World War I devalued the currency of many nations. Each country is now looking for ways to strengthen their currency. In this paper, Ambedkar explains how exchange rates are determined and gives prescriptions for India’s currency.
Most economists were vexed on whether a currency should be stabilized or pegged favorably to foreign currency. Many factors determine an exchange rate. The first and most important is the purchasing strength of currency in its home country. For example, if Indian prices drop allowing a consumer to buy more with his currency, then the currency value raises concerning other countries. That is if the other country experiences no change in price.
Exchange rates cause trade imbalances, not the other way around. When a country tries to peg their currency to foreign currency to improve trade is headed for disaster. If one ignores the actual purchasing power of the currency business at home will suffer.
For many years, the gold standard or pegging the currency to a fixed amount of gold was successful. Unfortunately, after the war, only the United States could keep their money pegged to an amount of gold. The gold standard reduces the ability of a country to change their money supply in times on need.
Economist split society into three classes. Investor class which lends money to the business class that hires the employer class. When a currency falls the business class benefits because the money they borrowed and the wage they agreed to pay their employees is discounted. When the currency increases it hurts the business class because the reverse will be true. So Ambedkar recommends India have a nimble currency that can move to accommodate changing conditions. He then presents a gold – rupee exchange rate that could work.
The full document can be read HERE