The legislation to set up the Reserve Bank of India was
first introduced in January 1927, but the enactment became an accomplished fact
on March 1934. There is, however, a long history, which has been traced to as
far back as 1773, when Warren Hasting; Governor of Bengal; placed before the
board of revenue his ‘Plan’ for a ‘General Bank in Bengal and Bihar’. The plan
for the proposed bank was approved by the Board, with some changes, and the
bank was set up in April 1773, but it proved to be only a short-lived
experiment. On April 13, 1774, the Court of Directors of the East India Company
wrote to the Governor-General in Council recommending certain changes in
respect of the bank. Hastings and Barwell opposed the changes, but they were
overruled by their other three colleagues, Francis, Monson and Clavering, who
succeeded in getting passed a resolution on February 15, 1775, providing for
the closure of the bank ; however, the managers were given five or six months
to wind up the bank’s affairs.
It must be mentioned that in India, as in many other
countries, matters relating to currency and exchange, such as the question of
the monetary standard and the exchange rate, received far more attention than
the subject of banking, especially central banking. Also, for long, the
interconnection between currency and banking does not appear to have been grasped
widely. The schemes for such a banking establishment drawn up from time to time
reflected, to some extent, the gradual evolution of central banking which had
been taking place in other countries during those years. Though it cannot be
said precisely when the term ‘central banking’ originated, history shows that
the two oldest functions of a central bank, viz., those of ‘note issue’ and
‘banker to Government’, were carried out in several countries by either an
existing bank or a new one set up for the purpose, even before such a bank came
to be known as the ‘central bank’. These banks, which were called ‘banks of
issue’, were doing general banking business as well. A clearer concept of
central banking later emerged, and central banking came to be regarded as a
special category of business, quite distinct from commercial banking.
In 1836, a proposal for a ‘Great Banking Establishment for British India’ was submitted to the
Court of Directors of the East India Company by a body of merchants in England having
trade relations with India. The memorandum stated that the Bank of Bengal –
which was the only Presidency Bank in existence at that time – was prevented
from being as efficient and as useful ‘as a Bank ought to be and might be
made’, because of its ‘immediate connection’ with Government. ‘The Great
Banking Establishment’, the merchants proposed, was to be set up under an Act
of Parliament and was to have adequate resources. The establishment of such a
bank would, according to the memorandum, facilitate ‘the employment of a
portion of the redundant capital of this country (England) for the general
improvement of Indian commerce, giving stability to the monetary system of
India . . .’. The bank was to transact public business at a moderate charge,
manage public debt and facilitate revenue receipt and expenditure. During the
end of nineteenth and beginning of twentieth century, it was proposed at that
time to amalgamate the three Presidency Banks into one strong institution; the
central banking functions envisaged for the new institution were not only those
of note issue and banker to Government, as in the earlier proposals, but also
maintenance of the gold standard, promoting gold circulation as well as
measuring and dealing with requirements of trade for foreign remittances. The new
bank was to perform commercial banking functions as well, as the Presidency
Banks had been doing till then.
In 1870, Mr.
Ellis, Member of the Viceroy’s Executive Council, suggested the setting up of
‘one State Bank for India’ under complete Government control, with branches at
the Presidency towns, generally on the model of the Bank of France. The
Government of India, at about that time wrote: ‘We look upon the establishment of a State Bank in India as a matter of
great uncertainty, perhaps of impossibility’. They took the view that it
might not be possible to induce really able and experienced men to come to
India and manage such a bank.
In the early twenties of this century, central banking
came to be treated as a separate class of business, distinct from commercial
banking; it was considered that a single institution could not suitably perform
both types of functions. The Hilton Young Commission was appointed in August
2005 ‘to examine and report on the Indian
exchange and currency system and practice; to consider whether any
modifications are desirable in the interests of India; and to make
recommendations’. Thus, in 1926, the Hilton Young Commission recommended
the setting up of an institution the Reserve Bank of India – which was to be
entrusted with pure central banking functions; it was to take over from the
Imperial Bank such of the central banking functions as that institution had
been performing till then, and the Imperial Bank was to be left free to do only
commercial banking business. The Gold Standard and Reserve Bank of India Bill, to
implement the recommendations of the Hilton Young Commission, was introduced in
the Legislative Assembly on January 25, 1927. The Bank was to take over the
management of the currency from the Governor-General in Council and was to
carry on the business of banking in accordance with the provisions of the Act.
The Bill was referred to a Joint Committee of 28 members, in March 1927. The Report of the Joint Committee was
not unanimous. Of the twenty-five members who signed the Report, seventeen
including the Finance Member Sir Basil Blackett, appended minutes of dissent,
while three members stated that they would move amendments in the House on the points
on which they disagreed. The minute of dissent signed by the Finance Member and
six others was mainly in respect of the controversial clauses relating to the
ownership of the Bank and the composition and constitution of the Board. They,
however, made it clear that they had confined their observations only to
clauses to which they attached ‘special importance’, and had refrained from
commenting on other provisions with which also they were not in entire
agreement. Three other members in separate minutes of dissent broadly supported
the Finance Member in respect of the controversial clauses.
In the
Legislative Assembly on August 29, 1927, on representation it was reported by
the Joint Committee that to be taken into consideration, that the Finance
Member stated there was ‘practical unanimity’ between Him and the Committee, as
to what
the Reserve Bank was to do. The differences of opinion were in regard
to the constitution of the Bank and the method of constituting its Directorate.
Sir Basil also emphasized that while the Joint Committee opposed a
shareholders’ bank, it shared the Government’s view that the Bank should be
completely independent of Government.
So the main controversy on proposals for a central bank
related to the questions of ownership – State versus private ownership and management
of such a bank. The more interesting thing about this controversy,
which had an element of shadow boxing about it, was that both the schools of
thought desired ‘independence’ of the bank from Government control in its
day-to-day working. It was more a matter of difference of approach with regard
to the method of selection of the Directors of the Governing Board, an element
of nomination by Government being present in all the schemes. Even in the
proposals where the whole of the capital was to be provided by Government, not
all the Directors were to be nominated by Government: there was provision for
an element of election or selection. The consensus among the Indian leaders was
against any scheme of selection of the Directorate by private shareholders.
Some other arrangements, such as selection by Chambers of Commerce and the
Legislature, were proposed. But the active participation
of the Legislature in the selection of the Board had its own snags. These
arrangements were not acceptable to the British Government in India, who
preferred to keep the Legislature out of the scheme and retain residuary powers
with the Governor-General. In the end, this view prevailed. Anyway, this
controversy was responsible for considerable delay in the establishment of the
Bank.
In January 1928,
the Government of India published a new Gold Standard and Reserve Bank Bill.
The Bill broadly followed the 1927 Bill, as amended by the Joint Committee, important
exceptions being the provisions relating to the ownership of the Bank and the constitution
and composition of the Board. As regards the ownership of the Bank, the new
Bill, like the original 1927 Bill, provided for a shareholders’ bank.
On February 6,
1929, when a question was asked in the Legislative Assembly whether Government
intended to bring before the Legislature a Reserve Bank Bill in the near
future, Government’s reply was in the negative. Government were convinced that
a central bank was in the country’s interest, but they could only proceed
subject to their being satisfied as to two conditions : first; that the organisation of the Bank is to be securely settled
on sound lines ; second; that there
is an adequate measure of general support among the representatives of public
opinion for the proposals.
From 1930-31
onwards, the question of establishing a Reserve Bank for India received fresh
impetus, in connection with the consideration of constitutional reforms for the
country. In their dispatch dated September 20, 1930 on proposals for constitutional
reforms the Government of India stated in unambiguous terms that
‘the formation of a Reserve Bank on sound
lines was in their view to be a condition precedent to any transfer of
financial responsibility from the agents of Parliament to a minister answerable
to the Indian Legislature’. - O. P.
Gupta, op. cit.
Another
development, meanwhile, was the submission of the Report of the Indian Central
Banking Enquiry Committee (1931) which also strongly recommended the
establishment of a Reserve Bank ‘at the earliest possible date’. The foreign
experts advising the Committee endorsed the recommendation observing:
‘The paramount interests for the country
involved in the establishment, within the shortest time possible, of such an
independent institution, free from political influence, can hardly be
over-estimated’.
Meanwhile, a
Departmental Committee was appointed in London by the India Office, with Mr. R.
A. Mant as the Chairman, named India Office Committee, to advice upon the
nature of Reserve Bank legislation. The Committee was against any Member of the
Legislature or any officer of the Government from becoming a member of the
Board. As regards appointing shareholders’ Directors, in the Committee’s view,
neither the 1927 nor the 1928 Bill would secure the desired objectives. The
India Office Committee’s Report was followed up by the appointment in London of
another committee to draft a Reserve Bank Bill. This ‘London Committee’
comprised authorities on central banking, financial administrators from India
and Great Britain, Members of the Indian Legislature and representatives of the
business community. The Bill was referred to a Joint Select Committee for the
reason not only that a precedent had been established in the case of the 1927
Bill but also that the London Committee desired further consideration being
given in India to certain vital issues like the initial proportion of gold and
sterling assets to be held against the note issue, the valuation of the gold
reserves to be taken over by the Reserve Bank from Government, the power of the
Bank to take part in open market operations, the relations of the Reserve Bank
with the Imperial Bank of India and the compensation to be paid to the Imperial
Bank for the loss of some of its functions.
The Reserve Bank
of India Bill, 1933, drafted on the basis of the recommendations of the London
Committee, was introduced in the Legislative Assembly by the Finance Member,
Sir George Schuster, on September 8, 1933. In his speech introducing the Bill,
the Finance Member explained the significance of a Reserve Bank in the
constitutional plan as follows:
‘It has generally been agreed in all the
constitutional discussions and the experience of all other countries bears this
out, that when the direction of public finance is in the hands of a ministry
responsible to a popularly elected Legislature, a ministry which would for that
reason be liable to frequent change with the changing political situation, it
is desirable that the control of currency and credit in the country should be
in the hands of an independent authority which can act with continuity . . .
Further, the experience of all countries is again united in leading to the
conclusion that the best and indeed the only practical device for securing this
independence and continuity is to set up a Central Bank, independent of
political influence’.
The Bill was
referred to a Joint Select Committee on September 13, 1933, and as amended by
the Committee was introduced in the Legislative Assembly on November 27, 1933,
at a special session. This session was not attended by the Congress party,
which had vigorously and successfully championed the principle of State
ownership of the proposed Reserve Bank, when the 1927 Bill came up before the
Legislature. The Bill was passed by the Assembly on December 22, 1933, and by
the Council of State on February 16, 1934. The Bill received the assent of the
Governor-General on March 6, 1934.
[Source: RBI (1935-51); 1970]
