Thread by @shrikanth_krish

The Rupee reached an all time low against US Dollar in Sep 2018 hitting close to 73 units to a dollar

But this fall in the rupee has coincided with one of the strongest phases of the Indian economy ever

An economy growing at a faster clip than it ever has in the past 4000 years

For those who are naive about the role of currency and monetary standards this may have seemed perplexing.

How can the economy be doing so well at a time when the country’s monetary unit is at its weakest.

While this question is no doubt naive it remains very seductive.

Most intelligent people would have this gut-feel that a country’s economic health mustn’t be judged by the state of its currency unit, but they may struggle to articulate why people who feel otherwise are wrong

The sensationalism of modern journalism is apt to project the fall of the currency unit as some kind of an economic debacle.

Reflection and deliberation are not in vogue

So this might be a good occasion to take a deep view into history and explore the history of the monetary standard in India throughout its history.

What is the history of the Rupee?

How did Indians conduct transactions and store value 2000 years ago? 500 years ago? A hundred years ago?

When did India move to a fiat currency? What are the problems in attempting to manage the value of currency unit while not maintaining the discipline to rein in inflation?

These are questions of economics, yes. But they are also moral questions

An examination of the history of the Rupee illustrates that monetary economics is a moral minefield. It is not possible to have the cake and eat it too.

So let’s examine the history of currency in India

Ancient India is widely regarded as one of the early innovators in money - among the first countries to start issuing coins, as observed in the coinage associated with the various Mahajanapadas (circa 6th-4th century BCE).

Here’s a sample of some of the early specimens of coins associated with the Mahajanapada period

Magadha coin
(25 mashakas - 5th cen BCE)
Source : coinindia.com

But we cannot find much text in the literature of the time elaborating on the monetary standard in these Mahajanapadas. What we do have are the coins.

For literary elaboration on the nature and type of Indian currency one of the earliest books is of course Kautilya’s Arthashastra - usually dated to 4th century BCE.

The Arthasastra is also interesting as it has the first clues to the etymology of the modern word “Rupee”

As per Kautilya, the Mauryan State managed the mint headed by a superintendent named “lakshanadhyakshah”.

The silver coins manufactured by the mint are referred to as “rūpya rūpa”. In Sanskrit, rūpya means “wrought silver” and rūpa refers to form / shape

Here's a glimpse at the Mauryan "Rupya - rupa" from roughly 4th / 3rd cen BCE

Kautilya however doesn’t suggest that the empire had a silver standard by any means. He also refers to other types of coins besides rūpyarūpa, most notably copper coins - tamra rūpa

Also “rūpya rūpa” notwithstanding the name appears to be a bit of a misnomer, as Kautilya clearly describes their composition - which is anything but exclusively silver

The “silver coin” in Kautilya’s words consists of 4 parts of copper, and 1/16th part of any of the following metals - tikshna, sisa, anjana, trapu

One is not sure of the actual silver content in it.

Similarly tamra rupa comprises of four parts of an alloy named “pAdajIvam”

So the monetary system was most likely not a silver standard, or even a bi-metallic standard, where the currency unit is defined in relation to two metals. But it was definitely a tightly regulated system where legal tender had to conform to certain standards

It’s also interesting that Kautilya’s understanding of money is pretty consistent with ours. He acknowledges its role not just as a medium of exchange, but also as a store of value.

vyavahArikim : Medium of exchange
Koshapraveshyam : Legal tender admissible to the treasury

It also appears there was a central banker of sorts (known as “rūpadarsaka”) whose job was to regulate the currency in the state.

Kautilya also talks of a seigniorage of 8% levied on new coins issued - referred to as “rūpika” - a source of revenue to the treasury

But we don’t have much more information that what is outlined above on the monetary standard in the Mauryan state

Now how did this change over the next 1000 years?

Judging by the coins associated with the great Gupta Empire of 4th-5th century CE, it does seem that Gold coins were a LOT more common in the Gupta Empire relative to the Mahajanapada or Mauryan periods

Here’s a Gold coin issued by Samudra-gupta circa 350CE. Interestingly the coin was called “dinara” - a foreign word as opposed to the Indian word for Gold coin - “Suvarna rūpa”

Source: coinindia.com

One hypothesis is that Gold coins became popular in India post Kushan rule who introduced the “dinara” later adopted by the Guptas.

The Gupta Empire also issued silver and copper coins, but Gold coins were extremely common

Now let’s fast forward by some 800 years to the period of the Delhi Sultanates.

There was a radical change in monetary standards introduced in India with the coming of Muslim rule after the 12th century (at least in North India)

The early Sultans did not depart from the Hindu numismatic standards

The earliest conqueror of the North Indian plain was Muhammad Ghūri in late 12th cen

His gold coin issues were adhering to convention with goddess Lakshmi on one side and the name of the ruler on the reverse

The manager of the mint at Delhi during the rule of Alladdin Khilji’s son was one Thakurra Pheru, a Hindu or a Jain, who left behind a book in Apabhramsa on exchange rate, and the details on metal composition in coins of different types

But despite the early continuity there were some radical changes in the course of the 13th century

The Delhi Sultanate established a firm equation between Gold and Silver of 1 : 10. A bi-metallic standard of sorts, that we didn’t quite encounter in earlier classical literature

Also this was a period of political and cultural upheaval.

The Khilji and Tughlaq Sultans were notorious for their raids on Hindu temples - which inevitably meant a great deal of Gold acquisition, and subsequent use of that Gold by the mint to issue coins

This monetary indiscipline in the 13th century put a strain on the 1:10 ratio between Gold and Silver.

Gold predominated in the general circulation, because of which the unofficial exchange rate between Gold and Silver dropped as low as 1:7, though the official rate was at 1:10

This is one of the early examples in monetary history where a “Fixed exchange rate” came under stress and eventually collapsed because it was not accompanied by monetary discipline and austerity.

The greed of the Sultans is well documented by the 14th century historian Ziauddin Barani, who talks of the “token currency” in copper and brass introduced by Muhammad Bin Tughlaq to arbitrarily replace silver

This had a disruptive effect on commercial activity forcing Tughlaq to backtrack and revoke the “token currency”.

Tughlaq's "token currency" was an innovation not inspired by hard thinking rooted in Indian realities, but a fad picked up from China at the time - where the Yuan dynasty was experimenting with “Chao” - a paper currency - usually regarded as the world’s first fiat currency

It is not surprising that the “paper currency” model did not work very well in China either which was beset with inflation problems at the time

The Gold surplus in the Sultanate period also found its way into many foreign countries including Iran and parts of Russia.

A 15th century Persian revenue manual suggests that the royal treasury at Tabriz had more Gold sourced from India than from any other source

Presumably the Sultanate was engaging in imports of luxury goods (furs, slaves, warhorses) from countries on the north west using the Gold surplus

It was clearly a policy that promoted certain trade patterns which suited the tastes of the Muslim rulers - funded by Indian Gold

But the chaos induced by monetary instability appears to have eventually led to issue of fewer gold coins during the later Tughlaq period and a reversion to the mixed metal currencies and copper coins - stemming from the gradual debasement of the silver “tanka”

During the 16th century under Mughal rule, there was greater standardization that set in, after the chaos of the previous few centuries.

At the onset of Mughal rule, North India largely used copper currency (known as sikandari)

While Southern India, less influenced by the monetary chaos in the North, stuck to Gold currency with the Gold coin going by the name “Pagoda” in the Vijayanagar Empire

Sher Shah Suri’s brief reign from 1540-45 was pivotal in the history of Indian monetary standard.

He established a tri-metallic coinage with strict standards after centuries of debasement -

The Rupaiya : Silver coin (and the principal coin in the Empire)
The Mohur : Gold coin
Dam : Copper coin

The standards were imposed uniformly across the empire.

With the spread of the Mughal Empire in Southern India in succeeding centuries, the rupee slowly replaced the Gold “Pagoda” in many provinces, but the “Pagoda” continued to be dominant in the Tamil country

So how do we judge the monetary standard from 16th to late 18th century under Mughal Rule

Dr BR Ambedkar, a fine monetary historian in his own right, speaks positively of the monetary discipline during Mughal rule in his work - “The Problem of the Rupee” published in the 1920s

It definitely was a less chaotic period compared to the plunder, indiscipline and thoughtless monetary innovation of the preceding Muslim rulers

The Silver Rupee was the dominant currency. But was it a silver standard? Not quite. As we discussed it was a tri-metallic system. The Mohur, the Rupee and the Dam were linked to each other by a fixed ratio

As we know, “Fixed” currency pegs are dangerous especially when not accompanied by monetary discipline. But the Mughal mints were relatively more disciplined and desisted from debasement for the most part.

One is not sure if the system changed in any material way when the Mughal Empire declined and power moved into Maratha hands in large parts of the country

But there definitely was a major change with the rise of the East India Company, and more particularly with the 1835 transition to a silver standard from a bi-metallic standard

The private banks set up during Company rule in late 18th century, particularly in Bengal, introduced paper currency in India for the first time - a “first” in Indian history

The banks that issued paper “rupees” included - “Bank of Hindustan” (1770-1832), General bank of Bengal and Bihar (1773-75), and Bengal Bank (1784-91)

But the monetary standard in the late 18th century remained a bi metallic or rather a tri-metallic system with primarily silver coins ( as well as gold and copper in circulation)

However at the dawn of the 19th century, the Company authorities were irked by the lack of uniformity that had probably crept in with the political chaos in India in the 18th century.

There were three types of Rupees - the rupee sicca of Bengal, the rupee surat of Bombay, and the rupee arcot of Madras.

Plus there were gold and copper coins as well in circulation - a legacy of Mughal and Vijayanagar rule

In 1835, there was an act passed that basically abrogated bi-metallism and moved British India to a mono-metallic “silver standard”

Broadly speaking we can think of the monetary standard in the British period in four different periods

1835-1893 : Silver standard
1893-1898 : Transition to Gold standard
1898 onwards : Gold exchange standard

So clearly the Silver standard was effective for the longest period

While standardization and a single standard starting 1835 may be viewed as “positive” developments by some, it created some problems because of the fact that while India moved to the silver standard, its chief trading partner and “ruler” - Britain - was on a Gold standard

The period of the Raj is unique in the long Indian monetary history

For the first time the economy was not entirely or primarily self-contained as in earlier centuries, but foreign trade (particularly trade with Britain) increasingly constituted a large part of economic activity

Given the move to a mono-metallic standard in 1835, it may have made sense to move to Gold, as Ambedkar mused a century later

But the move to Silver standard meant that the two countries were on different standards, and the govt made futile efforts to fix a ratio between the two

In 1841, a proclamation authorized the treasuries to fix the Gold - silve ratio at 1:15. Effectively a currency peg

But this proved problematic when new Gold deposits were discovered in Australia and California in US, bringing down the Gold price

As the Indian treasury was honoring the fixed exchange rate of 1:15, there developed a market in shipping Gold to India to make a profit.

This resulted in vast accumulation of Gold in the Indian treasuries

Eventually attempts to peg the exchange rate were abandoned in the 1850s following which there was a major “Fall of the Rupee” as illustrated below

Source: BR Ambedkar's "Problem of the Rupee"

This was in part triggered in the mid-late 19th century by two things

- Demonetization of silver in many countries (Germany, Scandinavia in 1870s)
- Discovery of new silver mines

But this turmoil in exchange rates must not be viewed as a “negative” because this was after all the period when Indian economy started growing after several centuries of total stagnation and decline

Indian trade volumes actually increased quite remarkably in this period of Rupee decline as shown below

Source: citeseerx.ist.psu.edu/viewdoc/downlo…

Also the rupee decline was not caused by currency debasement , or an irresponsible mint. (as we saw in the period of Sultanate)

Inflation in India remained under control (atleast compared to the standards we are used to in our times)

So the point to emphasize here is that letting the currency depreciate was not a catastrophe. A lesson there for our own times

Sure, it meant increased payment of “home charges” to Britain for maintenance and “upkeep”.

But these were the evils of colonial rule. Not so much the fall in the Rupee per se.

Under a lot of pressure, India did move to a Gold standard in the late 1890s. While “pegging” may have created a semblance of “stability” it meant the country had a very tight money supply and no monetary independence

This ties back to the maxim of “Impossible Trinity” in international economics. A country cannot have all three of the following -

Fixed exchange rate
Free capital movement
Independent monetary policy

In the later years of British Raj, under the Gold standard, what we had was a fixed exchange rate thanks to the Gold standard, and free capital movement.

But this naturally meant a surrender of monetary independence and a monetary policy ill suited to the Indian business cycle

In fact India did not even have an independent central bank till 1934 - the year RBI was instituted

Post independence, political independence and accountability meant that there was much greater emphasis and need on having an independent monetary policy that addressed the Indian business cycle

But we also continued with a fixed exchange rate, with extremely low volatility. The Rupee was pegged to 1 USD in 1947.

In later decades the low volatility of exchange rate was maintained despite some depreciation forced by crises.

But the Fixed exchange rate and independent monetary policy combo was achieved by erecting barriers not just on capital flows but also rather needlessly on the current account trade.

A period of relative isolation from the world - a huge opportunity cost paid by the economy

Here’s a look at the Rupee’s evolution vis-a-vis USD since independence -

Source: slideshare.net/MaAnU16/the-jo…

So what do we learn from this

Currency pegging came at the cost

And even though we had barriers on trade & capital flows for most of the post independence years, we still had to buckle under pressure to devalue the rupee in 1966 - when we faced our first severe economic crisis

India’s unjustifiably high exchange rate was maintained artificially by placing restrictions on imports and subsidizing exports

Sure, maybe the peg could have been maintained if we had at least exercised monetary discipline domestically and kept inflation in check.

But inflation went out of control in the 60s, making Indian goods extremely expensive abroad

India’s fiscal profligacy (arguably understandable for a poor country) meant that the deficit was partly funded through increasing money supply. As evident in the numbers below -

Source: ccs.in/internship_pap…

Foreign aid throughout the 50s / 60s helped prevent a crisis.

But things came to a head in 1966 when aid was cut off and India was forced to devalue its currency.

Though we did devalue the currency practically overnight from Rs 4.8 to Rs 7.1, it was not as radical and sharp as it probably should have been

What India needed then was a removal of trade barriers, and a much much weaker rupee to make India competitive. Yet we chose a strong rupee over a strong economy

There was a repeat of the 1966 crisis in slightly different circumstances in 1990-91. The country teetered on the verge of bankruptcy and India could barely finance 3 weeks of imports

The reforms were forced upon India in part, by an IMF bailout.

While the reforms involved many pieces, the center-piece of course was the abandonment of the fixed exchange rate policy and letting the Rupee depreciate.

The Rupee depreciated from 17 to a dollar to roughly 35 to a dollar between 1990 and 1996. Central to the revival of the Indian economy

The Rupee has progressively weakened since against major currencies

Yet the Indian economy has strengthened by the day. Today it is the strongest that it has ever been, at precisely the moment when the Rupee is arguably the weakest it has ever been

That's not an anomaly at all

The lessons from this quick examination of Indian monetary history from the Mauryan period to our times is remind ourselves that the “monetary standard” by itself tells you very little about the robustness of a country’s economic system

It behooves the central bank to maintain monetary independence, as well as monetary discipline

It also behooves the government particularly in the globally integrated times we live in to reduce barriers to trade and capital as barriers can only hurt a poor country like India

But it does not behoove the govt to prop up the rupee

Sure - if the rupee declines because of indiscriminate monetary policy and reckless printing of money and runaway inflation, that is definitely a concern. But the fall of the rupee is never a concern all by itself.

The value of the Rupee is best left to the market.

References used for this thread :

Indian Numismatics history: coinindia.com
Arthasastra : archive.org/stream/Arthasa…

Cambridge Economic history of India Volumes 1 and 2:

hkrdb.kar.nic.in/documents/Down…

hkrdb.kar.nic.in/documents/Down…

Ambedkar's Problem of the Rupee :
archive.org/details/in.ern…

JL Laughlin on 19th cen Indian monetary history:
journals.uchicago.edu/doi/pdfplus/10…

Impact of silver standard on 19th century trade:
citeseerx.ist.psu.edu/viewdoc/downlo…

Post independence Rupee trends:
slideshare.net/MaAnU16/the-jo…

CCS piece on 1966 crisis:
ccs.in/internship_pap…

Thanks for reading if you got this far

Thought I'd conclude with the image of the first silver "rupaiya" issued by Sher Shah in the 1540s

Had originally planned to include it while discussing Sher Shah's reforms

Source: commons.wikimedia.org/wiki/File:Sher…