My first lessons in central banking

Though I joined University College, Trivandrum, in 1978, for my BA (Economics), I shifted to the Government Arts College, Thycaud, Trivandrum, within a few months. This was for two reasons. First, Arts College offered Mathematics as a subsidiary as against History in University College. Second, Banking System was one of the optional papers at the Arts College, as against some other subject in University College.

The syllabus for BA Economics, I believe, was set by a Committee chaired by Dr. K.N. Raj, who had just a few years earlier helped establish the Centre for Development Studies in Trivandrum. Dr Raj had started his career with a brief stint with the Reserve Bank of India, where he helped the Bank compute its first Balance of Payments data. He was also a member of the Central Board of the Reserve Bank of India from April 1979 to November 1983, when the Governors of the Bank were Dr. I.G. Patel and Dr. Manmohan Singh.

It might be of interest to know what the textbooks for banking and central banking were in the 1970s. In a future post, I will write about what my suggestions for a central banking curriculum would be like.

Sayers’s Modern Banking

An introduction to banking was offered by R.S. Sayers’s Modern Banking. Sayers used to teach at Oxford. The book was first published in 1937, and the edition we had in hand was of the late 60s. Already over ten years old, the book I thought was a bit outdated and certain portions not relevant to the Indian situation. It, nevertheless, covered the basics of money supply, commercial banking, distribution of assets and deposits of commercial banks, central banking, discount market, bank rate, international monetary system, stock market, government financial policy, and banking in new countries. Maybe one reason the book was selected was that it also had a separate chapter discussing whether the banking system ought to be nationalised.

Banking Systems by Benjamin Beckhart

A second book was Banking Systems, edited by Benjamin Beckhart, a Professor of Banking at Columbia University. The first edition had come out in 1954, and was a standard book on Comparative Banking all through the 1950s, 60s, and most of 70s. A revised Indian edition was brought out in the late 1960s, maybe 1966, under the Joint Indian-American Standard Works Programme. Several Reserve Bank of India officials contributed to preparing an addendum for each chapter. Going by the acknowledgements in Beckhart’s Preface to the Indian edition, this included M. Narasimham (later Governor), who was then a Deputy Economic Adviser with the Reserve Bank, who coordinated the editorial work. The others were D.G. Borkar, J.M. Chona (Jag Chona, he was with the Rural Planning and Credit Department as an Adviser when I joined it in 1994), S.R.K. Rao, and K.R. Visvanathan.

The book had chapters on the banking systems of 16 countries, Australia, Brazil, Canada, Cuba, France, West Germany, India, Italy, Japan, Mexico, Netherlands, Sweden, Switzerland, Union of Soviet Socialist Republics, United Kingdom of Great Britain and Northern Ireland, and the United States. All that remained in memory was, apart from India, that of USA, UK, Soviet Union, and China. But, by the late 70s, the book had already started becoming outdated.

The Chapter on India was written by Dr. B.K. Madan, who till early 50s was a Deputy Governor at the Reserve Bank of India and at the time of publication, Executive Director, International Monetary Fund, Washington, D.C. He had acknowledged two of his junior colleagues who assisted him in drafting the article, Dr. P.J.J. Pinto and M. Narasimham, who went on to prepared the addendum for the Indian edition.

The College library did not have a copy, nor did the British Library or the University Library. Or perhaps the copies available were only for reference. It was also not available for sale. On my father’s suggestion, I checked up with his own teacher, Late Prof. V.R. Pillai, who had studied Economics at LSE, and taught at University College for decades, finally becoming its Principal for a short period. In the 1970s, already retired, he was my father’s occasional bridge partner. Luckily, he had a copy, which he was only too happy to lend. I would pick up a second hand copy of the book many years later, after joining the Reserve Bank, from a road-side second hand book dealer for Rs. 10!

Central Banking by M.H. de Kock

The main text book on Central Banking was by Dr. M.H. de Kock (1898-1976). He was a longstanding and legendary Governor of the South African Reserve Bank, from 1945 to 1972. Among Governors all with long tenures averaging over ten, de Kock was the third Governor, and had the longest stint of 17 years, having already served as Deputy Governor for 13 years prior to that, and going on to serve another eight years on the Bank’s board after that, including one year as Chairman. Written in 1939, when de Kock was Deputy Governor, the book was revised several times, the third edition coming out in 1954. A fourth edition came out after his retirement, in 1974, which was what I managed to borrow from the British Library, Trivandrum. There was an Indian reprint also available many years back and, I believe, translations in Hindi and Gujarati also had come out.

“Central Banking” was one of the most lucid books on banking that I had ever read. I was to re-read the book after joining the Reserve Bank of India, again keeping at as a reference book while being a Member of Faculty at the Bank’s Staff College. The book was one of the core texts that I used for my lectures on central banking.

While writing this, I do not have access to the fourth edition, but on perusing the third edition, I find that the structure was not very different. It is worth recounting how logically it progresses from the basics and an overview of history:

  • The rise of central banking: It discusses the evolution of central banking, starting with a history of the Bank of England and other central banks
  • Central Bank as bank of issue: Evolution of issue function, and so on
  • Central Bank as the government’s banker, agent and adviser
  • Central Bank as the custodian of the cash reserves of the commercial banks
  • Central Bank as the custodian of the nation’s reserves of international currency
  • Central Bank as the bank of rediscount and the lender of last resort
  • Central Bank as bank of central clearance, settlement and transfer
  • Central Bank as the controller of credit
  • Discount-rate policy
  • Open Market Operations
  • Other methods of credit control
  • Exchange control
  • Fiscal policy and compensatory government action – control of investment
  • Recent revival of monetary policy
  • The IMF and the IBRD
  • Constitution and administration of central banks

One notable feature in this is the absence of banking regulation and supervision, and also of financial stability which is a much more recent addition to the concerns of central banks. The book is, now doubt, outdated as a textbook, but continues to provide a useful introduction to the evolution of central banks and where central banks stood especially for an emerging countries like South Africa for most of the 20th century.

On a visit to Pretoria in October 2019, lecturing on Corporate Governance for the IMF, I shared with my South African counterparts my experience of having studied de Kock’s Central Banking as a textbook, and how I thoroughly enjoyed the book. I was informed that his son, Dr. G.P.C. de Kock, also served as Governor of the South African Reserve Bank, from 1981 to 1989.

Report of the Banking Commission

Not surprisingly, for want of better books on Indian banking, an introduction to the subject was provided by a Committee report. The Banking Commission was chaired by R.G. Saraiya, who was a member of the Reserve Bank Central Board for many years. As I would come to learn many years later, he was the son-in-law of Sir Purshottamdas Thakurdas, long-time director on the Board of Reserve Bank from day one, and in whose name there is a very important lecture series organized by the Indian Merchants Chamber. More on him in a future post.

The other members of the Banking Commission were Bhabatosh Dutta, eminent Professor of Economics from Calcutta, N. Ramanand Rao (Managing Director of State Bank of India and first custodian (later known as CMD) of Central Bank of India, then the second biggest bank), and V.G. Pendharkar, then Adviser and later Executive Director of the Reserve Bank of India. Pendharkar was the Member Secretary. Some of them changed as they demitted their office.

Set up in the same year as bank nationalisation, the Banking Commission had a very wide mandate, with the terms of reference going to ten points, that included banking structure, coverage, operating methods and procedures and management policies, cost and capital structure and adequacy of surplus and reserves, manpower planning including recruitment and training, cooperative banking, non-banking financial intermediaries, indigenous banking agencies, review of existing laws, and any other matter. Today, each of these items would have required a separate Committee. It is no surprise therefore that, apart from relying on earlier Study Group reports including the five appointed by the National Credit Council that had submitted their reports in the same year, the Commission set up the following five sub-groups to deal with different matters:

  • Study Group on Banking Costs (Chairman: Rameshwar Thakur)
  • Study Group to Review Legislation Affecting Banking (P.V. Rajamannar)
  • Study Group on Indigenous Bankers (H.T. Parekh)
  • Study Group on Bank Procedures (D.R. Joshi)
  • Study Group on Non-Banking Financial Intermediaries (Bhabatosh Datta)

All of them submitted their reports in 1971, and the Banking Commission proper submitted its report in 1972.

This report was also not available almost anywhere. Even Prof. V.R. Pillai did not have a copy. Maybe I was searching at the wrong places. My search at the University Library showed the book in the catalogue, but could not be located anywhere. After a long period of search, one of the librarians one day informed me about several books kept unsegregated on the third floor of the library and advised me to search there. That was finally where I found the book. The book is not an easy read, especially for an undergraduate. I remember skipping many dull portions. But, it provided a very comprehensive view of Indian banking as it existed then, like no other book did. It remains a forgotten report. But, it was my first experience of reading a Committee report. The way the report was structured and drafted is an object lesson for anyone approaching the work of a Committee. And, I think, it stood me in good stead in my over three decades with the Reserve Bank of India, when I was associated with around 30 Committees in various capacities, from member of secretariat to member, member secretary, and Chairman.

Other references

Among other references, there were Walter Bagehot’s Lombard Street, Crowther’s An Outline of Money, and Hawtrey’s The Art of Central Banking, the first two authors having been former editors of The Economist. I remember perusing all the three books, which were available in my College Library, but read with some interest only Bagehot’s Lombard Street. I could make better sense of the book only 20 years later, in the late 90s, when Wiley had republished the book as part of its Classics series, in a bright scarlet and cream cover. It will always remain essential reading for any central banker. And, of course, the book deserves a separate post — after a re-reading!.

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