ABSTRACT
The Indian gold exchange standard that had arisen at the end of the nineteenth century was an interesting and important one. India was consequently on neither; pure silver, pure gold nor bimetallic standard. Under this novel scheme, the exchange rate of the rupee (a token silver coin) was pegged to the British sovereign, which in turn was convertible to gold at a fixed rate. The exchange rate was pegged at a rate which ensured a small positive balance of payments surplus in favour of India (after accounting for all expenditures of the Indian government including remittance of home charges). Through this surplus, new coins were put into circulation. The question, however, arose as to whether this increase in money supply through a surplus in balance of payments was sufficient to accommodate the growing needs of the domestic (Indian) economy. If not, as we have seen above, deflation in the general price level was inevitable or in other words, an increase in the gold price of the rupee. The system of council bills also ensured that gold inflows into India were minimized to just the net surplus in the balance of payments. This was an important corollary to the gold exchange standard because even then the West continued to be weary of India’s propensity to hoard precious metals so that gold, once it entered India would be ‘consumed’, would never leave. The shortages of gold would raise its price, sending the world into deflation and recession.
