GENESIS OF RBI – The Fowler Committee and Schemes of Rothschild & Hambro

Posted: March 14, 2013 in Education, Geopolitics, Politics, Youths and Nation

Report by Shelley Kasli

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.


Sir Edward Law

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.

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.

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.

The Opium (Heroin) foundations of the BANKING INSTITUTIONS OF INDIA

Reference – THE PREPARATORY YEARS – Genesis of Central Banking in India



The Monetary problems of India

Brief notes on the Indian Currency System



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