The defects and weakness of the national system today are due to the isolation of, and lack of cohesion among, the great number of scattered units.[1]
In the aftermath of the Financial Panic of 1907, an article on ‘The Need of a Central Bank’ included the above sentence, and similar opinions are what led the USA to consider establishing a Central Bank. Eventually, in the first half of the twentieth century, most of the modern central banks we see in the world today were established. The Reserve Bank of India (RBI) being one of those.
However the context in which the RBI was established was completely different than those elsewhere. The major difference being India was not independent then. It is commonly inferred that the establishment of the RBI in the pre-independence era was the beginning of the decolonization of India, but archives of the Central Bank tell us a different story of how it was a crafty move by which the colonizers could further strengthen their hold over the subcontinent.
While the history of setting up a bank with the features of a Central Bank dates to 1773, the first instance of setting up a banking institution with these features happened as a result of the consolidation of the Presidency Banks of Bengal, Bombay and Madras in 1921. The Imperial Bank of India, as it was called, was founded because of a proposal made by John Maynard Keynes (Father of Macroeconomics) in 1913.
Although the Imperial Bank was referred to as the State Bank, a particularly important function of currency management still rested with the British Government. The discussion of a full-fledged Central Bank like the Bank of England started only in 1926 with the proposal of setting up the RBI (a recommendation of the Hilton Young Commission). There was a strong opposition to this proposal by many Indian nationalists and industrialists, primarily because they wanted a central bank, if any, to be independent of control from England and serve the needs of Indians first. While many arguments in opposition to the proposed Central Bank spurred up during this period, a prominent face amongst those was that of Purshutomdas Thakur, an Indian businessman. In his dissent towards the propositions of the report he stood firmly on maintaining the authority of the Imperial Bank, which was playing an essential role of resource mobilization in different parts of the country at that time. Along with him, the other capitalists were in strong favour of the bank being controlled by Indian representatives.
Although the passage of time led to the softening of the positions held by the Indian capitalists, the then government explicitly wanted the control of the financial institution with the Whitehall (British administration). The British Government, just prior to the establishment of the RBI, maintained its stand of separating the financial from the political sphere, which increasingly became a concern for them during the Round Table Conferences in the early 1930s. This need of separation came from their interest in preserving their business in the Indian subcontinent. Eventually, after a lot of deliberations and backlashes from the Indian politicians as well, the Reserve Bank of India Bill was introduced in the Legislative Assembly by the Finance Minister, Sir George Schuster in September 1933. The Bill was supposedly rushed through the Assembly till its assent in December 1933, and further approval by the Council of State in February 1934.
The Act which consisted of 61 Sections with 242 clauses and 5 Schedules faced a lot of criticism which was evident through the amendments proposed by many- the 373 amendments tabled by Dr Ziauddin Ahmad being the largest. Given the backdrop of the failure of state-owned banks during the first World War and the lack of control over private capital, it was decided that the unlike most Central Banks, RBI would follow a mixed pattern of ownership. Along with such other clauses pertaining to the operating hierarchy in the bank, the one that ushered the phase of central banking in India dealt with functions of the bank: (a) to serve as banker to Government, (b) to issue notes, (c) to serve as banker to other banks, and (d) to maintain the exchange ratio. Till date, these have been the principal functions of the RBI. However, the post-independence era saw a tremendous change in the operation of the bank; an important one being - Financial access to all Indians. Thus, began the phase of post-independence banking in India.
- Manasi Kutwal
manasikutwal53@gmail.com
[1] The Need of a Central Bank, George E Roberts, The Annals of the American Academy of Political and Social Science, 1908 2 RBI History Volume I, Chapter 1, https://www.rbi.org.in/scripts/RHvol-1.aspx