Seigniorage: British Imperialism & Colonial Currency Systems

Excerpts from:  
British Imperialism and the Making of Colonial Currency Systems
Wadan Narsey
Former Professor of Economics, University of the South Pacific, Fiji
PALGRAVE MACMILLAN - 2016
http://www.palgrave.com/us/book/9781137553171

This early sterling exchange standard revealed three imperial objectives
important in colonial currency policy centuries later. First was the gaining
of the seigniorage profits of issue. Second, was the control of money flows
and restricting the ‘undesirable’ expenditure of colonized people. Third, was
the attempt to use a token currency as the standard coin, in order to limit
the market for colonial possessors of currency and limit the convertibility
of the tokens to favored agents.

Colonies were also prevented from having a paper currency system
modeled on the Bank of England note issue. The imperial authorities had
two contrasting attitudes to the issue of paper currency in the early colonies.
They were adamantly opposed to colonial governments issuing notes except under the most rigid of constraints, claiming that impecunious governments might be tempted to engage in inflationary issues of paper currency,
thereby undermining all contracts and the currency itself. But they were not
averse to private banks issuing notes, with relatively weaker requirements.

Chandavarkar noted (1984:774) that Sir Lionel Abrahams had reproved Keynes for not considering the use of the currency seigniorage profits for public works in India. The enormous opportunity cost to Indian may be gauged from the simple but stark statistic that ‘between 1875 and 1914, some thirteen to sixteen million Indians died from famines.’ 24

Keynes ‘was gently chided by Sir Lionel Abrahams, the perceptive civil servant, for the absence of any provision in his otherwise admirable memorandum on the
“Indian State Bank”, to use the profits from seigniorage on Indian coinage
and fiduciary currency, for industrial investment such as railways.’

The evidence suggests that the London authorities were all too interested in the use of the seigniorage profits, but in London rather than India.

Bagchi (1982:90) points out that ‘India and China were used as dumping grounds for depreciating silver (during the period 1872–94 in the case of India, and up to a much later period in the case of China) when the advanced capitalist countries adopted gold as their monetary standard’.

During the latter half of the nineteenth century, the imperial authorities eliminated most international currencies and gold coins circulating in British West Africa, by undervaluation or demonetization, and, despite colonial opposition, replaced them with British silver tokens. Through an arrangement between the authorities and the Bank of British West Africa, the British silver tokens were landed at face value in the colonies, giving London the benefit of the seigniorage profits.

The profits increased rapidly when silver depreciated following the 1871
metropolitan demonetization of silver, becoming more than a half of the
face value of the coins, by the beginning of the twentieth century. A request from Lagos, that the seigniorage profits be used for colonial development, was rejected in 1897, although the Treasury suggested that they could have access to the seigniorage profits if they took complete responsibility for their own currency.

While most witnesses thought the colony should be given the seigniorage
profits, the committee argued that British silver was absorbed only because
the Africans either hoarded or melted it down; therefore the profit could
only be derived from those natives, who were ‘so ignorant of the true value of silver that they [were] prepared to pay for it more than double its worth’. 18
All were agreed that tokens which were being used at their face value to buy
goods, should be received back only at their intrinsic gold values. 19 There
seemed to be no objection from the committee to deception of the African natives.

The report stated that Australia had also asked for a share of the seigniorage profits but had been refused by the previous Chancellor of the Exchequer (who had become the Prime Minister by the time of the Emmott inquiry), whose views had to be accepted by the committee as conclusive.

Not only did the commercial witnesses feel that Britain had both an
economic and moral liability to redeem their own British tokens, since
they had enjoyed all the seigniorage profits till then, but a Colonial Office
witness pointed out that the 1907 Memorandum had acknowledged that
the shilling ‘was initially a promise to pay a twentieth of a sovereign on
demand’. 45 He therefore took it as ‘beyond controversy that the Treasury
would not hesitate to accept at face value any reasonable amounts that the
governments put in from time to time of the old British silver’. 46 Chapter 3
has also shown that, when the British silver had been originally enforced
on colonies, the authorities had given the full guarantee of redemption into
gold. Yet Britain continued to deny this liability.

There was also ‘no prospect of British silver coinage being introduced into East Africa, nor if such a step were taken, would there be any possibility of His Majesty’s Government consenting to allow the Protectorate any share of the seigniorage of such coinage’.

Most authors have concluded that the first objective of the currency board
system and the 1912 Emmott Committee was to ‘devise a method, acceptable to the Imperial Treasury, whereby the Colonial Governments might obtain a share’ in the seigniorage profits. 95 However, it has been shown in previous chapters that neither the authorities in London nor the colonial governments expected significant seigniorage profits from the currency board system or the new colonial currencies being proposed. The authorities acknowledged that the expectation of seigniorage profits was not even a minor objective in the creation of the currency board system. It is therefore no surprise to learn that ‘the actual returns were very small’ with the Ghana Government, for instance, receiving no return at all from the WACB until 1923, the Straits until 1926 and the EACB until 1952.

We argue that the Barbour Report was not implemented because Barbour’s recommendations would have allowed the colonies to spend half of the seigniorage profits, with only the remaining half going to reserves.

The authorities were therefore clearly prepared to allow more lenient reserve requirements for private note issuing banks 97 with obviously limited collateral. By contrast, the colonial state, with the entire colonial revenue to draw upon, and which was still stipulated to bear the ultimate liability for all colonial currency, was required to bear the onerous reserves burden that the private banks were saved.

Rothbard (2002, pp 210–32) has a fascinating account of American attempts to replicate British monetary imperialism in foreign territories they controlled, but based on the US dollar reserves in New York, comparable to sterling reserves in London, for British colonies. Rothbard describes how the leading lights of the American Economic Association, 103 in co-operation with American bankers, foreign investors, and corporate interests in gold and silver, set out to foster similar imperialist monetary systems in Puerto Rico, Philippines, Mexico, Cuba and China. The systems were supposed to be gold exchange standards, but based on dollars deposited in New York. The currencies in circulation would be new silver tokens with the seigniorage also deposited in New York, while the Mexican dollars would be eliminated by several artificial means. In Rothbard’s accounts, the American attempts succeeded in Philippines and Mexico, but failed in Cuba because of the American sugar interests there. They also failed in China, which recognized all the disadvantages in the American proposals.

The evidence indicates the imperial authorities readily granted political independence while continuing monetary imperialism, as in Ghana and Malaya.

This book provides precisely that historical evidence to reinforce many of Helleiner’s theoretically correct conclusions, while throwing much more light on the monetary aspects of imperialism and colonialism rarely discussed in the standard histories.

The evidence indicates that some of the mechanisms of ‘British monetary imperialism’ may even have continued after political independence had been readily granted to some colonies, and these mechanisms remained important to the international role of sterling after World War II.

The historical evidence

This study has shown that Britain enforced a number of colonial currency
policies which were known by Britain to be less than optimal. Imperial
and colonial authorities knew they were disadvantageous to the colonies in
unnecessarily transferring resources from colonies and imposing sub-optimal colonial currency systems not conducive to colonial trade: the removal
of gold standards and currencies, and other international currencies from
colonies; the demonetization of pre-colonial currencies and colonial savings
in the form of bullion; the enforcement of silver on colonies in return for gold
and commodities, especially after its demonetization by metropolitan countries, while Britain herself remained on the gold standard; the imposition
of sterling tokens rather than full sterling; the replacement of even the sterling tokens by distinct colonial silver currencies whose circulations became
localized; the export of currency reserves to London; the enforced holding of
low interest British Government securities; the holding of excessively liquid
reserves; the general export of colonial government savings and other cash
reserves to London; and opposition to the establishment of central monetary
authorities and other developmental financial institutions in colonies.

Nearly always, the imperial authorities were fully aware that there were
better policies available than the ones they were enforcing on the colonies.
Contrary to Fieldhouse’s view, in colonies, Britain did not apply the same
techniques of monetary management used in Britain itself. While Warren
argued that colonial policies, even though undemocratic, met with genuine
social acceptance, the reality was that most economic interests in colonies,
both metropolitan and colonized people, were in opposition to imperial
policies. Also opposed were colonial governments and imperial function-
aries in London, who were vested with the responsibility of safeguarding
colonial interests. Colonial currency systems were clearly ‘imperialist’, in
the many ways defined above, with clear state-created mechanisms that
tended to suppress colonial development and fostered underdevelopment.
The colonial currency system was also symptomatic of the dependency
relationship between the colony and the metropolitan power. While the
currency board system presented the facade of a separate state, requiring
separate foreign reserves to maintain confidence and convertibility of its
separate currency, the reality was that the imperial state had total control
over the colonial currency, although they publicly often denied the exercise of this power. At the same time, the authorities rejected the establishment of any independent colonial monetary authority, private or public, which might weaken their discretionary control over colonial currency and reserves. 16 While imperial authorities were unwilling to place significant controls on metropolitan capital flows, this reluctance did not apply to colonies where both colonial capitalists, especially indigenous, and colonial governments, found their economic freedom severely constrained.

While Britain’s currency system contained a fiduciary portion, which
was backed by British Government Securities and facilitated the expansion
of British Government expenditure, for the colonies such backing, which
might have similarly facilitated colonial government expenditure and
development, was not allowed. Instead, the colonial currency system was
used to facilitate the imperial state’s borrowings and expenditure. The colonial currency system was therefore another expression of the emasculation
of the colonial state, which could not act independently to facilitate independent colonial development.

Imperial decision makers were opposed to colonial governments being
given the power to create money, especially paper currency, except under the most rigid constraints of reserve requirements. By contrast, the authorities were not averse to similar powers being granted to the Bank of England in Britain, and private banks in colonies under much more lenient regulations, even though the credit of the colony ought to have been stronger than that of the private banks. The Bank of England was a private bank until after World War II (WWII). Significantly, a similar phenomenon existed in the early United States, where federal law refused state legislatures, some of which were democratically controlled, the right to issue money; although private banks were granted that freedom (Hurst 1973). Hammond (1957) has shown that, even when private banks, such as the early Bank of the United States, began to regulate the other private banks in the manner of a Reserve Bank, other banking interests eventually ensured the demise of the regulating bank. Also significant was that the largest proportion of the money supply (i.e. demand deposits) continued to be created by private banks with little regulation from the State. It is an astonishing phenomenon worthy of much more search that money issued by democratically controlled central or state banks in both colonial and independent capitalist economies was frowned upon by the British imperial state, while that issued by private banks was not.

One reflection of the dependency relationship was the asymmetry, which
we have previously described, between the British currency system and the
colonial currency system. While this would be expected of any exchange
standard system, in colonial currency systems the automatic convertibility
of metropolitan money into colonial money (and goods and services) was not
matched by the opposite convertibility, except at a discount and through the
London Money market. Colonial holders of currency were thereby encouraged to become dependent on metropolitan channels of finance and trade.
With the currency board reality that, ultimately, colonial currency could
only be increased by those who tendered sterling, there was also the logical consequence that the mode of production in colonies had to be more attuned to the possessors of sterling rather than the possessors of indigenous resources in the colonies. Hicks (1969: 44,51) was thus incorrect in arguing that the links between metropole and colonies did not imply an unequal relationship. 17 The colonial currency system could be regarded as a single specific mechanism that helps to explain the international division of labor
between the developing and the developed countries, as required by Barratt
Brown (1974: 28) of any acceptable theory of imperialism.

While Britain formally adopted the gold standard in 1816, for a century
afterwards sterling and the London money market continued to go through
severe gold reserve crises; although the Bank at most times had ample
supplies of silver, which she could convert into gold, either through the
Latin Union (when it was still bimetallic), or by forcing it on her colonies.
While this book provides evidence of the ‘imperialist’ currency policies
of Britain towards her colonies, it needs to be emphasized that the nature and the beneficiaries of these policies kept changing. With the enforcement of silver on colonies and extraction of gold, the beneficiaries were probably the silver merchants in London. British manufacturing exporters then benefitted, as colonial economies were bound tighter to Britain, and colonial markets denied to competing imperial powers by currency changes in colonies. Imperial policies to bolster sterling reserves were to the benefit of
City interests and British investors investing abroad. Imperial policies to force colonies to hold British Government securities, and liquid Treasury Bills, were to the advantage of the British Government, which as a result obtained low interest-guaranteed loans from colonial resources totally in their control.

Researchers are likely to face the problem of destruction of sensitive and confidential Colonial Office and Treasury files because of the possibility of negative fallout with still important former colonies, despite the thirty-year rule of the Public Records Office. 18