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Abstract
This paper investigates how the concrete operation of the gold-exchange standard in colonial India imposed a process of financial subordination embedding colonial India in the currency hierarchy of British sterling. This system was instrumental in entrenching a core-periphery asymmetry that undergirded Britain’s financial supremacy, providing elasticity to the sterling funding mechanisms of international money-markets by mobilizing the reserves of colonial India through the council bill mechanism and the placement of reserves in London. Its workings foreshadow the role of reserve accumulation in the financial subordination of developing countries in the context of the dollar hegemony in an international monetary hierarchy delinked from gold and enforced without colonial rule.
Acknowledgements
I would like to acknowledge the thoughtful comments and feedback of the referees of the journal, Catherine Desbarats and other participants of the Currency and Empire workshop at New School for Social Research, and Carol Heim, Jayati Ghosh Deepankar Basu and other participants of the History and Development workshop at University of Massachusetts, Amherst.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Bonizzi (Citation2013), Bonizzi, Kaltenbrunner, and Powell (Citation2020; Citation2022), Alami et al. (Citation2022), and Lapavitsas and Soydan (Citation2022) provide useful critical surveys of this vast literature.
2 Contributions to a recent symposium on De Cecco’s Money and Empire in Review of Political Economy also address how the connections between Britain and India were central to the governance of the international gold standard (S. Sen, Citation2022; Cristiano, Citation2022; Deleplace, Citation2022; Paesani, Citation2022).
3 Ambedkar’s (Citation1923) analysis of the impact of the gold exchange standard in contrast to Keynes (Citation1971[1913]) mounts a critique of the way colonial financial arrangements and the management of the gold-exchange standard subordinated the needs of the populace in the sub-continent to that of Britain, sacrificing price stability in India for exchange rate stability. (See also Eich, n.Citationd.).
4 Keynes (Citation2010[1923]) did, however, address the asymmetry of the international monetary system in the context of the emerging challenge posed to the global hegemony of Britain and the sterling by the rise of the dollar, after the First World War, when he argued that the return to gold would mean the surrender of Britain’s autonomy in the conduct of monetary policy to the US as it emerged as the leading creditor nation. This gravitational shift of the center of global dominance and the rising external debts of Britain would also shape the evolution in his thinking during the Bretton Woods negotiations (Skidelsky, Citation2003). Deleplace (Citation2022) compares Keynes and de Cecco’s analytical accounts of the gold-exchange standard.
5 Ambedkar (Citation1923) argues that India’s gold exchange standard was closer to England during the suspension period (1797-1821) in that there was no obligation on the government to gold in return for bank notes, with the caveat that the colonial government was committed to convert rupees to gold in the external market if the exchange fell below the fixed par.
6 Free minting of silver allowed any person to bring silver to the mint for coinage. The closure put an end to this practice. Indian mints were, however, allowed to exchange silver rupees against gold and British sovereigns.
7 Ambedkar (Citation1923) presents a detailed account of the devastation caused by the rupture of the gold-silver parity in India, a silver standard country that was bound to a colonizing gold-standard country. His account ascribes the falling silver prices to the demonetization of silver as more countries adopted the gold standard.
8 The Herschell Committee, set up to address India’s monetary problems estimated that the £16.5 million remitted in 1892-93 on account of home-charges required a payment in rupees that was in excess by an amount of Rs 8.7 million of what would have accrued at the 1873-74 exchange rate (De Cecco, Citation1974). Between 1875-1898, the deteriorating exchange led to losses estimated at around Rs 1.5 billion (Kaminsky, Citation1980).
9 The complaints of credit shortage and high interest rates are noted in the Fowler report 1898 (S. Sen, Citation1992). Cotton exports suffered initially due to the loss of competitiveness (with the appreciation of the rupee) relative to China which was still on silver in this period (Sivramkrishna, Citation2017).
10 In 1894, 74% of the PCR was held in silver and the remaining in Indian government securities. An influx of gold sovereigns due to a favorable trade balance and resumption of silver coinage led to depletion of the silver reserves from Rs 22 million to around Rs 5 million in 1900. In 1900 the composition of the PCR was only 18% silver, 35% securities and 47% gold.
11 The Treasury was also allowed to hold silver bullion so purchased as security for note issue until the actual coinage of rupees.
12 Between 1906-1912 the gold reserves placed in the London PCR branch amounted on average Rs 80 million annually (Bagchi, Citation1989, p. 101).
13 With the pegging of the rupee to sterling, the metallic value of silver rupee coins fell below their face value.
14 In fact, while the Bank of England bank rate had risen to 6.5% in November 1899, by 1902 it would be brought down to 3%, as conditions in the money market eased, helped by the deployment of India’s reserves.
15 In the aftermath of financial difficulties caused by the famine in 1876 and the Anglo-Afghan War in 1878, the colonial government kept only a minimal balance with the Presidency banks, retaining the rest in its treasury reserve.
16 Keynes (Citation1971[1913], Ch. 8) had highlighted the seasonal spike in the Presidency Bank’s discount rates and advocated measures to increase the elasticity of domestic note issue to eliminate the cyclical fluctuation and reduce the volatility of discount rates.
17 In 1887 deposits of exchange banks were 36% of the deposits of Presidency Banks. By 1913 their deposits had risen to 70% of the deposits of Presidency Banks, growing by about 1325% compared the growth of Presidency Bank deposits by 680% (Sivramkrishna, Citation2017, p. 375).
18 This asymmetry can be seen in the bail-out of exchange banks by the colonial administration when they were saddled with stockpiles of silver which they had imported in large amounts before the closure of mints was announced in 1893. The colonial government accepted this silver on special terms for coinage on the government’s account.
19 Thus 1899-90 when the Bombay money market faced unusual stress due to the falling price of silver, representatives of key exchange banks sought advances through the Presidency Bank of Bombay in order to ward off a financial crisis, while refusing to use the channel of telegraphic transfers from London because it would entail a higher cost at the prevailing rates on council bills, further aggravating the crisis (Bagchi, Citation1989).
20 Keynes (Citation1971[1913]) remains the seminal account of the mechanism.
21 The ceiling of the price of council bills was set at 16-1/8 pence per rupee. While there was no stipulated floor in practice, the bills did not sell below 15-29/32 pence per rupee.
22 Between 1900-1913 the share of colonial government expenditures in London were an average of 49% of the revenues of colonial government in India (N. Sen, Citation1992, Table 2.4).
23 The Gold Standard Reserve rose to £18 million in 1908, dipped to £18 million by March 1909, resuming its expansion to cross £20 million in 1912. The Paper Currency Reserve also rose to Rs 614 million in this period (Bagchi, Citation1989).
24 Kemmerer (1914) in his review of Keynes (Citation1971), however, took exception in his statement that the United States in dealing with her dependencies has ‘imitated, almost slavishly, India’ (p. 27) noting that the Philippines implemented a form of the gold-exchange standard in 1903.
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Ramaa Vasudevan
Ramaa Vasudevan is Professor at the Department of Economics, Colorado State University. She is an Associate Editor of Review of Political Economy and a member of the Editorial Board of Review of Social Economics and Catalyst.