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Profit Inflation, Keynes and the Holocaust in Bengal, 1943–44

I thank Mihir Bhattacharya, Radhika Desai, Cristina Marcuzzo and Amit Bhaduri for helpful comments on an earlier version of this paper.Utsa Patnaik (patnaikutsa@yahoo.com) is Professor Emeritus, Jawaharlal Nehru University, New Delhi.

The year 2018 marks the 75th anniversary of the Bengal famine, 1943–44. This paper argues that the famine arose from an engineered “profit inflation,” described by John Maynard Keynes in general terms as a necessary measure for “forced transferences of purchasing power” from the mass of working people, entailing reduction of their consumption in order to finance abnormal wartime expenditure. Keynes had a long connection with Indian financial affairs and, in 1940, became an advisor with special authority on Indian financial and monetary policy to the British Chancellor of the Exchequer and the Prime Minister. Facing trade union opposition in Britain to the highly regressive policy of profit inflation, he gave it up in favour of taxation. But, in India, extreme and deliberate profit inflation was implemented to finance war spending by the Allied forces, leading to the death by starvation of three million persons in Bengal.

I thank Mihir Bhattacharya, Radhika Desai, Cristina Marcuzzo and Amit Bhaduri for helpful comments on an earlier version of this paper.

Keynesian demand-management policies are usually associated with raising employment and incomes, but John Maynard Keynes also systematically discussed the exact opposite, measures for curtailing mass incomes that he considered necessary to raise resources for financing wartime spending. In A Treatise on Money: The Applied Theory of Money (1930) and in How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer (1940), specific measures for reducing mass consumption were explicitly discussed by Keynes.

During World War II, six million persons were put to death in Europe under fascist terror. But, the death of three million civilians in undivided Bengal in India during a shorter sub-period of the war, 1943 to 1944, has gone unnoticed in the international literature. This paper argues that these deaths were the direct result of the Keynesian policy of profit–inflation deliberately followed at that time by the British and colonial governments with a very specific purpose, to raise resources from the Indian population by curtailing mass consumption, in order to finance the Allies’ war in South Asia with Japan. Keynes himself was given the brief of advising the British government on Indian financial matters during the war. Because the policies followed were of demand management, which are always opaque to the general population, and remain opaque to this day even to the educated elite, the extreme compression of mass demand to raise forced savings that led to three million civilian deaths could be successfully camouflaged as a simple famine and attributed variously to natural phenomena like cyclone, or to food shortage, or to speculation and hoarding, or to not importing food in time, or a combination of these factors.

Keynes had coined the term “profit inflation” to describe a situation where in wartime, output prices are deliberately raised faster than wages, in order to redistribute incomes away from wages and towards profits, and ensure substantial reduction of the consumption of wage-earners. It can be applied equally to a situation where other than wage-earners, a large part of the working population comprises self-employed petty producers like artisans, fisherfolk, small peasants and so on who have to buy food staples from the market since they produce either no food at all, or not enough to meet their needs. Without deliberate state policy of curtailing mass consumption, over £1,600 million of extra resources could not have been extracted from Indians during the war, with the bulk of this enormous burden falling on the population of Bengal since the Allied forces were located in and operated from that province. The state policy was to induce a very rapid profit inflation which redistributed incomes away from the working population, towards capitalists and companies, which were then taxed. The colonial state directly spent, in every war year after 1941, a multiple of its normal revenues by printing money—an extreme measure of “profit inflation.”

Keynes was closely associated with Indian affairs from an early period of his life. He served in the India Office in London, leaving it when 25 years of age, and used the experience gained there to write and publish Indian Currency and Finance (1913) five years later. He was a member of or gave evidence to successive commissions set up to deliberate on Indian finance and currency (the Chamberlain, Babington–Smith, and Hilton Young Commissions, and for a while the Indian Fiscal Commission). He wrote articles on India and reviewed books on the Indian economy for the Economic Journal which he edited (such as T Morison’s “The Economic Transition in India” that discussed the drain of wealth). Keynes also gave lecture courses to students in Cambridge for many years on Indian monetary affairs.

In 1940, in view of the unusual financial situation arising from war, the British government appointed two economic advisors to the Chancellor of the Exchequer, an ex-banker, Lord Catto, and Keynes. Indian financial and monetary matters were specifically entrusted to Keynes given his expertise in the area. Keynes was the most influential figure at the Bretton Woods Conference in 1944 where the repayment of sterling owed by Britain to India was discussed by him with the Indian delegation.

Keynes’s four-decade-long India connection, his interest in the Indian monetary system, and his part in policies followed in India during World War II have been neglected by his biographers (Minsky 1975; Moggridge 1995; Skidelsky 2001). His biographers appear to have had little interest in or understanding of the financial and monetary mechanisms underpinning colonial rule that concerned Keynes, and they show no insight at all into India’s role sustaining the international gold standard even though literature on this was available (Saul 1960; De Cecco 1984). The severe impact on the colonies of the large forced loans Britain took from them is not mentioned, though Britain’s refusal to honour its promise to repay debt immediately at the end of the war is discussed albeit cursorily.

That Keynes participated directly in formulating wartime policies in India cannot be in doubt as he was specifically given the brief of advising on Indian financial and monetary matters by the British government. Moreover, the war financing policies implemented in India were uniquely Keynesian in nature, and were in most respects a textbook replication of policies he had advocated for raising resources in ATreatise on Money: The Applied Theory of Money referring to the problem of financing the first war, and in How to Pay for the War referring to the second war. This paper will first briefly discuss the specificity of the Indian fiscal and monetary system arising from the drain of wealth to Britain. Looking next at what Keynes had to say about war financing, his ideas will then be related to the main measures undertaken in India to finance war expenditure.

Economic Developments in India before World War II

The colonial government in India traditionally followed an apparently “balanced budget” policy with expenditures strictly limited to revenues—the latter consisted mainly of land revenue supplemented by indirect taxes and revenues from government monopolies. “Balanced budget” is a misnomer, however: the “drain of wealth” imposed on India consisted in the fact that a large share (up to one-third of the budgetary revenues every year) was not spent in the normal manner of sovereign countries but was set aside under the head of “expenditure abroad.” Effectively, the budget was kept in large surplus every year when domestic expenditure in relation to revenue is considered. The head of expenditure abroad always included the regular annual Home Charges incurred in sterling in Britain, additional variable items linked to military cost of wars abroad, and large “gifts” from India to Britain.

The transformation of the rupees set aside in the budget in India under “expenditure abroad,” into sterling in the account of the Secretary of State (SoS) for India in London, took place (and could only take place) through the earnings by India of gold and foreign exchange (forex) from its rising commodity export surplus to the world, entirely kept by Britain for its own use while Indian earners of this export surplus were “paid” out of their own taxes contributed to the budget. Not only were Indian producers deprived of international purchasing power they had earned, even the rupee equivalent of their export surplus earnings was not issued in the normal way, since not even the colonial government was credited with any part of their net forex earnings against which it could issue rupees. Rather, the Secretary of State for India in Council, based in London, issued bills of exchange cashable only in rupees (termed Council Bills) to the value of the gold and forex deposited with him as payment by foreign importers of Indian goods, who then sent the bills to the British-owned export houses and local export trading agents in India. These bills deposited with exchange banks were then paid out in rupees by the Treasury from the budgeted provision of “expenditure abroad,” and the exporting agents, in turn, paid to producers (peasants and artisans) from whom they sourced the goods after keeping a hefty commission for themselves. Thus, payment for India’s commodity surplus earnings came not from equivalent issue of rupees but out of the producers’ own tax contribution to the Indian budget, the part designated explicitly as expenditure abroad.

Y S Pandit (1937: 153) had pointed out that the rupee bills, issued by the SoS, were a means of retaining in London the gold that would otherwise have flowed to India as foreigners’ payment for its export surplus. Sunanda Sen (1992: 21–22) writes:

the CBs provided a route for retaining in England the entire amount of India’s export surplus … Funds earmarked in the annual budget as “Expenditure Abroad” were used to honour the Council Bills.

producers appeared to be paid, but in terms of real relations they were not actually paid since the “payment” came out of their own taxes and not out of their foreign earnings. This is what made India’s export surplus unrequited and constituted a tax-financed transfer to the metropolis. It entailed monetary stringency and high interest rates in British India.

 

Data from the United Nations (1962) on the matrix of global trade show that for three decades up to 1928 (and very possibly earlier as well), India posted the second-highest merchandise export surplus earnings in the world, second only to the United States (US). These rising global earnings were fully appropriated by Britain via the office of the SoS, and accounting balance was maintained by administratively imposing the very same items of invisible liabilities on India’s external account, now expressed in sterling, as were detailed in rupees in the budget under expenditure abroad. In fact the sum of the manipulated invisible demands put on India was deliberately pitched somewhat higher than actual commodity export surplus (no matter how fast the latter might rise), so that over a run of years the current account was always kept in deficit, and this deficit was shown as increase in India’s debt to Britain. Large sums under “gifts” were transferred whenever Britain required extra funds, with an accounting increase in Indian debt.

For example, in addition to the regular annual tax-financed transfer of about £25 million on account of Home Charges, an astonishing extra £100 million (that exceeded the entire annual budget of British India, and amounted to over 3% of Britain’s national income) was transferred after World War I as a “gift” to Britain, a gift that no Indian knew about.1 The important point to remember is that the actual producers and earners of the commodity export surplus, the local peasants and artisans, as mentioned were “paid” in rupees out of the very taxes they themselves had contributed to the budget revenues. Under this clever system this part of the total taxes extracted from them merely changed its form, from cash to goods embodied in export surplus. The budget was in perpetual surplus, if these “drain” items are excluded from the expenditure side and the external current account was in matching surplus when the sterling value of the drain items were excluded.

Deflationary Impact

Such surplus budgets entailing heavy tax-financed transfers every year (the “drain”) had a severe income-deflating effect: mass consumption was squeezed in order to release export goods. The greater the export surplus, the larger was the tax burden on the producers, and the more the decline in their consumption of basic staple foods (per capita annual foodgrains absorption in British India declined from 210 kilogram (kg) during the period 1904–09, to 157 kg during 1937–41 and reached its nadir of 137 kg by 1946).2 While the masses suffered severe nutritional decline, the foreign export houses in India and the local export traders (dalals) benefited by taking a large cut from the price the producer received.

This mechanism, discussed elsewhere (Patnaik 1984, 2006, 2017; Patnaik and Patnaik 2016), was operated so successfully that even though India continuously posted the second largest merchandise export surplus earnings in the world for decades, the entire benefit of these huge earnings went to the metropolis. It used them not only to pay for its own deficits on current account with industrial Europe and North America, but also to export capital to these same regions ensuring the diffusion of capitalism (Saul 1960; Bagchi 1972). By 1910 half of Britain’s £120 million balance of payments (BOPs) deficit with the US, Canada and Continental Europe combined, was being financed through Indian earnings according to Saul (1960: Table XX, 58) while by 1911–13 two-fifths of Britain’s BOP deficits with the entire world were being so financed, and our analysis of the United Nations (1962) data confirms this (Patnaik 2014). A discussion of the drain mechanism and a preliminary estimate of total drain from 1765 to 1938 are available in Patnaik (2017).

Keynes’s deep interest in the Indian financial system is understandable because that system was unique in being so very different from any metropolitan one and given the bimetallism prevalent at that time, presented technical problems of maintaining monetary stability. Considerable finessing of the exchange rate between the silver rupee and gold-linked sterling was necessary in a volatile world economy, to achieve the rulers’ multiple and connected aims of maximising India’s global commodity export surplus while making sure that all such financial gold and forex earnings remained in London for Britain’s use and did not leak back as payment to the actual producers in India (however, substantial commodity gold import was permitted). To this end, the rupee–sterling exchange rate was stabilised between “gold points” carefully adjusted to a fraction of a farthing, to ensure that foreign importers of Indian goods would never find it more profitable to send financial gold directly to India, but would follow the London Council Bill route. This enabled Britain to siphon off India’s external earnings and rip off colonised producers by “paying” them the rupee value of external earnings out of their own taxes—which meant not paying them at all.

The deflationary impact of annual surplus budgets in India was never explicitly discussed by Keynes to our knowledge but it is not beyond the bounds of probability that the seeds of some of his later ideas were sown during his early engagement with the Indian fiscal and monetary system. The young Keynes was encouraged and patronised for many years by Edwin Montagu, who when serving as SoS for India put him on the various currency and finance commissions mentioned earlier. The India Office in London followed a traditional practice of obfuscating reality by fudging Indian accounts while maintaining technical correctness, and after his India Office stint Keynes did the same in Indian Currency and Finance. Keynes presented, in slightly modified form, the credits and debits of the SoS’s account; on the credit side the actual receipts by the SoS of gold and forex from global importers of Indian products were not mentioned, only their rupee equivalent that was shown as the SoS’s claim on the Indian budget; while the debit side comprised sterling expenditure by England out of these funds (Keynes 1913: 113). A studied silence was always maintained on how exactly rupees in the Indian budget ended up as gold and sterling with Britain.

The long bonanza for Britain based on its appropriation of India’s booming export surplus earnings came to an end with the global agricultural depression followed by industrial depression, which saw a collapse of India’s export surplus as indeed occurred for all primary product exporters. The United Nations (1962) data show that India’s merchandise export surplus declined from its all-time high of $497 million in 1928, to only one-seventh at $73 million annual average by 1930–32 (Patnaik 2014: 30). Bereft of the main prop of its BoPs, Britain was unable to meet its global deficits and in 1931 was forced to devalue, finally abandoning the Gold Standard. Large distress financial gold outflow took place from India to Britain between 1931 and 1937 since Britain kept up its invisible demands on India despite the collapse of exchange earnings, but gold outflow was a once-for-all drain of assets, and India’s exchange earnings had no prospect of recovering to earlier heights in the changed world conjuncture. Since colonial transfers are not even recognised in standard economic literature, this important reason among others, for the dethroning of Britain as world capitalist leader, to this day finds no mention in the relevant literature on the Depression.

While the external “drain” from India to Britain reduced to a trickle after 1938, the irruption of Allied forces into India during 1941–45 and suddenly increased military spending was met by using the budget to extract massive forced savings from the local population that had already suffered nutritional decline in the interwar period. This was the background to the holocaust that claimed three million lives, whose economic cause is discussed below in Keynes’s own words.

Demand Compression Advised by Keynes

Keynesian demand-management policies are usually associated with state intervention to increase employment and incomes. But Keynes also repeatedly and systematically discussed measures for curtailing mass incomes and consumption, that he considered a practical necessity to raise resources for financing wartime spending. In A Treatise on Money: The Applied Theory of Money, referring to World War I, he said:

The war inevitably involved in all countries an immense diversion of resources to forms of production which, since they did not add to the volume of liquid consumption goods purchasable and consumable by income earners, had just the same effect as an increase in investment in fixed capital would have in ordinary times. The investment thus required was—especially after the initial period—on such a scale that it exceeded the maximum possible amount of voluntary saving which one could expect, even allowing for the cessation of most other kinds of investment including the replacement of wastage. Thus forced transferences of purchasing power in some shape or form were a necessary condition of investment in the material of war on the desired scale. The means of effecting this transference with the minimum of social friction and disturbance was the question for solution. (Keynes 1971: 152–53; emphasis added)

He then went on to discuss the three different methods through which such “forced transferences of purchasing power” could be achieved: first, by reducing money wages while keeping prices steady; second, by letting prices rise more than money wages so as to reduce real wages; and third, by taxing earnings. Taking up the third course, he thought that “the rich were too few” and therefore

the taxation would have had to be aimed directly at the relatively poor, since it was above all their consumption, in view of its aggregate magnitude, which had somehow or other to be reduced. (Keynes 1971: 153)

But the additional taxation of wage-earners would have to be substantial, it would meet trade union resistance and would be difficult for the government to implement.

It was a choice, therefore, between the remaining alternatives—between lowering money wages and letting prices rise … it would be natural—and sensible—to prefer the latter. (Keynes 1971: 153, 154)

Keynes argued that it would be as difficult to enforce the required 25% money wage cut, as to impose heavier taxes.

I conclude therefore that to allow prices to rise by permitting a profit inflation, is in time of war, both inevitable and wise (Keynes 1971: 155; emphasis added).

Keynes was positing “money illusion” on the part of workers—they would oppose money wage cuts for given prices but they would not, to the same extent, oppose inflation without matching money wage rise, even though the second course lowered their real wages to exactly the same degree as the first. However, a profit inflation cutting real wages and raising profits, would not by itself serve fully the aim of financing war spending, if all profits were retained by capitalists: taxation of profits was essential.

It is expedient to use entrepreneurs as collecting agents. But let them be agents and not principals. Having adopted for quite good reasons a policy which pours the booty into their laps, let us be sure that they hand it over as taxes and that they are not able to obtain a claim over the future income of the community by being allowed to “lend” to the State what has thus accrued to them. To let prices rise relatively to earnings and then tax entrepreneurs to the utmost is the right procedure for “virtuous” war finance. For high taxation of profits and of incomes above the exemption limit is not a substitute for profit inflation but an adjunct of it. (Keynes 1971: 155; emphasis added)

Keynes’s reasoning is clear—there had to be a substantial decline in the real consumption of the ordinary mass of the population and this could best be achieved without working class political opposition, not through additional taxation, but by a profit inflation, by following policies which raised output prices without raising incomes at all, or to the same extent. This would redistribute incomes away from wages to profits, which should then be taxed.

Keynes’s ideas on raising resources for war spending in Britain were further amplified in How to Pay for the War (1940) where he repeated the necessity of reducing mass consumption through an engineered inflation, and also discussed the methods of taxation and deferred payments. Keynes’s ideas should interest us greatly for he was an influential advisor both to the British Chancellor of the Exchequer and to the Prime Minister; and in view of his expertise “had special authority in discussion of Indian financial questions” (quoted in Chandavarkar 1989: 119). This fact throws light on how the balanced-budget dogmas of the conservative bureaucrats in India were thrown to the winds when required for raising finance to serve the Allies’ military spending.

War Financing through Extreme ‘Profit Inflation’ in India

India’s export earnings recovered slowly from the mid-1930s as the developed world especially the US started following expansionary policies. India’s total budget spending from 1938–39 to 1940–41 averaged ₹88.8 crore, and annual deficit was only ₹1.33 crore. (As the exchange rate averaged about ₹13.5 to £1, the initial budget size was about £66 million.) During 1939–40 Indian gold, worth ₹34.7 crore, was transferred to London and the Reserve Bank of India (RBI) was credited with equivalent blocked sterling marking in effect a forced loan. After the US entered the war against Japan in December 1941, Allied forces poured into Bengal and war spending grew by leaps and bounds. The category “recoverable war expenditure” had been created under the 1939 Indo–British financial agreement, specifying that the major costs of provisioning and operating Allied forces in India would be met through Indian resources until the end of the war. The RBI would be credited with the sterling equivalent of the rupees spent for the Allies. However, the account would be frozen, no sterling would be made available for actual spending, and the account would be activated only at the end of the war, whenever that might be. Other heads of war spending were to be borne entirely by India. It was the “recoverable war expenditures” which became a death warrant for three million persons in Bengal.

The movement of Allied troops and air forces into eastern India grew rapidly from early 1942; construction of air-strips, barracks and war-related industries was undertaken at a feverish pace. Private investment and output grew fast for munitions, chemicals, uniforms, bandages and the like as the government contracted with enterprises. The troops and supporting personnel had to be fed, clothed and transported at public expense. Table 1 details from the RBI’s 1945–46 report the unbelievably rapid growth of government expenditure, not matched in any other country—within a mere three years, by 1942–43, a sum amounting to 35% of the pre-war national income of British India was being spent for war purposes, over two-thirds of this by printing money.

A war boom of unprecedented proportions resulted as total spending by the central government exploded to reach ₹667 crore (£494 million) by fiscal 1942–43, posting a 7.5 fold increase in a mere three years, over the ₹88.8 crore (£66 million) annual average from 1937–38 to 1939–40. Increased taxation had only doubled the revenues by 1942–43, so the government’s own budget deficit ballooned from zero to reach ₹112 crore, a sum substantially more than the entire normal budget. A much greater impact resulted, however, from the additional ₹260 crore spent on average annually under “recoverable expenditure” during 1941–42 and 1942–43, amounting to three times the normal budget. The total deficit by 1942–43 reached ₹438 crore or £324 million (Table 1) nearly five times the pre-war budget. Three-quarters of this arose from the “recoverable war expenditures” undertaken for the Allied forces, and one quarter from the government’s own excess spending.

This exploding deficit was entirely met by printing money, justified by treating Britain’s sterling-denominated entries with the RBI in London, as reserves against which currency issue in India could be made up to two and a half times (Joshi 1975: 405–06; Sen 1981: 75). That this was not only specious but disingenuous reasoning on the part of the monetary authorities, is clear enough. Assets or reserves, as the term itself indicates, are meant to be actually there to be drawn upon in case of need, while these sterling “reserves” were a paper fiction, they did not actually exist since not a penny could be drawn. Nor was there any certainty of their being paid out in future as promised, after the war ended. The non-existent, so-called “reserves” were an accounting device for extracting massive resources from the Indian people.

During the Depression years, administrators trained in classical theories of “sound finance” and terrified of budget deficits, had actually cut domestic spending, thus intensifying the adverse effects of depression. Such conservative officials in India did not decide on the opposite course of monetising massive deficits every year to the tune of a multiple of the entire normal budget. Indian monetary policy was now being directed solely from London; all caution was thrown to the winds, to serve metropolitan interests at the expense of the Indian people. The RBI, set up in 1935, served as a pliant tool and implemented the fiction that mere paper entries of sterling sums were the same as actual reserves. Corresponding to the suddenly expanding level of wartime activity, it expanded the money supply nearly sevenfold (Table 2). India lacked the technical means of printing paper currency at this frenetic rate, so the notes were printed in England. (Reportedly, highly efficient German-owned firms in England were given the task of printing notes, which, if true, would be ironical indeed; but this author has not been able to confirm this as a fact.)

The reckless deficit spending, undertaken for the Allies, grew fastest between 1940–41 and 1942–43. The 1940–41 outlay was already 69% higher than the previous year. The next year it more than doubled, and nearly doubled again the following year; over two years government outlays expanded at 98% per annum (Table 1). By 1942–43 total outlays reached a level equalling 35% of the initial, 1939–40 national income of British India; and reached 51% of it as outlays peaked at ₹970 crore during 1944–45.3 Keynes cautioned against excessive spending, but solely in the interest of limiting Britain’s postwar indebtedness. He showed no interest in the extent of adverse impact on the Indian population. After all, the objective was precisely to reduce their consumption.

The unprecedented explosion of public expenditure combined with the private investment boom generated, through multiplier effects which were strong for a poor population, a sudden and immensely increased demand for food, clothing and other necessities on the part of the rising numbers employed in war industries, in addition to the demands of the Allied personnel. While multiplier effects that raise demand call forth increased output, where most of the demand was for primary products and expanded with such abnormal rapidity in a matter of months, the adjustment was bound to be through price rise of these products notably foodgrains, rather than output rise. Agricultural output could not possibly grow fast, and in Bengal rice output had been in absolute decline for three decades owing to land and resource diversion to export crops. Nowhere in the world were such irresponsible monetary policies followed during the war, as in India, and arguably nowhere else was inflation as rapid.

The personnel required for producing essential war goods and sevices was protected from price rise to a large extent through a system of food procurement and rationing which was rapidly put in place by the government (Sen 1981: 56). The urban population in one way or another had access to food, though it did have to take large cuts in real consumption. The burden of financing the mountainous extra public outlays was passed on to the unprotected mass of the rural population, which was severely affected, other than the small minority of landlords and moneylenders who benefited by foreclosing on the mortgaged assets of the majority struggling to survive.

Most of the government provisioning for the troops and supporting personnel and for the new urban rationing system was sourced from the surrounding hinterland of the towns in Bengal. Prices of all necessities started rising: the price of rice quadrupled over the 18 months from the last quarter of 1941 to the middle of 1943 (RBI Report 1945–46; Sen 1981: 54). While wholesale prices trebled in India as a whole by 1943 (see Table 2), the inflation was much sharper and compressed within a shorter period in Bengal where the bulk of the increased spending and sourcing of food from rural areas, actually took place.

Not an iota of sterling owed to India as recoverable war expenditure was made available for food imports. India’s own merchandise export surplus could have paid for food imports, but these earnings continued to be appropriated by Britain. From 1938–39 to 1943–44 India’s export surplus totalled ₹475 crore or about £352 million (Table 1) taken in full by Britain for its own spending, and in the RBI accounts shown as repayment of India’s sterling debt to Britain (Lokanathan 1946: 42). The “debt” itself had been artificially created, for invisible liabilities were imposed on India, always in excess of total external earnings as earlier explained.

As rice prices doubled, quadrupled and rose sixfold, the labourers, artisans, fisherfolk and poor peasantry in Bengal did not know what had hit them. Rapid inflation is the most regressive method possible of raising resources because it adversely impacts, to the greatest extent, the already poor rural labourers and net food purchasers. Food stocks physically disappeared as government bought up available supplies through contractors for urban distribution, and as traders held on to stocks anticipating further price rise. Many thousands of rural families, already at the margin of subsistence, sank first into dearth and then into hunger, then into famishment and finally into death. Many of those who migrated in search of food to the cities, in their weakened state, succumbed to disease. The final death toll during 1943–44 has been placed conservatively after reviewing the evidence, at between 2.7 and 3.1 million by A K Sen (1981), while some authors cite up to 3.5 million taking into account secondary effects of enhanced morbidity.

The sample survey carried out by Mahalanobis et al (1946) from the Indian Statistical Institute, on the after-effects of the famine found that among the survivors, half a million families had been reduced to utter destitution. British rule in India had started with the massive famine in Bengal in 1770, that decimated one-third of the population, the rapacity of the Company in trebling taxes over five years being a major reason for the high toll. British rule in India ended with a massive famine yet again in Bengal, made to bear the brunt of resource extraction.

Sen in Poverty and Famines (1981: 75) had correctly concluded that “The 1943 famine can indeed be described as a ‘boom famine’ related to powerful inflationary pressures initiated by public expenditure expansion” and had traced the “failure of exchange entitlements” to such inflationary pressures. However, he did not give any data on the extent of the monetised deficit in relation to the normal budget, or link the policies followed to Keynes and his theory of profit inflation for raising wartime resources. This author, a decade later (Patnaik 1991), had identified the famine as arising from engineered profit inflation described by Keynes in his A Treatise on Money as “virtuous war finance,” but did not know then that Keynes was personally charged with advising on Indian monetary matters from 1940, this information becoming available in A Chandavarkar’s Keynes and India (1989); it is not mentioned in any biography of Keynes. The digitisation of the RBI records has made it easier to access the detailed data presented in Table 14 while the publication of a definitive study of India’s national income by S Sivasubramonian (2000) has enabled us to relate deficit financing to national income.

Even though deficit financing through monetisation continued at a high level and reached its peak in 1946, we see from Table 2 that prices ceased to rise after 1943. This was owing to the severe compression of mass demand throughout the country, and the three million excess deaths, that together outweighed the continued increase in demand from organised labour employed in war-related activities, whose wages were indexed however inadequately to inflation. In an advanced country with unionised labour and near universal wage indexation, a wage–price spiral would have taken place, and the inflation might have acclererated. But, in India even at its height the organised labour force was very small relative to the total labour force. Lacking bargaining power, the mass of unorganised labour along with petty producers simply suffered absolute immiserisation.

Keynesian profit inflation was the policy followed in India albeit to a much more extreme extent than Keynes might have openly advocated, when the colonial government agreed to meet war spending for the Allies to an unlimited extent from the Indian budget, incurred deficits each war year to the tune of a mutiple of the entire pre-war budget, and monetised the deficits, printing money using the fiction that mere paper entries of sterling sums owed, could be treated at par with actual reserves. The resulting sharply inflationary war boom did much more than “pour the booty” into the laps of capitalists. The enormous excess of war expenditure over voluntary savings was brought to equality through the forced savings entailed in the inflation. The real consumption decline was so inequitably concentrated on the poorest segments of the population, and the decline was so large and rapid that it physically eliminated three million persons who starved to death.

This author had pointed out: “Such a savage and rapid compression of the real income and consumption of the most vulnerable sections of a population as a direct result of financing expenditures far in excess of voluntary savings, can find few parallels in the modern world” (Patnaik 1999: 336). Bengal’s population was especially vulnerable because its per capita absorption of foodgrains had fallen to the largest extent by 38% in the interwar period compared to 29% average for British India (Blyn 1966: Table 5.3, p 102). During this period there was absolute decline in rice output in Bengal while exported commercial crops continued to grow.

While no previous author to our knowledge has linked Keynes directly to the holocaust in Bengal, after putting together all the facts we have cited, there is no doubt in this author’s mind that Keynes himself, charged with advising on Indian monetary policy, was fully aware of and directly involved in Indian fiscal and monetary developments during the war. The profit inflation he had advocated in theory and watched unfolding in practice, resulted in forced consumption decline, hence forced savings of such a drastic magnitude that it killed three million people who starved to death. This was no less a result of public policy than was the gassing of holocaust victims in Europe. It amounted to economic genocide.

Inflation as a method of war financing, that had been termed as “virtuous finance” by Keynes, turned out to be a most “vicious” and uncivilised policy followed by Britain. Wholesale prices rose by 70% in England comparing 1944 to 1935, while the rise was by over 200% in India as a whole (Lokanathan 1946: 49) and even higher in Bengal. Keynes’s advice that after “pouring the booty” into the laps of capitalists they should be taxed, was also implemented faithfully. Table 3 shows that direct taxes in India, including corporation tax, rose more than tenfold, and their share in total tax revenues rose from below one quarter, to seven-tenths (Lokanathan 1946: 38). Increased taxes were woefully inadequate as a share of ballooning spending as we have already seen from Table 1.

Keynesian Wartime Policies in India and in Britain

In articles published in British newspapers in late 1939, and in How to Pay for the War (1940) Keynes repeated his earlier observations on the absolute necessity of reducing mass consumption in Britain, but his initial proposals of raising resources through inflation and compulsory savings, according to Skidelsky (2001), met with a “frosty reception” from the trade unions. Leaders like Aneurin Bevan certainly did not suffer from money illusion, and were fully aware of the highly adverse impact of inflation on the already needy within the working class; while the latter felt greatly offended by the presumption that workers would not voluntarily contribute resources for fighting fascism but had to be virtually tricked into doing so through inflation. Keynes was obliged to give up his initial proposals in favour of additional taxes graded by income levels. Strangely, Keynes opposed rationing of essentials even in wartime and his views on this coincided with those of Friedrich von Hayek who commended Keynes’s position. (Skidelsky comments that Keynes did not believe in dirigisme in general. It seems, later authors attributed it to him incorrectly in view of his advocacy of state action to generate employment.) Wiser counsel from other members of government prevailed, and rationing of all essential consumption items was introduced. In order to ensure working class support, not only was the socially divisive and highly regressive measure of inflation given up as an explicit method of war financing by Keynes in favour of taxation, he reformulated “compulsory savings” as the better-sounding “deferred incomes.” Additional taxation of £250 million was considered enough in the 1941 budget to cover the inflationary gap (Skidelsky 2001: 84–88).

Keynes worked out a preliminary estimate of national income for Britain and a detailed plan to distribute the proposed increased tax burden equitably over its population. He estimated Britain’s net national income at market prices, at £6,229 million in 1940.5 Those families earning below £5 per week were to be exempt, while graded taxation was to be imposed on higher income groups. Given a total population of 47.5 million this meant a per capita annual income of £131.14 while in India in 1940 per capita income was ₹64 (or £4.5).6 The average income of the Briton was some 30 times that of the Indian; additional taxes in Britain’s 1941 budget comprised £5.26 per capita, or 4% of average income. The monetised deficit per capita in British India in 1942–43, however, was 28% of the population’s far lower average income.

Keynes’s idea of deferred income was precisely what was entailed in the agreement signed by the British government with the colonial state, which put the onus of footing the war bill on India with a mere undertaking to repay after the end of war—except that the deferred income was to apply to an entire people, not particular classes which could afford to pay; the amount was astronomical relative to paying capacity; the method used was deliberate rapid inflation, highly regressive in hurting most the already poor among the peasantry and all rural net food purchasers; and there was no specific deadline by which repayment would take place, if at all. India was Britain’s largest creditor; its sterling debt to Egypt was far smaller.

As far back as the 1860s, the administrator W W Hunter had identified the classes of persons in Bengal that were entirely dependent on purchasing food from the market and were therefore the most vulnerable in the event of food price inflation. These classes comprised labourers, artisans and fishermen. In his remarkable little book titled A Famine Warning System for Bengal (1867), Hunter had given the estimated numbers belonging to these classes for the different districts of Bengal Presidency, the prevailing price of rice, and the extent of rise in this price that should serve as a warning trigger for the government to intervene to prevent famine (some of the data he compiled was reproduced in Patnaik 1991). Hunter’s book is significant in showing that administrators did not think of famine as arising from decline in food availability alone as in a drought, but clearly specified what Sen (1981) was later to term “failure of exchange entitlements” of net food purchasers as a cause of famine, and advocated a warning system to prevent inflation beyond a point deemed to be safe.

Overt and Covert Racism of Imperialists in ‘Civilised’ Countries

Exactly the opposite policy followed during wartime, the measures to promote rapid inflation detailed so far, were not unwitting but quite deliberate. Administrators were not so obtuse as to be unaware of the adverse impact of inflation on the population, a much higher fraction of which had become pauperised and landless after the Depression years and was more vulnerable than ever before. As the deaths mounted, the thrust of policy continued to be to suck foodgrains away from the famished rural population, and available food supplies with Britain donated by the US were directed not to India but to other countries in Europe (Mukerjee 2011). The rulers cared little for what they might have termed today “collateral damage” of deaths from rapid inflation and its impact on production, since it was clear to them that the days of British rule and hence of tax collection in India, were numbered.

Winston Churchill, with whom Keynes perforce worked closely during wartime, was an admirer of Mussolini and was unabashedly racist. According to Andrew Murray (2009: 20), “The British Premier held that Hindus were ‘a foul race’ who were ‘protected by their mere pullulation from the doom that is their due.’” The term Hindu was often used by the rulers to refer to Indians in general. Murray draws a convincing parallel between the racism of imperialists and the racism of fascists. An urgent request by the then SoS for India and Burma, Leopold Amery that food exports be stopped in view of famine, was turned down by Churchill in the crudest terms, prompting even the conservative Amery to criticise his Premier for his “Hitler-like” view of the colonised. Churchill had earlier “flirted with eugenics” (Murray 2009: 20, 27), being much concerned with checking the growth of what he called the “feeble-minded” in the British population.

Keynes too had a deep interest in eugenics and served during 1937 to 1944 as an important office-bearer of the English Eugenics Society (Murray 2009: 27). Keynes had long-held neo-Malthusian views on population especially with regard to colonised people of the global South, as John Toye (2005) points out. In The Economic Consequences of the Peace (1919) and later, Keynes worried about impending global food shortage, food price rise and decline in the terms of trade for “civilized countries” threatening their standard of life, the responsibility for which he attributed to the present and future “fecundity of the East”—the East presumably being where the “non-civilized” countries were located (Toye 2005: 132–34).

Yet, the decennial censuses showed absolute population decline in India between 1911 and 1921, owing mainly to the high mortality from the virulent 1918 influenza epidemic. India’s population grew by 17% between 1901 and 1931, lower than Britain’s population growth by 22% over the same period (despite a much higher rate of permanent outmigration from Britain). Keynes took no account of the fact that the growing poverty of the colonised offset their growth in numbers, and their per capita food consumption had declined sharply. While the perceived threat of increasing food price allegedly posed by the “fecundity of the East” had no rational basis, Keynes’s remarks did reflect in a distorted way the very real fears of an economist hailing from the most import-dependent industrial country in the world.

On his views about population and the terms of trade, Keynes was roundly criticised by William Beveridge who pin-pointed mistakes in his formal argument (Toye 2005: 135–36). Economic developments later were to follow the opposite course, a secular decline in terms of trade for primary producers. It is interesting to note that the 2008 global food price spike was similarly fallaciously attributed by the then US President George W Bush and economist Paul Krugman to rising demand from populous India and China, ignoring the fact that per capita grain consumption had fallen in both these countries and glossing over the huge diversion of grain to ethanol in the US.

Given his mephitic ideas, expressed in the crude language of an immature schoolboy, not surprisingly Churchill was quite unmoved by high famine mortality in Bengal created by British policy; indeed it is more than likely that he welcomed it as hastening the “beastly” Indians towards the “doom” that he considered as “their due.” Keynes was not known ever to be abusive, but his liberal views did not survive the litmus test of a rational attitude towards a subject population. In a private letter to the editor of The New Statesman and Nation in 1943, as the famine raged, Keynes attributed the carnage in Bengal to the Indianisation, hence a new-found alleged inefficiency of the civil service (Chandavarkar 1989: 181).

It should be stressed that overt or covert racism on the part of important political leaders and public personalities was nothing but an expression of the latent, deep fear that the rulers who are in a minority, always have of the numerically predominant ruled, and amounted to a form of self-exoneration, since policies of such inhumanity were imposed on subject populations, as they well knew, could have no moral justification. The rulers showed bad faith in the philosophical sense, in refusing to accept responsibility for their own actions. Their actions illustrated with textbook clarity the truism that exploitation not only degrades the exploited, but ultimately dehumanises the exploiters, however “civilised” they may consider themselves to be. Those British officials on the ground in India who were not racist also became knowingly or otherwise, complicit in these policies, that followed from the very logic of a long history of colonial oppression. But with their direct contact with ordinary working people, a few developed a modicum of sympathy and understanding, and did try sometimes to moderate the harshness of the policies they implemented.

An Alternative Way of War-financing

Was there an economic alternative to the imposition of the enormous burden of war financing on India and the resultant extinguishing of three million lives? Indeed, there was. The monetised budget deficit of ₹606 crore (about £448 million) from 1940–41, and the consequent reduced real consumption by the population owing to this inflationary gap, would have entailed dearth but not death, and was absorbable as part of the war effort. It was the additional war expenditure arbitrarily imposed on India entailing forced savings three times higher at ₹17.4 billion (£1.29 billion), that led to the extreme compression of rural consumption in Bengal and claimed three million lives. This was an impossible sum demanded of a people already overtaxed, drained for two centuries of exchange earnings and pushed into undernutrition; but it would not have been an impossible sum for the metropolitan population, amounting to only one-thirtieth of the burden actually placed on Indians. ₹17.4 billion, or £1.29 billion spent from 1940–41 to 1945–46, could have been raised by additional annual taxation in Britain of £4.5 per capita, while if the US had chipped in it would have been just over £1 per capita. Or, a combination of taxation to a lower extent, and crediting India with its own gold and dollar earnings that were entirely appropriated by Britain, would have been the more humane solution.

At Bretton Woods, 1944 and later, Britain argued for cancelling part of its debt and for postponing repayment of the rest beyond the end of the war, citing lack of capacity to pay. Keynes took a strong position against that of the Indian delegation, and scuttled its request for partial trilateral convertibility involving the US, which could have made some dollar funds available immediately to India for badly needed food imports, since only the US had goods to export. Keynes insisted that it was a bilateral matter between India and Britain (even though India had financed Allied forces, not Britain alone). The Indian delegation, including its British finance member, pressed Britain to honour its commitment of repaying the sterling debt, citing the extreme suffering the population had gone through. The illogical response was that the suffering was in the past. It was even suggested by a member of the British delegation that writing off sterling debt be made a condition for Indian independence, but fortunately this was opposed by Keynes (Skidelsky 2001: 413–14).

On the issue of sterling balances, the creditor nation, India was in a weaker position than the debtor imperialist country that, using its political position, had unilaterally taken a forced loan of gargantuan proportions and when the time came for repayment, was implacable in trying to reduce its obligation drastically. With not a penny of sterling funds owed to India released, and with India’s own wartime earnings from export surplus entirely taken over by Britain, very little food imports could take place: by 1946, per head grain availability had dropped further to 137 kg in India. And, by April 1946, Keynes himself was prematurely dead from a long-standing heart problem.

Keynes was no doubt a liberal and even a humanist in the European context, where the working class had reason to be grateful for his employment-enhancing policies. But he was a member of the British ruling class and was every inch an imperialist in the colonial context. He never visited India, but formulated and influenced public policies there, with apparently little interest in the extent of pauperisation to which two centuries of drain of wealth had reduced the population, especially that of Bengal, longest under British rule. His Indian students in Cambridge later stated that he showed no interest in debates over the standard of living in India: all that interested him was the financial and monetary system (Chandavarkar 1989: 135–37, 182).

The policies followed in India to raise wartime resources were thus in sharp contrast to those followed in Britain. Keynes abandoned his initial proposal in the face of working class opposition in Britain and worked out an equitably distributed tax burden over classes at different levels of income, while part of extra taxes were to be repaid after the war ended. But no such considerations existed when it came to a subject population with one-thirtieth of the per head income of the Briton. Economic genocide through profit inflation—for that is what the Bengal famine was—was perfectly acceptable to the British administrators. The long British imperium in India was coming to a messy end; therefore no thought needed to be wasted any longer on preserving the lives, working capacity hence taxable capacity of the population. The scale and rate of this final act of resource extraction was arguably the most extreme, considering the entire period of British rule in India.

Justice delayed is justice denied. Sterling balances owed to India under interim agreements were divided into two accounts in 1947, the first containing only £65 million that could be immediately spent, while the second was frozen. In 1948 the balances in the two accounts were £80.58 million and £1,033.23 million; sterling devaluation against the dollar in 1949 greatly reduced purchasing capacity of the first while the second remained frozen until the 1950s, when the Korean War boom had reduced real values further. Whatever was paid up had been divided between India and Pakistan in proportion to their populations. India’s share of the depleted sterling balances helped it to launch the ambitious Second Plan for development by providing a buffer against BoP worries for two to three years. The small fraction of sterling balances that Pakistan received is not likely to have been spent for the benefit of its eastern part which later became Bangladesh, from where the majority of the famine victims had hailed. Even in this very limited sense, no compensation was received for the enforced sacrifice of millions of lives.

Epilogue

History is the only laboratory that the scholar of the social sciences has. The holocaust in Bengal holds important lessons for analysing the current situation. It tells us that large-scale resource extraction entailing economic genocide, is something that imperialist countries could get away with quite easily, attributing it to natural causes and abnormal external conditions. Owing to such misinformation, not a single demand was raised in India by patriotic political leaders or by any public intellectual, that the Allies should pay reparations for the lives wantonly lost owing to the extreme and inhumane measure of resource extraction from a population already greatly impoverished by preceding decades of tax-financed transfers and by the Depression. Barring individual exceptions, even the most intelligent persons in the country who actually lived through the famine period, could be conceptually quite blind as regards its real cause. Or, if they did know the real cause, as perhaps some of Keynes’s brightest Indian students did, they found it expedient to maintain silence.

It should not surprise us that there continues to be neo-imperialist resource extraction from the peasantry in India as indeed in other developing countries today, which is neither recognised nor analysed as such, imposing a prolonged toll on the lives of peasants and of petty producers generally. Demand management is a two-edged weapon: it can be “virtuous finance” when used to expand public spending judiciously and reduce unemployment. Equally, when particular dominant Northern imperialist interests require a compression of mass consumption in developing countries to release primary resources for their own benefit, then these dominant interests can and do push for the implementing of “vicious finance” by national governments, by peddling incorrect and self-serving theories.

Fiscal policies that reduce public spending in developing countries even though resources are unemployed, trade policies that remove protection to petty producers and urge removal of the meagre subsidies developing countries offer for food security, financial reform policies that withdraw credit on easy terms for small-scale producers and try instead to promote credit-financed consumption durables for the rich, all fall in the category of “vicious finance.” They serve the same aim as taxation did under colonial systems, and as additional taxation plus profit inflation did during the war. These policies squeeze mass employment and incomes leading to a fall in the aggregate demand for basic food staples and simple traditional manufactures. This releases the land and investment resources for increasing the output of a range of exportable crops including new perishable items, which can never be produced in industrially advanced cold temperate countries but which are essential for filling their supermarket shelves especially in winter when their land is frozen and nothing will grow. These policies shift income distribution in developing countries further in favour of the already well-to-do minority, a desired outcome for advanced country corporations which want market demand expanding for their high-end consumer durables.

The cost is high for the poor majority of developing country populations subjected to neo-liberal policies. Given land constraint, more external demands without adequate investment leads to decline in domestic foodgrain output per head. Yet we see in India that stocks build up and massive food exports take place because income-deflation through fiscal contraction and “targeting” which denies access to affordable food from the public distribution system, reduces per capita demand even more than it reduces output. Such a severe decline of per capita foodgrain availability has taken India by now to a level below not only sub-Saharan Africa but also below the least developed countries. Exposure to global price volatility and removal of effective price support has resulted in debt-induced farmer suicides—the total number since 1997 by now exceeds 3,00,000. But, the seriousness of these trends is not even recognised by either government or by public intellectuals. Rather, fallacious arguments are advanced to rationalise and thus justify the adverse trends, including the idea that not economic but “cultural factors” underlie farmer suicides.

It is important to remember that these overall policies which go by the name of neo-liberal reforms, and have been systematically and successfully introduced by international financial organisations and transnational corporate interests, have but a single aim: to replicate imperialist control over developing countries, including India, in new forms appropriate to the present era. Without an understanding of this overall context, even the best-intentioned micro-level analyses run the danger of supporting and serving the neo-imperialist agenda.

Notes

1 See A K Bagchi (1997: 522). Share in British national income calculated by this author from G Tily (2009) Table 5, p 251. As India’s wartime export earnings had not risen sufficiently to allow such a large transfer in full, the balance was shown as increase in Indian debt.

2 Patnaik and Patnaik (2016), Table 7.2, p 99, calculated from basic data in Blyn (1966).

3 India’s national income estimates from Sivasubramonian (2000), adjusted for British India by this author.

4 I thank Arundhati Chowdhury for making available the digitised RBI reports to me.

5 See Table 5, p 251 of Tily (2009).

6 For Indian national income, Sivasubramonian (2000) adjusted for British India by this author.

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Updated On : 22nd Oct, 2018

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