18. I am inclined to think that such a remedy is possible. The manner in which the reserve against the note issue must be kept is needlessly restricted. Apart from that portion which is permanently invested, the whole must be kept in gold and silver. This is in imitation of the rules governing the Bank of England’s note–issue. But the note–issuing banks of Europe afford a better model. It might be proper to prescribe by law the holding of a certain proportion of the reserve (say one–third[30]) in gold or silver coin. A further amount might be held, as at present, permanently invested in Government of India securities. With regard to the rest the Government should, I think, permit itself much greater latitude. It should be free to lend it out on suitable security, either in India or London, for periods not exceeding three months. In London it should be lent out on the same conditions as the Cash Balances and the Gold–Exchange Standard (see Chapter VI.) are lent out at present. To lend in London would be technically convenient (for the reasons given on p. 172), but it would not cure the inelasticity of the Indian system. Part of the reserve should, therefore, be lent out _in India_. Suitable security for this purpose would be Government of India securities (which would have indirectly the effect of increasing the market for Rupee Paper) and Bills of Exchange of the highest class. It is not worth while to discuss here in detail the precise methods which it would be proper for the Government to adopt in lending out funds in India either from the Cash Balances or from the Paper Currency Reserve. Whether it were done through the Presidency Banks only, or whether an approved list of borrowers of Government funds were to be drawn up for India as is already the case for London, the effect on the Indian Money Market would be much the same. The needed element of elasticity would be obtained, and the present absolute dependence of India on London for an expansion of currency would be modified. I shall return to this proposal again in Chapters VI. and VIII. Its full force cannot be shown until we have discussed the question of the Secretary of State’s reserves as a whole, and have studied in detail the movements of the Indian bank rate. A good deal of opinion has been expressed in India lately in favour of loans being made there from the Government’s Cash Balances. In so far as this opinion demands some new machinery by which on suitable occasions the Government can lend out funds in India herself, the evil which it seeks to remedy is a real one. And the method proposed above is, I believe, the right way in which to approach the problem’s solution.