The Indian Gold Exchange Standard System and Inflow of Gold before World War I

The aim of this article is to investigate the characteristics of the Indian gold exchange standard system before W. W. I. India’s monetary system in the colonial period had been established as what was called the gold exchange standard system (GESS) by the early twentieth century. But this GESS (the Indian GESS) had not a few peculiar elements based on India’s monetary situations. The Indian GESS was severely criticized by the Indian nationalists. One point of their criticism was in that in spite of India’s favorable balance of international payments and Indians’ strong demand for gold, this monetary system was intended to restrict India’s absorption of gold. On the other hand, the British officials emphasized its effectiveness and advanced nature in terms of economizing the use of gold. Thus, one simple formula, that is “gold or silver”, appeared on the surface of India’s monetary history in the colonial period. But there is a fact apt to be disregarded if we have too much concern with this formula. It is that India had continued to import not a small amount of gold under the GESS. This fact had not been positively referred by the both sides and previous studies until nowadays also have not made much of it. But it is very important to investigate this fact in order to make clear what the Indian GESS was. The focus for considering this problem lies in that the Indian GESS was equipped with the facility of settling external balances with gold. In this sense, the Indian GESS had two features side by side. One consisted of elements of the gold exchange standard system, and the other consisted of elements of the gold coin standard system (GCSS). Why was the latter equipped in the Indian GESS? What roles did the latter played? What were the relations between the above two features? In answering these questions, I will focus my concern on the mechanism of the exchange banks’ arbitrage transactions of gold.