Price Movements and Fluctuations Since 1860

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PRICE MOVEMENTS AND FLUCTUATIONS SINCE 1860 Prior to the mid-nineteenth century, price statistics for British India were fragmentary, pertaining to very few markets and commodities. In the first half of the nineteenth century, prices saw several cycles of steady fall or rise, over a span of six to seven years each. In the absence of other data on economic activity, historians have sometimes relied too heavily on these price cycles, which do not necessarily infer cycles in production.

By 1875, however, an unmistakable trend does emerge; prices rose for the next fifty years. The price of wheat at the end of period in 1925 was about three times what it had been at the beginning. The expansion of the world economy, with buoyant demand for primary commodities, played an obvious role in stimulating more rapid rises in the prices of exportable commodities rather than those of imports. Monetary policy also played a role, via devaluation of the rupee between 1873 and 1893. From the mid-1920s, however, world commodity prices began to be depressed. The monetary policy of the British colonial government was faulted, this time for its determined defense of an overvalued rupee in the interest of British stabilization.


The longer trends and cycles were broken frequently by sharp short-term fluctuations. Prices in colonial India fluctuated rather more than either post-independence Indian or contemporary global prices. Between 1900 and 1935, for example, severe inflation of 20 to 30 percent was not uncommon, often as part of a price-cycle. On the other hand, during the Great Depression, prices fell by a factor of four or more.

Agricultural production, of course, depended too heavily on rainfall, which could change without warning. However, in the early twentieth century, unpredictable weather alone does not fully explain price movements. The correlation between prices and rainfall was mediated by other variables, such as addition to the money supply, and changing demand for nonmonetary gold. India functioned under currency regimes that left its money supply sensitive to balance of payments, and perhaps as a result, more volatile than one would expect under a central bank. The central bank began operation in 1935, but for a long time after that date, there was no explicit stabilization policy at work. Real incomes, on the other hand, depended primarily on harvests, which were more weather-sensitive in the early twentieth century than a hundred years later. These features led to an inherent maladjustment between money supply and transactions demand for money, which J. M. Keynes considered a major weakness of the Indian monetary system.

For example, in a year that had seen a bad harvest, domestic income and consumption might fall. And yet, a buoyant world trade could lead to monetary expansion, adding fuel to an ongoing price-rise. The real effects of monetary expansion were relatively weak because of undeveloped asset markets. A bad harvest normally led to a contraction in the demand for nonmonetary gold import, further adding to currency growth. If inflation eventually depressed exports, a countercyclical mechanism could work. In the interwar period, harvest fluctuations were milder. Still, the Great Depression was an example of the same kind of maladjustment. A trade-induced monetary contraction coincided with normal, even unusually good, agricultural seasons, leading to a large fall in prices. The microeconomics of price formation might also contribute to fluctuations, depending on how quickly and easily information about harvests traveled from the production site to the wholesale markets, and finally to the retail market. Traders were known to collaborate to try to control this information as much as possible.


In the early twentieth century, a conjunction of monetary and real pressures led to price instability. Each of the three major inflations—1903–1908, 1913–1914, and 1919–1920—was preceded by a major harvest failure. Real agricultural output declined by 7 percent in 1902–1904, by 15 percent in 1906–1907, by 14 percent in 1910–1913, and by nearly 30 percent in 1917–1918. Prices began to rise due to the shortage of agricultural goods. In each case, buoyant export demand led to expansion in money supply. These two factors combined to generate a very rapid rise in prices.

The intensity and duration of the inflations varied. Prices increased by 33 percent in 1905–1907; the average annual rates were about 6 to 10 percent in the second episode; whereas in 1919 prices increased by more than 50 percent over the previous year. This variation can be attributed to the extent of currency expansion. In the first of these three episodes, gold imports fell much more than agricultural exports, so that money supply expanded. In the second case, the effect of inflation on commodity trade was more pronounced than the effect on gold, dampening monetary growth. In 1919 private gold transactions were suspended, as the government needed gold for currency reserve.

During both world wars, expanding world demand for war-related goods coincided with supply constraints, resulting in rapid inflation. In World War II, however, monetary policy complicated the picture. The government had to spend much larger sums and proportions of the budget on defense. Fiscal measures were insufficient to cover the deficit. In 1939, however, unlike 1914, India had a central bank and substantial monetary autonomy. Consequently, money supply increased to finance the deficit as never before.

In the interwar period generally, harvest fluctuations were milder. As a result, price and currency fluctuations in the interwar period were entirely due to trade shocks. While the exchange rate partially bore the impact of trade shocks until the mid-1920s, thereafter the exchange was effectively fixed again, so that a gradual decline in export demand induced steady deflation. From 1926, currency growth, and all prices, began a seven-year downward course, the climax coming in 1931, when a sharp fall in exports caused prices to crash.

India shared two conditions with nearly all other open economies that suffered the depression. First, there was a contraction in exports. Second, the gold exchange standard compelled a deflation. Whereas the threat of deflation forced Britain, like several other economies, to leave the gold standard and devalue, India could not devalue. British authorities determining Indian policy feared that devaluation would render the government unable to pay its foreign debt. The result was a steady and severe deflation, worsened by cuts in government expenditure and a series of good harvests. Rise in real interest rates crowded out private investment. Private debts and rents ballooned. As time went on, land and gold began to be sold. A great deal of rural unrest began, crystallized around debt and rent relief. The really effective counterdeflationary measures did not come from the government. These were the export of gold that reflated the economy to some extent, and widespread cuts in money wages that restored profitability.

Prices and Production

Price trends have often been cited, and misused, as a link between politics and economic change under British rule. The earliest episode illustrating this is a price depression in the second quarter of the nineteenth century, which has been read widely as a sign of rural economic crisis, at some neglect of the fact that the prices of major consumer goods like cotton textiles in this period were falling worldwide. In the period of the essay, the two particularly controversial episodes were the mild inflation of 1870 to 1890 and the Great Depression. Both episodes involved a monetary policy driven by British imperial interests rather than Indian ones.

Tirthankar Roy

See alsoAgricultural Prices and Production, 1757–1947


McAlpin, Michelle. "Price Movements and Economic Fluctuations." In The Cambridge Economic History of India, vol. 2: C. 1757–1970, edited by Dharma Kumar. Cambridge, U.K., and New York: Cambridge University Press, 1983.

Roy, Tirthankar. "Price Movements in Early Twentieth Century India." Economic History Review 55 (1995): 118–133.