America's Money Machine

Into the Pit 253
As the relative market values of gold and silver fluctuated, the result
was a continual uncertainty in the exchange parity of the monetary units.
To resolve the problems ofunifying two monetary systems, one based on
gold and the other on silver, a royal commission was appointed to study
and to recommend a method.
During the hearings of the Commission, influential Indian opInIon
arose in defense ofthe existing system and cited a statement made earlier
(in 1877) by the government. The statement deserves quotation for its
clarity and the integrity of its premise:
A sound system of currency must be automatic and self-regulating. No
civilized government can undertake to determine from time to time by how
much the legal-tender currency should be increased or decreased, nor would
it be justified in leaving the community without a fixed metallic standard of
value, even for a short time. 1
What emerged from the Commission, however, was what is euphemistically
known as the gold exchange standard, which we have briefly discussed
above,2 and which John Maynard Keynes described as follows:
"The gold exchange standard arises out ofthe discovery [sic] that, so long
as gold is available for payments of international indebtedness at an approximately
constant rate in terms ofthe national currency, it is a matter
of comparative indifference whether it actually forms the national currency."3
Despite Indian opposition, the government of India now closed the
mints to the free coinage of silver and gradually restricted the quantity
ofmetallic circulation to that determined by government policy. To provide
circulating media it also introduced paper notes ofrupee denomination,
the acceptance of which was cultivated by making them convertible
into sterling (and hence, into gold).
Keynes, arch apostle of manipulated money, extolled the policy for its
blessings, even as he condemned the Indian people for "wasting their
resources in the needless accumulation ofthe precious metals." With the
complacency of the times in the effectiveness of authoritarian governments
he declared that "the Government ought not to encourage in the
slightest degree this ingrained fondness for handling hard gold [and
silver]."4
The gold exchange system was instituted in 1893. The experiment
lasted little more than two decades. With the outbreak of World War I,
Great Britain promptly suspended convertibility ofits sterling circulation