British India was totally dependent on London as far as its economic policy and its currency were concerned. In London it was not only the Secretary of State for India, but also the treasury and the Bank of England whose views had to be taken into account. All of them insisted that India should be able to pay its tribute punctually and thus retain its creditworthiness. The ‘flight from the rupee’ was a spectre which haunted them. It was feared that in a panic everybody might wish to sell off government of India bonds and this could lead to a major problem for the British government as it would have to guarantee those bonds. Colonial crisis management was therefore bound to be management in the interest of the creditors and not in the interest of India, which was indebted as a nation and also had among its citizens many indebted peasants and landlords. Deflationary measures carried out on behalf of the creditors increased the burden of debt, while an inflationary policy would have reduced that burden. Even before the depression the government of India had had to follow a deflationary policy in order to maintain the overvalued rupee which had been tied to the gold standard at a rate above the prewar parity. We shall therefore discuss the background of the British Indian currency policy before describing the impact of the depression on India, which was greatly enhanced by the continuation of this deflationary policy.
Until 1893 the Indian currency had been a silver currency. Anybody could bring silver to the mint and get it coined. The seignorage was moderate, as it was supposed to cover the cost of