The Government of India, as Sir David Barbour already stated, were not quite sure of their ground and were certainly unwilling to take the decisive step toward the adoption of gold. In October 1892, they proposed that the Indian mints should be closed to unlimited coinage of silver and that further steps should not be taken until the effect of closing the mints had been ascertained. If such closing did not prove sufficient to establish the desired rate of exchange, steps should be taken to reduce the amount of the rupee currency. As this procedure was taken with a view to the future adoption of the gold standard, it was tacitly agreed that the ratio between silver and gold should be based on the average price of silver during a short period before the mints were closed. In order to prevent any sudden and injurious rise in exchange the Government proposed to legislate to make the English sovereign legal tender to an unlimited extent at a rate not exceeding one shilling an six pence for the rupee. Except the recommendation of the closing of the mints, all the rest were only suggestions to follow that proposal later. The Secretary of State for India referred the proposals to what is now known as the Herschell Committee. This committee, of which Lord Herschell was the chairman, submitted a report on May 31, 1893, the principal recommendation being:

"While conscious of the gravity of the suggestions we cannot in view of the serious evils with which the Government of India may at any time be confronted if matters are left as they are, advise your Lordship to overrule the proposals for the closing of the mints and the adoption of a gold standard, which that Government with their responsibility and deep interest in the success of the measure suggested, have submitted to you. But we consider that the following modifications of these proposals are advisable. The closing of the mints against the free coinage of silver should be accompanied by an announcement that, though closed to the public, they will be used by the Government for the coinage of rupees in exchange for gold at a ratio to be then fixed, say one shilling and four pence per rupee; and that at the Government treasuries gold will be received in satisfaction of the public dues at the same ratio."

Following upon this recommendation the Government passed an act closing the mints to the coinage of silver on private account; and the rate at which rupees or notes were to be supplied in exchange for the tender of gold was a shilling and four pence per rupee. Contrary to expectations the rupee did not rise to one shilling and four pence and the average up to 1895 was one shilling and 2.546 pence per rupee.

One of the principal checks, which Indian economists did not attach sufficient importance to, was the repeal of the Sherman Act by the United States in November 1893, which let loose an enormous flood of silver up till then purchased by the United States Government, and nullified the results of the action of the Indian Government. There was an Australian banking crisis, also in 1893, besides a widespread depression in trade. It was found that at all costs the further entry of silver into India should be stopped for a time at least and in 1894 the Government imposed duty of 5 per cent. on all silver entering India. Further, famine, plague and a succession of budget deficits increased the difficulties. In 1896 another important event in the history of silver was the defeat of the silver party at the presidential election in the United States. Even at the close of 1897 the position was that the rupee exchange still stood at one shilling and 2.450 pence. The Government of India, therefore, proposed that money should be borrowed to form a gold reserve and that, if found necessary, special steps should be taken to reduce the surplus currency by calling in and melting down silver rupees. Extensive coinage of silver was being made in Russia, and Japan received a large indemnity for China and with the help of it adopted a gold standard.

All these factors, more especially the drawings of the Secretary of State in the shape of silver rupees, helped to bring the exchange up to one shilling and four pence. The proposals of the Government of India were referred to the Fowler Committee which recommended in 1899 that the permanent rate of exchange should be fixed at one shilling and four pence for the rupee and that gold should be made legal tender. The Committee also recommended that the profit from the coinage of rupees at the rate of fifteen rupees to one sovereign should be used to form a gold fund to secure the convertibility of the rupees into sovereigns at the same rate, and that the Indian mints should be opened for the coinage of gold.

This recommendation has been the crux of all future reforms in currency in India. I will now briefly detail the successive steps taken by the Indian Government to secure the desired result. In 1899 an Act was passed declaring the British sovereign and half sovereign legal tender to any amount at the rate of one shilling and four pence per rupee. From 1899 to 1903 negotiations were carried on for the coinage of sovereigns in India, until the proposal was dropped indefinitely on February 6, 1903; the proposal, however, was again made in 1912 and discussed by the Chamberlain Commission on Indian Finance and Currency in 1913. In 1900 a gold standard reserve was instituted out of the profits of coinage. The progress even at this stage was not unattended with difficulties. The arrangement was based on the assumption that when gold was received by the Government in exchange for rupees, it should, if not taken out by the public, be held as a portion of the paper currency reserve; these rupees were to be given from that reserve when gold was tendered, thus saving the cost to the Government of either holding gold which the public would not receive or of shipping it to England. But 'the anomaly of the situation was that so much gold was tendered that the stock of rupees actually ran short and the Government had to coin rupees at high pressure. To obviate such an unfortunate position in the future the Government decided to hold in the form of silver rupees 4,000,000 of the profit on the issue of silver rupees in exchange for gold, as a special reserve to meet sudden silver demands. Thus in 1900 the gold reserve became the gold standard reserve fund.

But gold did not circulate freely in India and could only be made useful in London; therefore, it was decided to receive gold, in London, from time to time, as well as in India and pay for it by drafts on the Indian Treasury. Arrangements were also made to hold a portion of the Indian paper currency reserve in London; and in case of need the Secretary of State for India could draw upon the reserves in London, an equivalent amount in rupees being simultaneously transferred to the paper currency reserve in India. Thus in 1904 the Secretary of State notified his willingness to sell council bills on India at Is. 4 1/8d. to a rupee without limit. In 1905 an Act was passed authorising the establishment of the currency chest of "ear-marked" gold at the Bank of England as part of the currency reserve against notes, and the investment of a stated part of currency reserve in sterling securities. In 1906 the notification which had directed the issue of rupees against the tender of gold (as distinguished from British gold coin), was withdrawn.

The years 1906 and 1907 were critical years in the history of Indian currency.

Even in 1905 the tender of gold became so great that the Government had to make continued purchases for coinage. In 1906 the Mexican mints were closed to the free coinage of silver. In 1907 the fall in Indian exports, which was more or less a direct consequence of the bolstering up of the rupee, became very serious. There was a financial crisis in the United States and a great demand for gold for that country. Exchange fell to l/3-ll/16d. All the gold in the gold standard reserve was exhausted and the Government sold bills at l/3-29/32d., withdrawing the par amount of the bills from circulation and placing the rupees in the Indian portion of the gold standard reserve. The currency was reduced by 120,000,000 rupees, and thus the rupee branch of the gold standard reserve had to be instituted.

The constant drain of gold became so great that in January 1909 the total amounted to 17,750,000 sterling, the balance remaining to the gold standard reserve being about 9,000,000 sterling. There was, of course, an accumulation of silver rupees in the reserve which, however, was of little use to support the gold standard. A better method was adopted later and the Secretary of State began to meet his requirements by withdrawing gold from the paper currency reserve or from the gold standard reserve, instead of by drawing bills on the Government of India for the amount required. The reduction on the amount of bills drawn was equivalent to an increase of an equal amount in the exports from India; and, as the Government of India simultaneously withdrew rupees and placed them in the Indian paper currency reserve or in the Indian portion of the gold standard reserve, there was a corresponding contraction of the currency with the usual effect on prices. Such a procedure had precisely the same effect on the exchange as would have resulted if the Indian currency had been composed of gold and a portion of that was exported from India to England with the following proviso: When the Secretary of State sold gold securities to acquire the means of meeting his ordinary liabilities, he added no gold to the available supply in London; also the total amount of the gold standard reserve was only the profit on the issue of a certain quantity of rupees. And further, if gold coins to the face value of the same amount of rupees were circulated in India, a greater amount would have been available for reducing the exchange by being exported and made available in London as an addition to the gold supply.