The question of the amalgamation of the Presidency Banks was not taken up again till 1898, when several witnesses before the Indian Currency Committee (Fowler Committee) drew attention to the inadequate banking facilities in India and the sharp fluctuations in the rate of discount. A few favoured the amalgamation of the Presidency Banks into a ‘State Bank’.
One witness, Mr. A. de Rothschild, outlined a scheme for the creation, in India, of a bank with privileges similar to those of the Bank of England, by absorbing the Presidency Banks. It was to have a capital, the same as that of the Bank of England, viz., £14 million, to be held partly in gold and partly in sterling securities. The bank was to have the right to issue notes. Government were to use the bank and its branches as their Treasury. The proposed bank was not to conduct any foreign exchange transactions. The bank was to make advances to the Indian Government, when necessary, against ‘deficiency’ bills. The management of the bank was to be vested in a Board comprising representatives of merchants and bankers and also those of Government. Government representation was regarded as necessary to ensure that the policy of the bank and that of Government were in ‘absolute harmony’. It is not known whether any consideration was given to this proposal.
One of the members of the Fowler Committee, Mr. Everard Hambro, urged the establishment of a strong bank in India, despite the fact that the question of banking facilities in India had not been referred to the Fowler Committee. Mr. Hambro stated that such a bank would be able to carry out the currency regulations more effectively and more in harmony with the trade needs of the country than any Government Department could possibly do, and, that, moreover, such a bank alone with ample facilities at its disposal, would be in a position to expand the supply of capital in times of pressure and contract it in times of slackness.
In a despatch dated July 25, 1899, the Secretary of State invited the attention of the Government of India particularly to ‘the important recommendation with regard to the improvement and concentration of banking facilities contained in the separate report of Mr. Hambro’. The Government of India, who, till 1871, had doubted the possibility of inducing really capable persons to come to India to manage such an institution, gave their whole-hearted support to Mr. Hambro’s suggestion. Such a bank, they stated, would be a powerful support to the State for effective maintenance of the gold standard and it could be entrusted with the management of Government paper currency. The Government of India, however, felt that as the Presidency Banks had given good service to the country, Government owed them full consideration and therefore an attempt should be made in the first instance ‘to absorb the three existing banks in one strong establishment, constituted on a sterling* basis’. Thus, at this stage, the object was not mere amalgamation, but the entrusting of central banking functions to the new institution. It was thought necessary to elicit the views of the Presidency Banks and the business community on the subject.
The question of amalgamation was examined in a wider context, viz., (i) whether banking resources in India had kept pace with the growth of trade in India, and (ii) whether the basis on which the entire trade was carried on was not narrow. The discussions with the representatives of Local Governments, banks and Chambers of Commerce which followed revealed ‘a remarkable unanimity of opinion’ that though the banks found it difficult to employ their resources fully during the slack season, the banking resources were found inadequate in the busy season and some temporary accommodation was absolutely necessary. One of the measures suggested for temporary accommodation was to allow the banks to borrow money in London, against the pledge of securities. The Government of India, in their despatch dated January 18, 1900 to the Secretary of State, stated that though it was desirable to have facilities for temporary expansion of resources, it was actually to an increase in the ‘ permanent capital ’ of the bank that trade had ‘a right to look primarily for adequate relief ’. Also, it would be more difficult, in their view, ‘to follow the operations of three banks than of a single institution’.
Amalgamation was, however, opposed, among others, by the Bombay Chamber of Commerce and the Lieutenant-Governor of Bengal. The Chamber considered India and Burma too vast to be effectively served by one central bank. Also, the Presidency town where such a bank would have its seat of management would have an advantage over the other two. The Lieutenant-Governor’s thinking was on the same lines. He added that a huge monopoly was not in the public interest, and that credit was ‘a matter of local knowledge and experience’.
About a year later, in the winter of 1900-01, the matter was again discussed by Sir Edward Law, the Finance Member, with the Presidency Banks, exchange banks and leading merchants. He expressed views akin to those of Sir Roger de Coverley:
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.
One of the ‘very great practical difficulties’ Sir Edward Law had in mind was ‘ securing a thoroughly suitable Board of Directors having the necessary leisure to devote to the business’.
The Government of India, in their despatch dated June 13, 1901 to the Secretary of State, stated that they accepted Sir Edward Law’s ‘ final deduction that sufficiently strong reasons have not been shown for carrying out the amalgamation scheme at the present time’. The despatch further said:
We are therefore regretfully compelled to advise that 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 . . . .
The Secretary of State while accepting this view reluctantly, added in the despatch of July
26, 1901, ‘I request 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, serious efforts made by Government over a period of about two years to amalgamate the three Presidency Banks proved infructuous.
- A bank on sterling basis was preferred because it was felt that such a bank would be in a better position to command confidence and attract capital than one on a rupee basis.
Chamberlain Commission and Question of State/Central Bank
The question of absorption of the three Presidency Banks into a central bank was thereafter lost to view, so far as Government were concerned. Even when the Royal Commission on Indian Finance and Currency (Chamberlain Commission) was appointed in 1913 to study and report on certain aspects of the working of the currency and exchange system, the question of the desirability of setting up a central bank was not specifically referred to it. However, at a very early stage of the enquiry, the Commission felt that it could not possibly deal adequately with the subjects referred to it, unless it considered the question of establishment of a State or central bank also. As no concrete proposals regarding a State or central bank came forth from the witnesses and in the absence of even general agreement among the witnesses as to what was implied by ‘a State or Central Bank’, the Commission requested two of its members, Sir Earnest Cable and Mr. J. M. Keynes, to prepare a detailed scheme for its consideration. Mr. Keynes submitted to the Commission his memorandum on ‘Proposals for the establishment of a State Bank in India’ after collaboration with Sir Ernest Cable. Another memorandum on ‘Proposals for the establishment of a State Bank for India’ was prepared by Mr. L. Abrahams, Assistant under Secretary of State for India, with the concurrence of the Secretary of State.
Keynes’s Proposals for a State Bank
According to Mr. Keynes, the ‘nucleus’ of the new bank was ‘to be obtained by the amalgamation of the capital and reserves of the three Presidency Banks’. He named the proposed bank ‘the Imperial Bank of India’. Government subscription to the capital, he considered, was not necessary, as it would ‘complicate rather than simplify the relations between the Government and the shareholders’. As regards control, the ‘supreme direction’ of the bank was to be vested in a Central Board, consisting of the Governor of the bank (who was to be the Chairman), the Deputy Governor, a representative of Government and three or more assessors. The assessors were to be the Managers, or their deputies, of the Presidency Head Offices or of other Head Offices. The assessors were to have no vote. The Governor was to be appointed by the Monarch, on the Secretary of State’s recommendation, while the Deputy Governor, the Government representative and the Managers of the Presidency Head Offices were to be appointed by the Viceroy; the appointment of the Managers of Presidency Head Offices was to be subject to the approval of the Presidency Boards. The Presidency Boards were to consist of the Manager (who was to be the Chairman and so have the casting vote), Deputy Manager, a representative of the Local Government and three or four non-official members.
The ‘State Bank’ proposed by Mr. Keynes was intended to put a little more responsibility on Government, while at the same time providing them with a ‘ thoroughly satisfactory machinery ’ for the discharge of the responsibility. To quote:
It cannot be maintained that some responsibility for banking, seeing that it is in fact undertaken by nearly all civilised Governments, is inherently undesirable. The undesirable features in the Government’s present degree of responsibility for these things in India are rather due to the lack of suitable machinery.
It seems clear that Government cannot entrust any of its existing duties to private hands. It has also become plain that, whether a State Bank is established or not, Government, so far from relinquishing old duties, must bend itself to new ones.
The choice lies between a good deal of responsibility without thoroughly satisfactory machinery for the discharge of it; and a little more responsibility with such a machinery. The balance of advantage is with the second alternative.
The Secretary of State would be behind the Bank, but his authority would only come into play on rare and important occasions. On important changes of policy and on alterations of clauses in the Bank Act, the Secretary of State would have the last word and with it the responsibility . . . . But for the ordinary daily work of the Bank he would necessarily disclaim responsibility to a far completer extent than is at present possible in the case of
any of the financial business now conducted by the Government.
The Bank, though ultimately dependent on the State, would lie altogether outside the ordinary Government machine; and its executive officers would be free, on the one hand, from the administrative interference of Government and free also, on the other hand, from too much pressure on the part of the shareholders, in cases where this might run counter to the general interest.
The main functions of the proposed bank included:
- (i) same functions as performed by the Presidency Banks, with relaxation of some restrictions;
- (ii) management of note issue;
- (iii) management of public debt in India;
- (iv) effecting remittance for the Secretary of State through the London Office; and (v) acceptance of payments and making of disbursements on behalf of Government at all places where the bank had a branch.
As Government banker, the bank was to hold free of interest all Government balances at Reserve Treasuries and in London with the exception of (i) £1 million to be held as emergency reserve by the Government in India, and (ii) balances held directly in the name of the Secretary of State at the Bank of England.
The management of the Mint and the custody of the Gold Standard Reserve were not to be entrusted to the bank.
Mr. Keynes also recommended in his scheme a proportional reserve system (though he did not use this expression) of a flexible type, for regulation of the note issue. As regards its relations with other banks, the bank was intended to do rediscount business ‘to the greatest possible extent’. The ‘State Bank’ proposed by Mr. Keynes was thus to perform central banking as well as commercial banking functions.
Report by Shelley Kasli