conference of 1867 contains several pointers that gold should be the monetary standard of the West, and its rich, civilised, Christian nations, while silver belonged to the East and its poor, barbaric, pagan world.8 An extract from a letter by Samuel Ruggles, Vice-President of the US Commission at the Universal Exposition at Paris, written in July 1867, exemplifi es this.

Wisely limited by its own organic law to one common coinage between the two great oceans, the world needs only the assent of our own continental republic to give to the gold dollar and its multiples a free, unchallenged circulation, meeting no money changer or other impediment through the whole breadth of Christendom. The US may alone complete the golden chain binding in one common monetary civilisation the outspread lands and waters of America and Europe, stretching from the Golden Gate of the Pacifi c over the auriferous Oberlands of the wide interior, and across Christian Europe to the western bounds of the Ottoman Empire. To widen and extend still further this majestic belt, to embrace in the same great measure of civilisation the residue of Europe with the wide extent of Asiatic Russia has been among the leading aims of the international monetary conference.Speaking the languages of Spain and Portugal, these Latin races of the two Americas approach, to say the least, in general culture and

Source: J L Laughlin (1897): History of Bimetallism in the United States, 4th ed, New York, p 294.

Figure 6: Gold-Silver Ratio (1851-67)15.8

15.6

15.4

15.2

15

15.5:1

1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867

G/S ratio

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intelligence, the Teutonic and Slavonic races represented in the Conference above all let us never forget that the two Americas are Christian members of the great family of nations, and that unifi cation of money may be close akin to other and higher objects of Christian concord (Index 1868: 17, 89, 94).

One would not expect the description of Asia as pagan in monetary discourse, but it was used purposefully although rather irrelevantly to emphasise the regions unfamiliarity with monetary systems.

It appears that, in ignorance of the actual relative values of the two metals in our Atlantic world (of 15 or 16 to 1) these pagan Asiatics had fi xed the ratio at only 4 to 1 the partial correction of the mistake by 1860 shows an advance of intelligence in this distant region, in-spiring the hope that, in due time, at least a portion of eastern Asia may be brought within a world-embracing and world-protecting belt of monetary unifi cation (Index 1868: 87-88).

The East was then clearly demarcated as the other, dis-tinct from the civilised Christian west. The following extract describes the deliberateness in the choice of monetary stand-ards across nations.

The world is divided in its monetary relation into two considerable and very distinct groups: on the one side the western states, where gold tends more and more to prevail; on the other, the countries of the extreme east, where silver continues to predominate (Index 1868: 40).

Keeping the East and India in particular away from gold also served another important purpose ensuring that it remained on silver.

Drain of Silver to India and Emergence of the Gold Standard in Europe

To Morys (2012: 7) the movement for a gold standard in Europe began for rather straightforward, almost trivial, rea-sons. First, its density, whereby gold allowed to encapsulate more value in the same volume than silver, and second, the increased infl ow of gold into Europe after the Californian and Australian discoveries, along with the outfl ow of silver on an unprecedented scale. While the abundance of gold was one of the factors that infl uenced Europes preference for this metal as coin, the acute scarcity of silver also played a part in moving to gold.

In our view, everything started with the gold supply shock of the 1850s: The immense gold fi ndings in California (1848) and Australia (1851) brought, for the fi rst time ever, gold to Europe in amounts large enough to actually contemplate the transition to gold for a large number of countries. European silver holdings, by contrast, had been dwindling rapidly since the early 1850s as a result of species re-compo-sition in the bimetallic countries. Both factors combined gave rise to a discussion of the monetary standard, with gold, silver and bimetallism as options. The 1860s monetary debates, we argue, were not about fol-lowing the English example or not. Instead, they were all about adap-tive strategies: How to choose the best monetary standard given that Europe had recently experienced gold infl ows (and silver outfl ows) on an unprecedented scale? (Morys 2012: 3).

But where was Frances (and Europes) silver going for spe-cies recomposition to happen if Europes silver standard coun-tries were not absorbing the excess supply?9 India; the answer though commonly known has not been explicitly highlighted

in recent research as having been a fundamental and neces-sary condition for the emergence of a pan-European move-ment in favour of gold monometallism (Morys 2012: 2). It was the massive drain of their silver reserves to India that had allowed the US and France to move to a de facto gold standard by 1864. Contemporary literature saw this interlinkage be-tween India and Europe in the transition to a gold standard as a matter of fact.

In the last nine years [prior to 1864] the silver imported into India alone, after deducting re-exports, has amounted to 89,638,792, or within half a million of the entire estimated production of the whole world for the same period. There were two great reserves of silver, the currencies of the United States and France. Both these reserves have been exhausted. The US has been avowedly placed on upon the basis of a gold standard with a subsidiary silver token currency. In France, al-though the law remains unchanged, gold has been coined in vast quantities, and the only silver coins remaining in circulation are those which by wear and tear have become depreciated (Levi 1864: 403).

Between 1856 and 1862, India consumed 15% more than the world production of silver. As seen in Figure 4, this incre-ased to almost 50% more than the world production by 1863. The global demand-supply gap was even greater; with total demand approximately three times the supply (annual net pro-duction). India was therefore draining Europe of its excess silver by sustaining its demand and keeping the market price of silver above the French legal ratio of 15.5:1.10 All this hap-pened because of the failed transition to gold in India in 1864.

In the 1860s, it may not have been Indias absorption of gold that was the primary cause of concern the massive infl ow of silver was causing its own share of problems. A severe dearth of small token silver coins developed across Europe. Britain too came under threat. Even small monometallic silver stand-ard countries such as Holland, which had chosen to abandon gold in 1850, faced adverse consequences on their coinage from the spurt in Indian demand for silver. At a more basic level, Indias demand for silver arose from the phenomenal increase in its cotton trade with Britain. If trade with India were to continue at the same rate, and with it the absorption of silver, then there was only one option remaining a dire one.

That India annually imports and absorbs more silver than the whole world annually produces, and that this excessive drain must inevitably lead to serious embarrassment both to India and the rest of the world that the continued drain of silver for India must derange, if not eventually destroy, the silver currency of all other nations (Bombay Chamber of Commerce 1864: 5, 7).

Cassels, in 1869, elaborated on the danger that silver ab-sorption by India had posed to Europe in the past (early 1860s) and the possibility this may repeat itself at any time.

At the present moment [in 1869], the state of trade is not such as to cause large quantities of silver to be forwarded to India. But what has been may again be. We have seen the bullion market of England thrown into a state of feverish excitement and the silver coinage of France swept away, by a demand for the east. Is it impossible, or even improbable that India should again, and at no distant date attract enormous quantities of silver to her shores to the great disturbance of the money markets of Europe? The failure, or even the partial failure, of one years crop of cotton in America would, in all likelihood, bring such an event to pass (p 102).

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A gold currency for India in the early 1860s would have prevented this crisis, stabilising the gold-silver parity by increasing the demand for gold and dampening that of silver. But the world was not listening.

Economics of Parallel Standard, Bimetallism, and International Bimetallism

For the silver of France and Europe to have drained out, gold had to be continuously overvalued as coin, that is, the legal ratio of 15.5S = 1G had to be greater than the market ratio of (say) 15.3S = 1G. This could happen only if the demand for sil-ver increased signifi cantly and its price stayed above the legal ratio (1/15.3 > 1/15.5). The Indian demand for silver did this job effi ciently for the West in the 1860s.

Had the Indian government not adopted the course of making silver the only legal tender in 1835, the currency would have very probably by this time settled itself, or been in the course of settling itself to gold, just as it did in England, France, and America. In these countries the demand of silver for India and China accelerated the process. When double currency prevails, the debtors and creditors discount its effect by taking it into consideration. The real effect of the double currency is that the dearer metal soon goes off to other countries where there may be greater demand for it, as silver left France and the United States because a demand arose for it in India (Naoroji 1870: 16).

If India had not absorbed the excess silver, legally overval-ued silver would have once again come back into circulation in Europe.11

And it did. In 1858-59, there was a sudden spike in the gold-silver ratio from 15.30 to 15.51 (Figure 6 and Table 1). This co-incided with the increase in Indias gold imports in that year by some 2 million and a simultaneous decline in silver imports by more than 8 million. In 1860-61, we once again observe a spurt in gold prices, and there is a correlation with a sharp decline in Indias silver imports. In 1864, as India opened its doors to a gold currency, albeit cautiously and in a rather ad hoc manner, the trend in the falling silver price of gold broke and instead the price of silver began to fall. It so happened that the [Latin] union was formed at the very beginning of silvers great decline, the initial cause of which must be laid at the doors of British India, which, late in 1864, took a step towards the gold basis (Russell 1898: 33). From 1867, the price of silver began to show signs of falling steadily. Why did this happen when production of silver had not increased? The answer lies in Indias absorption of silver, which declined dramatically from 1866 onwards because of the slowdown in cotton exports and capital infl ows. And when silver outfl ows to India further slowed down, the minting of silver coins began returning to their old levels in France almost immediately.

While France minted only about 40,000 fi ve-franc silver pieces in 1866, it minted 10 million in 1867, and 18 million in 1868 (Russell 1898: 32). Table 4, which shows the minting of gold and silver coins in France, bears a close relation-ship to Indias trade pattern and infl ows of precious metals. The reversal of the trend in France post-1867 also indicates that bimetal-lism had not yet lost its relevance. Nonetheless, the seeds of a gold standard were planted at a period when sil-ver outfl ows from Europe to India were massive.

Britains Indifference towards a Gold Currency for India in the 1860s

Could Britain have articulated the need for India to remain on silver for a smoother transition to gold in the West? Its trade with Europe and North America compared to that with their colonies showed a gradual increase between the late 18th and mid-19th centuries (Table 3). This could have motivated Britains alignment with European interests, and a common gold currency among western nations could have been perceived as more benefi cial for their trade and investment fl ows. But there is little real evidence to support such insinuations. The question, however, remains why Britain did not take a fi rm decision on Indias transition to a gold currency in the 1860s. When seen through the prism of real history, it may more have been Britains measured ambivalence towards the move-ment for a gold standard than a well-thought-out strategy that resulted in a missed golden opportunity for India.12 This is evident when we study the remarks against a gold currency made in 1861 by Charles Wood, Secretary of State for India, who was of utmost importance in deciding Indias transition to gold.

Silver is your [Indias] standard. It is, in truth, the standard of the greater part of the world now. It was, near to the end of the last century, the standard of the whole word. Accident and some silly reasons made England adopt a gold standard (quoted from Ambirajan 1984: 95).

Wood also reiterated some of the points raised by pro-silver voices in India, which included the political dangers of arbi-trarily altering the standard from silver to gold and a possible disruption of trade on account of bimetallism. Other impor-tant British Indian government offi cials also raised similar concerns over a gold currency, rather than articulating any strategic motive to consciously keep India away from gold.

One can, however, notice a signifi cant change in Britains policies towards Europe and Asia in the 1870s. As recognised by Bagchi (1997: 22), it was only in the 1870s that the question of monetary standards in India and other countries began to draw the attention of some of Britains famous specialists in money and banking such as Bagehot (1873) and Barbour (1885). Ambirajan (1984: 91) supports Bagchis view and points

Table 3: Pattern of British Foreign Trade, Destinations and Origins Imports Exports and Re-exports 1794-76 1854-76 1913 1794-76 1854-76 1913

Europe 44 36 41 38 40 37

Asia 22 14 16 13 11 23

North America 7 24 23 28 21 14

West Indies 25 6 1 18 3 1

Others 2 20 20 3 24 25

Source: de Jong, Jurrin (2003): Great Britain, the Industrial Revolution and the World Economy, 1780-1914, Leidschrift, 18 (2).

Table 4: Mintage of Gold and Silver in France (1803 to 1873)Year Gold Silver Ratio of (Million Francs) (Million Francs) Value

1803 to 1820 868 1,091 1-15.58

1821 to 1847 301 2,778 1-15.81

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

Source: Ambedkar (1947: 127).

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out that very few economists had actually said anything about this problem (gold currency) in the Indian context in the sixties. Although there may have been concerns over India adopting a gold currency as early as 1864, these apprehensions became more categorical after Germany offi cially transited to gold from silver;

We all know what the Germans have had to do, and how painful its effect upon has been. They have had to buy gold to substitute for that silver, and the result has been an unusual disturbance of the London market, with sometimes very high rates of discount; nor is the opera-tion as yet complete. But the effect of a similar operation in India upon us would be altogether greater and more disturbing, because the Indian silver currency is so very much greater than the German (Bagehot 1877: 9-10).

This also meant that the situation in the 1860s was more fl uid than from the late 1870s onwards. By the third quarter of the 19th century, most of Europe had offi cially moved to gold and gold shortages had begun inducing defl ation and depression. The response to calls for a gold currency that arose in India from the late 1870s onwards and continued right through the 1890s when silver (and with it the rupee) began to depreciate cannot be compared to that of the early 1860s.

Conclusion and Further Questions

Post-1866, Indias absorption of silver declined while that of gold continued at its prior level. The sharp decline in silver imports was because of declining stocks in the west. If Indias overall exports had to continue at their earlier levels, the coun-try would have been compelled to move to gold; but the trend in exports did not continue and showed a sharp decline after 1866. R B Chapman, Financial Secretary of the Government of India, noted,

It may be admitted that if it [the abnormal trade condition] had continued, India would have been very soon driven to take much more gold than silver in payment for her exports. Silver, in fact, would not have been forthcoming for remittance to the east at the same rate, and a gold currency would here very likely have become a necessity (Coyajee 1930: 30).

Capital imports also showed a sharp decline. The demand for money slowly abated with Indias exports stabilising at lower levels.

The movement for a gold currency, which reached a high point in 1864, had brought India closer than ever to a gold standard and well ahead of developments in Europe. We fi nd Feer-Herzog, the Swiss representative at the Paris International Monetary Conference, commenting three years later,

The state which demonetises fi rst will do so with but little loss, while the state which shall have hesitated and waited will undergo the losses resulting from the demonetisations which have preceded its own, and so will pay for all the rest. The German authors have perfectly under-stood and explained the advantages which will accrue to their country from acting speedily, while the states of the Latin Union still hold to the double standard (Russell 1898: 105).

India then had unequivocally lost an early mover advan-tage but the missed opportunity had paved the way for a de facto transition to gold in Europe. This leads us to impudently open the door to counterfactual history. Would transition to the gold standard in many parts of the world have taken place if the Indian initiative for gold had succeeded? Would Europe have found a convenient drain for its silver and abandoned bimetallism if India had moved to gold?

While the answers to such questions can only remain con-jectural, it does seem possible that if India had successfully shifted to gold in 1864-66, the story would have unfolded dif-ferently in Europe, with perhaps a different ending too. Gold prices would have remained high as a silver glut developed, silver exports would not have taken place, and the transition to a de facto gold standard in Europe and the US in the 1860s may never have taken place. Figure 5 illustrates that if India had substituted its silver imports with gold, there may well have been inadequate gold (and too much silver) for the rest of the world to move to a gold standard. By revisiting this signifi cant episode from monetary history, we aim to reinstate Indias position in the recent narrative on the emergence of the gold standard and the evolution of the international monetary system.

Notes

1 These historians who draw from late 19th and early 20th century works have also been ig-nored in the recent literature, in particular, those that fi nd mention in the surveys of Meiss-ner (2002), Redish (2006), and Morys (2012) on the emergence of the gold standard.

2 One gold equals 15 silver was the legal ratio for conversion of silver into gold in India.

3 Copper coins were circulated in denominations of only less than a rupee. Note that the amount of copper to be coined was regulated by the government. No private individual could bring copper to the mint and demand copper coin in exchange; otherwise the country could have been inundated with copper money. Moreover, copper coins were issued at a much higher money value than their actual weight would warrant (Ballard 1868: 14).

4 Unlike the pro-gold lobby (particularly the Chambers of Commerce) there was no anti-gold lobby per se. These were more the independent voices of political and economic commentators.

5 By which year this amount of currency would be required is not mentioned by Lees.

6 The original members of the Latin Monetary Union (LMU) were France, Belgium, Switzer-land, and Italy.

7 French statesman Flix Esquirou de Parieu was the architect of the LMU, which is considered the precursor of the European Monetary Union.

8 This term was commonly used, although it is not found in the literature referenced here.

9 Morys (2012: 29) points out that the German states (on a silver standard) were swamped with French gold coin in 1867.

10 A banker or bullion-dealer in London desires to send a hundred thousand pounds to India, or China, or Holland, or any country where silver circulates. Silver we will suppose is dear in London, so he sends a hundred thousand pounds worth of gold to his Paris agent, who has it coined and exchanged for fi ve-franc sil-ver pieces, which are then exported to their destination. The French Mint is set to work, and the French coinage is changed to the ex-tent of 100,000, for no purpose whatever but to minister to the gain of a foreign banker (Ballard 1868: 23).

11 Excess silver would have meant that the gold price of silver would have fallen in the market.

The legally overvalued silver would then fl ow back to mints and into circulation. Meanwhile, gold would have been undervalued as coin and fl owed out. This is how international bimetal-lism maintained parity at the French legal ratio of 15.5:1.

12 Drawing from the work of Bagehot, Mellyn (2009: 75-76) asserts that real history (as op-posed to conjectural history) views institu-tions as organic, not mechanical. The evolution of institutions was not always by design; more often than not they were accidents of Real History.

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