Evolution of the World Economy, Precious Metals and India

Published by EH.NET (May 2004)

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John McGuire, Patrick Bertola and Peter Reeves, editors, Evolution of the World Economy, Precious Metals and India. New Delhi: Oxford University Press, 2001. xi + 229 pp. ?14.00/$32/745 rupees (cloth), ISBN: 0-19-565374-2.

Reviewed for EH.NET by Arturo Giraldez, Department of Modern Languages and Literatures, University of the Pacific.

This volume is the result of a conference held in 1994 at Australia’s Curtin University of Technology. The purpose of the meeting was “to examine the role of precious metals in the world economy with particular reference to the place of India in this process” (p. v).

Modern monetary history is crucially linked to the Chinese and Indian economies. According to Irfan Habib: “The gold to silver ratio fluctuated in India as compared to Europe, and this influenced flows in and out of India” (p. 42). Chinese demand was a crucial factor, when the price of silver was higher in China, silver left India and when the bimetallic ratio was favorable the white metal returned. The monetary landscape changed when India became progressively integrated into the English Empire after the Battle of Plassey in 1757.

The volume is divided in three parts. Part 1 — Precious Metals in the Early Modern World Economy, 1500 to 1750 — contains articles from two distinguished researchers in Indian history: M.N. Pearson and Om Prakash. Pearson gathers previous and new reasearch under the title “Asia and World Precious Metal Flows in the Early Modern Period” (pp. 21-58), emphasizing that the forces moving precious metals are global by nature. His effort to draw East Africa into the economic panorama is worth mentioning. The article explains how cowries were exchanged for slaves and how East African gold entered Indian Ocean circuits. The article also discusses silver and gold flow estimates around the world and correctly emphasizes Japan as the second largest producer of bullion during the sixteenth and seventeenth centuries.

Om Prakash, “Global Precious Metal Flows and India, 1500-1750” (pp. 59-76) reviews the role played by local merchants as well as Portuguese, Dutch and English companies in the Indian economy. Europeans brought silver to Asia via the Cape of Good Hope. Bullion also arrived to India from the Persian Gulf and the Red Sea. These were the two main routes sending bullion into the Indian Ocean but after 1720 the Cape route became the most important (p. 66). Prakash emphasizes the “rational” uses of silver and gold in the subcontinent. About so called “hoarding” he writes: “Given the virtual absence of deposit banking facilities in Mughal India, hoarding on a reasonable scale can very well be interpreted as a perfectly legitimate and rational form of holding liquidity” (p. 70). Based in his research and that of others he denies “an increase in the general price level” in India (p. 73), despite increases in India’s money supply. He goes on to signal that foreign trade was an engine of growth for the internal and external sector of the Indian economy (p. 74).

Part 2 — The Role in the Capitalist World Economy: Some Cross-National Comparisons, 1880s-1940s — covers three regions: Japan, South Africa and Australia. Simon Bytheway’s “Japan’s Adoption of the Gold Standard: Financial and Monetary Reform in the Meiji Period” (pp. 79-96) is a remarkable piece that shows how Japanese industrialization was related to the adoption of the gold standard which in turn allowed Japan to import “an unprecedented amount of foreign capital” (p. 79). Silver was produced in great quantities during those decades and there was a corresponding decline in silver prices; importing commodities from gold standard countries was more expensive. Japanese agriculture prospered but inflation in silver was disadvantageous to creditors and people living on wages. Meiji authorities chose to implement the gold standard and to industrialize the country at the expense of the export sector. The agreement to end the Sino-Japanese war included an indemnity to be paid in English pounds convertible to gold in London. Japan adopted the gold standard in October 1897. The deposit in London of a Chinese indemnity secured British economic and political cooperation. In September 1917 an embargo was placed on gold exports from Japan and the gold standard ended. (p. 94).

Russell Ally’s “Gold, the Pound Sterling and the Witwatersrand, 1886-1914” (pp. 97-122) should had been placed before the previous article because in addition to examining the Witwatersrand history he succinctly explains how the gold standard of 1886-1914 was really a “sterling standard.” British commercial and financial supremacy depended on the gold-convertibility of the pound, which was the responsibility of the Bank of England (p. 103). The discovery on the Witwatersrand in 1886 came after “a frantic search for the metal all over the world.” The “Second Industrial Revolution” spanned two decades from 1871 to 1890 — decades during which industry and trade reached unprecedented levels. “The gold standard could not have accommodated the growth without a corresponding increase in the stock of gold” (p. 99). The South African discovery coincided with similar events in United States, Canada, Russia, and Australia. The economic emergence of the United States and Germany challenged the hegemonic monetary position of Britain. In this context the weekly remittances of South African gold were crucial. The South African War and, more importantly, World War I indicated how the British Imperial system was dependent on the Witwatersrand gold fields (p. 114).

Patrick Bertola’s “Cyclical Developments in Gold Mining at Kalgoorlie: 1893-1944” (pp. 123-152) explains how the “role of gold as the main money commodity in the emerging world economy has been a decisive element in the history of Kalgoorlie and of gold mining in Australia” (p. 125). Evidently the new gold mining industry was part of the monetary system of the British Empire and its gold-sterling convertibility. In addition to its own production, Australia received gold from New Guinea, Papua, and New Zealand. This gold was used to establish balances of trade between India, the United States and Britain. During World War I the Imperial authorities channeled gold from South Africa and Australia toward London and prevented inconvertibility in India (p. 128). Bertola rightly concludes: “The development of gold mining in Kalgoorlie then can only be fully understood in the context of the world economy” (p. 146).

The three articles of Part 3 — Precious Metals and the Imperial Economy: India, 1860-1940 — examine the economic role of India in the British financial system. First is Andrew Pope’s “Precious Metals Flow in the Indian Ocean in the Colonial Period: Australian Gold to India, 1866-1914” (pp. 155-178). Because India had the ability to absorb gold, it “continually exercised the minds of the British financial community who considered it to be a major threat to Britain’s financial stability” (p. 160). At the same time India’s export surpluses with America and Europe covered, to a certain extent, British deficits with the same areas. The Indian export sector was financed with gold imports from Britain, Australia, Egypt, Hong Kong and South Africa. Australian gold went to India as part of bi-lateral and multi-lateral trade arrangements. Due to falling world silver prices during the last decades of the nineteenth century, the silver rupee was depreciated. As a consequence foreign trade was disrupted and budgetary difficulties required the adoption of a gold-based currency system, but gold reserves were needed in London and India. Thus the increased supplies of gold in Australia established in Asia “a new axis for the flow of gold from Australia to India” (p. 173).

John McGuire’s “India, Britain, Precious Metals and the World Economy: The Role of the State between 1873 and 1893” (pp. 179-198) studies the ramifications for India and Britain of maintaining a silver-based currency on the subcontinent when the sterling exchange value of the rupee dropped in a significant way. The retention of the silver money increased payments to London for home charges. The low value of the rupee increased Indian exports, which generated surpluses in relation to the rest of the world. These surpluses were invested in the City of London. In the same decades many European countries and the United States were moving to a gold exchange standard. In order to maintain the sterling supremacy, the City required sufficient gold supplies. India was forced to remain on the silver standard. The pressure eased when gold was found in Australia and South Africa. Colonial authorities were perfectly aware of disruptions created for the Indian economy by their monetary policy but the exchange issue was addressed only when changes in the world economy required it. “The imperial factor overruled the colonial factor” (p. 195).

G. Balachandran’s “The Gold Exchange Standard and Empire: India, 1900-1940” (pp. 199-229) is the final chapter. The dates of the article’s title don’t correspond to the period covered in it. It begins by citing the fateful date of August 15, 1971 on which United States suspended the convertibility of the dollar to gold. The British pound sterling based exchange standard survived both World Wars. In addition several countries had their currencies “linked to sterling in the 1920s and 1930s even through periods when the latter had no fixed parity with gold” (p. 200). In those years India’s demand of gold was substantial. When the commodity exports were large, India’s “gold imports accounted for a quarter to one-third of the world’s output of the metal” (p. 200). Britain’s deficits increased after World War I “thus threatening the stability of sterling, and with it, the stability of the gold exchange standard” (p. 212). London’s control of gold flows to India, “helps explain why she never let go of her control over Indian monetary policy till the very end of her rule” (p. 213).

These articles show that the monetary policy behind the ‘gold standard’ was part of an Imperial system that served the interests of the City of London. The collected studies show that implementation of monetary theories, like the much praised gold standard, are inseparable from historical developments and power relations. Economists, students of the British Empire and economic historians in general, will benefit greatly by reading this excellent collection of essays.

Arturo Giraldez (in collaboration with Dennis O. Flynn) has published articles and edited volumes on precious metal history and the history of the Pacific. He is co-editor of a Variorum series, The Pacific World: Lands, Peoples and History of the Pacific, 1500-1900.

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