India (21 page)

In other respects, the India Office tried to run along modern lines. Speaking tubes had been installed between offices, and the telephone could be used to communicate with other government departments. One resident clerk was known to travel the corridors of the building on roller skates, until ordered to cease. The department was so big that it even housed its own printers in a basement backing on to the prime minister’s house in
Downing Street, ready to send off despatches to the subcontinent. “Boy copyists” had been replaced by “female manipulators,” who operated typewriters in a secure office at the top of the building to ensure their safety, with work coming in and going out through a small hatch in the door.
²
This whole mechanism, along with civil and military salaries and pensions, was paid for by the Indian taxpayer: Indians had, without being asked, outsourced the running of their government to Britain.

After examining military accounts for several months, Keynes moved to the Department of Revenue, Statistics and Commerce, and passed each day in a large room overlooking St. James’s Park, inspecting files and circulating them back and forth. He was worried by the quality of the statistics he received, and told the head of his department it was absurd they were prepared without technical knowledge. He suggested the India Office appoint a statistician. This was one of the difficulties with running a government from on high: it was detached from lived experience, and bred resentment. The politician Harold Cox, who had taught mathematics at Aligarh Muslim University, was once advised by a judge in India: “Cox, when you are a bit older, you will not quote Indian statistics with that assurance. The Government are very keen on amassing statistics—they collect them, add them, raise them to the
n
th power, take the cube root and prepare wonderful diagrams. But what you must never forget is that every one of those figures comes in the first instance from the
chowty dar
[chowkidar], who just puts down what he damn pleases.”
³
Keynes, charged with preparing a report on “The Moral and Material Progress of India” for Parliament, distracted himself by studying stock market fluctuations. “A special feature of this year’s edition,” he wrote to an occasional male lover, “is to be an illustrated appendix on Sodomy.”
⁴

Like numerous imperial officials through history, Keynes had no strong interest in the country he was helping to control. It was easier to hold the prevailing view that it was best governed from a distance; although he was acquainted with some Indian students, he never himself went further east than Luxor. At this point, only 6 percent of entrants to the civil service in India were Indian, since many practical obstacles stopped them from joining. A proposal by the Indian National Congress that the entrance examination be held not only in London but in Bombay, Calcutta and Madras was rejected; one British official inadvertently undermined the idea of racial superiority when he wrote that “half the service would be Bengali” if it were opened to this sort of competition, since Indian students were “infinitely quicker” at exams than Europeans.
⁵
Keynes found the India Office a
frustrating place to work, although he enjoyed having enough spare time to go to wild Bloomsbury parties, the ballet, the theatre, art galleries and suffragette meetings. With an agile and capacious brain and a range of interests, he spent his spare office hours working on an academic study of probability. Soon he was so bored and so convinced the people around him were his intellectual inferiors, that at the age of twenty-five he resigned from the India Office and returned to Cambridge to relax, coach students and give lectures in economics.

Keynes is known today as the figure who revolutionized perceptions of the link between the economy and the role of government, principally through his influential 1936 book
The General Theory of Employment, Interest and Money
. He was the panjandrum of economics, married to the cheeky Russian ballerina Lydia Lopokova (he appears to have been genuinely bisexual), who offered world leaders solutions to complex problems. His achievements were not only academic: Keynes attended the Versailles negotiations, was the lead British representative at Bretton Woods in 1944 and is considered the father of the World Bank and the International Monetary Fund. In the 1970s in an era of high inflation, failing socialist experiments and the rise of monetarism, his reputation went into eclipse as he was blamed for sins he had not committed. After the world financial crisis of 2008, he fell back into fashion. His argument that during a slump the government had a duty to spend money in order to kick-start the economy (he referred to it as “magneto trouble”) was widely accepted. In fact, the earlier equation of Keynesian thinking with uncontrolled government borrowing was wrong: he regarded deficit spending (using money the government did not have, in advance of future tax receipts) more as a technical fix. He viewed risk as central to the free market, and foresaw a safer and better regulated form of capitalism.

Ensconced in Cambridge eating anchovies on toast and drinking coffee, Keynes maintained an intellectual interest in India’s economy. Although the existence of an interconnected global banking and monetary system is now assumed, economists were at the time groping towards an understanding of how such a thing might work. Large quantities of silver had been discovered in the United States, and in the 1870s Germany and other countries had abandoned bimetallism (by which their currency could be converted at fixed rates to gold or silver) and adopted a gold standard. This meant currencies like the rupee which were on a silver standard dropped, and debts the Indian government incurred in Britain, which was on a gold standard, became increasingly expensive to service. To boost confidence in the rupee,
the India Office ordered gold sovereigns to be distributed from Bombay, but Indian bullion dealers had the bright idea of melting them down and selling the gold at a higher price than the face value. Panicked, the authorities shipped a large part of India’s gold reserves to London, and as a temporary measure went on the “gold-exchange standard,” meaning the rupee was now supported by assets held in a stable foreign currency—sterling.
⁶

India’s monetary problems had for some time been a matter of public and political concern. In Oscar Wilde’s 1895 play
The Importance of Being Earnest
, Miss Prism tells her charge: “Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.”
⁷
In 1912 news broke that Samuel Montagu & Co., a firm of London brokers, was secretly purchasing silver on behalf of the Indian government for its reserves. This was a sensible move designed to avoid speculation, and the silver was bought below the market rate, yet the press preferred the idea of possible impropriety: senior Jewish politicians might be enriching themselves by passing business to bullion dealers, to whom they had family connections. Were India’s monetary arrangements a disgrace or a danger?

It was a typically English story, concentrating on the minutiae of a possible scandal while missing the larger point that the arrangements of the world’s currencies were changing. (Nearly a century later, the British media would focus more attention on MPs claiming £1m in dubious expenses than on the government’s creation of a debt nearing £1tn.) Irritated by the level of ignorance and the India Office’s inability to state its case properly, Keynes decided to write a book in explanation,
The Monetary Affairs of India
. He began it in December 1912 and had proofs in his hand less than four months later when he left for a much anticipated holiday in Egypt, his first trip to the east. He was to stay with his old friend Robin Furness, a magistrate in Alexandria, who had promised him “all the attractions which made Gomorrah such a popular resort in the good old days,” including his houseboys.
⁸

The book on India’s monetary affairs, with the final title
Indian Currency and Finance
, was published in 1913 and sold fewer than 1,000 copies in the year following publication. Keynes came to several important conclusions, specifically that the ancient link between money and metal was no longer necessary. His contention was that far from being dangerous, as monetary fundamentalists suggested, India’s interim use of the gold-exchange standard should be made permanent. It was part of the evolution of global finance and would benefit business through a greater elasticity of money. In
the long run, rather than pegging national currencies to the price of gold, the world should think about using a global reserve currency.
⁹

Looking at India, he tracked the development of its paper currency. Although silver coins had been circulating in the subcontinent for more than 2,000 years, rupee notes of various denominations (promissory notes payable to the bearer on demand by the government of India) were presently issued by as many as seven different centres: Calcutta, Cawnpore, Lahore, Madras, Bombay, Karachi and Rangoon in Burma. Until recently, these notes had been accepted only in their area of issue.
¹⁰
In addition, several princely states had their own currencies, and the rulers of Goa issued rupee notes printed in the name of “India Portuguesa”—Portuguese India.
¹¹
Keynes suggested immediate reform: paper notes should be circulated more widely in the subcontinent, the direct link to gold should be permanently curtailed and an Indian reserve bank established. The peg to sterling would secure the value of the rupee. He subsequently joined an official royal commission and managed to promote these proposals, although the Reserve Bank of India would not be created until 1935.

As well as developing his ideas about currency in the book, young Keynes elaborated a theory of money, value and hoarding, which would later become the concept of liquidity preference outlined in his
General Theory
. His supposition undermined the previously accepted thinking of Adam Smith that money saved was used either by the saver as capital or by another person to whom it was lent through the banking system. Keynes suggested that liquidity preference determined the rate of interest, since at times of uncertainty people hoarded money—not spending it, but not putting it to economic use either. In
Indian Currency and Finance
, he wrote breezily of the “needless accumulation of the precious metals” by Indians, “an uncivilized and wasteful habit” which damaged the Indian economy by absorbing redundant bullion from the West.
¹²
At the least sign of danger, people in India hoarded gold or cash. “I know, for example, a very conservative Brahmin family, small landowners in Eastern Bengal, where this is the case. Once a week the head of the family will retire privately to a corner of the roof of the house, take out the little hoard of notes with ritual care, count and check them, dust each with a feather brush, and lay them out in the sun to air and to recover from any trace of damp.”
¹³

It is apparent that Keynes was writing here about the family of a Bengali Brahmin student, Bimla Sarkar, with whom he was having sex. Keynes had arranged for him to be admitted to one of the Cambridge colleges, although Sarkar had already been blackballed for falling under “dangerous
influences” at the university. Over several years Keynes gave him substantial amounts of money, which appear to have been prompted by an uneasy mixture of goodwill and desperation.
¹⁴
“He is a strange and charming creature,” wrote Keynes to another lover, the painter Duncan Grant. “I don’t know how our relationship is going to end. I have had all to-day the most violent sexual feelings towards him … yet I don’t feel at all certain what feelings there are in his odd Indian head.”
¹⁵
When Sarkar ran up debts with a muscular clergyman at his college and his family were unable to pay his fees (he had come to England without telling them), Keynes threatened to bring the monetary affair to an end and have him deported. The relationship was predicated on imbalance and incomprehension, and was indicative of the attitude of the British ruling class at the time. Keynes had been born to a world of privilege at a particularly stable moment in British history; he wore a top hat to the royal commission on Indian finance, risked his career with illegal sexual escapades and spent weekends at country houses with cabinet ministers and Virginia Woolf. Consumed by Edwardian optimism and a sense of entitlement, he could not understand how people from other backgrounds might flounder or respond in different ways. Sarkar, with his chaotic finances and unformed interest in Marlowe and Shakespeare, was an enticement and an irritant.

In some kind of subtext, Keynes played out his desire and exasperation in his little-known first book, seeking to put a price on a country he had envisioned only through statistics. What he could not see, for instance, was that the Indian emphasis on what he called hoarding was a logical response to circumstance: there was no formal national banking system, and no certainty the prevailing power would still be in place for the next generation. While England had not been invaded since 1066, north India had faced repeated invasions and disturbance since around the same time. There was no reliable mechanism to invest money, and borrowing only happened within the extended family or from particular caste communities, at exorbitant rates. Gold and jewellery were the ideal movable asset, as Queen Victoria had realized when she plucked the world’s largest diamond, the Koh-i-Noor, from the ruler of Punjab and implanted it in her imperial crown. In India’s joint family system, gold was one of the most effective forms of retaining and displaying wealth. New money did not usually go into banks or real estate (whose house would it be when you had paid the cash—your father’s, your brothers’, your own?) but into gold necklaces, bangles, rings, buttons, waistbands and headpieces to be displayed on rich men and women. Gold in India was, and is, a hedge against uncertainty. It
could be hoarded, guarded and dusted, like the unfortunate Bimla Sarkar’s father’s rooftop notes. In his way Keynes, however distantly, realized through his inadvertent connection to India that the assumptions of the classical economists about human behaviour were insufficiently flexible. India had a preference for liquidity.