America's Money Machine

34.
Into the Pit
APERSPECTIVE UPON THE POLITICAL, social and moral influences
flowing world-wide from the adoption of the monetary theories
enacted in the Federal Reserve System requires a step back into the
nineteenth century-specifically, to the coronation in 1876 of Victoria,
queen of England, as empress of India. That event, occurring just a
century following the u. S. Declaration ofIndependence and the appearance
of Adam Smith's Wealth ofNations, produced not only a revolution
in the British political structure but in monetary practice. India, though
long a British dependency, governed indirectly by a British proprietary
company, the East India Company, was now integrated into an imperial
system, and British economic interest in India required a similar integration
of the monetary system.
The problem arose from the fact that England was on the gold standard,
with the paper circulation convertible into gold coins, while in India
paper notes were unknown and the circulation consisted of silver rupees
ofhigh quality. (The thirteenth century Mongol overlords ofthe East had
introduced paper circulation into China, but had never succeeded in
doing so in the Middle East and South Asia.) In India, where banking
institutions were undeveloped, silver coinage provided both a satisfactory
medium of exchange and a store of value, particularly for the great
masses of the poor. British colonial practice had been to assure a supply
ofrupees through the system offree coinage, by which anyone could take
silver to the mint and, for a small mintage charge, have it coined into legal
tender with purchasing power never lower than that of the market value
of the metal.