³⁵⁵ Cf. in this connection the brilliant paper by F. A. Fetter, “The Gold Reserve: its Function and its Maintenance,” in the _Political Science Quarterly_, 1896, Vol. XI, No. 2.
The existence of a reserve, therefore, cannot lend any strength to the gold-exchange standard. On the other hand, if we inquire into the genesis of the reserve, its existence is an enormous source of weakness to that standard. For how does the Government obtain its gold-standard reserve? Does it increase its reserve in the same way as the banks do, by reducing their issues? Quite the contrary. So peculiar is the constitution of the Indian gold-standard reserve that in it the assets, i.e. the reserve, and the liabilities, i.e. the rupee, are dangerously concomitant. In other words, the reserve cannot increase without an increase in the rupee currency. This ominous situation arises from the fact that the reserve is built out of the profits of rupee coinage. That being its origin, it is obvious that the fund can grow only as a consequence of increased rupee coinage. What profit the rupee coinage yields depends upon how great is the difference between the cost price of the rupee and its exchange value. Barring the minting charges, which are more or less fixed, the most important factor in the situation is the price of silver. Whether there shall be any profit to be credited to the reserve depends upon the price paid for the silver to be manufactured into rupees.³⁵⁶
Not only is the reserve an evil by the nature of its origin, but having regard to its documentary character the reserve cannot be said to be absolutely dependable in a time of crisis. There is no doubt that the intention of the Government in investing the reserve is to promote its increase by adding to it the interest accruing from the securities in which it is invested. The critics of the Government want a _large_ and at the same time a _metallic_ reserve. But they do not realize that having regard to the origin of the reserve the two demands are incompatible. If the reserve needs to be large then it must be invested. Indeed, if the reserve had not been invested it would have remained distressingly [pg 236] meagre.³⁵⁸ But is there no danger in a reserve of this kind? [pg 237]