Model Answer
0 min readIntroduction
The Gold Bullion Standard, implemented in British India in 1898, was a monetary system where the Indian rupee was pegged to the British pound sterling, and the pound was convertible into gold. This system aimed to stabilize the Indian economy and facilitate trade with Britain. However, the standard faced increasing strain in the early 20th century due to several factors, culminating in the ‘ratio controversy’ which ultimately led to its abandonment in 1917. This controversy revolved around the increasing disparity between the official exchange rate and the market rate of silver and gold, impacting India’s balance of payments and economic stability.
Establishment and Functioning of the Gold Bullion Standard
Prior to 1898, India operated under a silver standard. The adoption of the Gold Bullion Standard was largely influenced by British interests, aiming to align the Indian monetary system with the global gold standard dominated by Britain. Under this system, the Indian government guaranteed the convertibility of rupees into sterling, which in turn was convertible into gold at a fixed rate. This meant India could only issue currency backed by its gold reserves or its ability to obtain sterling for gold.
The Emergence of the Ratio Controversy
The root of the controversy lay in the divergence between the official exchange rate and the market rate of silver and gold. Britain’s adherence to the gold standard, coupled with increased silver production globally, led to a fall in the price of silver. This meant that India, a major silver producer, received less value for its silver exports when converted to sterling. Simultaneously, Britain’s ‘home charges’ – expenses incurred by the British government in India (including military expenditure, pensions, and administrative costs) – were substantial and payable in sterling. These charges increased over time.
Impact of Home Charges and Silver-Gold Ratio
- Increasing Drain of Wealth: The combination of declining silver prices and rising home charges resulted in a significant drain of wealth from India to Britain. India had to export more silver to pay for the same amount of sterling, exacerbating the economic imbalance.
- Fixed Exchange Rate Problem: The fixed exchange rate between the rupee and the pound became increasingly unsustainable. The market demanded a devaluation of the rupee to reflect the changing silver-gold ratio, but the British government resisted this, fearing it would damage British prestige and trade.
- Restriction on Currency Issue: The gold standard limited the Indian government’s ability to increase the money supply to meet domestic needs, hindering economic growth.
The Suspension of the Gold Bullion Standard
The outbreak of World War I in 1914 further aggravated the situation. Increased wartime expenditure by Britain led to a further rise in home charges. The demand for sterling increased, putting further pressure on India’s gold reserves. By 1917, India’s gold reserves were severely depleted, and the government was forced to suspend the Gold Bullion Standard. This suspension allowed the rupee to float, leading to its devaluation against the pound. The official exchange rate was adjusted to better reflect the market realities of the silver-gold ratio.
Consequences of the Suspension
The suspension of the Gold Bullion Standard had several consequences:
- Rupee Devaluation: The rupee depreciated, making Indian exports more competitive and imports more expensive.
- Increased Inflation: The increased money supply led to some inflation in India.
- Reduced Drain of Wealth: The devaluation helped to reduce the drain of wealth to Britain, as India received more rupees for each pound of sterling.
| Feature | Pre-1917 (Gold Bullion Standard) | Post-1917 (Suspension) |
|---|---|---|
| Exchange Rate | Fixed (Rupee pegged to Pound Sterling) | Floating (Rupee value determined by market forces) |
| Gold Reserves | Required to back currency | Less critical for currency issuance |
| Home Charges | Significant drain on Indian wealth | Reduced impact due to rupee devaluation |
Conclusion
The end of the Gold Bullion Standard in British India, triggered by the ‘ratio controversy’, was a pivotal moment in Indian economic history. It exposed the inherent imbalances and exploitative nature of the system, which favored British interests at the expense of India’s economic well-being. The suspension, while initially disruptive, ultimately provided India with greater monetary autonomy and helped to alleviate the drain of wealth. This event laid the groundwork for future debates about monetary policy and economic independence in India.
Answer Length
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