Hilton-Young Commission 1926: India’s Currency Anchor and the RBI Recommendation

The Hilton-Young Commission (1926) — formally the Royal Commission on Indian Currency and Finance — is best known as the body whose report first recommended a central bank for India, the recommendation that led to the establishment of the Reserve Bank of India (RBI) in 1935. Chaired by Edward Hilton-Young, it was appointed in August 1925 and submitted its report in July 1926, also fixing the rupee-sterling exchange at 1s 6d (₹15 = £1) and proposing a gold bullion standard.

The Royal Commission on Indian Currency and Finance, chaired by Edward Hilton-Young and known as the Hilton-Young Commission, was appointed in August 1925 and submitted its report in July 1926. Its terms of reference covered the stability of India’s currency, the appropriate exchange ratio between the rupee and the pound sterling, the question of an Indian central bank, and the relationship between the Imperial Treasury and Indian fiscal affairs. The decisions it took in 1926 — particularly the artificial fixing of the rupee-sterling exchange and the recommendation of a gold bullion standard — shaped the operation of India’s monetary system through the rest of the colonial era and through the early Indian central banking experience.

The currency question before the Commission

India entered the 1920s with a currency system already battered by a decade of disruption. The First World War had pushed the gold price of silver up sharply, and the rupee, which had been pegged at 1 shilling 4 pence (1s 4d) by the Fowler Committee of 1898, oscillated wildly during 1919-20. The Babington Smith Committee of 1919 had recommended raising the rate to 2 shillings (2s); the Government of India adopted that rate in February 1920 and almost immediately failed to defend it. By 1921 the rupee had collapsed back to around 1s 3d. A drift around 1s 4d to 1s 6d characterised the first half of the 1920s.

The Hilton-Young Commission was appointed to resolve this confusion definitively. The Commission’s eleven members included Lionel Robbins, Sir Reginald Mant, and a small number of Indian representatives — notably Sir Purshotamdas Thakurdas, who would file a celebrated minute of dissent.

The exchange rate decision

The Commission recommended fixing the rupee-sterling rate at 1 shilling 6 pence gold (1s 6d) — that is, ₹15 = £1 sterling.

This was an *artificially fixed* rate in two senses. First, it was higher than the prevailing market exchange rate had been for most of the previous decade. Second, the Government of India committed to defend it through the central bank’s market operations, regardless of underlying balance-of-payments pressures.

The Commission justified the 1s 6d rate on several grounds. Its primary stated reasons were:

• Maintaining India’s creditworthiness in the London money market. Indian government and railway debt was denominated and serviced in sterling. A weaker rupee would raise the local-currency cost of this debt service. A firm rate at 1s 6d kept the Government of India’s borrowing costs in London predictable.
• Aiding the flow of remittances from India to Britain. Three substantial flows of remittance ran from India to Britain — pensions to retired British civil and military personnel (“Home Charges”), profits of British firms operating in India, and the so-called *invisible* payments for shipping, banking, and insurance services. A higher-valued rupee meant each rupee remitted bought more pounds, which suited the recipient class in Britain.
• Stabilising domestic prices. The Commission argued that a stable, higher-valued rupee would dampen domestic inflation by keeping import prices low and forcing Indian producers to compete with cheaper imports.

The dissent — Thakurdas’s minute and parallel arguments from Indian businessmen — held that 1s 6d was too high; that the rate hurt Indian exporters (notably cotton textiles and jute), made Indian goods uncompetitive in world markets, and forced Indian agricultural producers to sell into a deflationary domestic price environment. The Indian Chambers of Commerce campaigned for a 1s 4d rate, which they regarded as the natural market level. The Government nonetheless adopted the Commission’s recommendation.

What the rate accomplished — and for whom

The 1s 6d rate, formally adopted in March 1927, served the interests of three groups:

1. British creditors and pension recipients — for whom remittances of pensions, dividends, and Home Charges were worth more in sterling.

2. The Government of India’s debt management — which faced lower local-currency debt service.

3. The British exchange banks operating in India — which earned commissions on the increased flow of remittances and on managing the maintained rate.

The losers were Indian exporters (whose goods became dearer in sterling markets), Indian agricultural producers (who faced lower export prices in rupee terms), and the broader Indian economy (which absorbed the deflationary pressure of the maintained rate during the global slump after 1929).

Option (d) in some discussions of the Commission — “preventing depreciation of the rupee in terms of gold” — was *a consequence* of the rate decision but not the operative justification. The operative justifications were creditworthiness and remittance facilitation.

The gold bullion standard

The Commission rejected both a gold standard (free gold coin circulation) and a gold exchange standard (linkage through reserves held in sterling). It recommended a *gold bullion standard*: the rupee would be convertible into gold bullion at a fixed rate, but only in large minimum quantities (initially 1065 tolas, roughly £1,200 worth), and gold coins would not circulate domestically. The reserves backing the rupee would be held partly in gold and partly in approved foreign securities.

The Gold Standard and Reserve Bank Bill embodying this scheme passed the Indian legislature in 1927, though the gold bullion standard never functioned in practice — the Great Depression forced India off it in 1931 within hours of Britain’s own departure from gold.

The Reserve Bank recommendation

The Commission’s most consequential institutional recommendation was the creation of a central bank for India. The Government of India had operated as the effective central monetary authority since 1858 through the Controller of the Currency and the three Presidency Banks (Bengal, Bombay, Madras, merged into the Imperial Bank of India in 1921). The Commission found this arrangement inadequate. It recommended a single, semi-private central bank with the authority to:

• Issue the rupee currency
• Hold the gold and foreign exchange reserves
• Manage the government’s debt and banker’s accounts
• Conduct open-market operations to defend the exchange rate
• Regulate commercial bank credit

The Gold Standard and Reserve Bank Bill of 1927 attempted to legislate this central bank but failed because of disagreements over the bank’s ownership structure (shareholders versus state) and its relationship with the Imperial Bank. The proposal lay dormant until a fresh attempt in 1933-34, after the second Round Table Conference had revisited Indian financial autonomy. The Reserve Bank of India Act was passed on 6 March 1934 and the RBI commenced operations on 1 April 1935 — eight years after the Hilton-Young Commission’s report had first proposed it.

The RBI of 1935 was thus an institution born from the Hilton-Young architecture, even if the specific shareholder structure (private subscription, later nationalised in 1949) had been negotiated separately.

Long shadow

The Hilton-Young Commission’s three core decisions — the artificial 1s 6d rate, the gold bullion standard, and the central bank — defined Indian monetary policy from 1927 to Independence:

• The 1s 6d rate was maintained until 1939, when India entered wartime exchange controls. It was inherited as the basis of the rupee’s parity in the Bretton Woods system at Independence.
• The gold bullion standard collapsed in September 1931 but the reserves architecture (gold plus foreign securities) persisted.
• The RBI became operational in 1935, took over note issue, banking supervision, and exchange management, and continued as independent India’s central bank after the 1949 nationalisation.

The dissent of Indian commerce — Thakurdas in particular — also entered the wider record as an early articulation of economic nationalism: that the rupee should be valued in the interests of Indian producers, not British creditors. This argument would resurface in the 1947 debates around the rupee’s Bretton Woods parity and in the depreciation episodes of 1949 (8.6%) and 1966 (36.5%).

FAQs

What was the Hilton-Young Commission and when was it appointed?

A Royal Commission on Indian Currency and Finance appointed in August 1925, chaired by Edward Hilton-Young, with eleven members. It submitted its report in July 1926.

What rupee-sterling rate did it recommend?

1 shilling 6 pence gold (1s 6d), or ₹15 per £1 sterling. This was an artificially fixed rate, higher than the market average of the early 1920s.

Why was the 1s 6d rate adopted?

To aid the flow of remittances from India to Britain (pensions, Home Charges, dividends of British firms) and to maintain India’s creditworthiness in the London money market — both of which favoured a higher-valued rupee. Indian commercial opinion argued the rate should be lower (1s 4d) to support Indian exporters.

What was the gold bullion standard?

A modified gold standard in which the rupee was convertible into gold bullion at a fixed rate, but only in large minimum quantities, with no gold coins in domestic circulation. India operated under it from 1927 until September 1931, when the Great Depression forced India off gold.

Did the Commission recommend a central bank for India?

Yes. It recommended a single central bank with note-issue, reserves-management, debt-management, and exchange-defence functions. The 1927 Gold Standard and Reserve Bank Bill embodying this idea failed; the recommendation finally fructified as the Reserve Bank of India in 1935.

Who dissented from the Commission’s recommendations?

Sir Purshotamdas Thakurdas, the principal Indian member, filed a minute of dissent arguing that 1s 6d was too high and hurt Indian exporters. The Indian Chambers of Commerce campaigned in parallel for a 1s 4d rate.

What was Karl Marx’s view of the rate? (Common confusion)

Marx wrote in 1856 about Awadh, not about the 1926 currency decision — he died in 1883. The economic critique of the 1s 6d rate came from Indian commercial opinion of the 1920s and 1930s, not from Marx.

How long did the 1s 6d rate last?

From March 1927 until the imposition of wartime exchange controls in September 1939. It was the basis of the rupee’s Bretton Woods parity at Independence in 1947 and was first revised by the devaluation of September 1949.

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