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Unformatted text preview: (continued from front flap) The compilation of this volume was begun in March 1968 and completed in March 1970. Cover design: Alpana Khare ISBN: 81-7596-247-X The Reserve Bank of India, though only thirty-five years old, is one of the oldest central banks in the developing countries. Its formative years have been eventful. Its efforts to adapt central banking functions and techniques to a developing economy make the Bank’s initial years of special interest. This volume is more than a history of the Reserve Bank; it is also, to some extent, a financial history of India. Wherever relevant or interesting, comments of the press, university professors and concerned interests like cooperative institutions, on important developments in the Bank, have been given, so that the history contains not merely the official point of view, but also an indication of representative public opinion. The Bank’s working has been given in a detailed manner so that it may be of practical use to those on whom may fall the responsibility of shaping and administering India’s monetary policy in the years to come. 1935–1951 THE RESERVE BANK OF INDIA The history was compiled under the guidance of an Editorial Committee with Dr C.D. Deshmukh, the first Indian Governor of the Bank and later Union Finance Minister, as Chairman, and Shri R.G. Saraiya, Dr Bhabatosh Datta and Shri J.J. Anjaria as members. The drafting of the history was undertaken by Shri S.L.N. Simha. The Committee endeavoured to compile a history that is ‘comprehensive, authentic, accurate and objective, while at the same time scholarly and eminently readable, so that it may have the widest possible appeal to those interested’. Volume 1 THE RESERVE BANK OF INDIA It was decided that this volume should cover the first sixteen years of the Bank’s working, 1935–51; 1951 constitutes a watershed in the country’s annals, since it witnessed the launching of India’s first Five Year Plan. The volume is divided into four parts. In the first part, entitled the ‘Preparatory Years’, a brief and yet comprehensive account is given of the developments in money, banking and exchange in India for almost a century prior to the establishment of the Bank in 1935. A detailed account is also given of the Reserve Bank of India Act. The sixteen years covered in this volume divides itself into three distinct sub-periods – 1935–39 (the Formative Years), 1939–45 (the War Years) and 1945–51 (the Post-War Years). Volume 1 1935–1951 (continued on back flap) HISTORY OF THE RESERVE BANK OF INDIA Price : Inland Rs 50 Foreign $ 10 HISTORY OF THE RESERVE BANK OF INDIA (1935-51) RESERVE BANK OF INDIA BOMBAY © The Reserve Bank of India 1970 First published in 1970 by The Reserve Bank of India Central Office Mumbai-400 001 Reprinted in 2005 Paper specially manufactured by the Andhra Pradesh Paper Mills Ltd. Printed by Pyarelal Sah at the Times of India Press, Bombay, India, and published by S. L. N. Simha for the Reserve Bank of India, Bombay, India Prepared by S. L. N. SIMHA under the guidance of an Editorial Committee comprising DR. C. D. DESHMUKH Chairman SHRI J. J. ANJARIA SHRI R.G. SARAIYA DR. BHABATOSH DATTA FOREWORD The Reserve Bank of India is now 35 years old. Relatively to some of the oldest Central Banks, such as the Riksbank of Sweden and the Bank of England which date back to the 17th century, the Reserve Bank is still a very young institution indeed. However, it is one of the oldest central banks in the developing countries. Its formative years have been eventful. Its efforts to adapt central banking functions and techniques to an economy in which modern banking was neither deep-rooted nor widespread, the special responsibilities including those of exchange control that it was called upon to shoulder with the outbreak of World War II in the very first decade of its existence, its transformation from a privately owned institution to a nationalized undertaking, its new role in the economy with the advent of independence -all these make the Bank’s initial years of special interest. The Bank therefore felt that it would not be too soon for a history of its earlier years to be written. A factor influencing this decision was that at this stage it was possible to draw upon the knowledge of those who were connected intimately with the Bank in its early years. We were fortunate in being able to secure the assistance of Dr. C. D. Deshmukh, the first Indian Governor of the Bank, to chair the Editorial Committee, which included Shri R. G. Saraiya who had for long been associated with the Bank as a Director and otherwise and is currently the Chairman of the Banking Commission, Dr. Bhabatosh Datta, an eminent economist from the Calcutta University, and Shri J. J. Anjaria who had joined the Bank many years ago and thereafter been the Chief Economic Adviser to the Government of India, the Executive Director for India on the International Monetary Fund and retired only recently as Deputy Governor after the work of the Editorial Committee was duly completed. The Bank made available the wholetime services of Shri S. L. N. Simha, a senior economist within the Bank, with long standing and experience, to be the Member-Secretary of the Committee and to undertake the writing of the history under the guidance of the Editorial Committee. vii viii FOREWORD A question which had to be faced at the very outset was how many years of the Bank’s existence the first volume of the history should cover. In consultation with the Editorial Committee it was decided that this volume should cover the first 16 years of the Bank’s working, 1935-51.1951 constitutes a watershed in the country’s annals, since it witnessed the launching of India’s first Five Year Plan. It was also felt that the period that followed was too close for it to be viewed in the kind of time perspective that history needs. I am happy that this work has been completed before I lay down office as Governor. The preparation of this comprehensive volume in about two years’ time owes much to Dr. Deshmukh’s dynamic and wise leadership. I wish to record the Bank’s gratitude to him and to the other members of the Committee. I trust that the volume, which in some ways, is a chapter in the financial history of the country, will prove to be both interesting and useful not only to students and practitioners of central banking but also to those in India and abroad who are concerned, one way or another, with the problems of a developing economy. I hope in due course this volume will be followed by others covering the later periods of the Bank’s working. RESERVE BANK OF INDIA, BOMBAY, March 13, 1970 L. K. JHA Governor PREFACE When the Governor of the Reserve Bank consulted me regarding the value of compiling a history of the Bank, I welcomed the Bank’s initiative. When he invited me to be Chairman of the History Committee, with three distinguished colleagues, apart from the Member-Secretary, I readily consented. For with my long association with the Bank, first as Government Director, Secretary, Deputy Governor and Governor and later as Union Finance Minister, extending over a period of seventeen years from 1939, I considered it my duty to give such assistance as I could to what I considered was a worthy project. Actually, the chairmanship of the Editorial Committee to compile an authentic and comprehensive history of the Reserve Bank of India has been for me an extremely interesting and responsible assignment. Perhaps I should mention at the outset that the Bank gave the Committee complete freedom as regards the scope, the pattern and size of the volume. In turn the Committee gave the fullest freedom to the Officer entrusted with the compilation of the history, Shri S. L. N. Simha (who, incidentally, was among the first batch of Officers I recruited for the Bank’s Department of Research and Statistics, in 1945). Our endeavour has been to compile a history that is comprehensive, authentic, accurate and objective while at the same time scholarly and eminently readable, so that it may have the widest possible appeal to those interested. Since the History Committee comprised mostly persons who have had close associations with the Bank, we took special care to ensure that the facts given or quotations cited served these objectives, irrespective of any possible unpleasantness or embarrassment to the individuals concerned. At its first meeting held towards the close of March 1968, the Committee reached decisions on the scope of the history and its work programme. For the objectives in view the Committee did not consider it necessary to attempt any systematic assessment of the Bank’s working. All that it attempted as a matter of duty to the public was to place all the relevant material before the readers in a manner that would readily ix x PREFACE assist them to form their own judgement. For this purpose, the Committee decided to give, wherever relevant or interesting, the comments of the press, university professors and concerned interests like cooperative institutions, on the important developments in the Bank, so that the History contains not merely the official point of view but also what might be called an indication of representative public opinion. It was agreed that Shri Simha would circulate the synopsis of individual chapters to members of the Committee and later the drafts of the chapters. The drafts of the individual chapters were considered in detail-in fact, page by page-at the various meetings of the Committee. The Committee’s suggestions regarding modification of substance and arrangement as well as language were incorporated by Shri Simha, who circulated a revised draft in each case for the Committee’s final approval some of these drafts were considered again at a Committee meeting. The Committee held in all ten meetings, in Bombay, New Delhi and Hyderabad. Our continuous concern has been to conduct our deliberations in a spirit of academic detachment and objectivity combined with a judicious pragmatism. It is my hope that the readers will share our views that the Committee has succeeded in setting up the very high standards that a compilation of this nature calls for. Perhaps I should make some observation on the scope of the volume. Readers will note that we have given a brief and yet comprehensive account of the developments in money, banking and exchange in India for almost a century prior to the establishment of the Bank in 1935. This we regarded as essential to an understanding of the rationale of the central bank for India. We have also given a very detailed history of the efforts to establish a central banking institution in India, leading to the passage of the necessary legislation in 1934. Perhaps very few central banking Statutes have a longer period of gestation than that of the Reserve Bank of India ; it is hoped that the readers will find the description of the Statute in Chapter 3 of special interest. It is not entirely fortuitous that this piece of legislation immediately preceded the Government of India Act, 1935. The course of the historical developments that were leading to India’s independence, and to consequential new set-up of Government, was held up by World War II. But by that time the Reserve Bank of India, with substantial non-official PREFACE xi participation and control had already been in existence for some years and was in a position to watch vigilantly India’s interests in the vital monetary sphere, as also to handle complex technical problems like exchange control after the actual outbreak of war. What is more, it had already matured enough to make a significant contribution in the new world of international finance, in which the two special agencies of the United Nations, viz., the World Bank and the International Monetary Fund, were to take their place and towards joining which India had to take a decision. This decision, the Bank influenced materially. India’s membership has helped in innumerable ways3 beginning with the postwar development of her currency and the advance of the first development loans. The Bank also gave valuable technical assistance in straightening out the numerous currency tangles arising out of the partition. The period of sixteen years covered in this volume divides itself into three distinct subperiods, namely, 1935-39 (the formative years), 1939-45 (the war years) and 1945-51 (the post-war years). The treatment of the matter is both chronological and subject-wise. Extracts from official papers have been given extensively not only for the benefit of the scholar but also that of the general reader. I must say a final word regarding the size of the volume. Perhaps it will be a matter of some surprise to many that a sixteen year history should have run into over 850 pages. The Committee took the view that the account of the Bank’s working must be sufficiently detailed to be of some practical use to those on whom may fall the responsibility of shaping and administering India’s monetary policy in the years to come. Moreover, on several aspects of the Bank’s functioning in those years the public have had inadequate information. Further, a briefer volume would have done scarce justice to the rich material available on the subject. Also, in describing the numerous developments, for instance, the Reserve Bank’s advice on the International Currency Plans, we have given considerable background material for a clear understanding of the issues involved. Finally, in judging the size of the volume, readers will take into account the fact that this is something more than a history of the Reserve Bank and that it is also, to some extent, a financial history of India. xii PREFACE On behalf of the Committee I wish to thank the Governor of the Reserve Bank for associating us with this interesting and important work and for his hospitality to us. The satisfactory completion of our task owes a great deal to the remarkable capability, diligence and dispatch of the Member-Secretary, Shri S. L. N. Simha. My other colleagues and I should like to record here our great appreciation of his consistently competent work in this assignment. INDIA INTERNATIONAL CENTRE, NEW DELHI, February 28, 1970. C. D. DESHMUKH Chairman, Editorial Committee. ACKNOWLEDGEMENTS A Volume of this nature is a co-operative endeavour and I wish to record my sincere thanks to all those who have contributed to its compilation. I must first mention the various libraries, which went out of their way in loaning to us books and reports, namely, the Bombay University Library, the Asiatic Library, Bombay, the Nehru Memorial Museum and Library, New Delhi, and the National Archives, New Delhi. The officials of the Ministry of Finance promptly complied with our requests for papers and reports. Shri R. G. Saraiya was good enough to make special arrangements with the Nehru Museum for studying the papers of Sir Purshotamdas Thakurdas. Thanks are due to the India Office Library for arranging to send us a photostat copy of the ‘Extract of the proceedings of the Council of Revenue, held at Fort William the 13th April 1773, containing the plan for the Establishment of the general Bank in Bengal and Bahar’ and to the Nederlandsche Bank for supplying us with a copy of the Bank Act of 1863. I have derived much benefit from discussions with several distinguished persons, who have had close connections with the Bank in some capacity or other, namely, Sarvashri T. T. Krishnamachari, Benegal Rama Rau, B. M. Birla, Kasturbhai Lalbhai, Satya Paul Virmani, K. G. Ambegaokar, N. Sundaresan, Ram Nath and J. V. Joshi. I am grateful to them for having spared their valuable time. I should also thank Shri C. S. Narasimhan, Editor of the Swadesamitran, for making available to me, for perusal, the papers of his father, Shri C. R. Srinivasan, relating to the Bank. Several of my colleagues in the Bank have seen individual chapters and given valuable comments and suggestions. In this connection I must thank Sarvashri N. D. Nangia, D. N. Maluste, M. S. Nadkarni, R. M. Halasyam, R. P. Chatterjee, S. Narayanswamy and K. MadhavaDas. In the writing of the History, I have received very valuable assistance from the Officer staff associated with me in this project, namely, xiii xiv ACKNOWLEDGEMENTS Piloo S. Mirza, Vimala Visvanathan, K. N. Ramanathan, R. V. Varadarajan and S. Krishnamurthy. In preparing the preliminary drafts of chapters, in checking and rechecking the innumerable facts and figures and in comparing the many proofs, their work was of a high standard. I cannot thank them adequately for the contribution they have made to the volume by their very hard and dedicated work. Shri R. Krishnan was of much help in drafting Chapter 24. Shri Nispat Desai rendered valuable assistance in locating the innumerable files relating to the Bank’s policies and operations. I must also place on record my appreciation of the dedicated work of K. G. Kurup, A. Qavi, Kundabala V. Phadnis, L. P. J. D’Souza, N. V. Ganesan, V. N. P. Nair and V. B. Shikarkhane. I also thank the Graph Section of the Bank for preparing the design of the jacket. Our thanks are due to the Times of India Press for executing the printing work neatly and expeditiously. Finally, I must express my gratitude to the members of the Editorial Committee and in particular the Chairman, Dr. C. D. Deshmukh, for their valuable guidance, uniform courtesy and sense of appreciation, which enabled my staff colleagues and me to complete the work on schedule. RESERVE BANK OF INDIA, Central Office, Bombay, April, 1, 1970. S. L. N. SIMHA Member-Secretary. CONTENTS Page Foreword vii Preface ix Acknowledgements xiii THE PREPARATORY YEARS 1. Genesis of Central Banking in India 3 2. Currency, Exchange and Banking Prior to 1935 40 3. The Reserve Bank of India Act 82 THE FORMATIVE YEARS: 1935-39 4. The Beginnings 121 5. Early Central Banking Policies and Operations 153 6. Emerging Role as a Bankers’ Bank 177 7. First Steps in Agricultural Finance 199 8. Governors, Government, Board and Shareholders 222 THE WAR YEARS: 1939-45 9. Organisation, Management and Allied Matters 241 10. The Pattern and Consequences of War Financing 283 11. War-time Central Banking Operations 310 12. Exchange Control 345 13. Repatriation of Sterling Debt 377 14. Participation in Post-War Currency Plans 405 15. Commercial Banking Developments 436 16. Policies in the Sphere of Agricultural Credit 467 xv xvi CONTENTS THE POST-WAR YEARS : 1945-51 Page 17. Changes in the Bank’s Organisation and Status 495 18. The Bank and the Partition 537 19. International Financial Institutions and Sterling Balances 584 20. Exchange Control and Management 630 21. Monetary Management and Allied Issues 675 22. A Commercial Bank Regulation Act at Last 717 23. Progress in the Sphere of Agricultural Credit 759 24. The Bank as an Employer 796 25. Epilogue 839 Appendix Index (i) Statistical Tables 852 (ii) Sources of Material 863 869 DETAILED CHAPTER CONTENTS PAGE CHAPTER 1: GENESIS OF CENTRAL BANKING IN INDIA Plan of Warren Hastings Robert Rickards’s Scheme Proposal for a ‘Great Banking Establishment for British India ’ Constitutional Changes of 1858 Proposals for a large ‘National Banking Establishment ’ Proposed Amalgamation of Presidency Banks A Bank on the Model of the Bank of France and the Netherlands Bank The Fowler Committee and Schemes of Rothschild and Hambro Chamberlain Commission and Question of State/Central Bank Keynes’s Proposals for a State Mr. Abrahams’s Scheme The Chamberlain Commission’s Recommendations Establishment of the Imperial Bank of India Hilton Young Commission Report Scheme of the Reserve Bank of India 1927 Reserve Bank Bill 1928 Reserve Bank Bill Constitutional Reforms and the Question of Central Bank India Office Committee London Committee Reserve Bank Bill, 1933 CHAPTER 2: CURRENCY, EXCHANGE AND BANKING PRIOR TO 1935 HISTORY OF INDIAN C URRENCY AND EXCHANGE Silver Standard: 1835-93 The Uniform Rupee Paper Curr...
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