It is difficult to imagine today that over a century ago, India was a chronically trade-surplus country. Well, during 1900-13, its annual surplus of exports over imports averaged $119 million, peaking at $215 million in 1911.

This article’s focus, however, is not on the trade surpluses as much as their effect on silver prices — especially the speculation that followed World War I, leading to a windfall for many a Marwari businessman, from Ghanshyamdas Birla to Ramkrishna Dalmia.

At the centre of it all was the rupee, which, since 1835, had been a silver coin containing one tola (0.375 troy ounces) of the metal of 91.67 per cent fineness. Besides being a token coin made of silver, it was freely convertible against the pound sterling at a fixed exchange rate of one shilling and four pence (1s 4d; one pound=20s and 1s=12d).

The fact that India habitually exported more than it imported meant the rupee had a naturally tendency for appreciation — a far cry from the situation in recent times.

The usual method to check appreciation was through the issue of so-called Council Bills by the British Secretary of State for India in London. These Bills, denominated in sterling and sold through weekly auctions at the Bank of England, were purchased by exchange banks. The latter, then, sent the Bills to India (by mail or telegraphic transfers) and redeemed them in rupees at government treasuries at the fixed parity of 1s 4d.

Simply put, the sale of Council Bills expanded the sterling base against which coined silver rupees were issued. The more the Bills sold, the more the supply of rupees, preventing its appreciation beyond 1s 4d.

On the other hand, if the rupee tended to fall below 1s 4d, the Government issued ‘Reverse Councils’ in India. The sales of these Councils, encashable in sterling at London, resulted in the mopping up of rupees. But this route, to arrest the rupee’s depreciation, was clearly employed only in rare circumstances.

A system challenged

The smooth working of the system, in the words of the legendary British economist John Maynard Keynes (his first book was actually titled Indian Currency and Finance ), depended on the authorities in India “keeping sufficient reserves of coined rupees to enable them at all times to exchange international currency for local currency”. Besides, it required importing silver in adequate quantity at reasonable rates for coinage purposes.

This assumption of unlimited supply of silver at moderate cost — on which the system of a convertible rupee at a fixed exchange rate rested — suffered a body blow during World War I that began on July 28, 1914.

The war, by disrupting normal trade channels and causing shipping shortages, reduced India’s imports — especially from Britain and the rest of Europe. At the same time, exports rose with the surge in wartime demand, particularly for jute sandbags, canvas and sacks. The result was a further widening of trade surpluses, making the rupee still more prone to appreciation and necessitating the increased issue of Council Bills.

The other thing the war did was to push up demand for silver. The primary source of this was India: Its coinage requirements soared not only to support the encashment of enhanced Council Bill issuances, but also to pay the one million-odd Indian troops serving in Mesopotamia, Persia and East Africa. According to a Times of India report dated July 15, 1920, India’s silver imports amounted to 17 per cent of world production in 1915-16. This ratio rose in the next three year to 53, 42 and 122 per cent respectively. Together with the increased coinage needs of other countries, it drove up global silver prices from 22.125d an ounce in November 1914 to 55d in September 1917, before hitting a high of 89.5d in February 1920.

For the British government, this posed a dilemma given its commitment to issue silver rupees on demand against Council Bills. The problem really was that the cost of the 0.375 ounces of silver in a one-rupee coin equalled its nominal value (of 1s 4d or 16d) at roughly 43d an ounce. The moment world prices crossed this bullion parity by the middle of 1917, coinage became an unviable proposition: The Government couldn’t obviously afford to buy silver at 55d to coin into rupees with a face value of 43d. Worse, there was temptation now for jewellers to simply melt rupee coins to meet their bullion requirements!

Silver kings

But what all this also did was to make silver an ideal commodity for speculation. There was money to be made not just from hoarding, but even supplying the metal to the Government for coinage purpose.

Ramkrishna Dalmia and his maternal uncle Motilal Jhunjhunwala — he was known as India’s ‘Silver King’ — formed a syndicate in early 1918 that cornered silver worth well over a crore, which they stocked in Calcutta and Bombay. This bullion they supplied to the Government, whose silver rupee coin reserves had depleted to below 11 per cent of its outstanding paper note issuances as against 58 per cent at the outbreak of the war.

No less big wartime speculators were Ghanshyamdas, Jugalkishore and Rameshwardas Birla. So large was the three brothers’ turnover from this business — apart from jute, opium, linseed and grains — that their father Baldeodas, then leading a quiet retired life in Benares, was summoned to help out.

One doubts if the Marwari merchants of that period were fully aware of the underlying ‘fundamentals’ propping up silver prices, leave alone the intricacies of Council Bill auctions at the Bank of England. But they certainly had figured out the link between silver prices and the ‘German War’, as Dalmia called it.

The party ends

Towards late 1917, the colonial authorities had realised the futility of maintaining the rupee’s fixed peg. To start with, they discontinued unlimited sales of Council Bills in London; henceforth auction limits were fixed strictly in accordance with the available official resources of coin and bullion in India.

Secondly, it was decided to redeem Council Bills in rupees not at the fixed 1s 4d rate, but based on the price at which silver could be bought.

This direct linkage with world silver prices, thus, led to the rupee’s official exchange rate appreciating to 1s 6d in 1918, then to 1s 8d in May 1919 and finally to 2s 4d in December of the same year. By that time, the war had ended.

Once the commitment to issue fresh silver rupee coins at a fixed parity was gone, the Government didn’t need to stock up bullion to meet unlimited redemption demands from Bill holders. It could buy silver at the ruling market price and issue coins against Bills at an exchange rate corresponding to that price.

With the demand for silver coins matching what the mints could supply, there was also limited business opportunity now for hoarding bullion in the expectation of eventually selling to a desperate government.

Allowing the rupee to float by linking its exchange rate to the price of silver, in other words, made speculation in the white metal that much less attractive for our astute Marwari traders. But they made enough while the party lasted through much of the war.