"free gold in America cannot be regarded as superfluous and will probably be absorbed in a comparatively short time. (ii) Uncertainty of the estimates of the amount and 39. There is an element of uncertainty involved in the estimate of the amount of gold required for giving effect to the scheme, and it is impossible to be sure that the additional demand for gold could be spread over the period of 10 years. 40. Sufficient weight has not been given to the possibility of the replacement, as the result of the scheme, of a part of the note circulation by gold. If a high valued gold coin is introduced, the alternative of carrying a few gold coins would present some attractions and might make people prefer gold coin. In view of India's attitude towards gold, many who have been in the habit of using notes because paper is more convenient than silver rupees might turn to gold, which would be as convenient as rupees and more attractive than notes. own. 41. Gold coin is fully valued and the metal has a prestige of its We anticipate that the decline in the value of silver which would result from the proposals of the scheme relating to that metal would lead to a loss of confidence by the Indian people in the value of silver as a store of savings, and would, to that degree, induce an enlarged absorption of gold for non-monetary purposes, thus augmenting the gold requirements of the scheme. 42. It has been urged that if a gold currency is introduced into circulation, and if exchange is stabilized, the result would be so to increase confidence that gold would come out into circulation or come back into banking reserves from its present location in hoards. This effect might no doubt be produce1 by a development of banking and investment habits; but there is no very obvious reason why it should be produced by putting gold into circulation. The mere act of putting gold into circulation would not in our opinion develop the banking and investment habit. 43. The scheme involves the reduction of the proportion of gold and sterling securities in the Reserve to gross note circulation, during the transitional period, to 30 per cent. That proportion is in our opinion too low for safety, especially during a period of transition, and the external convertibility of the local currency would be seriously jeopardised if the transition to the new system should coincide with an unusually bad year for Indian exports. An increase in the proportion to a safe level during this period would mean an addition to the estimated gold requirements. 44. It would be imprudent to place much reliance on the anticipation that the initial demand for gold can be limited to Rs.50 crores. As soon as it became known, and it must become known at once, that the status of the rupee was threatened, holders would probably hasten to get rid of every rupee they could spare, and it is quite possible that the conversion of the whole amount of surplus rupees might thus have to be effected within a short time after the initiation of the scheme. 45. If the gold requirements should prove to be greater than is contemplated in the scheme, or if the absorption could not be spread over a period of 10 years but progressed more rapidly, the effect would be to intensify the difficulties and to increase the expense of the project. Had the control of the currency meanwhile been transferred to a bank, such an intensification might involve a restriction of credit conditions in a manner and to a degree highly detrimental to the country's economic progress. (iii) Effect on the silver market, and possibility of realising the assumed price. 46. The proposals as to silver involve even more risk than those as to gold and even greater disadvantages. To the extent of about two-thirds of the output, silver is not won for its own sake alone but either as a by-product of base metals or in conjunction with gold. If a substantial fall in the price of silver were to take place, any consequent curtailment of output would hardly affect the base metal product at all, would have more (but still little) influence on the production from gold ores, and would have its chief effect on silver ores only, i.e., on about one-third of the silver production. Even here the effect would be slower and smaller than might at first sight be expected, because the fall in price would not affect the richer mines, and the poorer mines would struggle to continue their production as long as possible. On the other hand, the increasing use of notes, not only in Europe but in the Far East, and the increasing resort to nickel and other base metals for subsidiary coinage, are factors which point to a distinct diminution in the demand for silver in future. The future of the silver market must at all times be a matter shrouded in obscurity: but, assuming no change in the status of the silver rupee, the best working hypothesis at present is that the production of silver in the next 10 years will be sufficient to meet the demand. But if, as contemplated in the scheme, silver were to be dethroned from its present position in India, and if for several years India were to meet her own normal demand for silver by melting rupees, we should not be surprised to see silver fall much. below the level of 24d. assumed in the scheme, especially if, as is not improbable, the action of India had the effect of making other silver using countries follow suit. 47. The Government's policy in regard to gold would also react on the silver position. If the policy of introducing a gold currency were adopted, it would, by largely augmenting the already extensive demand for a metal that threatens to be in increasingly short supply, result in further depression of the gold price of silver. (iv) Effect on silver hoards. 48. The people of India have from time immemorial placed their trust in silver as the medium of exchange and as their store of value. They are deeply interested in the value of silver bullion, and it is contrary to their interests to depreciate it. The present proposals would inflict heavy losses heavy losses on the poorer classes, who have put their savings into silver ornaments and who would find their stores of value depreciated by perhaps 50 per cent. by the action of Government. It might well happen that, when it was seen that the price of silver was doomed to fall, there would be a tendency to change over from silver to gold in all parts of the world where silver is still held in large quantities as a store of value. It is proposed, in the scheme, to protect the value value of the Indian holdings. of silver against this inevitable depreciation by an import duty. Quite possibly, if it were a very heavy duty, it might protect them to some extent. If it did, it would put the Government of India under a moral obligation to maintain the price of silver for practically all time; for at the completion of the plan they would have sold nearly 700 million ounces of silver to the people at a price that was possibly double the world price. In our opinion, however, the effort to maintain the domestic price of silver irrespective of world price would probably fail. There has always been a considerable trade in silver over the land frontiers of India; and, apart from the difficulties of attempting to exclude a valuable metal from a wide frontier, if people who are accustomed to do that trade were to find that the value of silver in the outside world was very much below the value in India, it would probably affect confidence in the value of silver in India itself. In the case of an article which, like silver, is largely kept as a store of value, the influence of opinion on its value is extremely important. (v) Effects on China. 49. We have thought it desirable to treat separately the effects of these proposals on China. For a very long time the Chinese have been profoundly concerned at the uncertainty of silver as a basis of credit and as а measure of value in China. China is now the only great silver standard country. The countries with which the bulk of her trade is carried on are all either on the gold standard or on the gold exchange standard. The Chinese have for a long time been trying to find some means of substituting gold or some form of gold standard as the basis of their currency. This would probably have been done already but for the expense. The catastrophic fall in the price of silver in terms of gold, which would take place on the bare announcement that surplus silver equal to the world production for three years was for sale, would undoubtedly tend greatly to accelerate the movement in China, and might induce her immediately to set about securing the gold needed as a basis for instituting some form of gold exchange standard. That would in turn magnify the effect which had already been produced on silver by the Indian announcement, both by the reduction in demand and to some extent by the increased supply of silver that might come into the market. Moreover, the adoption of a gold standard by China would produce a further new demand on the world's gold supplies, and this demand would tend to appreciate gold and thus still further to depress the price of silver. 50. The reaction on Chinese trade would be by no means negligible. China is the greatest, and perhaps the only great, undeveloped market left for the expansion of international trade. The effect of the announcement that the Indian Government proposed selling a large quantity of silver would be immediately to throw out of gear the exchange with China and for a time to paralyse the growing trade of the world with that country. India, apart from her direct trade with China, which is a growing market for cotton and cotton goods, could not escape injury from a wide-spread dislocation of the kind. (vi) Raising of the required credits. 51. As regards the question of credits, we have had the benefit of the opinion and advice of the authorities best qualified to speak on the subject, namely the Governor of the Bank of England and the Governor of the Federal Reserve Bank of New York. This is a matter in which Great Britain would not be able to act alone without the co-operation of America. Both authorities view the proposal with alarm on the grounds that it would retard the progress of monetary reconstruction in Europe, would upset world prices, and would be fundamentally harmful both to India and to the rest of the world. The United States is directly interested in the proposal through its mining industry, both in silver and in base metals. The currency authorities and bankers of the United States, with its great and traditional interest in silver, cannot be expected to support or encourage a proposal which would deal such a blow to the silver market as the addition to supplies of thrice the whole of the world's production for a year. In these circumstances it appears that insuperable difficulties would be encountered in obtaining the necessary credits. It must be pointed out that, before adopting this proposal, or any other proposal for the introduction of a a gold currency into India, the authorities responsible for the scheme must be certain beyond the possibility of doubt that they can carry the scheme successfully through. For that purpose, they must be absolutely assured that they can obtain the amount of gold required. The evidence which we have received. prevents any such assurance. In view of that evidence, we are confident that those responsible for the scheme under consideration would be the first to recognise that the external conditions which are essential for the success of the scheme at the present time are not fulfilled. Cost of the scheme. 52. Before concluding this section we must refer to the estimates of the cost of the scheme. Mr. Denning puts the cost at 165 crores per annum during the first five years and 1'12 crores thereafter. Sir Basil Blackett, by providing for a smaller holding of gold, would reduce the estimate to about two-thirds of a crore after the transitional period. These estimates are based on a proportion of 30 per cent. gold and gold securities in the Reserve during the transition period, a figure which we have already criticized as unsafe. Moreover, these estimates take credit for the income to be derived from the conversion of redundant rupees into interest bearing securities. This income would become available ultimately whether the scheme were adopted or not. Mr. Kisch, after eliminating this credit, considers that, even on the basis of a 30 per cent. proportion, the permanent loss to India as the result of the adoption of the scheme, to which he is strongly opposed, can scarcely fall short of 3 crores a year, besides an indefinite and incalculable amount depending on the extent to which the promotion of a gold circulation checks the future natural growth of the note issue. We have not attempted to recast any of these estimates on an arithmetical basis because we feel that from the nature of the case they must be largely conjectural and would be liable to be greatly exceeded owing to various causes which have been referred to above. All that is certain is that there is expense involved, and that it must be substantial. Unacceptability of the Scheme. 53. For all these reasons, the scheme fails to commend itself In our opinion both the objects which the scheme has in view can be attained without any of the risks and disadvantages attendant on the scheme itself. Indeed, all that is claimed for it, in comparison with other proposals, is that it would attain the object of educating the Indian people in the habits of banking and investment, and out of the habit of hoarding, more speedily than any other scheme. As already indicated in paragraph 42, we do not think it would do so. The habit of hoarding the precious metals became ingrained in India through centuries of war and rapine, and has persisted under British rule in spite of security of property and the introduction of improved currency and banking facilities. There are welcome signs that the deep-seated habit is beginning to vield to these influences, but we see no reason to believe that the introduction of a gold currency would accelerate the process. Even if it would do so, it seems to us that the acceleration would |