Our Banking Messiah

(Being a Critical Examination of Sir Daniel Hamilton’s

Free Paper Standard Scheme.)

BY PROF. B. RAMACHANDRA RAU, M.A.

‘Verily, a Daniel is come to judgment’ and has pronounced his verdict on the Indian Banking and Monetary system. Under the caption, "Man, Money and Banking", Sir D. Hamilton discusses the urgent necessity of spreading the co-operative credit movement based on managed paper currency, without any gold ing as its ultimate support.¹ By a machinery of ‘monetising labour’ which can be constructed without entering into the question of gold ing, and carefully spreading the money, without incurring the risk of inflation, into the hands of the workers through co-operative credit societies composed of reliable and active men, he proposes to infuse credit –the life-blood of all economic activities–into the present-day weak, disjointed and decaying villages, whose economic structure is incapable of sustaining real stress. Rural reconstruction by able-bodied, selfless and patriotic local leaders, standing shoulder to shoulder and banded into co-operative units, would revivify our villages and create well-deserved opulence in place of the present-day denial to the villagers of the enjoyment of a simple and contented life.

SYNOPSIS OF THE NEW SCHEME

As the present-day bankers tell us that gold or silver must be the basis of credit, it is impossible to find full employment for all the reliable and willing working population of the nation and set them on the feet of productive activity. Present-day bank credit, being based purely on private shareholders’ capital, is far less secure than Government currency which is ed by all the assets of the nation, whose organised administrative embodiment is the Government. Hence it is the bounden duty of the Government to create enough money and only enough money (‘inconvertible paper money’ as the gold standard advocates would put it) to accomplish the above object. This is the real implication of that pregnant statement, "that it is folly to regulate the food-supply of India by the silver output of Mexico."

Limited to the necessary quantity demanded by the workers for securing the capital equipment of the country, the Government money can organise prosperity for the poverty-stricken people of the land. Co-operative credit is the poor people's pooled or organised credit, and on the strength of their joint credit, the members borrow loans at cheap rates from the money factory for purely productive purposes. The return from the undertaking would enable them to repay the loans with interest and also to reap a net yield out of their productive operations.

The printing press is to be the Minerva's head and not a Pandora's box, from which have to spring the thousand and one money instruments, which would set out not to create evil but to find employment for all the able-bodied people in productive work. The millennium of prosperity or a ‘veritable Utopia’ is to be reached through this ‘created money’ which would serve to distribute capital into proper hands for efficient application to new production. Rice, wheat, sugar and other necessaries of life, which the wider markets of the world require, can be produced and exchanged for their money, viz., gold and silver, which will flow to the extent of the goods so created and sold to the outside world.

The creation of a new money system in place of the present defective one is the ideal aimed at. The private money monopoly, which is fattening the idlers and making the workers and the isolated and individual borrowers poorer than before, has to be swept away. The private greed of the usurious money-lender is to be killed, and in place of the exploitative capitalistic money-lenders, a more sympathetic money-agency which can reach the masses swiftly and in requisite proportion has to be built up. By putting the printing press into operation, money instruments can be created which will be lent to reliable men to

be used for securing better seeds, more manure and improved implements, and adopting scientific methods in the intensive cultivation of land.

At the end of a definite period, there would be plenty for these labouring masses over and above the repayment of the loan to the Government. This process Sir Daniel graphically expresses in the most rhetorical phrase viz., ‘monetising labour.’ This at any rate is the scheme placed before Mahatma Gandhi. After the manner of the prophets of Baal, this economic Messiah is leaping upon pyres and crying out and stabbing the village "wolves and human rats possessing golden claws and silver teeth." While it is easy to charge the money-lenders in villages with having deliberately ruined the ryots, it is quite another matter to prove that, by merely creating a free-paper standard, we secure the Alladin's Lamp which provides the village homes and fields with all their wants and requirements.

In rapid succession to his articles in ‘Young India’, Sir Daniel Hamilton delivered a series of lectures expatiating on this central theme of free-paper standard based on real work which is meant for the weal of all. Venomous and bitter are his words leveled at the Mahajan. Long ago, in his "Souls of Good Quality," we find him writing most disparagingly of the Mahajan." India needs legislation dipped in the blood of the Mahajan." He returns to this attack afresh and says that "the many sow and these few reap." Mere stinging words can neither carry conviction nor pour oil on troubled waters. It must be candidly recognised that the Mahajans are the "diseased products of a diseased community."²

Before paying further attention to the feasibility of his plan, certain misconceptions and loose terminology in Sir Daniel's thesis have to be corrected in the light of trained economic judgment.

LOOSE TERMINOLOGY: (i) ‘MONEY POWER’

"India", says Sir Daniel, "is the greatest real money power" in the world, next to China. This is a very loose or uneconomic use of the term ‘money.’ ‘Money’ is here employed in the sense of raw materials and able-bodied men. The variety, the extent and easy availability of requisite raw material resources can be conceded, but the quality of men must be of such a character as to make the most of the opportunities afforded them. It is the happy combination of efficient manpower and adequate raw materials that can create plenty of saleable and finished goods. These being sold on the markets of the world, the demon of poverty can be chased out of the country.

Though there are certain economists who point out the inadequacy and inferiority of certain necessary raw materials produced by nature in this country, still the consensus of opinion on the part of enlightened men is decidedly inclined to the opposite view. It holds that under proper survey and adequate stock taking, the existing resources and raw materials are enough to provide ample opportunities for her people, who have the necessary will, knowledge and capital to put them to productive uses. Scientific agriculture alone can absorb the work of an in-finite number of able-bodied men, and any number of cottage industries can be started. More manufactures can be developed than is the case at present.

But there is also a consensus of opinion that, in this unfortunate land, men are decidedly inferior in mental calibre, efficiency and practical working to the people of the advanced nations of the West. Canada, which is only very sparsely peopled and has fewer natural resources to her credit, is still producing a large amount of articles for export trade, as "the Canadian citizen is nearly thirty times as efficient as the Indian." Though this quantitative comparison is meaningless, still it is a patent fact that the Indian people are inefficient. It is nevertheless true that under more sympathetic and favourable conditions, the Indian people can work efficiently. Several of them have already proved to the hilt that, given equal opportunities, the Indian can prove himself the equal of the best Westerner in any walk of life–law, theology, fine arts, the sciences, organisation of industry and banking. Even in the field of sports, they are in no way inferior to the best talent of the West. Absolute reliance can be placed on such men. Provided such efficient men are trained, they can work wonders in this land of ‘dreams’, ‘masterly inactivity’ and ‘metaphysics’ as some of the Westerners put it.

Understood in this sense of man power and raw materials, India has real money power. India's present position, though not very bright, need not cause any serious apprehension that she would fail to make a productive use of capital when placed in proper hands. Concurrently, if more practical steps are taken to improve the manual efficiency, enhance the mental equipment and increase the economic stimulus, the Indian people will not fail to respond to the created opportunities of self-improvement that may be placed before them.

But ‘money’ is used by Sir Daniel in the widest non-technical sense. In economic language, ‘money’ means the unit of account or counter employed in public accountings, collective accountings and individual accountings, or a ticket for transferring or exchanging of one kind of finished labour into another, thus reducing the inconveniences of ancient barter. Monetary instruments give purchasing power over the desirable commodities of life. Past labour entitles the holder of the monetary instruments or tickets to convert them into present or future desirable assets. In this sense, India does not possess a sufficiently simple, easily understood and cheap monetary system.

But this misfortune is not confined to India. Even the gold standard of other countries has not proved a satisfactory standard of money. The value of goods as well as of gold was moving, but only at different velocities Though the slow speed at which the value of gold was changing led the common people to think that gold was stationary in value, still it was not only its value but the value of all other commodities also that was changing. But before this gold standard system could be consolidated as an international monetary standard, it broke down during the eventful years of 1914 to 1924. A new species of ‘phantom war money’ was created to perform money's work. Thus the monetary system was not perfected even during the course of so many centuries after its first invention by man.

The mission of money was never properly understood except by savants like Prof. Gustav Cassel. These clearly recognised that money was like a power which can safely be compared to "electricity, magnetism or gravity." Without the prior existence of the materials of production, mere money is of little avail. The monetary system is a pure abstraction, and it is not founded on a gold basis but on the quantity of goods produced in a society. This does not mean that money can be dispensed with in any society. But the character of banks and the financial system might change in the coming future. The banks might no longer be required to handle the rights to goods, i.e. money, but they might become the recorders of production and consumption going on in the society, and some tickets of the cheapest possible material might be selected as the means of payment. That such a system would ultimately be brought about, is clear to every rational man who understands the real sanction, source and function of money in our modern ‘pecuniary society.’

As the conception of money was not understood properly, there was very often undue emphasis laid on the importance of money. There were others who belittled money. Neither school cared to analyse the correct perspective and concept of money. Money is only an intangible conception denoting the value of goods. Currency is the tangible unit or the ticket, or order, or token, or the counter in which it is expressed. Money really means ‘general purchasing power’ and has nothing to do with the precious metals of which it might be composed. All people take money because of its virtue of exchanging itself for other necessities that may be required. It is true that from the individual point of view, more money can be considered as an evidence of a man's wealth. But from the national point of view, no nation is rich or gains anything if it holds more money. Other things being equal, the economic prosperity of a nation depends on the productive efficiency of its labourers working successfully on the raw materials afforded by nature.

Currency which is the visible body of the intangible conception of money, ought not to influence the value of money. This is the supreme test of the efficiency of the currency mechanism. Any instability in the value of money leads to unpleasant consequences on business life. To be precise, "unemployment, the precarious life of the workers, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator and the profiteer"³ all proceed in a large measure from the instability in the value of the monetary standard.

Currency not only acts as a medium of exchange but sometimes as a store of value. When it is stored up for future use, it should not lose its value as a result of the action of extraneous influences. Currency is not wanted for its own sake, but only for the purpose of providing oneself with the necessary supplies of life. This is the real meaning of the statement that, "currency has no final consumer and like the battledore and the shuttlecock passes wards and forwards.⁴

The late war acted as a first-rate Professor of Economics and imprinted several lessons about money which should not be forgotten. Firstly, it freed money of its golden fetters. Secondly, gold reserves were put out of action and the real position that a gold reserve has to perform in the credit society was clearly illustrated. Thirdly, it proved clearly that currency need not be composed of metallic coins. Sometimes, a distinct disadvantage may be attached to such a currency composed of metallic substance, be it gold or silver. Most of these lessons were grasped by Prof. Knapp and explained lucidly by him.

The conscious and consistent guidance of currency has been first advocated by Prof. Knapp in the following language: "To the chartalist, the ordering of currency is a branch of the administration of the State." He demands first "a conscious consistent guidance in place of piecemeal measures suggested by the heads of the Mints and the Central Banks, with good practical instinct but without any grasp of theory. The lytric administration must be delivered of this empiricism; after knowing its own aims, it must proceed to clearly conscious action entrusting the direction of it expressly de jure to the office which has de facto dealt with these matters in the past."⁵ During the war, there was more or less an unconscious resort to such guidance, but unfortunately it was fitful, inexperienced and often had to be interfered with in the interests of the State. If prior to the war, there was more production of goods and less of currency, with the necessary consequence that all producers denounced the monetary system, the tables were practically turned during the war. During the war, there was more of currency, and less of production of goods. A monetary system, like the recent unregulated gold standard that we had before the war, was open to both these defects. A rational monetary standard equipped with any kind of substance would no doubt possess all the necessary functions of a medium of exchange. The amount of this money must exactly correspond with the goods produced by the entrepreneurs of society. The production of this money has to be so done by the State that the unit of money itself does not change its value, causing uncertainty and confusion in the business and trading circles of society.

Though the creation of paper money is in the hands of the Government, as Sir Daniel would like it to be, paper currency is created to a very limited extent on real labour in the shape of internal commercial bills. South African gold, Mexican silver and British and Indian Government ‘promises to pay’ form the prop of the present-day Government paper currency. Indian banks have not succeeded in creating a highly elastic system of deposit-banking, and being forced to maintain a desirable proportion of cash (gold, or silver coins, or legal tender Government paper currency), their creation of credit currency is insignificant when compared with their Western confreres. As such, it has failed to make good the deficiencies of inelastic Government paper currency.

(ii) "PRODUCTIVE CAPITAL"

Nextly, ‘productive capital’ is another vague phrase introduced in the thesis of Sir D. Hamilton. ‘Capital’ is past labour set aside for aiding the processes of production. Understood in this sense, it denotes factories, goods, etc., the product of past labour on the part of society. Metallic money, be it gold or silver, forms only a small part of the ‘capital goods’ which again form a part of the wider whole, namely ‘wealth’. Metallic money is only one form of capital. From the national standpoint, which is quite different from the individual standpoint, the holding of large stores of gold does not betoken the prosperity or the wealth of the nation. The real wealth of the nation lies more in its factories, railroads, forests and mines, and the industrial character of its people than in its gold hoards. Any misconception on this point would only be on obstacle to the right understanding of the economic processes of society. Germany, after all, with its accumulated hoards of gold in its war-chest could not defeat England and her Allies during the recent war. It was the greater pooled resources and real wealth of the Allies that enabled them to achieve victory over Germany.

‘Productive capital’ is evidently used in the sense of both ‘man-power and natural resources.’ Though both of them exist in this country, the lack of monetary instruments precludes their being placed in a position of close juxtaposition. They cannot be organised into a correlated mass. The fundamental productive efficiency and capacity of the economic system of a country depends on the bounty of nature viz, plenty of required natural resources and land; the ingenuity of man who is willing to give them time-value, form-value and place-value; the availability of capital to secure the co-operation of other factors necessary for the proper working of the industry; and an alert, efficient organisation looking into the internal and external economies of production, always anxious to derive the utmost benefit out of a rigorous application of the economic principle of substitution and harmonious combination of the productive agents in due and proper proportion so as to derive the maximum output possible.

(iii) "FULL EMPLOYMENT CREATES PROSPERITY"

Thirdly, "full employment in growing rice, wheat, sugar, and spinning, weaving and other productive purposes, would create prosperity." Granted that scientific agricultural improvement and manufacturing efficiency increases the output of production, it does not immediately bring about the millennium of economic prosperity. Mere increase of the volume of production does not complete the economic process. Consumption of the whole output at a steadily remunerative price is essential, and without this consumption in India or outside, the increased output cannot be disposed of Burma is reduced to sore straits as her old customers, the Indian consumers, have taken a liking to another kind of rice. Similarly, when a quarantine is established against wheat in America, there is restriction of the market for Indian wheat there. When Chinese customers go on ‘consumer's strike,’ there is limited effective demand for British manufactured cotton goods. The Khadi campaign of Mahatma Gandhi will surely and vitally affect the cotton industry of Lancashire in spite of recent improvements tending to rationalise the industry under the fostering guidance and monetary help of the Bank of England. Its future is gloomy so far as the Indian market is considered. Thus consumption is the other side of the shield. The fundamental truth underlying the above economic statement is often stated tersely by the oft-quoted but little understood remark that "production is not finished till it reaches the final hands of the consumers."

The flow of money to the consumer must keep pace with the production of consumer's goods. Although production can be made to increase, consumption must keep pace with the production. Unless this takes place, economic progress is not completely assured by mere quantitative increase of production. The necessity of making savings against a rainy day in the future detracts people's ability to purchase consumer's goods. The circuit flow of money from consumers to producers gets interrupted. This can only be checked by the increase of capital money. The consumption of a surplus is absolutely essential. Even co-operative marketing can do very little in this direction. Storing at great expense by the State would be folly, nor can it be dumped abroad at low prices as it would provoke retaliatory legislation. Bounty-fed Australian butter is subject to a countervailing tariff in Canada. To pay a bounty on agricultural produce to be exported at a loss is false economy ⁶. Growth of sales on an installment plan would mitigate the hardship, but this can only be applied to manufactured products. Moreover it depends on prompt business organisation, collecting the dues systematically from the purchaser. This would however result in high distribution costs.

STANDARD OF LIVING USE OF PROFITS

Again, the Indian people should not make a population use of increased production and the profits arising out of it. The standard of living use is essential and if this is not forthcoming–

"Science finds out ingenious ways to kill

Strong men and keep alive the weak and ill–

That these sickly progeny may breed

Too poor to tax, too numerous to feed" –⁷

A high birth-rate would soon be associated with poverty, disease and low mentality, the very demons which the scheme plans to drive out of the country. The population problem of India, potential or actual, has to be borne in mind. Any encouragement beyond the optimum population would be a bar to efficient production and distribution of the material comforts of life. The quantity and quality of population must be kept stationary at this optimum point. There can be no thought of birth-control, delayed marriage and increased celibacy. All these are anathema to the religiously minded Indian people.

OTHER GRAVE OMISSIONS: (i) DIMINISHING RETURNS

Another point not emphasised by the scheme is the character of the agricultural industry and forestry. They soon reach a productive limit and any further application of fresh doses of capital and labour to land would bring in infallibly the law of diminishing returns. As soon as this point of diminishing returns is reached, the application of further capital should cease.

(ii) FAIRER DISTRIBUTION

Still another point of grave omission is that there is no attempt to point out the necessity of fairer distribution of products than at present. If land produces more, the tenants would be further exploited by the absentee landlords for whom, of course, Sir Daniel has the most profound contempt. If organised labour is not strong enough to secure higher real wages and higher social wages, mere increase of productivity is of no use. It is not the money-lender alone that intervenes and knocks off a slice from the agriculturists’ hard-earned savings. The middlemen and the parasitic landlords who do little to benefit the agriculturists obtain a portion. Distributive justice is no less essential to the success of the scheme. It is stated that the reward should go to the toiling workers. Unless the peasant-proprietorship plan is advocated, there is no means of securing the ryot as much as he produces. The State demand in the present Ryotwari areas should be reasonable, and a periodical enhancement at the time of every Resettlement in the Ryotwari areas should be checked. Protection against the State's encroachment on the ryot's portion is absolutely essential. It is on this issue that the Bardoli affair is being contested.

Another defect in our production is the poor quality of the produce. The great spread of the price between the price of the highest quality⁸ and that of the lowest quality of our produce, denotes extra profits that can be safely annexed by improving the quality of our produce. Hygienic cleaning, rectification and careful preparation and systematic grading of the Indian produce, wheat, cotton, tea, hides, groundnuts, shellac, are essential.

Again another chief defect in our productive aspect is the lack of a thorough understanding on the part of the producers as regards the requirements of the customers to be secured for their output. This is the chief characteristic, not only of agricultural production, but industrial production also. The wastes involved in overproduction in the absence of statistical estimate of requirements, need not be pointed out in detail in this thesis. The adaptation of efficient production to total national needs is essential. War-time controls in the Western countries amply demonstrated the possibility of increasing the output of physical production per man employed. A statistical bureau should estimate the people's annual requirements and the possibility of sale of it in the foreign markets. Coordinated and well-directed production would reduce and ultimately eliminate all the wastes of ill-directed production. The Brazilian Government restricts the coffee average to a crop which will yield a good price, and burns coffee as fuel, and arranges for artificial restriction of rubber. Bengal is attempting to do the same thing by restricting jute production so as to fetch higher prices. The League of Nations (Wheat Division) is now surveying the whole world and the probable yield of wheat fields, so as to suggest the allocation of the output on a minimum haul basis to the nearest importing area. The object is not only to check famine and starvation resulting out of under-production, but prevent excessive overproduction over a definite normal surplus as a possible safeguard against the times of lean harvests.

(iii) PROVISION FOR INTERNATIONAL PAYMENTS

Another substantial difficulty of accepting this scheme of Sir Daniel is the lack of any provision for international payment. It is assumed that with abundant production which is keenly demanded by the world, the exchanges would be in our favour and bring in gold into the country. Here he appears to be a true materialistic ‘money grubber’. Says Sir Daniel, "the more plentifully capital is issued for using rice, wheat and sugar, there would be the greater inflow of gold and silver, and the firmer the foreign exchanges.’ If niggardly Nature intervenes and production fails as a result of natural calamities, the exchanges would

become unfavourable. The Government-issued paper-rupee would not be retained. There must be some mechanism to use this gold allowed to enter into our country during favourable seasons for liquidating this balance at that time. Keynes in his managed paper currency still retains gold for payment of international balances. His buying and selling price of gold by the Central Bank normally sets limits which can be safely compared to the par points of the gold standard. While checking excessive short-period fluctuations in exchange rates, he permits permanent long-time variations in exchange. The new buying and selling price of gold would be set up by the Central Bank. Similarly, the Government must be permitted to operate the buying and selling of gold likewise in this country, if it were to accept Sir Daniel's managed paper currency scheme. It can depend on floating foreign loans and building up foreign credits to operate on the same to secure exchange stability. When once the exchange rates come within the par points, the Government can recede as an active operator from the foreign exchange market. Gold would still have to be retained for international payments; otherwise, international trade transactions which are so essential for an orderly economic life, would be rendered difficult and impossible. As the world is at present constituted, the gold link cannot be snapped light-heartedly.

Nextly, if more gold and silver flows in, it does not increase the economic progress of the people, as they are not currency under Sir Daniel's scheme and possess no legal tender character. It is the requisition of economic goods in return for our exports that is the indispensable thing, the sine qua non of our future economic progress. If over and above our wants, something remains as a net favourable balance of payments, it must be wisely invested, not in the shape of gold and silver, but to increase of capital equipments either in this country or abroad. When gold fails to be the basis of money, and there is no provision as in Keynes’ scheme on the part of the currency authority, the Mint or the Central Bank, to buy and sell gold, it can no longer act as a helpful source of capital to the individual. Even from the national point of view, the result would be the same. When more exports are sent out, the payment of the net-balance must be made in domestic currency to the Indian exporters. Under Sir Daniel's scheme, there is no provision for this. The Controller must be willing to accept and sell foreign money again, and to release and purchase internal currency at par points. The Government acting as the currency authority, which I would consider inferior to Bank management of currency, must provide domestic currency and foreign currency or exchange to suit the needs of our foreign trade. Though the exchange stability of the domestic unit may not be the all-important consideration, excessive short-term fluctuations in foreign exchange should be eliminated. As in Keynes’ managed Currency, elaborate provision would have to be made to check foreign exchange fluctuations.

(iv) REGULATING THE PRICE-LEVEL

The main trouble is that Sir Daniel is thinking of India as an isolated unit, and imagines that if currency can be wisely manipulated, economic progress can be realised. But the influence of the world price-level on the domestic price-level is all important. Deliberate management of domestic credit to attain a stable internal price-level is necessary. Such a conscious control alone can remove all dangers of sudden fluctuations in the world price-level, exerting their full influence on the domestic price-level. But variable foreign exchanges must have to be tolerated, if price-stability is the ideal aimed at.

Again, a persistently favourable net balance of payments always results in a rise of the domestic price-level. Look at India's gradually rising price-level during the years 1900-1914. It was not only a favourable balance that led to a rise in domestic prices, but India was borrowing abroad and prices rose in the borrowing country. Unless special measures to properly invest the net balance of payments are devised, it is impossible to attain a steady price-level in our country.

Finally, India would be alone in conducting this managed paper currency scheme not based on metallic basis. It is unwise though not impossible for a nation to adopt this scheme without international co-operation. Provided safeguards are established to check exchange rates and fluctuations, and gold is kept for international payment, there would be no complications from this side. Internal price policy need not be moving in line with international price movements. But if international co-operation is forthcoming to help a country, it can easily solve the monetary problem. The currency authority, viz., the Central Bank of Issue, would create sufficient bank-note currency to enable the Banks to keep them as their reserve. On it the Banks can base the credit structure that is needed by the growth of the needs of commerce, agriculture, and industry under a stable price-level. It would enable the, public to hold a proportionate quantity of hand-to-hand currency.

THE REAL PROBLEM

The problem in India, as everywhere else, is to create enough purchasing power possessing stable value to suit the needs of the community. All cases of unemployment and crises and several other economic phenomena can be traced in-directly, though not always directly, to monetary causes. The amplitude of the industrial fluctuations and the rigour of the unemployment evil can be reduced to a great extent by cautious credit policies pursued solely in the wider interests of the country. Other causes initiate the above phenomena, but the monetary weapon can tone downthe evils to a large extent, if judiciously used at the right psychological moment. Limited markets are the result of either under spending by the comparatively well-to-do richer classes, or lack of effective demand on the part of the other poorer sections of society. The total supply of finished goods under the present-day organised capitalistic mass production is bound to be greater than the demand, as there is no working against a set of previous orders as in the case of the handicraft system of industrial production. Unless effective demand is stimulated, recurrent overproduction, depression and crises, result as industry runs on in its due course. Such has been the fate of capitalistic production organised on a competitive basis. Stabilisation of business is a no less important cry than rationalisation⁹ of business methods and realisation of the economies of large-scale production. Various expedients are being tried to achieve this in forward and enlightened industries of the United States of America. But credit control is one method to check abnormal fluctuations in prices and enable the rational industry to run on an even keel. As in other countries, our ultimate goal should be steadier and more stabilised business. Without it there can be no real economic progress in India. More efficient money and a more rational use of it is essential to secure the expansion, rationalisation and stabilisation of business. The five M's are needed to make any country, India in particular, an efficient and progressive country, viz (1) man power, (2) money, (3) maintenance or food (4) material resources, and (5) morale or intelligence, with which the first four are directed. It clearly follows then that all countries should ensure the maintenance of prosperity with a growing population and ever-improving standard of living, both of which require an expansion in the volume of production and trade. Any false restrictions on the quantity of sound money would surely retard the growth of production and of trade.

HOW FAR THE SCHEME IS VALID

The creating of an elastic rural credit system, which is the sole object of this reform, is undoubtedly essential. It has long been overdue. Government paper distributed through co-operative credit societies is to be the elastic credit system. The joint-stock banking machinery has to be discarded, as the agriculturists posses no banking account. Safe and unfettered deposit banking as adovcated by the school of the ‘Banking Principle’ cannot be the desired remedy, as the Indian people do not possess good and sound banks spreading a network of branches allover the country. Nor do the people keep a deposit account with the banks, even if the banks were to extend their branches into the interior. Sir Daniel's ideas can be better expressed in correct economic language when it is stated that it is not the ‘reserve discount policy’ that Sir Daniel approves, but it is his aim to create enough credit without endangering the price-level to any extent, or subjecting it to the evils of artificial inflation. This at any rate, is the prevailing conception in the monetary field. Since 1923, this credit control and price-stabilisation policy are the newer ideals firing the imagination of all monetary reformers. Though not directly admitted, the self-same ideal which has been preached in England is being pursued to a certain extent by the Federal Reserve Board of the United States of America.

Secondly, war-time experience amply demonstrates the possibility of pure paper money with no specie ing. That is the truth underlying Sir Daiel's free-paper standard. The unit of account would be the paper-rupee: one-rupee paper preferably acceptable to the co-operative credit banks, the Government and the people, and possessing tolerably fixed purchasing power over a basket of goods in general. The weight of the unit, or the exchange value, or intrinsic value of the commodity used as the unit, are not of any real significance. The units which have to possess constant and stable value or purchasing power must be limited to actual requirements; then alone can they be true standard of value. The folly and unprofitableness of metallic money units, be they gold or silver, has long ago been exposed. Metallic money fails to act as a perfect store of value. Even paper money, if it fails to possess constant purchasing power, cannot be a store of value.

Another great essential virtue which true and efficient money should possess is the desirable quality of elasticity. Commodity money, be it gold or silver, does not possess this desirable quality, and in this respect it is paper money that can furnish this desirable feature. Apart from the fact that this virtue may be overdone or abused, wisely managed paper money alone can give the needed elasticity in all periods of time, short as well as long, or to use the economic language, seasonal, secular, cyclical and abnormal periods. But the manner of employing it must not be careless, or else, it might prove to be the most unsatisfactory and dangerous money. Hence all reformers prefer to have managed paper money, as it is the best and the most efficient type of money which society has discovered. Prof. Gustav Cassel in his book "Theoretische Sozialokonomia Winter Verlag Leipzig", says that "paper money quite unconnected with precious metals is theoretically the simplest and no doubt the most efficient (as he later on explains) monetary system. The further money is removed from the precious metals, the better will it be." Since this theoretical deduction of his has proved the true quality of money, the zeal for money reform is becoming more evident. Paper money, provided it is perfectly understood, generally accepted, easily defined, scientifically controlled and intelligently regulated, would prove a better substitute than a gold unit. But it is quite possible to manage gold as a kind of ‘fiat money’ and its value can be regulated by the credit of a Central Bank and Goverment's co-operation with them. A government-managed currency alone can indeed, theoretically speaking, be true money and posses all the characteristics of true money. But unfortunately, past experience in currency history teaches us that this cannot with any amount of reasonable assurance be secured. Theoretically speaking, intentional artificial control can stabilise the value of government-managed paper currency by setting up limitation of the supply of paper money. However, there are two dangers. The note-issue can be easily subjected to a profit and loss philosophy. Secondly, it can be subjected to artificial expansion in days of fiscal expediency. It is on this score that the paper currency management must be entrusted to a Central Bank or a National Board of Currency Commissioners, who are not likely to derive any personal benefit by subjecting it to a profit and loss philosophy.

The next important truth in Sir Daniel's plan of monetary reconstruction is the utilisation of the co-operative credit societies in place of the capitalistic mechanisms known as the joint-stock banking institutions. Every well-wisher of this country recognises that this co-operative spirit is nothing new to this country. With proper propaganda and encouragement, there would be early improvement of the character of the co-operative credit societies. With proper co-operative spirit, the society organised by non-officials can improve the right calibre of the borrowers and bring about a productive use of borrowed money. If such reliable men are trained, as Sir Daniel Hamilton recognises, more money can be placed in their hands for productive purposes. It is these that create money, and the Central Bank or the National Board of Currency Commissioners can issue it on the basis of the interchange of the products of their work. The Central Bank possessing details of the volume of production, the level of prices, the nature of unemployment, the stock of goods, and statistics of consumption that can be gathered out of a mass of statistics, will be of incalculable value in adjusting the money or bank cash to meet the needed money's work, so that there is the exact amount of money; neither insufficient nor superfluous. The publicity of its transactions would reveal the amount of money and the nature of the borrowers selected to make use of that money. The interest obtained for these operations can be used for promoting the welfare of the people. The rate of interest charged upon the workers and producers must conduce to their interests. So long as the Central Bank or the N.B.C. Commissioners pay heed to the consumers also, the well-being of all sections of society can be safeguarded. Production, Finance, Labour, and Consumers will all be satisfied with this method of creating and controlling money. But it depends on disinterested financial statesmanship of a very high order in the interpretation of the above statistics and controlling bank credit in this way.

The superiority of co-operative banking organisation to joint-stock banking is not carefully explained in the thesis of Sir Daniel. The possibility of making use of money for productive purposes is assured under the control of the efficient co-operative credit society. Foreigners who have to manage the joint-stock branches cannot understand the needs and requirements of the people. The salary that has to be paid would be so heavy that real branch-bank expansion is limited only to a few banks, and unless this machinery is superseded or supplemented largely by the new co-operative credit societies, we cannot hope to reach the masses quickly. It is for this reason that co-operative banking has to be preferred to joint-stock banking, which can easily become a prey to the capitalistic ambitions of the shareholders.

The existing defects of the co-operative credit societies must be remedied. The co-operative level has to be raised: quality and not quantity should be the ideal aimed at in the expansion of co-operative credit. Defective societies established in every city and town or big village cannot be considered as a ‘store of money’. The seed of co-operative credit takes a long time to grow into a flourishing plant and bear fruit. Though this seed has been planted in 1904, still the results are not encouraging. There are black sheep among the co-operative fold causing grave anxiety to the well-wishers of the movement. On their elimination, and proper application of money for productive purposes and businesslike habits in the matter of collecting arrears, depends the success of the movement. Co-operative credit aided by other manifestations of the co-operative spirit in the different walks of life, would soon raise the village life into a higher plane of economic progress, freeing it from indebtedness, ill-health and ignorance.

NOT A NOVEL SCHEME

While attention has already been drawn to the economic truths which underlie Sir Daniel's scheme, it must be frankly admitted that similar schemes were forged by distinguished thinkers in other parts of the world long ago. Mr. Henry Ford stated this self-same revolutionary idea long ago in the New York Times in 1921 in a famous essay entitled "Muscle Shoals". Sylvio Gessel and Keynes startled the world of bankers by their free and outspoken criticism of the present monetary standard based on gold holdings. There are a host of lesser lights who have been voicing the same maxim in season and out of season. The puzzled public have, beyond shaking their heads, done nothing to advocate the use of the recipe for their numerous ills. Sir Daniel, then, is in excellent company with such distinguished thinkers. But while others have systematically elaborated their plans and unfolded their ideas in a strictly scientific manner, there is a total absence of such procedure in Sir Daniel's statements. While he attempts to discard the whole monetary structure and throw it overboard, he does not logically fill in the gaps by placing suitable, acceptable and fool-proof or knave-proof planks. He appears to be lacking in the ‘engineering faculties’ which any architect should possess before he can hope to rear a lasting edifice.

GOVERNMENT CURRENCY vs BANK CURRENCY

While placing the issue of notes in the hands of the Government, Sir Daniel insists on due limitation of the quantity of its issue. He postulates for a thing which may or may not be secured. It is improper to level the charge that Sir Daniel is a mere ‘more money’ enthusiast. Money to whatever extent may be required by the people, must be created. The Government is to print such volume of paper alone. But fiscal expediency and abnormal demands for which no provision can be made, may give scope to unjust tampering with the currency issue. Unfortunately, the lack of stern morality in impecunious governments which have a fatal temptation to over-issue currency, is a real impediment in the path. Besides this, paper currencies are purely national in circulation, and the regulation of foreign exchange values would be a difficult matter. Even though rapid and arbitrary changes in the internal price-level can be remedied by varying the volume of inconvertible paper according to the dictates of an effective index number, which itself is a difficult thing to be constructed, small scale oscillations round the selected norm of the price-level would still be the prevailing feature.

Sir Daniel's scheme as well as Keynes’ managed currency have all the evils attendant on the scheme of Prof. Fisher. Yet they do not possess the chief merit of the latter. Gold has to be retained perhaps as a "servant and not as a master of mankind." This really is the difference between Prof. Fisher's stabilisation scheme and the pure pre-war gold standard system. Prof. Fisher is shrewd enough to grasp that gold is a thing that cannot be dispensed with. It has won an accepted position as a regulator and governor of commercial and financial values.

Even granted that the Government does not abuse the privilege of issue, it does not immediately follow that Government issue is superior to bank currency. The superiority is presumed because of the fact that the nation's assets, which are the assets behind the Government currency, must necessarily be larger than bank assets consisting of the shareholders’ wealth alone. But Sir Daniel is evidently confusing ing for limitation. He appears here to consider ing as the sole creator of the necessary value of the currency note. Sir Daniel seems to have the conception of ultimate redemption in his mind. It seems impossible for him to disassociate his mind from the value of things behind or at the of it i.e., the Government note. This process of economic reasoning is faulty. It is limitation with reference to demand that creates value. It is not the land, labour, or real estate, that gives value to the Government note. Issued for progressively productive purposes, our "Monetised or capitalised labour" instruments, would bring prosperity, he argues like Mirabeau. He does not go to the extreme length of Mirabeau who declared "that land-secured notes would never become redundant any more than the humidity of the atmosphere can become excessive." Sir Daniel indeed argues for limitation. True value depends on this, rather than the things at the of the note. But he does not recognise the inferiority of paper money to commodity money. Inconvertible paper not being redeemable into any fixed, standard uniform thing at a fixed rate, can be easily over-issued. Commodity money alone possesses this, and prompt redemption acts as a check against over-issue. If the matter of redemption is removed, the road to over-issue becomes plain and easy. Once set foot on the path of the inclined plane, the Government would soon be landed in a bottomless abyss, and financial recovery would become a hopeless affair.

It is strange why the inferiority of Government supplied currency to bank currency in the matter of elasticity, cheapness and prompt satisfying of the needs of the people, is not

recognised. Safe and unfettered deposit banking furnishes the elastic currency that is needed by the people. A managed government paper currency, not based on gold and issued through the Controller of Currency, requires conduit pipes through which the flow of money should take place. If these are too many, weak, unnecessary and intervening links between the ultimate provider and the ultimate user of the credit instruments, as is at present the case, it follows clearly that the real object would be defeated: Through the co-operative credit societies or people's banks, he would secure the distribution of credit currency. Additions to stock of money have to be made by the Controller, or currency authority, if the volume of wealth is increasing. A rapid transfer of the same from the credit manufactory is to take place, so that the benefits of such creation might reach the masses quickly. A government managed currency can thus be made cheap and elastic if the above defects are removed. A prompt satisfying of the needs may take place under wise management. It is through the co-operative banks that such provision of elastic currency is to be indirectly secured. It must also be noted that this indebtedness to Government must be declared a first lien on the assets of the co-operative banks. Banks have certain inducements which can make the people accept their notes, while a paper currency of the Government might have no such means. The co-operative banks might do the same thing. Thus the needed expansion might be brought about by them.

A second reason why the Government ‘fiat’ money may fail to be ideal money is this. The Government might be afraid to contract currency as soon as production or trade diminishes or falls off. When the Government attempts to reduce currency to attain stable prices, it soon becomes unpopular. While everybody welcomes currency inflation, no one tolerates the idea of deflation, though it is needed by the state of economic circumstances prevailing at the time.

Like Emperor Frederick the Second of Germany, Bryan of the United States of America, Sir Charles Wood, the father of the present Government paper currency system, Lord William Bentinck, the founder of the Government Bank of Madras of 1805, Robert Owen, the English Socialist, Bronterre O’Brien, the Chartist Leader, or Arthur Kitson, the English industrialist, and Major Douglas, the English currency reformer, Sir Daniel Hamilton is a staunch believer in the superiority of Government credit over private credit. Like the other famous thinkers, he is of opinion that the true function of the State is to issue currency. But the same arrangement can be obtained by making the Central Bank note a government-guaranteed note, as has been done in the United States of America. President Wilson needed an elastic bank issue, and in order to placate the Republican Party and Bryan, the Government guarantee had to be superimposed on the original plan formulated by Mr. Glass. The Government credit for which Sir Daniel is so anxious, can be easily enrolled by this device and all the advantages of bank-issue would be retained. Under proper safeguards, such as supervision, the Government guarantee of the Central Bank note can be easily taken up without serious detriment to the Government. A Central Bank's management of paper currency with Government guarantee behind every bank note issued, would be the better ideal. If the reformers of managed paper currency were to enlist this ideal, even the illiterate masses of the country would not question the standing of the bank note, The supercession of the present G. P. currency note by the Government-guaranteed bank note would become an easy matter. All the disadvantages of Government Paper Currency would be very easily removed by a Central Bank or National Bank of Currency Commissioners, independent of political influences or pressure, creating this credit currency and spreading it through the channel of the co-operative credit societies. It is far better to have the credit of the Central Bank called into question than the credit of the Government itself, which might happen at troublesome times, if the Government were to issue notes directly.

PROVISIONAL CONCLUSIONS

Apart from the above instances of deviations from the accepted scientific terminology, grave omissions and imperfect planning of his whole scheme, Sir Daniel has allowed himself to be carried away by his zeal and enthusiasm in the statement of the conclusions which form an important part in the scheme of his monetary reconstruction. A few such examples have to be given lest our remark might be misunderstood, Sir Daniel repeats the oft-quoted truth that "managed paper currency is the best currency," He asks with almost naive simplicity, whether silver or paper currency is the best? Even at the risk of tiresome repetition, it must be admitted that it is not banking or convertibility that gives value to currency. The fundamental thing is that the value of money, like other things, is determined by scarcity or by the interaction of the forces of demand and supply. Limitation is the fundamental basis of value of paper money, for its demand is only monetary demand. There is no composite demand for it as in the case of gold. Every student of economics knows that neither gold nor silver is ideal money. Managed currency alone can come up to ideal money, which possesses stable purchasing power, and is elastic enough to suit the needs of the people over short as well as long periods of time, including seasonal, secular and cyclical changes. Government currency based on labour and actual products must be created. It is an undeniable fact that, "labour is the only fund on which any groundwork of a sound system of credit must ultimately be placed." There is nothing fundamentally wrong in this statement or which will not be accepted by the orthodox economic thought. Since Adam Smith, the father of English Economic thought, stated long ago that "the annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes," it has become the object of all economists to forge a lasting, direct and desirable link between this fund, which ought on no score to be spirited away for unproductive purposes, and the credit system of the country. This is the true security or the ultimate assets on which money and credit should be based. Sir Daniel would create Government paper currency on this basis in order to make it more efficient than present-day currency and bank credit, which are based on the decreasing output or assets of the gold mines. A rational money and marketing plan is essential in this age of industrial rationalisation to organise prosperity for the hardworking producers. Thus stated, the whole scheme is economically feasible and not fallacious. But whether any country, present-day India in particular, is in a position to work this scheme, has to be decidedly proved before any hazardous schemes that are theoretically sound can be successfully carried out.

But the return to the gold standard by all the important countries of the world need hardly be mentioned. The good old gold standard has been reintroduced with slight variations here and there to suit local conditions. International attempts to stabilise the long-period tread of prices are being made on a large scale. The attempt is to manage the gold standard with the avowed object of realising economic stability in life. Without departing from the safe conservative and accepted principles of monetary economies, a pragmatic and workable control of price stabilisation is being attempted by some of the Gold Standard countries. Moderation of price swings, and their relative stability round a norm, and prompt satisfying of the business needs, are the present day aspirations of the enlightened people. Manipulation of the discount rates, open market operations and moral suasion, are to be the recognised means to be employed by the Central Bank. Such a policy is to be worked under the alert management of the Central Bank officials according to a set of indices, such as the general purpose index number, volume of credit, state of consumption, volume of production, and volume of employment, which afford the criteria for their action. The Central Bank's policy is to be reinforced by timely action on the part of the Treasury, so that this idea might be achieved under a managed gold standard system. This is the aim of modern Central Bank policies. But unfortunately this is not the ideal that our Banking Messiah wants to develop in this Country. We would be alone and isolated if we were to pursue the scheme of Sir Daniel. Though his scheme can be made theoretically perfect and conceivable, it is bound to be ineffective. Until the improvements suggested in the second part of my article are carried out, even the refinement of the thesis would not be complete.

1 A synopsis of his thesis is necessary before any criticism can be leveled at it. It is a pity the whole of his doctrine is not available in any tabloid form, and so inference has to be made from his recent lectures on different platforms.

2 See my ‘Present Day-Banking in India’ 2nd Edition 1925, Calcutta University publication. Chapter on the "Indigenous Banker of India"–

3 See J.M. Keynes–"Preface to the Tract on Monetary Reform" –

4 See H Lowenfeld–"Money in Fetters" –p. 18–

5 See Prof G. Knapp–"The State Theory of Money"–p. 301–

6 Mr. A. H. Abbati says that the economic problems chiefly arise out of consumption and a step towards their solution would be the regulation of Government purchases, so that they may vary inversely with the expenditure of private consumers. An interesting suggestion, but purely dependent on State finances to be carried out effectively.

7 This is the best four-line epigram on the "Modern World" for which a prize was awarded by the London Spectator.

8 See the Indian Trade Commissioner's Report in London for the two years, 1926-1928–

9 The principle of rationalisation includes control of production in relation to demand, the elimination of price-cutting competition, the central organisation and simplification of marketing and distribution, the prevention of waste in transport and the reduction of labour costs by the fullest possible utilisation of labour-saving machinery, the closing of obsolete and inefficient works and the concentration of production in the most modern and highly mechanised plants. Unless such a policy is applied to our cotton and coal and industries as a whole, it would not be possible for India, the Lazarus amongst the nations, to be clad in the raiment of Dives. See Walter Meakins’, "The New Industrial Revolution."