§3. Gold and Rupee Bonds

Having compared the rates of interest of paper and coin bonds, we may next compare those of gold and silver securities. The comparison, to be of value, must be between gold and silver contracts in the same market and with the same security. Fortunately such contracts have been available in the London market of government securities. The loans of India have been made partly in gold and partly in silver, and both forms of securities have been quoted in London.46 The interest on the silver bonds, or rather rupee bonds, was paid by draft on India. The sums actually received in English money depended on the state of the exchanges. The rate of interest in the silver standard was calculated47 in the same way as was Edition: current; Page: [404] shown for coin bonds in §2. The results follow:

Footnotes to the table are given on page 405.

Edition: current; Page: [405] From this table it will be seen that the rates realized to investors in bonds of the two standards differed but slightly until 1875, when the fall of Indian exchange began. The average difference from 1875 to 1892 inclusive was 0.7 per cent. Within this period, from 1884, exchange fell much more rapidly than before, and the difference in the two rates of interest rose accordingly, amounting in one year to 1.1 per cent. Inasmuch as the two bonds were issued by the same government, possessed the same degree of security, were quoted side by side in the same market, and were similar in all important respects except in the standard in which they are expressed, the results afford evidence that the fall of exchange (after it once began) was, to some extent, discounted in advance and affected the rates of interest in those standards. Of course investors did not form perfectly definite estimates of the future fall, but the fear Edition: current; Page: [406] of a fall predominated in varying degrees over the hope of a rise.

The year 1890 was one of great disturbance in exchanges, the average for the first six months being 17.6 and for the last six months, 19.3. The gold price of the silver bonds rose from an average for the first six months of 73.8 to 83.5 for the last six months, but the rise in their silver price was only from 100.6 to 103.7, showing that the increase of confidence in the future of silver was not great, and, in fact, only reduced the disparity in the interest from 1.0 to .8 per cent.

This great rise in exchange and the slight revival in silver securities occurred simultaneously with the passage of the Sherman Act of July, 1890, by which the United States was to purchase four and a half million ounces of silver per month. The disturbance was doubtless due in some measure to the operation, or expected operation, of that law.

This is not the only case in which the relative prices of rupee paper and gold bonds were probably affected by political action. One of the smallest differences in the two rates occurs in 1878, which was the year of the Bland Act and of the first International Monetary Conference.

After the closure of the Indian mints to silver on June 26, 1893, exchange rose from 14.7 to 15.9, the gold price of rupee paper from 62 to 70, and consequently its rupee price from 101.2 to 105.7.

From this point the exchange again dropped, much to the mystification of those who had predicted an established parity between gold and silver at the new legal rate of 16d per rupee. There was much discussion as to the reasons for the failure of the legal rate to become operative. The chief reason seems to have been that the Edition: current; Page: [407] closure of the mints to silver attracted into the circulation silver from other channels, especially old native hoards. Within a few years, however, this source of supply was dried up so that the legal par was reached in 1898 and was maintained thereafter, subject only to the slight variations of exchange due to the cost of shipping specie.

But until the par was proved actually stable by two or three years' experience, the public refused to have confidence that gold and the rupee were once more to run parallel. Their lack of confidence was shown in the difference in the rates of interest in gold and rupee securities during the transition period, 1893-1898, and the two or three succeeding years. From 1893 to 1900 inclusive the two rates averaged .5 per cent apart. From 1901 to 1906 inclusive, the average difference was only .1 per cent,51 showing that confidence in the gold value of the rupee had been established.