CO882-(8-9) — Page 423

PUBLIC RECORD OFFICE

Reference -

C.O. 882

22

36

Perhaps the nearest approach to our own conditions are the conditions in There, as in Holland, they have had for many Java and the Netherlands hubies

The circulation consists of silver bears a gold standard without a gold circulation

As in Holland, no reserve is maintained against gulders and Bank of Java botes

What proportion the silver currency hears to the total circula

The Bank the silver eurrenev tion it is impossibile to say, as no liggures of silver circulation are available under its Charter issues notes of 5-10-25, 30 and up to 1,000 guilders, and it has the obligation, which the Government has here, to maintain the parity of the circulation. To enable to do this it has to maintain a com reserve of two fifths of its issue, of which at least half or one fifth of its issue must be in silver guiblers, and three- fourths of the reserve or thrve tenths of the total issue must be kept in Netherlands Lustra

On 31st October last the Bank had notes to the value of eighty million guilders in circulation. against which it held in Netherlands India gold coin 3.155.4×0 guilders, and in silver 34,961,745 guilders, besides 135,368 guilders in subsidiary coin It had also in foreign gold and bullion 8,505,000 guilders, making a total gold coin and bullion reserve of 11,660,4×0 guilders against not only 80 millions of notes, but also a further 1,300,000 in deposits, and no reserve against an unknown amount of legal tender silver

23

21 It is true it had also fourteen millions

"

at call in Amsterdam, but counting that, it gives a total gold reserve of twenty five millions six hundred and sixty thousand against liabilities on notes and deposits of ninety eight millions, or a httle more than one fourth

23 In bonds which correspond to our securities if had one million eight hundred and forty five thousand guilders only.

26 The Charter of the Bank of the Netherlands is similar to that of the Java Bank The legal proportion of its total coin reserve to its note issue is two-fifths, and in 190 against a note circulation of 268 million guilders, in round figures, it held 924 millions in gold and 501 millions in silver, the balance being held as dis- counts and advances Lately it has been increasing its gold and diminishing its silver. On 13th February last, according to the Economist, it had in gold 120,996,000 guilders, in silver 34,×56,000, and in discounts and advances 131,388,000, against a No doubt a certain proportion of the silver circulation of 277,020,000 guilders

went to Sumatra to replace Straits dollars

27 Besides its large paper circulation the Netherlands had in 1907 a silver circulation of 661 million guilders against which it had no reserve (Statesman's Year Book 1909, prtge 1042)

24.

From what has been stated it will be seen that in no country with a fiduciary circulation depending on monopoly or scarcity for its value is the gold-cash or bullion reserve more than one third of its fiduciary circulation of coin and paper. That is the case even in countries like Netherlands and Japan with a gold currency of their own, and as the issuing institutions in these countries have also heavy liabilities on deposit and other accounts the effective reserve is really very much less. 29. In our case we have no liability for redemption of our fiduciary circulation in consequence of displacement by gold or other medium of circulation now that our currency has been ousted from all places not under the authority of the Governor. It may be held by the banks as part Gold cannot take any place in our circulation.

of their balances, but to get into circulation it must pass into the hands of the Seven pounds is too large Currency Commissioners in exchange for notes or dollars.

30

for a unit in a country like this, and the individual sovereign at $8.57 is undervalued, and no coin that is undervalued will ever become an effective part of the circulation. We have not therefore to provide against a displacement of our fiduciary circulation of coin and notes by gold, but only for such contraction as may he necessary in times of stress, and our reserves for this purpose must be proportioned India, as has been shown above, to our total circulation, not merely to our note issue. had to contract its circulation about five per cent. in an exceptional time of stress, while Japan had at the same time to contract only about one per cent.

31. India intends to aim at a gold reserve of twenty five millions sterling. That, with the gold in its note issue reserve, will give it a gold fund of fifteen per cent. of its circulation, and it has no more beyond the ten millions sterling of gold Practically the whole of its twenty-five investments in its note issue reserve. millions, when it gets them, will be invested or at any rate lent as money "at call."

Our position in one important respect differs from that of any other

32.

37

country. In proportion to our population, perhaps no country in the world has so large a trade to finance Our imports and exports aggregate some seventy millions sterling India, with its vast population, has an aggregate trade only three times as large as ours. The financing of our enormous trade is in the hands of the exchange banks, and, as already stated, the proportion of our circulation held by Differences between banks are them is a very substantial proportion of the whole. settled in Government notes, and the bulk of our $100 and $50 notes are held by Our banks the barks as the most convenient method of settling such differences. therefore require currency for this purpose in addition to the balances which prudent banking requires them to maintain against liabilities on deposit and current account, and that is the reason why they hold so large a proportion of our total circulation

33 Bad times must, in the circumstances, tell with exceptional severity on our Circulation, as not only does employment tend to become scarce and wages and prices to fall, but the exchange operations of the banks fall off to an even greater extent. A five per cent contraction, which sufficed to carry India through the recent had times, would have been inadequate here.

34. The facts during the recent crisis are obscured and complicated by the demonetization of our currency in Sumatra and the Siamese Provinces of the Malay Peninsula. The returns of imports and exports of coin are incomplete, as a large quantity enters and leaves in the pockets of small traders in notes or coin, of which the returns take no account, but the import and export returns show that in 1907 and 1908 the imports of our coin exceeded the exports by some four and a half millions. In the same period our circulation fell by nine and a half millions, so that apart from the demonetization of our currency in other countries our circulation contracted by five millions at most, probably four and a half is nearer the mark On the assumption that the internal contraction was five millions our internal circulation fell from forty two millions at the end of 1906 to thirty-seven

per cent millions at the end of 1908-a fall of less than twelve

35

As the financial crisis fell upon us with exceptional severity, and was one of the most serious and prolonged of modern times, and we met it by redeeming less than 12 per cent. of our circulation, it may safely be contended that an immediately available reserve of 20 per cent. of our total circulation would enable us to weather I mean twenty per cent. any probable crisis without trenching on our investments. of our total circulation, not merely of our note issue.

36. To make ourselves absolutely safe and at the same time to obviate any necessity of selling investments in a time of crisis when we should probably lose heavily, it might be put that our immediately available reserve, half in gold and half at call, should normally be between twenty and thirty per cent. of our total circula- tion, and should not be allowed to fall for any period exceeding, say, six months below ten per cent.

37. Our silver reserve, which is only required to meet a sudden change in the universal tendency of modern times to prefer notes to coin, need not at the outside be more than one-fifth or twenty per cent. of our note issue, but should perhaps not It is useless, as already pointed be allowed to fall below ten or fifteen per cent.

out, for the purpose of maintaining the parity of our currency, and is only necessary in so far as it may be required at any time by the public in place of notes.

38. The immediate problem is the realization of our silver bullion in the reserve and its due allocation between gold, gold at call, and investment.

39.

With the present acute demand for labour, which is daily growing more acute, our circulation must expand as that demand is satisfied. The prospect of our circulation having to be contracted is therefore remote, and the prudent policy is to That can take advantage of this period of safety to strengthen our reserves. obviously best be done by adding to the parts of our reserves which yield a return-- money at call and investments--instead of keeping any additional part in coin which yields no return and in fact involves a small charge for its custody. If the amount realized by this bullion is divided equally between investments and call money it will bring investments up to eleven million dollars. Accretions to the reserve due to expansion of circulation should be divided as to one-half to investments and one- quarter each to call money and coin, until gold and call money amount to thirty per cent. of our total circulation.

40. If that policy is pursued the deficit in the investment portion of our reserve should be wiped out in two years' time, about.

41.

As to keeping gold here, the experience of the late crisis has proved unmistakeably the wisdom of not doing so, but of keeping it in London.

India

F 3

21005

I DA

6

PUBLIC RECORD OFFICE, LONDON

ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC- COPYRIGHT PHOTOGRAPH-NOT TO