Few economists around the world are more widely known and respected than John Maynard Keynes. Born in 1883 to an upper middle class family in Cambridge, England, he received a scholarship to attend Eton College, where he developed a love for mathematics, classics and history. While he went on to receive a B.A. in mathematics in 1904 from King’s College, Cambridge, the rest of his career was far from that of a typical mathematician.

As he spent the summer of 1905 enjoying a mountain climbing holiday in Switzerland, he read one of the key economics texts at the time, Alfred Marshall’s Principles of Economics. Influenced by the writing, he returned to Cambridge to attend graduate-level economics lectures by Marshall, his only formal education in the subject. Impressed with Keynes, Marshall wrote to his father, “Your son is doing excellent work in economics. I have told him that I should be greatly delighted if he should decide on the career of a professional economist." However, Keynes had other plans. He cleared the civil service examination in 1906 and started his career in London as a clerk in the India office. Thus began his extremely productive scholarly engagement with India, purely by chance.

Keynes and India

Even though he returned to Cambridge only two years later to work on probability theory (it was natural for such a brilliant and curious mind to become bored in a clerical job), India had piqued his interest. In the next few years, he continued to explore various aspects of the Indian economy. In 1909, he published a paper in The Economic Journal, titled “Recent Economic Events in India", which explored India’s unfavourable trade balance during 1908 and its impact on London’s money market. Acknowledging the uniqueness of the Indian system, he wrote, “India’s intricate and highly artificial system presents problems of special interest to the student of the theory of currency." In 1913, he published his first book, Indian Currency and Finance, which contained chapters on the position of the rupee, the gold-exchange standard and Indian banking.

Before the last chapter of the book was in type, Keynes was offered a seat on the Royal Commission on Indian Finance and Currency (1913), also known as the Chamberlain Commission. Keen to start work on the commission, he published a curtailed version of the book. He wrote in the preface, “If my book had been far less advanced, I should have delayed publication until the Commission had reported, and my opinions had been more fully formed by the discussions of the Commission and by the evidence placed before it. In the circumstances, however, I have decided to publish immediately what I had written, without addition of certain chapters which had been projected." In spite of being an incomplete version, it remains a key text on Indian finance in the early 20th century.

The Chamberlain Commission was appointed to consider, among other things, certain measures taken by the Indian government to maintain the exchange value of the rupee, with a particular focus on evaluating if India needed a gold standard based on the circulation of gold currency. While the mandate of the commission was specific to the currency and exchange system, the members felt it essential to address another key question: the establishment of a state or central bank in India. On the request of the commission, Keynes, in collaboration with Sir Ernest Cable (another member), submitted a memorandum on “Proposals for the establishment of a State Bank in India".

A 140-year-long debate

Keynes’ proposal was preceded by a 140-year-long debate on the establishment of a central bank-like institution in India. Various schemes proposed during this period reflected, at least partly, the evolution of thought around the world with respect to central banking. It is important to note that central banking was not treated as a separate class of business till the early 1920s. Thus, most schemes envisaged a bank which would perform both central banking and commercial banking functions.

The first of such schemes can be traced back to 1773, when Warren Hastings, the governor of Bengal, proposed the “General Bank of Bengal and Bahar". The plan proposed a “principal house" (headquarter) in Calcutta and “inferior houses" (branches) in each of the collectorships. The main functions of the bank were to standardize the rupee, facilitate revenue collection for the government and render remittance services to private merchants. The Board of Revenue approved the plan and the bank was set up in April 1773, only to be closed in 1775, for reasons that were not necessarily economic.

Two more plans were proposed between 1775 and the revolution of 1857, when the control over territories in India was transferred from the East India Company to the British Crown, but the proposals remained on paper. In 1867, G. Dickson, secretary and treasurer of the Bank of Bengal, proposed the merger of the three Presidency banks—Bank of Bengal, Bank of Bombay and Bank of Madras—into a “Central Bank for all India". The plan was, however, opposed by the shareholders of the banks, along with the viceroy, Sir John Lawrence, who felt that the merged bank would become too powerful for the government’s liking. Between 1867 and 1913, several attempts were made to set up a central bank, most noteworthy of which was that by the Fowler Committee in 1898.

Keynes’ proposal for an Imperial Bank of India

In 1913, Keynes proposed the merger of the three Presidency banks to create the “Imperial Bank of India". The main functions of the bank included commercial banking activities (accepting deposits, lending, remittance and payment services) as well as central banking activities (management of note issue, management of public debt, banker to the government, rediscounting of bills). Interestingly, he thought that government subscription to the capital of the bank was not necessary as it would “complicate rather than simplify the relations between the government and the shareholders". The bank would be governed by a central board, consisting of a governor (as chairman), a deputy governor, a government representative and the three managers of the Presidency head offices. The British Crown would appoint the governor and the viceroy would appoint the other board members.

The Chamberlain Commission report was ambivalent about Keynes’ proposal and suggested the appointment of a small expert committee to further examine the issue. In 1914, the first World War broke out and no action was taken on the recommendations of the commission. However, experiences of the “Great War" convinced the three Presidency banks that it was in their interest to merge into a single Imperial Bank. In 1920, the Imperial Bank of India Bill was passed in the Indian Legislative Council. While the bank was primarily a commercial bank, it was entrusted with two important central banking functions: banker to the government and to some extent, banker to the banks. However, it was not the all-encompassing bank envisaged by Keynes. Key central banking functions like the regulation of note issue and foreign exchange management were kept outside its purview.

The Reserve Bank of India (RBI) was finally established in 1935, based on the recommendations of the Hilton Young Commission (1925). By that time, the consensus around the world had changed. Central banking was considered an important and complex activity, not to be mixed with commercial banking to avoid conflict of interest. Thus, the commission proposed a pure play central bank and the Imperial Bank functioned primarily as a commercial bank once the RBI was established.

If Imperial Bank had become the central bank

What if Keynes’ proposal was accepted in its original form and the Imperial Bank had also become a full-fledged central bank? Then, probably, the Imperial Bank of India would have been renamed as the “Reserve-State Bank of India" (R-SBI) in 1955, instead of what is now the State Bank of India.

Fast forward to 2017. The R-SBI is a massive conglomerate (maybe privately-owned), employing 3,00,000 people in its commercial banking division and 15,000 people in its central banking division. It owns 24,000 branches and 59,000 ATMs, with a balance sheet size of Rs33 trillion and foreign exchange reserves of $400 billion. It dominates the commercial banking industry, which it also regulates. It is a banker to the government, manages India’s public debt and foreign exchange, while also administering monetary policy. Its governor/chairman is one of the most powerful people in India and almost completely immune to any supervision by key stakeholders, including the government. Imagine what would happen if such a bank generated a huge pile of non-performing loans on its balance sheet. Complete disaster!

There is no doubt that Keynes was a brilliant economist who revolutionized the field with major theoretical contributions and prescient policy prescriptions. When Time magazine included Keynes among its “Most Important People of the Century" in 1999, it said, “His radical idea that governments should spend money they don’t have may have saved capitalism." However, if Keynes’ proposal for the establishment India’s central bank was implemented, it would’ve had catastrophic economic consequences. A rare case in an otherwise stellar career.

Rohan Chinchwadkar is an assistant professor of finance at the Indian Institute of Management Trichy.

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