Gold-exchange standard and/or the bimetallic standard in India: Keynes and Kemmerer

Abstract

The accepted explanation is that monetary reform in India was advanced by adopting the gold-exchange standard. This paper identifies India's system as the bimetallic-exchange standard. Rupee banknotes backed by silver circulated in the domestic economy, while gold species was used for payments in foreign transactions. India's economy did not have a central bank, and the British government established the Gold Standard Reserve and the Paper Bank Reserve to accumulate banknotes and gold specie in India and on the balance sheet of the Bank of England.

The stock of specie accumulated in the Reserves was formed from the profits of speculative operations by monopolistic banks. The balance of silver and gold species in the economy alternately increased and decreased between 1900 and 1914. When the economy suffered a recession between 1909 and 1913, the monopolistic banks preferred to accumulate the stock of gold species, the price of which continued to rise. The Gold Standard and the Paper Money Reserve served to mediate the flow of specie between India and Great Britain.

Keynes (1913) proposed the need to establish a central bank in India to control the money supply; however, Kemmerer (1916) explains that the Indian government had to expand the issuance of banknotes without limit during the crisis.