9. Keynes and India

Keynes and India

WHILE at Eton, young Keynes (aged 17 and 18) witnessed a wave of antiimperialist sentiment in the wake of Britain’s war against the Boers in South Africa. Yet he was never influenced by that sentiment. As Skidelsky notes,

Throughout his life he assumed the Empire as a fact of life and never showed the slightest interest in discarding it. … He never much deviated from the view that, all things being considered, it was better to have Englishmen running the world than foreigners. (Skidelsky 1983, p. 91)

In late 1905, despite Marshall’s importuning, Keynes abandoned graduate studies in economics after one term and, the following year, took Civil Service exams, gaining a clerkship in the India Office. In the spring of 1907, Keynes was transferred from the Military Department to the Revenue, Statistics, and Commerce Department. While he was to become an expert on Indian affairs, he nevertheless blithely assumed that British rule was not to be questioned: Britain simply disseminated good government in places which could not develop it on their own.

“Maynard,” Skidelsky points out, “always saw the Raj from Whitehall; he never considered the human and moral implications of imperial rule or whether the British were exploiting the Indians” In the grand imperialist tradition of the Mills and Thomas Macaulay in 19th-century England, moreover, Keynes never felt the need to travel to India, to learn Indian languages, or to read any books on the area except as they dealt with finance (ibid., p. 176).

Despite his rise to high levels of the Civil Service, Keynes soon grew tired of his quasi sinecure and tried to return to Cambridge by way of a teaching post. Finally, in the spring of 1908, Marshall wrote to Keynes, offering him a lectureship in economics. Although Marshall was on the point of retirement, he easily persuaded his friend, favorite student, and handpicked successor, Arthur C. Pigou, to follow Marshall’s practice of paying for the lectureship out of his own salary; Neville Keynes promptly offered to match the stipend.

In 1908, Keynes happily took up the insular role of lecturing in Marshallian economics at his old school, King’s College, Cambridge. But most of his time and energy were spent as a busy man of affairs in London (Corry 1978, p. 5). One of his functions was to be an informal but valued adviser to the India Office; indeed, his association with the office actually expanded after 1908 (Keynes 1971, p. 17). As a result, he played an important role in Indian monetary affairs, writing his first major journal article on India for the Economic Journal in 1909; writing influential memoranda out of which grew his first book, the brief monograph on Indian Currency and Finance in 1913; and playing an influential role on the Royal Commission on Indian Finance and Currency, to which distinguished post he was appointed before the age of 30.

Keynes’s role in Indian finance was not only important but also ultimately pernicious, presaging his later role in international finance. Upon converting India from a silver to a gold standard in 1892, the British government had stumbled into a gold-exchange standard, instead of the full gold-coin standard that had marked Britain and the other major Western nations. Gold was not minted as coin or otherwise available in India, and Indian gold reserves for rupees were kept as sterling balances in London rather than in gold per se.

To most government officials, this arrangement was only a halfway measure toward an eventual full gold standard; but Keynes hailed the new gold-exchange standard as progressive, scientific, and moving toward an ideal currency. Echoing centuries-old inflationist views, he opined that gold coin “wastes” resources, which can be “economized” by paper and foreign exchange.

The crucial point, however, is that a phony gold standard, as a gold-exchange standard must be, allows far more room for monetary management and inflation by central governments. It takes away the public’s power over money and places that power in the hands of the government. Keynes praised the Indian standard as allowing a far greater “elasticity” (a code word for monetary inflation) of money in response to demand. Moreover, he specifically hailed the report of a US government commission in 1903 advocating a gold-exchange standard in China and other Third World silver countries—a drive by progressive economists and politicians to bring such nations into a US dominated and managed gold-dollar bloc (Keynes 1971, pp. 60–85; see also Parrini and Sklar 1983; Rosenberg 1985).

Indeed, Keynes explicitly looked forward to the time when the gold standard would disappear altogether, to be replaced by a more “scientific” system based on a few key national paper currencies. “A preference for a tangible reserve currency,” Keynes opined, is “a relic of a time when governments were less trustworthy in these matters than they are now” (1971, p. 51). Here was the foreshadowing of Keynes’s famous dismissal of gold as a “barbarous relic.” More broadly, Keynes’s early monetary views presaged the disastrous gold-exchange standard engineered by Britain during the 1920s, as well as the deeply flawed Bretton Woods scheme of a managed gold-dollar imposed by the United States—with the help of Britain and Lord Keynes—at the end of World War II.

The Cambridge economist, however, was not content to defend the gold-exchange status quo in India. Believing that the march toward managed inflation was not proceeding rapidly enough, he urged the creation of a central bank (or “State Bank”) for India, thus enabling centralization of reserves, far greater monetary elasticity, and far more monetary expansion and inflation. Although he was unable to convince the Royal Commission to come out in support of a central bank, he was highly influential in its final report.

The report included his central-bank view in an appendix, and Keynes also led the harsh cross-examination of pro-gold coin standard and anti-central bank witnesses. An interesting footnote to the affair was the reaction to Keynes’s central-bank appendix by his old teacher, Alfred Marshall. Marshall wrote Keynes that he was “entranced by it as a prodigy of constructive work” (ibid., p. 268).

Keynes generally liked to tackle economic theory in order to solve practical problems. His primary motivation for plunging into the Indian currency question was to defend the record of his first and most important political patron, Edwin Samuel Montagu, of the influential Montagu and Samuel families of London international banking. Montagu had been president of the Cambridge Union, the university debating society, when Keynes was an undergraduate, and Keynes had become a favorite of his. In the 1906 general elections, Keynes had campaigned for Montagu’s successful bid for a Parliamentary seat as a Liberal.

In late 1912, when Montagu was Undersecretary of State for India, a scandal developed in Indian finance. The Indian government, of which Montagu was second-in-command, had contracted secretly with the banking firm of Samuel Montagu and Company to purchase silver. It turned out that nepotism had figured strongly in this contract. Lord Swaythling, a senior partner in the firm, was the father of undersecretary Edwin S. Montagu; another partner, Sir Stuart Samuel, was the brother of Herbert Samuel, postmaster general of the Asquith government (see Skidelsky 1983, p. 273).