The original principles on which paper currency in India was established were: first, that the function of note issues should be entirely dissociated from that of banking; second, that "the amount of notes issued on Government securities should be maintained at a fixed sum, within the limit of the smallest amount which experience has proved to be necessary for the monetary transactions of the country, and that any further amount or notes should be issued on coin or bullion.*" Paper currency in India has been entirely Government issue. Up to 1910 these notes took a very minor place in the currency system of the country. It is unnecessary to go in detail into purely local questions; at first, all the notes were issued in seven different circles, corresponding roughly to the principal provinces. For a long time the notes of one circle were not usually cashable in another, and, therefore, were not readily convertible. But recently, practically all of the notes except those of very high values were universalized, i.e., the notes of one circle were cashable in another. The average gross circulation of currency notes, or the value of all the notes issued and not yet paid off was £18,000,000 in 1892/93 and £38,000,000 in 1911/12; the net circulation, or the value of the gross circulation, less the value of the notes held by the Government in its own treasuries as also those held by the Presidency Banks, was £13,000,000 in 1892/93 and £28,000,000 in 1911/12. For these currency notes a reserve is held. A portion of the reserve is invested; the invested portion amounted to 800 lakhs in 1892, 1,000 lakhs in 1877, and 1,400 lakhs (£9,333,000), of which 400 lakhs (£2,666,000) were in English securities, in 1911. The interest from the invested portion of the reserve, less the expenses of the paper currency department, is the profit of note circulation. The balance of the reserve used to be held in silver coins up till 1898. Under the provisions of several later acts, the Government obtained power to hold the metallic portion of the reserve in gold and silver; at its discretion the metallic portion of the reserve might be held, either in England or in India. For instance, the note circulation in March 31, 1913 was £46,000,000; the reserve for this was held as follows: Rupees £11,000,000, gold in India £19,500,000; gold in London £6,000,000; securities £9,500,000, of which about £3,000,000 was invested in London. It must be noted that the increase in the circulation of notes has been of larger proportion than the increase of the invested portion of the reserve; a growing and not a diminishing portion has been kept in liquid form, because the object of the bullion reserve is not only to cash notes and legal tender on demand, but also to enable the Secretary of State to support exchange in times of depression and maintain at par the gold value of the rupee. The note circulation varies with the seasonal demands for money; the position is unlike that in England where there is a steady circulation. As in the United States, the Government maintains an independent treasury system, which controls the circulation of notes, coins as well as reserves. Owing to the exigencies of the situation the Government have thought it wise not to allow of expedients for the temporary expansion of currency by means like those employed in England.
* Secretary of State's Despatch (Sir Charles Wood, March 26, 1860).
The underlying principle of the note issue in India is the minimizing of currency, while at the same time having a full reserve, the larger part of which to be in gold; this step became necessary in view of the fact that, while being a silver using country, India adopted a gold standard and until recently payments in gold had to be made out of India. The reserves had necessarily to be so adjusted as to be able to support exchange in times of depression. Recently, the development of trade has been such as to make the system not quita suitable to the country. Exports have increased so much, that, in spite of all the home charges, India has become more of a creditor nation; and the only manner in which she could receive the balance due to her is the import of gold, which has been very heavy during recent years. Although British bankers have viewed with alarm the drain of gold into India latterly, this import was fostered by the Government - at first the Government very seriously forcing gold into circulation. While reserves against notes were kept to the full amount of the issues, metallic reserve in gold and silver was nearly seventy per cent; and the value of notes in circulation as compared to the value of coins in circulation is roughly in the ratio of one to three.