In the history of Indian currency and central banking, the Fowler Committee occupies an important position. But, its relevance went beyond the currency question. One suggestion that emanated from its report was Sir Everard Hambro’s central bank proposal. Hambro suggested establishing a state bank along the lines of the Bank of England and the Bank of France. Hambro’s central bank proposal is contained in a brief note attached to the Fowler Report. It provided the rationale for the proposal. The suggestion went back and forth between Calcutta and London before it was dropped after objections from different quarters.
Sir Everard Hambro
Sir Everard Hambro (1842-1925) was a British banker of Danish descent. Hambro served on the Court of Directors of the Bank of England for nearly a half century. He tenure lasted from 1879 till his death in 1925.
Hambro’s central bank proposal was on the strength of evidence given to the Fowler Committee. Prominent among them were Lord Rothschild and his brother, Alfred de Rothschild. Certain others who gave evidence to the Committee also made references to creating such a bank. This included O’Conor, Lindsay, Montagu, Rothschild, Northbrook, Giffen, and Macdonald. The official history of the Reserve Bank of India refers to Hambro and Rothschild. We will go into each of these comments in chronological order, before turning to Hambro’s note. Thereafter, we will conclude with a discussion on the developments thereafter.
The Evidence
Mr. James Edward O’Conor
One of the early key witnesses was Mr. James O’Conor (1843-1917). A Fellow of the Royal Statistical Society, he was Director General of Statistics to the Government of India. He had been in the Finance Department of the Government of India since May 1895. By virtue of this, he was ex officio assistant secretary in the Finance Department. As in charge of the Trade Department since 1875, he wrote the annual review of trade in India since 1875. He also wrote short reports on vanilla cultivation in India. Another relevant monograph was The Price of Silver in London and the Exchange Value of the Rupee in India from 1st January 1892 to 30th June 1896.
Hambro asked whether it was wise to have a law where currency would increase or decrease automatically as necessity arose? O’Conor replied that it was the ideal and the best way for India.
Hambro also asked specifically that if “a Bank of India were started with a gold capital, having power to issue notes and hold money against those notes, do not you think the native commercial people of India would rather borrow from that bank than from the money lenders at high rates?” O’Conor replied that “No natives borrow money from money lenders at high rates except those who cannot obtain money from the banks now, that is, those who have no good security to offer, classes who borrow on portable property in the way of pawn transactions.”
To another question, O’Conor replied that a bank as described by Hambro will be unable to raise gold from natives. Such gold is only with the rulers. The natives kept them in the form of jewellery.
Thus, Hambro’s central bank proposal did not receive much support from O’Conor. He might not have been prepared for the leading questions.
Mr. Alexander Martin Lindsay
Mr. Alexander Martin Lindsay (1844-1906), a Fellow of the Bankers Institute of London, had been in India for 32 years. The first few years were in a mercantile firm. For the next 29 years he was in the service of the Bank of Bengal as Deputy Secretary and Treasurer.
Lindsay is largely forgotten today. But, he seems to have been an early influence on Edwin Kemmerer and John Keynes. Kemmerer helped design the Federal Reserve and promoted central banking in many other countries. Lindsay’s writings apparently influenced Keynes in his early works on India and monetary theory. (More on Kemmerer and Lindsay in a future post).
Lindsay’s Evidence
Lindsay was speaking in his private capacity. The extracts relevant to Hambro’s central bank proposal are as follows:
Hambro: The question I wanted to get at was this: Suppose this scheme of yours, or something on the same basis, instead of being carried out by the Government was carried out by banks; suppose, for example, the Presidency banks were to amalgamated somehow into, we might call it, a Bank of India, and the capital were increased by, say, 10 millions sterling, with a right of fiduciary issue against gold, and the capital being partly subscribed, we will suppose, in London and partly in India, and having the right also of issuing notes against money deposited in England. Do you think that such a bank with so large a capital would be able to carry out the transaction, such as you imagine, or something of a similar character, more easily than the Government?
Lindsay: I have not the least doubt that if the Government of India will make over the management of the currency, and the profits derivable from its currency, to any large banking institution, that banking institution will be only too glad to undertake the responsibility which I propose the Government of India should undertake. I have no doubt that many large financial operators would be very glad to sell to the public an article of universal consumption at a profit of 45 per cent, or more, because that is what it really comes to.
Hambro: I said with power to issue based on gold; I do not see where 45 per cent profit comes in then?
Lindsay: Based on gold coins, you mean.
Hambro: On gold?
Lindsay: Of course the banks would be glad to resume the note circulation in India, and no doubt that is the great complaint of the Presidency banks that the note circulation was taken out of their hands too soon.
Hambro: Do you not suppose that if the Presidency banks were combined together, and their capital largely increased, the convertibility of their notes into gold would be gradually acknowledged and confidence restored?
Lindsay: …the difficulty with … notes is that the native … dislikes the use of notes very much.
Hambro: He uses now how many notes?
Lindsay: …note circulation is about 24 crores, … a very large proportion …is paper money locked up in government treasuries. Including the notes in the Treasury balances, … the circulation now is about 24 crores.
Hambro: I only wanted to get a whether you thought the Government was the best custodian of a currency on a gold basis, or, as in France, Russia, Germany, and England, a bank?
Lindsay: Certainly, from the point of view of the Presidency banks, they would very greatly prefer to issue the paper currency. Then, in addition to that, I think that with the aid of their branches, and with the power that bankers have of putting paper money into circulation and insisting on their customers using a certain form of money, if the Presidency banks were entrusted with the issue of paper money, they would increase the circulation considerably, but whether the community in general would benefit is, of course, another question.
Continuing the evidence the next day, Hambro asked: Do you think that your scheme would have a greater chance of success by being carried out by a Governmental Department, or by being carried out by banks, or a bank, instituted and composed of the Presidency banks and others? I just want to put that general question to you?
Lindsay: Do I understand that you mean the scheme as it is, with the notes and rupee currency of India not to be made convertible into gold coins in India?
Hambro: I mean your scheme?
Lindsay: In reply to that I should think equally well by either party, for this reason: there is no banking difficulty at all in the scheme, it is entirely automatic. As far as the working of it goes it is purely mechanical; there is no discretion whatever to be exercised, and a small Government Office could carry it out quite as easily in my opinion as a bank.
Lindsay’s amounts to a half endorsement of Hambro’s central bank proposal in that it spoke of it not as a bank but a government department.
Sir Samuel Montagu
Another important witness, in the context of Hambro’s central bank proposal, was Sir Samuel Montagu who gave evidence on 12 July 1898. Montagu was a bullion merchant in London for over 50 years. He would be better remembered in India through his son, Sir Edwin Montagu. As the Secretary of State for India, Edwin Montagu got immortalised with the Montagu-Chelmsford reforms of 1919.
In reply to a question from Sir Fowler, Sir Montagu had said: “…What is necessary in order to accumulate gold is, first good credit, and secondly resolution, and I may add a third condition – keeping your discount rates (which you do in accord with the Presidency banks) at a fairly moderate range so as not to injure trade; say not below four and not above six.”
When asked how the government could do that, Sir Montagu replied: “They could do it in accord with the banks. The Presidency banks might fairly be joined together into a State bank – not a Government bank but an Indian National bank, which could do that local business of the country and have branches and offer facilities for trade in the way of transmission of funds.”
Taking the idea further, Hambro asked Montagu: Do you think that if a national bank was erected in conjunction with the Presidency banks with a large gold capital, 20,000,000 l., or any amount you like, and if the currency of India, subject to proper laws, was placed under the management and control of that bank, the bank would be more likely to carry out your views than the governmental department?
Montagu: Certainly, I think it would be wise to amalgamate the Presidency banks into a State bank and give them the note issue.
Hambro: Would it not be wise also to increase the capital of the Presidency banks?
Montagu: Certainly.
Hambro: And it would be easy to get any amount they required?
Montagu: Any amount.
Hambro: You think if the currency was taken away from the control, or rather the management of the Government, but that subject to the laws, the management were given to a bank composed of merchants and bankers and officials, it would be easier to carry out such an operation as you contemplate, which is, I understand, buying gold in the cheapest market, not always taking a great profit?
Montagu: Certainly it would be the best mode.
Montagu’s was the among the first endorsements of Hambro’s central bank proposal.
Lord Rothschild
The Committee examined Nathaniel Mayer de Rothschild (1840 – 1915), the 1st Lord Rothschild, on 25 July 1898. Lord Rothschild needed no introduction. But, before reading out a statement, he said: “I may say at the outset that I know nothing of India itself, never having been there; therefore, in reading this paper, and in giving my opinions, I only given them as an Englishman, and knowing the circumstances in other countries.”
After Lord Rothschild read out his statement, Mr Dent asked him about “the secrecy that you suggest is necessary to carry out successfully any gold operations in India.” He said: “You tell us that an attempt to start a large bank in Brazil was a failure, and that an attempt to do something of the same sort in the United States in 1830 was also a failure?”
To this, Rothschild replied that “Those two banks were failures – the United States bank failed afterwards – but I was speaking of regulating the exchange by drafts backwards and forwards.”
Dent: Then you would not advocate say large national bank being started in India?
Rothschild: There are two distinct questions. It may be necessary in the interests of India to have a bank like the Bank of England. That is for internal purposes. That I know nothing about. I am not an Indian authority. But what I say is that any bank which is started for regulating the exchange, drawing on London and being drawn against, would be a failure and would lead to disastrous results.
Hambro later asked Rothschild: “Suppose you went on to a real gold currency, do you think it would be more easy for the internal arrangements of that currency to be properly looked after by a bank like the bank of England, or the Bank of France, or the Bank of Germany, rather than by the Government?
Rothschild: The internal arrangement of the currency is always better looked after by a bank than by a Government. The best proof you have of that is in the case of America, where the tendency arose twice to mix up the measure of the currency with the wants of the Treasury. The accounts were not kept sufficiently distinct. A bank would know that they were under the necessity of redeeming their notes in gold or silver, and they would keep the money market easy. In fact, a bank would never have allowed the stringency in the money market to arise as it did the other day in India, because they thought they could not convert their notes.
Le Marchant: If such a bank as you alluded to were to be established, would it not be essential that it should have wide business relations with the country? If it were to exercise influence on currency and exchange?
Rothschild: I do not pretend to know sufficient of the circumstances of India to be able to say what would be necessary. All the European banks have a large business besides the currency, and I do not know how far that would be necessary in India. I have not sufficient knowledge of it to say.
Le Marchant: In the absence of extensive independent business relations, would it not partake of the nature of a Government office?
Rothschild: I am not sufficiently well acquainted with Indian circumstances to give an answer to that.
Thus, Hambro’s central bank proposal did not receive much support from Lord Rothschild.
Earl of Northbrook
Rt. Hon. Earl of Northbrook’s links with India went back a few decades. It started as private secretary, from 1853 to 1855, to Lord Halifax when he was Sir Charles Wood and President of the Board of Control (for the East India Company). That was before the Government of India was transferred from the East India Company to the Crown. Thereafter, he was Under Secretary for India from 1859 to 1860 when Sir Charles Wood was Secretary of State for India. From there he went to the War Office for a short period before returning to the India Office where he remained till 1864. Prime Minister Gladstone appointed him Viceroy of India in 1872. He remained in that position till 1876 when he resigned over the Afghanistan question. Born as Thomas George Baring, he belonged to the banking family which held five separate hereditary peerages.
Referring to proposals of Lord Rothschild and others, Lord Northbrook gave detailed evidence where the relevant portions are worth quoting in full. He stated as follows: “… the idea is put forward that there should be a great bank in India like the Bank of England, which would manage the currency, and have the full use of the Government balances. I should like to say something upon this subject. It is a difficult question, and I want to point out to the Committee that it was very fully considered about the year 1861, when I happened to be Under Secretary and Lord Halifax (then Sir Charles Wood) was Secretary of State for India. The whole history will be found in papers laid before Parliament at that time.”
“Sir Charles Wood had a strong opinion that the note issue should be entirely separate from the banks, and that it should be managed by a Government Department. After a very long argument (because Mr. Laing, who was then Finance Minister in India, took the other view) the present system was established, and I should be exceedingly doubtful as to the policy of altering the present system, after it had been so fully considered by so great an authority in all currency matters as Sir Charles Wood was. Now, as to the arrangements with the different banks, as the Committee know, the Bank of Bengal, the Bank of Bombay, and the Bank of Madras are, to a certain extent, Government departments. The Government have a strong hold upon them. They had at one time, at any rate, representatives on the management of the banks.”
“The Bank of Bengal, which I had mainly to do with, was managed exceedingly well, and we had every confidence in its transactions. But, at the same time, I do not think that these banks, in their present condition, have the capital or the strength which would enable the Government to treat them in the same way as the Bank of England is treated in this country. The Bank of England is the product of a great number of years, and it has the absolute confidence of the Government and public. There is no reasonable probability of establishing a bank, in my opinion, that could occupy the same position in India.”
“As regards mixing up the currency with the banking business, it must be remembered that, although commercial crises in this country have been met by allowing the issue of notes by the Bank of England beyond the statutory limit, that would not do for India. In a crisis in India you want rupees, you want the actual money for payments up country. I can give the Committee an instance of what happened to me in connexion with this particular subject.”
“In the year 1874 there was a famine in Bengal, and in order to feed the people we had to buy rice in Burma and send it to Bengal. In order to get the rice we had to pay hard coin, rupees, for it. The banks then had the full use of the Government balances, and the Bank of Bombay had at that time more than a million tens of rupees – a million and a half I believe – of the Government balances. In order to pay for the rice, we wanted some of this money. When we asked the Bank for it, we had the greatest difficulty in getting it. The Government of Bombay objected, and it was only after considerable correspondence and by insisting upon getting our money that we got at last about half a million of the million and a half that they had of our balances.”
“It was so serious a condition of things for the Government of India not to be able to get their money when they wanted it, that we addressed the Secretary of State on the subject, and the correspondence is given in the evidence published in the first Report of a Commission now sitting on Indian expenditure, at Question 2805. We said: – “We have been much impressed with the consideration that the effect of the existing agreements with the banks, which compels us to place all the cash balances belonging to Government in their hands, leads to consequences which may be very inconvenient, if not worse, both to Government and trade. The only use of these balances to Government is that they may be made available the “the moment the public service requires them.
“We have had no difficulty in regard to the balances in the hands of the Banks of Bengal and Madras; the Bank of Bombay, however, protested against meeting drafts upon it, and, on the urgent representations of the Governor of Bombay, we were obliged on the 29th January to allow a month’s time before drawing. The Bank of Bombay, accustomed to high Government balances and relying on the maintenance of these balances, had so employed them that they were practically locked up, for, had we insisted on withdrawing them more suddenly, we should have done so in the face of a warning that we should produce a commercial crisis, and, therefore, for a time, the Government balances at Bombay were useless for the purposes of the Government.”
“The upshot of it all was that an alteration was made, and at our recommendation the Government now hold about 2 crores in the reserve Treasury. They are not bound now to keep the whole of their balances in the banks, and they keep 2 crores actually in their own banks, which they can use on an emergency. I do not think it is safe for the Government of India not to have the absolute command of 2 crores of rupees.”
Lord Northbrook did not go into the details of the proposal for a separate bank as it was not within the terms of reference of the Fowler Committee. While Northbrook gave a historical perspective, he did not state whether a central bank remained infeasible. Thus, he did not seem to endorse Hambro’s central bank proposal.
Sir Robert Giffen
Robert Giffen (1837-1910) was immortalised in Economics when Alfred Marshall coined the term Giffen goods for his classic work, Principles of Economics (1890). Robert Giffen was a Scottish statistician and economist who was also a Fellow of the Royal Society. He started his career as a journalist, including eight years as assistant editor to Walter Bagehot at The Economist. Later, he headed the Statistical and Commercial (later, the Commercial, Labour, and Statistical) Department of the Board of Trade for over 20 years until his retirement in 1897.
Mr. Hambro asked Giffen, “Do you think that those difficulties would be at all lightened if some automatic machinery were provided like the Act of 1844 – if a bank were started in India like the Bank of England?”
Giffen: I think it is a very good arrangement in all countries that the Government should have a bank in which to deposit its money and upon which to write its cheques, but how far the circumstances of India would enable such a bank to be established in a proper way I am not able to say. I am old enough to recollect that you had trouble in India in the sixties with the Government having some share in the management of the Bank of Bombay, which did not answer altogether very well; but that would not apply to a bank like the Bank of England.
Hambro: I was not asking you as a business matter, I was asking you as an economist, whether it was not a good plan to separate the management of the currency from the Government?
Giffen: I think it is a good plan. As a rule you ought to have a bank doing business for the Government as well as other people.
Hambro: And looking after the currency?
Giffen: Not so much looking after the currency as doing banking business.
Hambro: I mean, automatically looking after it?
Giffen: What I mean is that you ought to have a mint that the currency issues ought to belong to the bank and not to the Government. That is the general view that I have in these matters.
Giffen too thus was in favour of separating currency issue from the government. He, however, did not elaborate on the details of the arrangement. In spite of leading questions, Giffen did not seem to endorse Hambro’s central bank proposal.
Alfred de Rothschild
Another Rothschild who gave evidence was Alfred Charles de Rothschild (1842-1918). He was the brother of Lord Rothschild referred to above. Joining the family owned N.M. Rothschild & Co. as a partner at the age of 21, he became a director of the Bank of England at the age of 26, remaining there for 20 years till 1889. He thus became the first Jew on the Court of the Bank of England, and the only one for another fifty years. He had also represented England at the international bimetallic conference in Brussels in 1892.
In his absence due to illness, Alfred Rothschild’s statement was read out on 12 Jan 1899. This, among other things, detailed a proposal for a bank to established by merging the three Presidency banks. This can be stated to be the basis for Hambro’s central bank proposal.
“Proposed Bank to absorb the present Presidency Banks.
“The capital to be the same as that of the Bank of England, namely, 14,000,000 l., and it would be a matter for consideration as to how much gold should be placed at once in the Issue department, and as to how much should be invested out of the 14,000,000 l. in Government securities, &c., against both of which the Bank would have the right to issue notes. But the question of the amount of capital is a matter for further and detailed consideration, with reference both to the efficiency of the Bank as a machine for maintaining the gold standard, and as a machine for earning dividends for the proprietors, and also as a machine for aiding in the development of trade and industry.”
“The notes should bear their value stamped both in sterling and rupees, in the proportion of 15 rupees to 1l. But naturally the convertibility of rupees into gold would not be attempted all at once, nor would it be desirable to do so; but, even if absolute convertibility were declared, it could never take place on a very large scale, because, with such an enormous population as that of India, a very large amount of rupee currency would always be required.”
“The Board should be as influential as possible, and composed of representatives of the chief merchants and bankers, the Government having the right to appoint its own representatives, as it is most desirable that the policy of the Government of India and that of the Bank should be in absolute harmony.”
“The Government of India would, of course, use the Bank and its branches as its Treasury, which is the case at present with the Presidency banks, and, as regards the fusion of the latter into one large State bank, I think there ought to be no difficulty in bringing this about, especially if the new institution were prepared to offer very favourable and liberal terms.”
“It has occurred to me that all silver imported into the country might be subjected to a heavier import duty (I do not, however, consider this as absolutely imperative), but, in the event of the number of silver rupees for currency purposes being deficient, and of its being felt that more are required, the Bank should have the sole right of buying silver duty free, all the silver bought being sent to the mint for coinage. Such coinage could be left in the hands of the Government, and would only be undertaken when actually ordered by the Government; but still, I cannot help thinking that the Bank should have some share in the profit on coining, the proportion of such share to be decided by the Government. This would facilitate the raising of the capital of the Bank, and would prove that the Bank had the Government’s goodwill and support.”
“But in making the suggestion of a silver import duty, I do so with a view of trying to make the intrinsic value of the rupee more nearly approximate to its token value, and, if I have mentioned the coming of silver rupees by the Bank of India, supporting it were formed, it is because at some future period there might not be a sufficient amount of currency in the country in connexion with the payment of wages for the moving of crops, or the payment of troops, &c., &c; and this, in my opinion, has been the weak point in connexion with the closing of the mints in 1893, namely, that since then nothing has been done to augment the available currency of the country, the population of which has unquestionably increased, and demands, therefore, increased facilities for making payments.”
“This is the necessary consequence of the period of transaction, in which the Government have ceased to add silver to the currency and no gold has been substituted for the silver. I think, therefore, that, while it may be necessary from time to time to coin rupees, it must also be part of the scheme to make the sovereign legal tender, as suggested by Sir Edgar Vincent in his evidence before the Committee and as intended by the Government of India. This would also facilitate the operations of the Bank, one of the principal objects of which is to introduce gold into the country.”
“I should like to emphasise (should a gold standard with a gold currency be suggested) that gold should be current in commercial centres and for international transactions, but not necessarily for all. Native internal purposes; and, in support of this argument, if we assume that the new bank is formed, and it will have the custody of the Government balances (these, if I am not mistaken, amounting to about five crores of rupees monthly, i.e., just sufficient to pay the India Council bills), no gold would be withdrawn by the Government for the interior, but only notes or silver.”
“Advantages of the Bank
“The advantages of a bank of this sort would be multifarious, amongst the principal ones being the following:–
- A large sum of gold would be immediately provided.
- This sum would be found by private enterprise and without recourse to a Government loan, thus avoiding a further heavy permanent charge upon the revenues of the country.
- By the establishment of the Bank, the machinery would be at once provided for the effective maintenance of a gold currency and for the conduct of operations connected therewith, which can be far better carried out by an institution of this description than by a governmental department, especially as regards the gradual accumulation of a further stock of gold.
- The maintenance of a steady rate of discount. Money could never be dear in the principal centres of India for more than a few hours, namely, the time occupied in the exchange of telegrams, because, if a million sterling were paid into the Bank of England (presuming the latter to be agents of the Bank of India, which, no doubt, would be the case), the Bank of India, on being telegraphically advised, would at once have a right to issue 1,000,000 l. in notes, or to give out gold certificates pending the arrival of the bullion itself. I am aware that telegraphic transfers of this kind can be made now through the agency of the Government; but, without convertibility, it is not certain that the money could be had back when required.
- The establishment of the Bank would tend to create confidence in the public mind as to the security and permanence of the currency system, and would consequently be effectively instrumental in directing to India the flow of capital which is so desirable for the increase of her prosperity.”
“The fact of there now being in India about 100,000,000 acres of uncultivated soil ought alone to be sufficient inducement to attract any amount of British capital, which, I believe, would be at once forthcoming if the British investor knew that there was a fixed rate of exchange between the two countries.”
“The Bank should not conduct any exchange transactions, but should confine itself (like the existing Presidency banks) exclusively to internal operations, and it would also, when necessary make advances to the Indian Government against deficiency bills, which is frequently the case with the Bank of England.”
“Considerable amounts of silver and gold go yearly to India, but what becomes exactly of these amounts it is difficult to say. Whatever may be their ultimate destination, it is a pity that the Government should not derive any benefit from them, which they certainly would do if a more substantial import duty on silver were established. In addition to this, a gold standard, if attempted, would materially contribute towards the shipments of gold which would naturally take the place of those of silver.”
“I am aware that, in the opinion of some, India would soon lose her gold; but against such a contingency the new bank would have to act for the first few years with great discrimination, and would have to exercise its judgment as between the gold required for internal and genuine trade purposes, and that which would be required for exchange operations as being the cheapest mode of remittance. In fact, each case would have to be considered on its own merits.”
“In cases of small amounts intended for internal purposes – these would be freely given – but in the case of any large amount for transfer or export, then the advisability of raising the rate of discount would have to be considered by the Bank authorities, which is the case all over the world when State banks are called upon to protect their stock of gold.”
“The Bank of France takes very stringent measures for the protection of its bullion, but immediately charging a premium; the Bank of Germany has likewise the means of placing impediments in the way of exports of bullion, and the Bank of England has the power to raise its price for eagles, bar gold, and all foreign coins, to a certain extent, but naturally not for sovereigns.”
“But in the event of the Bank running short of gold, then I would suggest that the Government should come to the rescue to the extent of 10,000,000l. sterling, by buying one or two crores of rupees, and, according to competent authorities, what with the gold raised by the Bank, and this Government subsidy, there should be sufficient to face all eventualities for some time to come.”
“At the same time, I know that no special legislation in respect to the currency of any country is sufficient in itself to bring about absolute prosperity. Such prosperity depends upon the country’s trade, which consists of its imports and exports; but, if giving stability to the currency would tend to bring about confidence, then, in proportion to the confidence thus restored, fresh capital would be forthcoming, and the trade of the country would flourish and increase in the same ratio; …”
“I cannot help thinking that this would be accomplished if a gold standard were introduced and if a relative value of 15 to 1 were established between the rupee and the sovereign. If I say a relative value of 15 to 1, it is because the majority of the witnesses are of opinion that this is the ratio which one should seek to maintain permanently, and it is approximately the ratio which now exists and seems likely to continue. After all, the financial position of a country in respect to its currency should be judged by its credit and its resources.”
“As regards the former, the credit of India is second only to that of England, and, as regards the latter, the exports of India considerably exceed its imports, as is shown by the demand for Council drafts and the quantities of gold and silver annually sent into the country.”
“It is estimated that there are in circulation four rupees to every inhabitant in India, the amount in circulation being 1,200,000,000; and if by the introduction of a gold standard, and taking the exchange at 1s. 4d., the fact could be established that the British £ is worth 15 rupees, then it is equally true that 15 rupees would be worth 1l. in fact, my idea of a gold standard with a gold currency is where the note of a State bank inspires such confidence that it passes pari passu with coin, and I feel convinced that the notes of the Bank of India would very shortly command the same confidence as do those of the Bank of England.”
“But in addition to the reasons to which I have briefly alluded above, there is one which has much greater weight with me than any other, namely, that all great countries have of late years adopted the gold standard, and in view of the fact that China is the only important country at present which is a buyer of silver, and then only on a limited scale, it may perhaps be said that the day has already come when India would find it difficult, if not impossible, to get rid of any appreciable amount of silver if she were anxious to sell on a large scale.”
“Under these circumstances I should like to see the future profits made by the exporters of goods, as well as those made by the internal trade, represented by gold. A part of this gold would certainly leave the country if the balance of trade went against India, but if there were no gold to export, then the exchange would decline to a much greater extent, and the rupees would decline in value likewise.”
“I am also fully aware that it has been suggested that a proposal for the creation of a great bank in India with certain privileges, and which would presumably do a very large and profitable business, might arouse opposition on the part of the great financial institutions both in India and in Europe; I doubt this, but in any case I feel certain that that opposition would be over short duration, and that these institutions would be the first to lend their valuable aid and cooperation, which would be easily secured if their directors or managers figures on the board of the new bank. The world, in fact, is large enough for every one, and I am sure that the London Joint Stock Banks and private institutions do not suffer because there is a Bank of England, and on that score, therefore, I am quite confident.”
“I have purposely not entered into statistics, nor alluded to any figures; these have been so fully gone into by the different witnesses before the Committee, that I feel it would be impossible to add to them, and even useless to allude to them.”
“I have ventured to set out this very important question in a wide and general way, being convinced that what has been carried out successfully by other countries, far less powerful in every respect than India, not only might but ought to be attempted in that country, and that we in England ought to lend our co-operation in the settlement of the currency question of a country with which we have such intimate relations, commercially and politically.”
“Of course, where an experiment is made, it is impossible to speak with certainty as to its results; but it seems to me that this would be an experiment attended with a minimum of risk.”
“The more advanced the principles in connexion with the currency of a country, the more they emphasise the civilization which exists; and, as India is England and England is India, I, for my own part, have every confidence and belief that a gold standard might be introduced, and have no doubt but that, in the course of time, the British £ would be accepted in India, in the character of full legal tender, as readily as in other parts of the Queen’s dominions.”
The most detailed endorsement of Hambro’s central bank proposal thus came from Alfred de Rothschild.
Mr. John Matheson Macdonald
Mr. Macdonald of the firm Matheson & Co., was based in London, and had decades of experience trading with China. He brought to the proceedings of the Committee the perspective of a trader whose dealings in cotton were in direct competition with exports from India. But, as he said, the inflated rupee meant that Indian cotton had no chance against Chinese cotton. But, according to him, even in the absence of this support, China would have been able to hold its own.
Macdonald discussed the comparative advantages of the two standards. He said that “… there is a distinct difference between an automatic currency and what you may call a managed currency. With silver you may have an automatic currency which is undoubtedly the most desirable from every point of view. With a managed currency – of course it can be done, there is a large experience in this world of countries that are worked upon a managed currency – but the difficulties in the way are enormous, and very much greater in the case of an English dependency than in the case of any other country.” He defined a managed currency as “one in which the Government controls the currency. In an automatic currency the Government does not interfere at all. It is simply the agent to certify to the fineness and the quality and the weight of the coin.”
According to Macdonald, silver as a token currency in England was different from silver as a token currency in India with a nominally gold standard. This was because convertibility was safe and it is comparatively small in proportion. Moreover, in England, “so much business is carried on without the intervention of coin at all ,whereas in India that is not the state of things.”
Fowler: Why should not a token currency be as safe and good for use within India as it is for England?
Macdonald: If India had no foreign trade it would be perfectly good there.
Fowler: It would?
Macdonald: Yes.
Fowler: It is the foreign trade that you have in view?
Macdonald: The foreign trade entirely. The rupee is good enough for the internal trade in India, but it is absolutely worthless for foreign trade, under existing circumstances.
Fowler: You regard it as very important to establish confidence?
Macdonald: Yes. With all currency systems confidence is half the battle.
Fowler: If confidence were established with the rupee at either 1s., or 1s. 2d., or 1s 4d., and continuity and permanence were secured, you would be satisfied with that system?
Macdonald: Yes, but I do not see how confidence is to be established by anything ubt a thoroughgoing and sound system of currency.
Fowler: If the public knew that a sovereign would command 15 rupees and that 15 rupees would command a sovereign, would that establish confidence?
Macdonald: If they had that assurance and could count upon it, yes; but I do not see how they are to get it.
Fowler: You would consider that the British Government and the Indian Government might ensure it?
Macdonald: at a very great cost they might.
Fowler: What would the cost be? You said just now that the gold would only be used for exchange purposes?
Macdonald: Yes, chiefly for exchange purposes.
Fowler: Where is the great cost?
Macdonald: I think that, if the present system were continued, it would be absolutely essential for the Government of India to establish an Indian bank, with the sole object of managing the currency; and that the Indian Government would practically have to hold the gold reserve of the trade of India; and that, in consequence of so large a proportion of the currency being in silver, the gold reserve necessary to be held by the bank to meet the fluctuations would be very large indeed.
Sir F. Mowat: Because of the large amount of business done in silver?
Macdonald: No, but because of the fluctuations of the foreign trade, for the settlement of the balance of trade. It would be necessary to hold a gold reserve which was equal to the drain at any one time. As long as the adverse balance was against India, the Government would have to see it through to establish confidence, and, if there was any question about their gold reserve being insufficient, of course confidence would be at once broken.
Thus, Hambro’s central bank proposal had some support from Macdonald. But he said that it would be at a high cost.
Everard Hambro’s proposal
The Fowler Committee did not comment on having a separate institution, along the lines of the Bank of England. That was perhaps because it fell outside its terms of reference. Sir Everard Hambro’s central bank proposal was made in a separate note appended to the Fowler Report. It is worth reproducing in full:
“Although I am aware that the question of the banking facilities of India was not referred to the Committee, I venture to all special attention to the first part of paragraph 22 where it is pointed out that they have not of late years kept pace with the increasing trade, and, further, to draw attention to the fact that it has been considered wise in Europe to entrust the carrying out of currency laws to banks established or strengthened for that purpose.”
“In my opinion, a strong bank, properly constituted, would be powerful assistant in giving effect to any regulation having the convertibility of the rupee in view, and that, working under proper currency regulations, such a bank would be likely to carry them out in a more effective way, and in a manner more in harmony with the trade wants of the country, than any Government Department, however well administered, could possibly do.”
“I venture to call attention to this point because I believe that the success of the recommendations of the Committee, if adopted, will very much depend on the banking wants of the country being assisted in times of pressure, and curtailed in times of slackness; and this, in my opinion, could only be done by the establishment of some institution having ample facilities at its disposal, and framed on somewhat similar lines to those of either the Bank of England or the Bank of France.”
Note to the Fowler Report, 1899
This was the first known public call for establishing a central bank after 1871. At that time, the matter was closed for want of sufficient number of qualified persons to be on its Board. Though Hambro’s central bank proposal came from a lone member of the Committee, the Secretary of State for India through a despatch dated 25 July 1899, sought the views of the Government of India.
Government of India reply
The Government of India supported Hambro’s central bank proposal, and wrote to the Secretary of State for India as follows:
“There can, we think, be no question that, for the purpose of the effective maintenance of the gold standard, a bank with a large sterling capital, and constituted on the model of the Bank of England or Bank of France, would be a very powerful support to the State. Such a Bank would be better able to measure and deal with the requirements of trade for foreign remittances than any Government, and it would have the capacity, which a Government Department cannot be expected to possess, of preventing unnecessary export of gold without hampering trade. An institution of the kind would also be most effective in promoting the circulation of gold. It would again be an effective agent for securing an increased circulation of fiduciary money ; and we might find it possible to entrust it with the management of the Government Paper Currency.”
Proposed merger of the Presidency Banks
The Government of India took into account the long association of the three Presidency Banks with currency and government banking. It, therefore, preferred considering their merger first before handing over central banking functions to it. Such an institution, it added, was to be constituted on a sterling basis, and not on rupee basis.
But, considering the issue of amalgamation before implementing Hambro’s central bank proposal, took the discussion in a different direction. Various questions had to be considered whether banking had kept pace with the growth of trade and the narrow basis on which trade was conducted. The Local Governments, banks and Chambers of Commerce unanimously expressed difficulty in deploying resources during the slack season and in raising resources during the busy season, necessitating temporary accommodation. One proposal was permission to borrow in London. A merged bank, instead of by three separate ones, would greatly facilitate this.
The Bombay Chamber of Commerce and the Lieutenant-Governor of Bengal opposed the amalgamation of the three banks. This was key to implementing Hambro’s central bank proposal. The former felt that India which then included Burma was too big for one central bank. It also felt that the city where the merged entity would be headquartered would have an unfair advantage over the other two. Thinking along these lines, the latter felt that the huge monopoly that would result by a merger was not in public interest. He also emphasised the role of ‘local knowledge and experience’ in dispensing credit.
The Secretary of State considered Hambro’s central bank proposal in January 1900 and raised a few objections. The matter remained pending for consideration of the new Finance Member, Sir Edward Law.
Sir Edward Law on the proposal
Sir Edward Law was Finance Member in the Viceroy’s Council from 1900 to 1905. He was earlier an Army major in India for three years, in the 1870s. After Law took over as the Finance Member, he discussed the matter with the three banks, the exchange banks, and leading merchants. Thereafter, he expressed his views on Hambro’s central bank proposal in a long winding fashion:
“…the conclusions which have forced themselves on my mind are that there is under present conditions no real necessity for the foundation of such a bank in the interests of trade, and that although, in my opinion, the existence of a strong bank with abundant resources would be useful in connection with possible exchange difficulties, and . . . from other points of view, be convenient to Government, the direct cost of its establishment would be greater than I venture to recommend for acceptance.”
“I am still of opinion that if practical difficulties could be overcome, it would be distinctly advisable to establish such a bank so as to relieve Government of present heavy responsibilities and to secure the advantages arising from the control of the banking system of a country, by a solid, powerful, Central Institution.”
In short, Law was for Hambro’s central bank proposal, but found it impracticable. The Reserve Bank of India’s official history (Volume 1) compared Law’s observations to the style of Sir Roger de Coverley, the 19th century fictional character of Joseph Addison, created for The Spectator magazine.
The objections to Hambro’s central bank proposal were for many reasons. First, a central bank was unnecessary to assist trade. Second, it was unprofitable for assist in exchange difficulties. A third difficulty was ‘securing a thoroughly suitable Board of Directors having the necessary leisure to devote to the business.’ Law thus concluded that the idea of a central bank was premature.
Views of the Secretary of State
The Government of India, in its despatch dated June 13, 1901, to the Secretary of State, gave its final view. It agreed ‘that sufficiently strong reasons have not been shown for carrying out the amalgamation scheme at the present time.’ It, however, added:
“… the scheme should be held in abeyance, although we desire at the same time to record our deliberate opinion that it would be distinctly advisable, if practicable, to establish a Central Bank in India …”
Accepting this view, the Secretary of State replied on 26 July 1901 that “… this object may be kept in view and that the scheme may be revived, whenever there is a probability of its being successfully carried out.”
Thus, the deliberations and correspondence spread over two years proved to be infructuous. Hambro’s central bank proposal was dropped.
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