During the last quarter of the nineteenth century, when the world was abandoning bimetallism in favor of the gold standard, India adapted its silver standard to a modified gold system that held gold reserves to maintain the value of an entirely silver coinage.
The Indian currency system had always attracted the curiosity of the British. In 1772 the eminent economist Sir James Steuart advanced a recommendation to the East India Company “for correcting the defects of the present currency.” John Maynard Keynes wrote his first book, Indian Currency and Finance, after serving on a committee studying India’s monetary system.
A bit of the impression India’s nineteenth-century monetary system left on contemporary British observers may be gleaned from a quotation of A. J. Balfour, later prime minister of England:
What is the British system of currency? You go to Hong Kong and the Straits Settlements, and you find obligations are measured in silver; you go to England, and you find that obligations are measured in gold; you stop half way, in India, and you find that obligations are measured in something which is neither gold nor silver—the strangest product of monometallist ingenuity which the world has ever seen—a currency which is as arbitrary as any forced paper currency which the world has ever heard of, and which is as expensive as any metallic currency that the world has ever faced, and which, unhappily, combines in itself all the disadvantages of every currency which human beings have ever tried to form.
Between 1835 and 1893, India practiced what in the United States was called free silver, a silver standard that allowed anyone to bring silver to the Indian mint for coinage. Only two coins were struck, the silver rupee and the silver half rupee, and only silver coins were legal tender. Gold was not legal tender and the mint did not strike gold coins.
As long as the European bimetallic system remained a viable monetary system, preserving a constant ratio of silver to gold of about 15.5 to 1, the Indian system functioned with a stable exchange rate between the silver rupee and Britain’s gold pound sterling. India’s silver rupee equaled 22.39 pence under Britain’s gold standard. After Western trading partners began shifting over to the gold standard in the 1870s, the value of silver fell, adversely affecting the terms of trade of countries on the silver standard, mainly China, India, and Japan. Prices of both domestic and foreign goods rose in India, putting in a squeeze the household budgets of civil servants and other groups on fixed incomes.
In an effort to raise the value of the silver rupee, the government suspended the private coinage of silver in 1893, hoping to manage the supply of silver currency and maintain its value in gold. The value of the silver rupee modestly climbed relative to gold to a rate of 1 shilling and 4 pence per rupee, or 15 rupees per British sovereign. The government stood ready to redeem silver rupees and paper rupees in gold at an official rate of 1 shilling and 4 pence in gold per rupee. The silver coinage now wore the aspect of a token coinage whose value was supported in the same manner as the value of paper rupees was supported. India became a gold standard country but its only circulating coinage was silver.
The limitation on Indian coinage of silver, coupled with high Indian interest rates needed to support the rupee internationally, depressed economic conditions in India and led to further calls for currency reform. In 1898 another government commission studied the problem and recommended that India bolster its gold reserves and issue gold coinage. These new reforms failed to bring monetary relief to India and in 1912 the British government formed the Royal Commission on Indian Currency and Finance, including among its members John Maynard Keynes, who would later become the most famous economist of the twentieth century. Keynes wrote a book on Indian currency in which he recommended that India remove gold coins from circulation and concentrate gold holdings in a state bank that would use the gold as reserves to support bank notes.