BY MR. S. A. PANDE, M.A., LL.B. HE recent rise in exchange has been attracting much attention in the press, and much confusion must have been created in the minds of the readers as to what the situation really is, because of the treatment of the subject having been more or less incomplete and also because all sorts of widely divergent opinions have been expressed on the same. To extricate the reader's mind from all this confusion and to present in a clear and concise manner the rationale of the present exchange situation is the purport of this article. I shall try to explain in this contribution the nature and causes of the present rise in exchange and the effects of the same on India's welfare. Exchange has always to do with the foreign indebtedness of the country. It is a sure index of the total amount of debt on account of commerce, and other expenses that one country has to make in another; this foreign debt may be due to excess of imports over exports, foreign travel of residents of the debtor country into the creditor, the political tributes that a debtor country has to pay towards the creditor, as well as some economic tributes such as shipping charges and their like. In the international market of which London forms a formidable centre, every country owes something to another and owns something from another; the balance of this mutual indebtedness is struck and the excess of this debt has to be paid for generally in one or the other of the two precious metals namely gold or silver. India is also a member of this international community of nations and she gets her due for her excess of exports over her imports from that community by the import of the two precious metals. Generally India's claims in the international market are greater than the claims of foreign countries against her; all these mutual claims are settled in London by the institutions called the Exchange Banks in clearing houses. as During War foreign countries such England, America and Japan purchased India's goods on an unprecedented scale and for unusually high prices, for reasons partly given in my article on the "Rise in Prices" published in the September issue of the Indian Leview. The balance of trade became thus highly in India's favour, all the more so as India did not import so much of foreign commodities during the war, because of the transport difficulties and other causes. All this excess of exports over imports had to be paid for in India by the internal currency of the country viz Gold and Silver bullion or coin and the currency notes; during the four years of war no less than twelve hundred millions of rupees were minted and circulated to the public by the State, a figure which has beaten all record and yet the note issue also had to be increased, a considerable portion of which was rendered inconvertible for want of metallic money; Gold coin or bullion which was the main strength of all the belligerent and the big trading countries of the West was as far as possible conserved in the vaults of the National Banks; and any export of gold either on private account or for State purposes was looked at with considerable anxiety and envy and was forbidden; India however managed to get silver for two years of the war for minting rupees in payment of her favourable balance of trade; but the decrease of this white metal's production from the mines and the increased demand for the same all over the world and especially in India, naturally made silver a dearer commodity in comparison with the sister metal of gold. You could not defer payment for India's goods; silver had to be found; it could not be got adequately with the result that the gold price of silver rose alarmingly following the usual economic law of supply and demand. This naturally led to a rise in exchange; that is, the ratio of silver to gold increased; how this happened will be now looked to. As stated above generally India is a creditor country in the international trade; that is, India has to receive more money than she has to give for her commerce; this payment is made to Indian merchants and sellers in rupees by the contrivance of "Council Bills." These Council Bills, originally designed only to meet the requirements of the Secretary of State for his Home-Charges, are since 1900 A. D. sold also to support exchange, that is the Government of India undertakes to pay at the rate of 15 rupees in India for every sovereign that the Secretary of State receives in London by the sale of these Council Bills over and above the Home-Charges and thus maintains the fixed ratio between the rupee and the Sovereign; the Government has thus undertaken to accommodate the foreign trade by this mechanism. Under this arrangement the exchange banks which collect all India's debts for her excess of exports over her imports, receive these Councils by paying gold in London and present the same in India at the Government treasuries and receive the rupees for paying the same to the producers of these exports. These Bills continued to be sold at 15 rupees per sovereign; but later on, due to the scarcity of silver and its, high price, the Government of India refused to issue in India 15 rupees for every£ that these banks deposited with the Secretary of State in London, and hence the exchange rose first to 1s. 6d. per rupee, to 1s. 8d. and 2s. 2d. as at present. This means that the Government of India is not willing to pay more than 10 rupees now for every £ that the Secretary of State receives in London by the sale of these Council Bills, the reason being that the Government of India has to pay more for the silver which is coined into rupees now than before. consequently the highest prices since that year World consumption of silver approximated to 375 million ounces overtopping all previous records more than 50 per cent; most of the demand fell in the last eight months. The world production of new silver is estimated between 145 and 150 million ounces,-more than 200 million ounces less new silver was produced than was consumed; to make up for the balance, the silver dollar of the American treasury and upward of 40,000,000 of Mexican Pesos were melted. The Pittman Act passed on April 23rd 1918 authorized melting of 350 out of 495 million silver dollars in the United States Treasury, containing 270,690,000 ounces of silver bullion and the sale of this bullion at the State fixed price of 1 dollar per five ounces raised to 1-1 dollar; by October 1st, of 1918, over 194,000,000 of the silver dollars were reported melted and the entire authorized supply appears destined for exhaustion by February 1919. Production of new silver has fallen steadily notwithstanding high prices for this metal, since 1915; price increased from the average of 497 cents to 65:5 cents in 1916, to 81 7 cents in 1917 and to 97 cent in 1918 per ounce. Production in 1915 was 209,931,827 ounces; in 1916, it fell off to 156,675,521 ounces; in 1917 to 159,444,500and in 1918 to 145 to 150 millions ounces; care was taken to prevent this silver from falling into Germany's hands; and silver used for arts and industries was also restricated; in August 1918 export of silver except for direct payment of goods received for use of war, was prohibited, Exports of silver on this one account from the United States reached the stuper dous total of 205,000,000 dollars for eleven months of 1918; this exceeds world's production, and compares with 84,130,876 dollars of silver export in 1917 and 70,595,037 in 1916, all these figures also beating all the past record. The reasons given for this advance are the mint demand of bellige rent countries for coinage of silver as gold was with drawn from circulation; every year since 1915 new silver coinage has exceeded world's production of new silver and for years to come this coinage will continue to exceed production to meet the high trade conditions and to appease the popular desire for hard money. In 1917 huge trade balances in favour of India and China had to be paid for in silver and about 80 percent of American silver exports went in 1918 to India and China; To India America sent 601 percent less before the war. The result is that the sellers, exporters, or producers of the Indian commodities receive a less amount of rupees now for every unit of their export than they got before; this to them, it is urged, is a decided loss, for they thereby get less of silver in exchange for their commodities than they would get before; for every £ worth of their export they now get enly ten rupees where as they were getting rupees fifteen for the same before this rise. The foreign merchant has nothing to gain in this transaction for he pays the same old price for every unit of commodity. The silver merchant has everything to gain if the rise is due to speculation; but that is not the case; silver prices have not gone up so much because of the speculative spirit of trade as because of the reduced supply of this white metal and increased demand for the same. An article published in the North China Herald of the 29th March and republished in the Times of India of 23rd May 1919 presents a graphic picture of the silver situation of the world, its production and prices and the demand for the same due to inflated trade. We learn from this able article which in its turn is based on the report issued from the United States by Messrs. Coleman and Reitze who have analyzed the future possibilities of this metal, that in 1918 there was the greatest world demand in history for silver and the smallest production of the same since 1891 and The three major demands for silver which continue are thus (1) the minting of silver coin to meet the deficiency in hard money that people always want, whether gold be restored to circulation or not;-(2) the greatly inflated trade balance due from the world to India which may still more be inflated when shipping is restored and Europe enters the Indian markets; (3) Europe must buy silver to support her billions of unsecured paper money floated during war. I have already written on this topic in my article published in the September issue of Indian Review on the Rice in Prices where the currency aspect of the world is discussed sufficiently fully. The readers will appreciate fully from the above description which I have largely taken from the article republished in the Times, the exact silver situation and my lengthy description of the same may thus be not out of place. It would thus be clear that the Indian demand increased for silver or gold whichever would be offered to her for her excess of exports with the increase in her exports which latter increased because of the increased consumption during war ; it will continue to increase after the war also as great activity is likely to be evinced in production after the war to make up for past waste; and as gold export was looked at askance by all countries of the West where banks stored all gold in their vaults to keep up their prestige in the financial world as a provision against contingencies of war, and as silver also was absorbed largely by all countries ever having gold standard, the Government of India found it difficult to provide rupees for Councils which the exchange banks offered; demand for silver increased trebly. Countries like India and China tipped for exports on a larger scale than ever before and with higher prices, because of war conditions; again, even those countries which usually did not care for white metal began to prize it, as hard money is always dearer to people than paper, all the more so in the war period when everybody throws out paper money and hoards hard money; thus demand for silver trebled and supply as shown before diminished; the Government of India which has taken upon itself since 1893 to supply all rupees for trade purposes found itself unable to do the same without further debasing the rupee by reducing its silver contents; thus Government did not like to pay more than ten rupees in exchange for one pound if debasement was not to be made; this is how the rise in exchange took place; it is called rise because were excharge is expressed in shilling and pence in London with respect to Indian rupee as so many pence per rupee, now it has risen from-say-16d. per rupee to 20d. per rupee; but the whole phenomenon simply means that you will get 8 rupees in India for £ 1 in London and £1 in London for 8 rupees tendered in India. They give fewer rupees because silver with which rupees are minted is not available. I have thus shown the nature and causes of the exchange situation; we shall dismiss the subject by a short reference to the effects of the same on the Indian welfare and the remedies that should be adopted. Now it is patent enough that this rise means a loss to the Indian seller and producer; this latter is parting with his precious commodities at this most critical time in the world's history when every body is badly in need of raw materials in exchange for a smaller quantity of the white metal because the latter is dear partly due to speculation and partly due to increased demand and reduced supply. We have thus to accept less metal than before for our valuable raw materials that we are selling; In this transaction those countries which are paying us with their old stored and cheap silver are certainly making enormous wealth at our cost; again those silver producers and traders who have increased their prices of silver because of these new market conditions also gain at our cost; they sell dear and buy cheap. Readers can thus imagine the enormous loss that India is put to because of this abnormal situation caused by a currency organisation never approved by the sons of India; and all this when her financial condition undergoes no collapse. This loss will be all the more felt if attempts would be made to restore the old exchange at 1s. 4d. per Rupee in the near future. The Indian merchants who do exporting business also will suffer for they would be mulcted in their profits to a great extent because of the prices having gone down proportionately. The importers of foreign goods will profit by this rise, for they will have to pay now fewer rupees for their imported goods when they have to pay only 8 Rupees for every £ worth of goods-and foreign goods are always valued in sovereignsrather than rupees 15 which they had to pay before; I think however that this advantage will be less marked in the case of those who have fresh supplies of rupees in exchange for their exports than in the case of those having old stocks rupees and those that get every month fixed of salaries from state treasuries. Already we have suffered so much due to reduction of the silver contents of the rupee since 1893 A.D. when the free coinage was suspended for whereas before 1893 A.D. we got a full silver rupee we now get rupee having some 10 annas worth of silver: thus Government issued out to the public something like three rupees for every two rupees, worth of silver; now because of this recent rise we will get still less silver for every unit of any commodity that we sell; thus at this juncture when every body in the world is selling dear we would be selling cheap. It is stated that a high exchange is a mitigation of high prices. There may be some truth in this proposition but we would not gain much by this rise as it is only a temporary incident. Again this would not prevent our exports from going out, if low prices caused by the scarcity of silver were to prevent our exports of food and raw materials from going out then it would be something. But that is not to be the case, hence such propositions put forward by Government do not in any way sooth us. We want low prices for us, but then low prices must discourage our exports. Exports would go out in the same tremendous scile as in war period but at lower prices to us. Prof. Jevons of the Allahabad University suggests that the rupee should always in future stand in the present high ratio to a £; for reasons stated above, it would not seem to be advantageous if silver were to be cheap as before, for the State would make enormous profits out of coining dear rupees with cheap silver and thus gain at the expense of the ryot in this transaction. We don't want the State to be rich, at the cost of the poor ryot, especially when people have no effective control on the finances of the State in India. Prof. Gilbert Slater suggests introduction of British Treasury Notes; this has been well refuted by Prof. Kale in the columns of The Commonweal of Madras. I don't see why we should be made to accept British Notes when they can and should pay us in gold. Why should they postpone payment of specie when they have already received our goods; we may say, "don't purchase our goods if you don't want to pay us back in the commodity that we want in return and not that that you want to give; but the British sentiment on the point is something like the one expressed by Noreton Fremen and reproduced in the Bombay Chronicle of the 20th August 1919 wherein he says "If we pay her (India's) trade balances in gold we shall lose about one hundred million sovereigns next year after the peace and in ten years India after financial convulsions here will have landed us in silver mono-metallism." This remark indeed speaks for itself as observed by the contributor to the Chronicle. Well, you fear England will lose all gold, but what of India who has lost all valuable commodities by exports; again you fear England will land in silver mono-metallism; what about India whom you have already landed in silver and paper money only. Some correspondents to the Times of Bombay recommended the reduc tion of a silver contents of the Rupee and to maintain exchange of the two coins at the old rates; this is also disadvantageous to India; all these proposals aim at putting less silver into the pockets of the Indian ryot for his wares that are valued all over the world. I think the situation is such that such make-shifts would not serve us well; some permanent measures will have to be adopted involving the overhauling of all our present currency system under which, for the last four years when we should have hoarded in our country so much of either of the two precious metals, we have been inundated with all sorts of bad currency such as nickel-pieces and inconver tible paper money. The question is very likely to agitate us for many years to come; so far as the silver production is concerned, it does not augur well for the future as will appear from the American account of the metal alluded to above; thus silver supply is bound to be short for many years while the prices of all commodities are likely to remain dear also for many years to come as all commodities used in the production of wealth will be in great demand in future to make up for the past wastage and to reclaim all indebtedness. India and China will add to their claims against foreign countries rather than mitigate the same; and if the present proposed make-shifts were to be resorted to, India will suffer much loss as it is suffering now for no fault of her. It is therefore suggested in many quarters to adopt for India a gold currency and to do away with the present system of Gold Exchange Standard which has fallen into greater disrepute because of the abnormal silver condition during is really plain this And the issue war. enough for those who have no axes of their own to grind; why! you want India's goods and at |