en the
balance of trade turned in favour of India and soon assumed
unprecedented proportions. The enormous Indian exports could not be paid
for in goods, as the Allied countries had neither goods nor freight
available for maintaining their own export trade. Nor could they be
paid for in bullion, as gold and silver were taken under rigid control.
Nor could internal borrowings in India (though the success of the Indian
war loans was a phenomenon hitherto undreamt of) suffice to finance the
expenditure incurred in India on behalf of the Imperial Government. The
Government of India made very large purchases of silver, which combined
with the stimulated world-demand to drive the price of the white metal
up to inordinate levels, and to keep pace with this rise and avoid an
intolerable loss on the coining of rupees the rate of exchange--_i.e._
the rate at which the Secretary of State sells "Council bills" in
London--was raised until it actually reached 2s. 5d. for the rupee. To
meet the balance of Imperial expenditure in India the Government of
India issued currency notes against London Treasury bills.

The result of these operations was that at the end of the war the funds
standing to the credit of the Government of India in London had been
swollen to the unprecedented figure of L106,000,000, a large proportion
of which had to be paid back to India when, with the cessation of the
abnormal conditions induced by the war, the balance of trade turned
against her, and the rate of exchange had been raised from the legal
standard of sixteenpence to the rupee to 2s. 5d. The very important
question then arose of the future legal ratio of the rupee to the
sovereign or the L1 sterling. A Committee was appointed to advise the
Secretary of State as to the best means of securing fixity of exchange
under the new conditions; it took evidence in London during the year
1919 and reported towards the end of the year. A majority of the
Committee recommended that the rupee should be linked with the gold
sovereign and not with the L1 sterling, which had become divorced from
gold under the pressure of war finance, and that the legally established
ratio of 1s. 4d. or fifteen rupees to the sovereign should be raised to
2s., _i.e._ ten rupees to the sovereign. The Secretary of State accepted
the recommendations of the majority of the Committee, and in February
1920 steps were taken to establish the new ratio regardless of the fact
that signs were indub