‘John Maynard Pangloss: Indian Currency and Finance in

Imperial Context’ in Sheila Dow, Jesper Jespersen & Geoff Tily

(eds), The General Theory and Keynes for the 21st Century,
Cheltenham: Edward Elgar Publishing Ltd, 2018:

9.  
John Maynard Pangloss: Indian
Currency and Finance in imperial
context
Radhika Desai

Keynes’s writing is bookended by major exertions on international mone-

tary subjects. Indian Currency and Finance (1913, hereafter ICF), generally
regarded as a masterly description of the operation of the gold standard,
opened an intellectual career centrally concerned with matters monetary. It
closed with the Bretton Woods proposals for a new international monetary
system for the post-war international world emerging from the Thirty
Years’ Crisis of 1914–45, based on a thorough critique of the imperial one
that entered it. As originally proposed, these arrangements were designed
to allow ‘each country to pursue its national objectives of full employment
and price stability’ (Dostaler 2007, p. 206), rather than sacrifice them to
exchange rate stability as the gold standard required. These proposals were
defeated by the US’s vain desire to install the dollar as the world’s currency
on the model of sterling before 1914 (Desai 2013). However, the regularity
with which they pop up in discussions of the reform of the international
monetary system even today shows that they were in advance of historical
possibilities (Desai 2009) and remain a lodestar.
Most writers on Keynes emphasise continuity between the two. Robert
Skidelsky argues that ‘[i]nternational monetary reform, based on the grad-
ual elimination of gold, was . . . a constant in Keynes’s thought’ (Skidelsky
1983, p. 275). Gilles Dostaler believes ICF contained ‘an early formulation
of [Keynes’s] positions on international monetary system reform, which he
developed fully in the 1940s’ (Dostaler 2007, p. 206). Dudley Dillard finds
in ICF ‘Keynes’ early opposition to orthodox monetary theory’ (Dillard
1948, p. 298). However, this chapter seeks to demonstrate that, while there
are elements of truth in such statements, like much Keynes scholarship,
they privilege the technical over the political in ways that dissimulate the
radicalism of Keynes’s mature ideas (Desai 2009; Desai and Freeman
2009) and the intellectual conformity of his early years. They attribute to
the technical aspects of ICF an originality they did not have, while ignoring

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the fact that the genius of the Bretton Woods proposals which, by contrast,
were original to Keynes, lay not in the technicalities of managing money
but in Keynes’s vastly changed conception of the purposes for which to
do so.
The Bretton Woods proposals were based on Keynes’s comprehensive
critique of the gold standard: for its deflationary bias, its focus on exchange
rate stability at the expense of expanding employment and production, its
constrained liquidity, its control by a single country, its reliance on unre-
stricted short-term international capital flows and support for the short-
termist financial interests of the City, for speculation and a high degree of
what we today call ‘financialisation’. Not only is this critique wholly absent
in ICF, it celebrates the ‘perfection’ of the gold standard in India (ICF, p.
25) that put her not only in the ‘mainstream of currency evolution’ (ICF, p.
21), but ‘in the forefront of monetary progress’ (ICF, p. 182).
No one was more aware of the long and arduous journey he had under-
taken than Keynes himself: so many of his writings open with remarks on
the intellectual distance he had travelled since his youth and how conven-
tionally free market and free trade his views then were. Smithies dates his
‘long struggle of escape’ from 1919, when the problem of unemployment
first began to unsettle Keynes’s Marshallian convictions (Smithies 1972,
pp. 463–4).
This brief chapter seeks to reveal the political chasm between Keynes’s
Panglossian positions in 1913 – as they related to both India and Britain –
and those in the 1940s, by now chiefly relating to Britain. Exactly how
Keynes traversed the chasm – certainly slowly if we note that as late as
1929 he sought to use the reinstated gold standard to fight off the US’s
financial challenge to Britain (Keynes [1931] 1971, pp. 235–7; Dostaler
2007, p. 215) – is the subject for another longer work (Desai 2015 is a start).
In what follows, I first deal with what Keynes was really defending and
criticising in ICF, since this is often ill-understood. I then go on to provide
the historical and biographical backgrounds against which to understand
ICF before going on to discuss the unoriginality of its idea of monetary
management and the conformity of its political and policy positions with
those of the India Office and the ‘City–Bank–Treasury’ nexus of which it
was a part.

GOLD STANDARD SEMANTICS

The international monetary system in the decades before 1914 is called

both the gold standard and gold exchange standard. In it, the value of the
circulating medium was fixed in relation to gold. If Keynes distinguished

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the gold exchange standard from the gold standard, he also said the gold
standard never existed anywhere: gold was nowhere ‘the principal or even
in the aggregate a very important medium of exchange’ (ICF, p. 21). It
could not be: even where gold circulates, Marx notes, it does so as minted
coin, not bullion, as a symbol of value, not its container. The wear of cir-
culation transforms ‘the coin into a symbol of its official metallic content’
implying ‘the latent possibility of replacing metallic money with tokens’
(Marx [1867] 1977, pp. 222–3). The sterling standard before 1914 was the
subject of ICF. Not only was it already extensively managed, and could
hardly not have been, as Ricardo had foreseen and its creators and manag-
ers in the India Office well knew. It also operated in ways that directly
contradicted Humean expectations (De Cecco 1984, p. 123).
Keynes’s definition covered nearly all the cases in this system (he
excepted Egypt):

The gold exchange standard may be said to exist when gold does not circulate
in a country to any appreciable extent, when the local currency is not necessarily
redeemable in gold, but when the government or central bank makes arrange-
ments for the provision of foreign remittances in gold at a fixed minimum rate in
terms of the local currency, the reserves necessary to provide these remittances
being kept to a considerable extent abroad (ICF, pp. 21–2).

However, asymmetry was the essence of the system (ICF, p. 21),

consisting of the key currency country, Britain, its main challengers,
like Germany, who sought that status for their own currencies, other less
powerful countries and Britain’s formal and informal colonies.
There is another semantic confusion about the gold standard: its basis
lay less in gold than in empire. The Bank of England held ‘less gold than
the central bank of any other first-class power – far less than even the
Caja of the Argentine’ but still met ‘its international engagements’ with
‘promptness and certainty’ (ICF, p. 126) thanks to the efficient working
of Britain’s front line of defence: her international creditor position. It
permitted Britain to counter ‘gold claims . . . for immediate payment’ with
‘counter-balancing claims . . . for equally immediate payment’ (ICF, p.12);
for example by simply raising bank rate, the London money market was
prompted to reduce international lending below claims falling due (ICF,
pp. 12–13).
India, the largest part of Britain’s empire, was critical in several ways. It
absorbed Britain’s increasingly uncompetitive exports under the one-way
free trade which only an imperial power could impose on her colonies in an
age when most free powers were practising protection (De Cecco 1984, pp.
34–5; Gallagher and Robinson 1953). This reduced Britain’s trade deficit
and hence limited gold claims against her. Secondly, India balanced this

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deficit by her trade surpluses. And finally, India ensured the adequacy of
British gold reserves, furnished the masse de manoeuvre necessary to keep
sterling’s gold value from periodic threats and enabled Britain to make
the international investments through which she provided the world with
international liquidity and retained the creditor status that permitted her
to maintain the sterling standard (Saul 1960, p. 6). This was accomplished
by the annual transfer of home charges, dividends and ‘gifts’ from India
to Britain which together usually equalled or exceeded India’s export
surpluses, keeping her more or less permanently in debt despite them, and
which Indian nationalists regarded as a ‘drain’ on the Indian economy
(Patnaik 2017). Home charges included interest on Government of India
(GOI) debt, pensions of former Indian Civil Service (ICS) and British
Army officials, payments to the War Office for upkeep of the Indian Army,
costs shared with the Foreign Office for various Middle East outposts,
purchase of material stores for India in London, and the expenses and
salaries of the India Office establishment, essentially what India paid for
the dubious privilege of being ruled by Britain and supporting her empire
elsewhere. These funds were transferred to London through the sale of
council bills in London in sterling to foreign importers of India’s exports,
encashable in India for rupees. This was the system that transformed
India’s drain into sterling or gold for Britain, whose intricacies ICF dealt
with so cleverly. This transfer also enabled Britain to remain a creditor
country, supplying the world with liquidity and preventing outflows of
gold by simply countering demands for gold by calling in her claims.
India’s centrality to the operation of the sterling standard is why a book
about Indian currency and finance could become a primer on it.
The fact that monies transferred from her non-settler colonies, chiefly
India, enabled continuing investment in the white settler colonies was one
of the darker aspects of the operation of the gold standard, an aspect
which most writers have so far been too ignorant to note or too polite to
discuss (see also Feis [1930] 1964, pp. 17–26). One may note, however, that
Keynes did justify this even as he was arriving at his more mature views. He
spoke of how it was ‘natural’, ‘[a]t a time when wholesale migrations were
populating new continents, . . . that the men should carry with them into
the New Worlds the material fruits of the technique of the Old, embodying
the savings of those who were sending them’ (Keynes [1933] 1982, p. 237),
blithely forgetting that the ‘savings’ in question were not British but Indian
and colonial.
In ICF, Keynes is nonchalant about the gold standard’s effects on the
economies of both India and Britain. While Keynes’s views evolved radi-
cally in tandem with Britain’s steep decline during the Thirty Years’ Crisis
(this is the argument of Desai 2015), and though he certainly became

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concerned about the effects of monetary arrangements on output and

employment levels, many (for example Bagchi 1991, p. 237) would argue
he never overcame his bias toward a certain Ricardian conception of the
international division of labour between the manufacturing West and the
primary commodity-producing colonial and ex-colonial world.

THE TURBULENCE OF THE GOLD STANDARD

Most understand the international monetary system of the decades

before 1914 ahistorically and attribute to it a false stability broken only
by war. As De Cecco notes (1984, p. 13), this Ricardian understanding
must be replaced by a Listian one to reveal the system’s volatility. Amid
the Second Industrial Revolution, with its heavy capital requirements,
the contender countries – chiefly the US, Germany and Japan – pursued
state-led industrialisation with regulatory and banking structures tailored
for it and behind protectionist walls, undermining Britain’s manufacturing
superiority (Desai 2013, ch. 2, but see also Hobsbawm 1987, ch. 2, and
Chang 2002). Industrial competition sharpened, spilled over into imperial
competition and led, as is well known, to the First World War (Hobsbawm
1987). The international monetary system could hardly remain unaffected
by this turbulence.
After the Napoleonic wars, gold sovereigns circulated in Britain along-
side notes. Since the 1844 Bank Charter Act limited their supply, only the
development of banking and the use of cheques ensured the adequacy
of currency amid rapid industrial and commercial expansion. The rest of
the world, however, continued on a silver or bimetallic standard until the
1870s when contender challengers as well as other countries began to peg
their currencies to gold, for shorter or longer periods (De Cecco 1984,
p. 2), making the gold standard international. However, it was never as
pervasive, permanent or pure as nostalgic accounts assume. While gold
appreciated, some countries, such as the oligarchical primary commodity
exporters, Austria-Hungary and Russia, remained with depreciating silver
(De Cecco 1984, pp. 51–2). And the countries which adopted the gold
standard did so for varied reasons: to escape the depreciation of silver, to
obtain credit, or, in the case of contender industrialisers such as Germany,
to gain international acceptability for their own currency as part of a drive
to expand market share (De Cecco 1984, ch. 3).
The result was international monetary instability. After all, ‘a stable gold
exchange standard could exist only so long as the political sovereignty of
the centre countries vis-à-vis the periphery remained unchallenged’ (De
Cecco 1984, p. 57). So,

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the system was stable while it remained a Sterling Standard, and . . . it began
to oscillate more and more dangerously, till its final collapse in July 1914, as
Britain declined and other large industrial countries rose to greater prominence,
and adopted the Gold Standard [i.e. sought to become key currency countries]
as a form of monetary nationalism, in order to deprive Britain of her last power,
that of control over international financial flows’ (De Cecco 1984, pp. vii–viii).

Moreover, as the mature Keynes would have appreciated, there were

domestic sources of volatility too. While Eichengreen’s (1992) account
of the role of organised labour in undermining the gold standard is
confined to the inter-war years, even Britain’s legendary commitment to
the gold standard was weakening well before 1914, inducing it to avoid its
‘discipline’ and ‘adjustment’ ‘rather than continuing to accept the sacrifice
of domestic unemployment’ (Block 1977, p. 14; Lindert 1969, pp. 74–5).
Germany broke with silver in 1871. The resulting flood of depreciated
silver into France forced her off silver too. Both were creditor countries
too, though their foreign lending was considerably more modest than
Britain’s and aimed at very different purposes. France, ‘a home of artistic
trades, of ateliers, of small workshops, many of which used no power’ (J.H.
Clapham, quoted in Feis [1930] 1964, p. 34), had little need of capital at
home and lent internationally to provide a return to the scrupulous savings
of its sea of petty bourgeois rentiers (ibid.). For her part, the industrial
powerhouse that was Germany had massive capital needs at home and
internationally, focused on investments that expanded the market for its
goods (ibid., p. 78).
As silver depreciated against gold in the 1870s, there was monetary
upheaval in silver-using countries including the two biggest, the United
States and India. The US went from demonetising gold in 1873 to limited
coinage under the Bland and Sherman Acts of 1878 and 1890. Silver
and bimetallism remained a live issue in the US, with William Jennings
Bryan campaigning on a silver platform in 1896. Internationally, silver
and bimetallic interests fought a losing battle in the string of international
monetary conferences, culminating in the Brussels conference in 1892
(Tripathi 1966).
Meanwhile, in India, silver’s depreciation caused the rupee to fall in
value from 1s 11½d in 1871 to 1s 7¾d in 1878 and 1s 2¾d in 1892. In these
years, India became the sink of the world’s silver, helping to prop up its
price, which, as US producers knew keenly, boosted Indian exports and her
trade surplus. This would have been fine for Britain but for the problems
the rupee’s depreciation created in transferring India’s trade surplus to
London. With silver and the rupee depreciating, more of them were
needed in the coffers of the British GOI to effect this transfer. It refused
to countenance reductions in home charges and made only half-hearted

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attempts to stem the fall in the value of the rupee or silver: ‘Britain being a
creditor nation with a gold standard had little interest in raising the value
of silver’ (Tripathi 1966, pp. 793, 798).
Instead, on the Herschell Committee’s recommendation, free minting of
silver in India was ended in 1893 as a step towards a gold currency. However,
while this was backed by powerful Anglo-Indian interests organised as the
Indian Currency Association and the Gold Standard Defence Association
(Kaminsky 1980, p. 311), it was opposed by Lombard Street, that is, the
City (although London’s financial interests have recently dispersed over the
city). In the words of Finance Secretary of the Government of India, James
Finlay, the City’s agents in Cabinet would not permit a gold currency ‘at
a time when the fears of the London financial world already are that gold
may be withdrawn from London to a most inconvenient extent’ (quoted in
Kaminsky 1980, p. 321). So the 1893 measures effectively instituted the gold
exchange standard – an arrangement which kept the exchange value of the
rupee stable in relation to gold, no matter the domestic consequences. It had
been advocated since the beginning of silver depreciation by the politically
prescient A.M. Lindsay of the Bank of Bengal (Bagchi 1991, p. 211).
The rupee now became a token currency whose gold value was raised
slightly to 1s 4d by restricting its quantity. At that still steeply depreciated
level, it wiped out 50 per cent of the savings Indians were used to keeping
in silver ornaments (Tripathi 1966, p. 797) and nationalist opinion was
outraged, calling the closing of the mints ‘dishonourable’, opposing the
‘artificial currency’, accusing the Government of ‘trying to “fatten” at
the expense of the peasants’ and seeing it as ‘indirect taxation of burden-
some and indefinite character’ (Kaminsky 1980, pp. 315–16). The new
dispensation deprived ordinary Indians of the power they had to create
money under free minting. Moreover, Keynes may have believed that ‘[a]
preference for a tangible . . . currency is no longer more than a relic of a
time when governments were less trustworthy in these matters than they
are now’ (ICF, p. 51), but this simply did not apply to the GOI.
Given the centrality of India as a market for silver, within 48 hours all
US silver mines closed and the Sherman Act was repealed (Tripathi 1966,
pp. 794–5). By the end of the century, the gold rush, prompted no doubt
by the extraordinary appreciation of gold, had yielded enough gold to get
prices rising again and close the question of silver.

KEYNES AND INDIA

We now know enough about the international monetary turbulence of

the late nineteenth century to appreciate why, during Keynes’s youth, ‘the

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matter of appropriate monetary arrangements for India was one of the

most discussed issues among British monetary economists’ (Moggridge
1992, p. 201). Even the educated public was engaged, so much so that, as
Moggridge notes in an amusing footnote, ‘in Oscar Wilde’s The Importance
of Being Earnest Miss Prism could send Cecily, the play’s heroine, to her
books with the words “Cecily, you will read your political economy in
my absence. The chapter on the Fall of the Rupee you may omit. It is
somewhat too sensational. Even these metallic problems have their melo-
dramatic side”’ (Moggridge 1992, p. 201). We also know enough about the
centrality of India to British interests – to balance her trade, yield capital
for export and reserves to operate the gold standard – to understand why,
for Keynes’s generation, ‘the Indian Empire and the problems of the
British Government of India stood as a great challenge, luring many of
the most intelligent men of the age into its service’ (Sayers 1972, p. 592).
It was conventional for the first and second ranking candidates for the
Civil Service examination to choose the Treasury and the India Office in
that order of preference, with Otto Niemeyer, who came first to Keynes’s
second, even briefly considering choosing the India Office.
It is not entirely clear why Keynes wrote ICF when he did. Certainly,
there was no burning question to be addressed. Silver was no longer an
issue and the Fowler committee’s recommendation to put gold in circula-
tion had resulted only in an abortive experiment in 1899. The 1907–08
problem, when inflation and an unprecedented Indian trade deficit posed
a problem for the remission of home charges to London, was also a distant
memory.
After leaving the India office in 1908, Keynes continued playing ‘a
delicate part, acting as public defender and private critic, of India’s evolv-
ing financial system’ (Skidelsky 1983, p. 272) delivering lectures on it at the
LSE and Cambridge and writing three papers on Indian questions. The
bulk of his writings and public activities in the period 1909–11 related to
India (Chandavarkar 1989, p. 25).
‘India and Indian affairs ranked second only to Britain in Keynes’s
intellectual preoccupations, and in some respects even outranked it, as for
instance, his contributions to the theory and practice of the gold exchange
standard and the formulation of the developmental role of a central
bank’ and Keynes was ‘emphatically a country specialist’ of India in his
formative years (Chandavarkar 1989, p. 2). His mentors at the India Office,
particularly Lionel Abrahams, had hitherto relied on Alfred Marshall,
Keynes’s mentor, for advice and now turned to Keynes (Moggridge 1992,
p. 203).
Perhaps the most proximate impulse was the silver scandal. The India
Office purchased a large quantity of silver – secretly to prevent ­anticipatory

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speculation – through the offices of Samuel Montagu & Co., and when
this became public the opposition attacked the Lloyd George government
because the firm had close family ties with the Under-Secretary of State for
India and Keynes’s friend, Edwin Montagu, who was among the accused.
Keynes played the role of the defender of the India Office and Edwin
Montagu by writing a response to anti-government articles in The Times,
and Keynes and the India Office agreed that he was their best ‘spokesman’
(Skidelsky 1983, pp. 272–3). When the silver scandal erupted, it gave some
traction to the idea of introducing gold and prompted the establishment
of a Royal Commission on Indian Finance and Currency in 1913. It was a
safety valve more than anything else, though it did provide another stage
for a display of Keynes’s mastery of Indian affairs. The draft of the book
transformed an offer of the secretaryship of the Royal Commission on
Indian Finance and Currency into one of membership, and unsurprisingly
its report ‘expressed the Commission’s unqualified approval of the conduct
of the India office and its warm support of the gold exchange standard as
the system best suited to India’ (De Cecco 1984, p. 75).

INDIAN CURRENCY AND FINANCE

Not only was Moggridge right that Keynes’s ‘writings on India reflected
what might be called the India Office view of the world’ (Moggridge 1992,
p. 203), the India Office in these years was a central part of what would
later be called the ‘City–Bank–Treasury’ nexus (Ingham 1984). For, given
India’s centrality to the operation of the gold standard, the India Office
was its engine room, where the fuel of the home charges turned its big
wheels of credit and Keynes was the protégé of its key engineers such as
Lionel Abrahams. In ICF, he merely put down their understanding of
how they worked the gold standard, managed money and economised on
gold, and made minor suggestions on how it might be improved to better
serve the same purposes. While there was intellectual merit in his lucid and
informative synthesis, that is all it was.
Keynes himself acknowledged the influence of Ricardo’s scheme for
managed money for post-Napoleonic-wars Britain in ICF and credited
A.M. Lindsay of the Bank of Bengal as the originator of the system
(ICF, p. 24; see also Moggridge 1992, p. 207). But there was more: as H.S.
Foxwell pointed out in his review,

There is not much room for originality on the fundamental principles either of
currency or banking. This is especially the case with regard to currency. The
searching discussions which followed the monetary disturbances after 1873, and

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the admirable work of men like Dana Horton, Lindsay, Conant, and others,
have led to a remarkable advance, almost a revolution, in expert opinion on
monetary subjects (Foxwell 1913, p. 571).

And Bagchi further reminds us of Thornton, Bagehot and Palgrave

(Bagchi 1991, p. 209) as key intellectual precursors of ideas of mon-
etary management. Moreover, in defending existing India Office practice,
Keynes was far less radical than Ricardo, who had proposed a national
bank to replace the Bank of England’s international role in order to direct
its profits to the national treasury (Bagchi 1991, pp. 210, 213n).
Some appearance of technical novelty may have been created because
Keynes attributed to India Office detractors views more benighted than
they actually were (Foxwell 1913, p. 562) and partly because he makes no
reference to the vast literature on international monetary matters that had
accumulated, and had to accumulate, over the decades of international
monetary turbulence. Take David Barbour’s The Standard of Value,
published just a year before ICF. The work concludes the monetary
arrangements of the future in which the vexed question of an appropriate
standard of value remained to be answered:

The extension and improvement of Banking tend to reduce the demand for gold
. . . In the past the Standard of Value has been chosen mainly with reference
to its convenience as a Medium of Exchange, but in future the question of
Stability of Value will possess greater importance, and some Economists hold
that the final solution of the monetary problem will involve the abandonment
of a metallic Standard of Value and the regulation of the quantity of Currency
with reference to the average level of prices. (Barbour 1912, pp. 241–2).

If such unoriginal technical elements of ICF can be found in his later

works, Keynes’s later political beliefs are nowhere to be found in ICF.
‘Good Keynesians’, Smithies remarked in his review of the first four
volumes of the Collected Writings, ‘will be horrified to find no mention of
stability of employment or the price level’ (Smithies 1972, p. 465). Robert
Dimand rightly points out that ICF was ‘strongly embedded in the classi-
cal tradition of Ricardo, Mill and Marshall and did not share the major
concern of Keynes’ maturity, the determination of the level of output and
employment’ (Dimand 1991, p. 34), not only in the case of India but also
Britain.
Keynes was aware (Chandavarkar 1989, p. 38) that the key process ICF
described – the annual transfer of India’s export surplus to Britain as home
charges through council bills – was considered an economic drain on India
(Chandra 1966, pp. 636–708) not only by Indian nationalists like Dadabhai
Naoroji but also by James Mill and many British officials such as Ricard

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Wingate (Chandavarkar 1989, p. 38) and Sir Louis Mallet (Bagchi 1991, p.
213n), but he does not discuss it in ICF, which also reflects, but does not
reflect on, the centrality of India to the sterling standard.
Bagchi argues that it was this ‘conception of the economy of India as
being governed by the right principles in all the major aspects that allowed
Keynes to concentrate only on the monetary aspects of the question’
in ICF (Bagchi 1991, p. 218). Though we would argue that Keynes’s
inattention to the Indian economy stemmed from his general disregard
for the effects of monetary arrangements on the economy at this time,
Bagchi’s masterful reconstruction of Keynes’s understanding of the Indian
economy in ICF and Keynes’s other writings of the time and the effects on
it of the monetary system he celebrated is worth pausing over.
While Keynes was happy to adduce India’s developmental needs and
‘capital expansion’ when it suited his purposes, such as ‘to avoid extrava-
gance in reserve policy’ (ICF, p. 120), for him the Indian economy was
immutably agricultural, more or less incapable of development. He ruled
out the possibility of Indian industrialisation (Keynes [1911] 1983, pp. 27
and 29). He showed that levels of foreign investment in India were quite
low (Bagchi 1991, p. 214n) and appeared to believe that capital imports
would only be inflationary (Bagchi 1991, p. 215). India’s high interest rates
relative to Britain’s were unlikely to be ironed out by the private transfer
of capital simply because they relied on the differential. Only India Office
commitment to two-way convertibility of the rupee at the established rate
of 1s 4d per Re, or Rs 15 per £, would ensure such a flow and this Keynes
ruled out on the basis of the costs involved, privileging the one-way con-
vertibility of the rupee into sterling.
Keynes also accepted that India’s money supply was inelastic and was
governed until 1900 by the requirements of the transfer of home charges
(ICF, p. 75) and thereafter by the demand in London for rupees (ICF,
p. 77), that is by the sum of the demand generated by the transfer of
home charges, foreign trade and the low levels of foreign investment. The
inelasticity of money supply in India also led interest rates to fluctuate
seasonally. While this fact entered his clever account of when telegraphic
transfers would be preferred over the slower council bills and his discus-
sion of reserves indicated how it might be mitigated, it did not lead him to
seek real remedy.
The expansionary effects of export surpluses one would normally expect
were entirely absent from the Indian case: the exports were ‘paid for’
through taxes, that is, they were essentially obtained free (Patnaik 2017,
p. 289). Indeed there could be a deflationary effect in two ways. First, the
Secretary of State kept the exchange rate from rising above 1s 4d by accu-
mulating any balance of payments surplus over and above home charges

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 John Maynard Pangloss: Indian Currency and Finance ­127

in the form of ‘forced foreign credits extended by India . . . in the shape of
sterling securities or gold held in England’ (Bagchi 1991, p. 226). Secondly,
the Secretary of State did not undertake to support the rupee against
downward movement in a context where such depreciation was unlikely to
have any expansionary effect, thanks to the price inelasticity of the supply
of Indian exports; it would, on the contrary, have a contractionary effect,
as happened in 1907–08 (Bagchi 1991, p. 227).
Bagchi also notes that through the British exchange banks, operating
in India with fewer regulations than permitted by the governments of the
white settler colonies, the City withdrew even more liquidity from India.
These banks financed their lending in London through their borrowings
in India while relying on loans from the presidency banks to finance their
lending in India (Bagchi 1991, p. 228) largely because demand of credit
in India remained seasonal and because presidency banks sat on large,
unutilised balances most of the time (Bagchi 1991, p. 230).
With this volume of one-way funds transfer from rupees into sterling,
the possibility of an exchange rate crisis was ever present and, with the
lack of regulation of the exchange banks, so was a banking crisis. To
prevent this, at first, Keynes recommended only that the GOI hold larger
reserves, mostly in London and in gold, and later proposed ‘only half a
central bank’ to manage government funds and organise a more flexible
note issue but not to formulate monetary policy or regulate banking. As
such, it worked chiefly as an instrument of control by the India office and
the GOI over the transfer of the export surplus. This was largely due to the
opposition of the exchange banks to a central bank. They did not wish to
see unfair competition from a bank with access to government balances
even though such balances had become less important and even though
exchange banks had many other privileges, such as being able to operate in
the foreign exchange market, lend for long- and short-term purposes with
few restrictions and being free from the obligation of presidency banks to
maintain large cash balances (Bagchi 1991, pp. 229–30).
Arguably, the overriding purpose of ICF was to contest the case for
putting gold into circulation. Keynes gave two reasons: because it would
only end up in hoards and because, since most of India’s international
obligations were settled from London, it was best to concentrate its gold
and sterling reserves there. This amounted to saying that gold hoarding
was to be Britain’s privilege, and economising on gold to be India’s burden.
Though recognising that Indians had begun to demand gold only over
the previous decade (ICF, p. 53), Keynes castigates Indians for their
‘uncivilised and wasteful habit’ (ICF, p. 70) of ‘needless’ and ‘barren
accumulation of gold’ (Bagchi 1991, pp. 69, 53) and refrains from seeking
a cause. Foxwell, however, does not:

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 128 The General Theory and Keynes for the 21st century

Just as a Frenchman buys and sells Rentes instead of opening a bank account,
so the Indian uses ornaments. When the rupee contained its face value of silver,
silver might be used for this purpose. Now that the rupee circulates at an arti-
ficially appreciated value [in relation to its silver content, that is], there would
be a heavy loss in turning silver ornaments into rupees. He therefore now uses
gold ornaments or sovereigns; and this is the main cause of the increased gold
absorption by India. (Foxwell 1913, p. 564).

Moreover, ICF contained ‘no proof that the establishment of a mint in

Bombay and the free coinage of rupees would increase the absorption of
gold in India’ since it was ‘possible that the mint would serve as a substitute
for the jewelry factory or for the import of sovereigns’ and that ‘confidence
in the stability of the currency would be increased by circulating coin’
(Smithies 1972, p. 465).
While Keynes sought to disabuse India of her gold hoarding habits,

the most sophisticated money market in the world, London, was avidly absorb-
ing gold (let alone such relatively ‘unsophisticated’ markets as Paris and New
York), and the accumulation of gold and sterling securities by the Secretary
of State for India in London added to the reserves that could be manipulated
by the Bank of England. The Indian appetite for gold which Keynes deplored
interfered with the process of centralization of the international monetary
resources of India in London. (Bagchi 1991, p. 228).

Rather than judge India’s monetary arrangements in relation to eco-

nomic realities, ICF concentrated entirely on justifying the existing system
and its fearful asymmetry. If, for Keynes, India stood in the forefront of
monetary progress as the first country to adopt the gold exchange stand-
ard (GES) fully (ICF, p. 23), it was because her monetary arrangements,
being entirely under the control of the India Office, could be finely tuned
to the requirements of maintaining sterling as the dominant key currency.
If, however, Keynes saw further progress lying in the direction of reducing
other countries to the same position, he was dreaming in technicolour (De
Cecco 1984, p. 58). Few independent countries could be expected to accept
such a dispensation and they did not: no amount of Schadenfreude about
their inability to mimic British arrangements would change that (ICF, pp.
14–16) and that, as De Cecco pointed out, was the source of instability in
the system.
There is also the separate question of whether they would want to
create arrangements that so militated against domestic investment. In ICF,
Keynes comments on their inability to maintain the gold standard without
maintaining larger reserves and the embarrassment of periodic suspen-
sions of gold payments, because they lacked a financial system of the
British type, able to act as the outer line of defence for the gold ­standard

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 John Maynard Pangloss: Indian Currency and Finance ­129

(ICF, pp. 14–16). What he did not point out is that the British system
could only perform this function because it was largely unconcerned with
(the sorely needed) domestic investment and because large parts of it were
focused on short-term investments that gave the system its liquidity.
For ICF can only be regarded as being in continuity with the later
Keynes by ignoring the role of the gold standard and its requirements
in the industrial decline of Britain that began in the 1870s and would
dominate Britain’s politics for a century, thanks to her inability to adopt
a sane industrial policy. Though home to the industrial revolution, the
British state remained dominated by its original, agrarian, capitalist class
and, over the 19th century, financial and commercial interests became as
intimately linked to it as industrial capitalists were socially distant. Britain’s
industrial lead, moreover, made London the world’s ‘major international
commercial and banking centre’ and British financial and commercial
interests, headquartered in the City of London, came to constitute the
‘City–Bank–Treasury nexus’ (Ingham 1984, p. 134; see also Anderson
1987) of which, as we have seen, the India Office was such a critical party.
It ensured a policy bias towards maintaining London’s world commercial
and financial role. The formal commitments it required, namely, ‘a domes-
tic gold standard – which later unintentionally served the world – free
trade and budgetary prudence’ ensured that ‘[a]t the precise moment at
the turn of the century when industrial regeneration was called for to meet
the German and American challenge, the City’s diversion or draining of
capital accelerated’ (Ingham 1984, p. 227).

CONCLUSION

The purpose of this outline of the distance that separates ICF from
Keynes’s mature view is to aid our appreciation of the epic scale of the
intellectual metamorphosis he underwent, under the heat and pressure
of being engaged with British policy as she declined so steeply during the
Thirty Years’ Crisis, from the John Maynard Pangloss of 1913 into the
John Maynard Keynes we know as the twentieth century’s greatest analyst
of the capitalist economy (Desai 2015).

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