SOAS Research Online

Abstract

This thesis examines the multi-lateral considerations that, in our view, underlay the formulation of monetary policy in India in the period between the two world wars. During and after the First World War, Britain faced a severe liquidity crisis. We argue that monetary policy in India was formulated to take account of this crisis. Traditionally, India was a large absorber of gold on the non-monetary account. The persistent aim of British monetary policy in the Indian context during the entire interwar period was that of not allowing India to set up a monetary demand for gold in addition to her non-monetary demand for it and secondly, through deflationary policies (including exchange rate adjustments), to limit India's non-monetary gold demands to the minimum. Indian gold exports during the depression, which gave room for manoeuvre in the management of the sterling after September 1931, were a logical sequel to this policy. The British liquidity crisis in this period took the form of her current account surpluses being inadequate to support a high level of overseas lending. Besides, in an uncertain financial environment, Britain was a large short-term debtor as the British bank rate acted as much to increase her short-term liabilities as it did by calling in her short-term assets. The British desire to return to gold at the pre-1914 parity required domestic deflation which itself was a matter of severe political contention. In the circumstances, Britain hoped her return to gold would be accomplished by a US inflation and US export of capital. Compounding this situation was the thinly veiled fear, in Britain, of the erosion of the key currency role of the sterling and the loss of its global financial leadership to the USA. Control over Indian monetary policy and its outcome proved valuable to Britain in this environment.