By THE HON. V. RAMADAS PANTULU

WHAT is the nature of the Central Bank which Sir Basil Blackett proposed to give to India, and why was the passage of the Reserve Bank Bill through the Central Legislature successfully obstructed? In answer to the Royal Commission on Indian Currency and Finance, the Governor of the Bank of England gave the following description of the essential features of a Reserve Bank :—

"It should have the sole right of note issue; it should be the channel, and the sole channel, for the output and intake of legal tender currency. It should be the holder of all Government balances; the holder of all the reserves of the other banks and branches of banks in the country. It should be the agent, so to speak, through which the financial operations at home and abroad of the Government would be performed. It would further be the duty of a Central Bank to effect, so far as it could, suitable contraction and suitable expansion, in addition to aiming generally at stability, and to maintain that stability within as well as without. When necessary it would be the ultimate source from which emergency credit might be obtained in the form of rediscounting of approved bills, or advances on approved short securities, or Government paper."

It must be familiar to students of the constitutions of Central Banks, that while all or many of these Central Banking functions are discharged by most of the Central Banks, they do not all conform to a single type and differ in the character and scope of some of their business aspects. The divergence between the several types mainly turns on the relations between the Central Bank, Commercial Banks and the money market. The three chief types are the American Federal Reserve Banks, the Continental Bank of Europe and the Bank of England. The American type of banks are called pure Central Banks. They do little besides controlling currency and credit. They act as bankers for the banks and the Government, and "do no regular private business at all beyond the open market dealings in bills, notes and securities, permitted by their charters and dictated by the monetary policy they happen to be pursuing at any particular moment. It is true they have dealings with other Central Banks, but those are incidental to the international obligations of the times in which we live and are in no sense to be linked to the domestic private business of Central Banks of the continental type." The Continental Central Bank is a mixed type combining the central and ordinary commercial banking functions. "Apart from its duties as a Central Bank, this type of institution conducts a substantial private business in more or less direct competition with the Commercial Banks. The Reichs Bank has 450 branches all over Germany, while the Bank of France operates through more than 250 offices scattered throughout the country. Deposits are accepted from the Public as distinguished from Banks and Government; and discounting and loan facilities are granted to customers generally". The Bank of England is a peculiar institution. It virtually stands by itself and represents its own type. It also conducts a class of important private business in addition to its central banking functions. It does not however carry on its private business by means of loan or re-discounting operations directly with the Joint Stock Banks; and it has no branches. On what may be termed the assets side of its business, the Bank of England has no direct relation with the Joint Stock Banks. "The Joint Stock Banks, the Commercial Banks proper, never borrow or re-discount bills with the Bank of England, though they maintain large balances there. Consequently, they are not the direct medium through which the Bank's monetary policy makes itself immediately felt. That role is filled by the money market, consisting of the bill brokers and discount houses, who borrow from the Joint Stock Banks when possible, and from the Bank of England when necessary. It is primarily through this agency that restrictive and expansive measures adopted by the Bank of England exert their influence." So the control over credit which is secured to Central Banks elsewhere by direct loan and re-discount relations with commercial banks, is secured to the Bank of England through its "direct dealings with the money market coupled with its open market sales and purchases of bills and securities."

It now remains to be seen to which of these types the proposed Reserve Bank for India approximates. Its structure is largely based on the recommendations of the Royal Commission on Indian Currency and Finance, who undoubtedly show a partiality to the American type, and this spirit is carried out by the Bill. The proposed Bank's power of competition with the commercial banks and its open market operations are circumscribed like those of the Federal Reserve Banks. The Bill restricts to the scheduled banks the facilities afforded by the Reserve Bank in the matter of the sale, purchase, and re-discount of bills of exchange and promissory notes and the like. These scheduled banks are placed under statutory obligation to maintain compulsory deposits, free of interest, in the Reserve Bank and are in turn accorded preferential treatment. When the Reserve Bank may trench on these privileges of the scheduled banks, it is only under conditions and safeguards. The Bank may open accounts with, or act as agents of, only central banks which are the principal currency authorities in their countries (including the Federal Reserve Banks of, America). It cannot do so with ordinary commercial banks. In order to assist central banks in providing necessary credit facilities to finance industry and movement of crops, which are at present effected by cash credits, the Reserve Bank is authorised to advance money against promissory notes of the scheduled banks, but only subject to limitations and for a limited period of five years. The Reserve Bank has to borrow both in London and in India-in London to keep the Secretary of State for India in funds, and in India to facilitate the control of credit. This borrowing power is so restricted as to prevent the Reserve Bank competing with other banks for fixed deposits. The open market operations of the Bank are restricted in two ways: firstly the purposes of the operations are restricted to those which are necessary in the interests of Indian trade or commerce or for the performance by the Bank of its functions under the Act; and secondly any action taken in this manner must be with the approval of the Board of the Bank. It is therefore clear that the power of the Bank to compete with other banks and to go into the open market, are more restricted than those of the Reichs Bank in Berlin or the Bank of France in Paris and resemble more closely those of the Federal Reserve Banks of America.

An examination of the detailed provisions of the now defunct bill will be of little interest, if not out of place. It is enough to state some of its features which led to its being wrecked on the shoals of the Assembly. The question of its constitution was naturally the chief bone of contention. The Joint Select Committee of both Chambers of the Legislature, which sat on the first bill, definitely turned down the shareholders' scheme and voted for a State Bank. When the Bill was proceeded with in the Assembly up to the stage when the clause relating to the composition of the directorate was reached, the Assembly affirmed the Select Committee's decision and voted for a State Bank. The comparative merits of a State Bank and a Shareholders' Bank were fully debated upon both inside and outside the Central Legislature. In the second bill the revised scheme of shareholders, no doubt, showed a real improvement over the earlier one and made it as innocuous as possible. Nevertheless those of us who believed that, under present conditions in India, a State Bank was to be preferred to a shareholders' bank, adhere to our view, and our convictions in the matter remain unshaken to-day. The Government were however prepared to yield on this deadlock over the constitution, and waive their adherence to the shareholders' scheme, provided that an independent directorate which is absolutely free from political influences can be agreed upon to the satisfaction of the Government. The question of the directorate was therefore the second great stumbling block in the way of the measure. The popular representatives stood pledged to secure a directorate with a substantial, elected, Indian majority, with a clear emphasis on all the three adjectives. For want of a better alternative, if not on its own merits, representation through the Central and Provincial Legislatures was advocated by the Joint Select Committee to secure the end in view. Any mention of representation through the legislatures, direct or indirect, was however an anathema to the Government. They would not touch any such proposal with the longest stick. There were subsidiary differences, also of a vital nature, between the Government and the people's spokesmen in the Assembly, which contributed in no small measure to the feeling that the measure was not after all worth having. The Bill adhered to the decisions which the Government carried through the Legislature in March 1927 against strenuous popular opposition, by a mere snatch vote, with the help of the official and nominated block, on what is popularly known as the Ratio Act. In pursuance of those decisions, the Bill ignored the popular demand to establish gold currency in India by minting gold mohurs for circulation, in the country. On the other hand, the sovereign was demonitised. The 18 d. ratio was also stuck to with religious faith in its potentialities for the good of India. Provisions relating to the concentration and management of reserves which have a bearing on the gold currency problem were also considered unsatisfactory by the popular side. The statutory maximum of the proportion of the gold bullion and gold coin in the total amount of reserves was fixed at 25% or one quarter, the rest being permitted to be held in gold securities, rupee coin and rupee securities. The gold securities may be of any gold standard country, as may be notified by the Governor-General. The popular representatives had not much faith in those securities except those of Great Britain and America, for the experience of the Great War Finance served as a warning against placing any faith in the value of the securities of continental countries during times of crisis. Again 85% of the gold coins and bullion alone need be kept in India. In the result only 21¼ of the total reserves will be in India in the shape of gold bullion or gold coin. This was considered not safe or sound in the interests of India. How could the Bill have a smooth sailing in the face of such grave defects?

What was the measure that India wanted? An American critic, who was no doubt appreciatively disposed to Sir Basil's Bill, laid down the following test of what constituted a suitable institution for India: "Anyone can concoct a Bill based on standard occidental principles and call it a project for a Central Bank for India. Devising an Indian Central Bank is quite another matter-an institution which will fit in with Indian life, is adapted to Indian practices, and adjusted to the diverse needs of the population. An imported European or American Central Bank of either standard type would no doubt offer some advantage over the present system. But the Central Bank that India needs must be Indian-it must be as Indian as the Ganges". Any assertion that the Bill concocted by Sir Basil with the concurrence of the Financial advisers at Whitehall who unquestionably control the currency, credit, and exchange policy of India, satisfied this test must be characterised as being extravagant. Concentration and management of reserves in the interests on India, development of indigenous banking and creating adequate facilities for rural credit, are our most important needs. Did the Bill satisfy them?

The preamble to the Bill stated that the Bank was constituted to control the working of the gold standard and to regulate the issue of bank notes and the keeping of reserves with a view to securing stability in the monetary system of British India. There is nothing in this statement to assure us that the needs of India are specially kept in view in the constitution of the Bank. The words 'control' and 'regulate' do not provide against the chances of the currency being manipulated by the Bank in the objectionable manner to which we have been long familiarised by the State in this country. It all depended upon how the Bank was to be actually controlled and worked, and the fight therefore naturally turned on the clauses relating to the controlling authority of the Bank. As for the development of the commercial banking of the country and encouraging the growth of the indigenous banking houses, it depended upon how the active entry of the Imperial Bank in its new commercial role into the field of 'wholesome' competition with other banks reacted on indigenous banking. The revised conditions of Imperial Bank's services to the State, as an agent of the Reserve Bank, were considered by some to be far too generous; they were certainly not illiberal in any case. It therefore remained to be tested whether its competition with Indian Banks would have proved 'wholesome', in the language of the Royal Commission, or whether it would have handicapped the weaker banks, while giving points to their stronger rival, the Imperial Bank. Again a claim that the Bank was specially suited to Indian conditions could not be substantiated, unless it provided adequate facilities for rural credit. The Bill did not touch, as a matter of fact, even the fringe of the problem of rural credit. The right of the Provincial Co-operative Banks to elect one director to represent agricultural interests, and a few halting provisions for the rediscount of some agricultural paper countersigned by Provincial Co-operative Banks, the latter having been exempted from liability to maintain free balances with the Reserve Bank, practically exhausted all the provisions relating to the promotion of agricultural interests. There was nowhere in the Bill any indication of the recognition of the fact that financing agriculture, in a predominantly agricultural country like India, was the primary duty of the State and the Central Banking Institution set up by it.

Even in self-governing countries, Central Banks have not yet worked financial and economic wonders. One of the main objects of the scheme according to the preamble is 'securing of the stability of the monetary system of India.' If it means the keeping of the currency of the country at par with gold, it will not be out of place to ask whether well-established Central Banks elsewhere in the world succeeded in doing it? Has France achieved this goal even to-day, with its renowned Bank of France? If by stability of monetary system it is also intended to comprehend the stability of prices, all that can be attempted is that prices in India, in terms of gold, are kept at the same level as prices in other countries, in terms of gold. This result can be brought about by the maintenance of the gold standard, whether by the Central Bank or by any other agencies dealing with currency. No Central Bank can maintain internal prices at a particular level. It was therefore meaningless to have raised extravagant expectations and credited the Reserve Bank with all possible and impossible things. There was much less reason to do so in the case of the ill-starred Bill of Sir Basil over whose fate some are inclined to deeply lament. One Journal indeed went so far as to proclaim that with the proposed Bank, an era of financial millennium had already dawned on India and that the retiring Finance Member was an instrument in the hands of Providence in laying the foundation of constitutional autonomy for India on the financial freedom supposed to be vouchsafed by the Bill. Surely all such verbal extravagance is utterly uncalled for. Indeed I have said enough to show that there were many features in the Bill with which the popular representatives in the Central legislature were genuinely dissatisfied. Their action in impeding the further progress of the Bill in its present objectionable form was neither hasty nor ill-advised. It was deliberate and was amply justified.

The scheme for the establishment of a Reserve Bank for India will however be revived at no distant date, especially in view of the circumstance that the operation of the Imperial Bank Act will cease with the 31^st day of December 1930. Sometime before that date arrives, the question of placing the Banking and Currency system of India on a more satisfactory basis than it is to-day, is bound to engage the attention of the Government and the people. In the meantime we will be well-advised to devote some time and attention to the, study of the Central Banking Problem and decide upon a suitable type of Reserve Bank for India which will promote our agricultural, commercial, and industrial interests. With the establishment of a sound Central Banking Institution, a new era will undoubtedly commence in our banking and monetary history. But the making of that history lies in our hands. Let us be wide awake to our legitimate rights.