An bankrupt West is a bad economic model to follow. RBI in the last 3-5 years has shown some independence in policy matters - finally. (Cartoon courtesy - bhra.files.wordpress.com). Click for larger image.
there is a curious aspect to the Indian economic System (defined as commentators, policy makers, and academicians). The System systematically thinks in a skewed fashion, and unlike any other System in the world. In particular, it is trigger happy to bring the economy to a screeching halt by raising interest rates, but asleep at the wheel when the economy is in desperate shape — e.g. confidence at historic lows, industrial growth at zero, and exports diving over a cliff. (via Surjit Bhalla: Lazy banking at its finest).
It is not so curious Mr.Bhalla. You only have to look at the history of RBI formation and its objective. Fact is RBI has not outgrown its colonial DNA.
April Fool Joke – The RBI
On April 1st, 1934, while the ‘Squeeze India’ campaign was under execution – and being choreographed by Montagu Norman, Neville Chamberlain, Winston Churchill and Lord Willingdon, RBI, India’s banking authority was set up. From that April Fool’s day till now, RBI character has not changed. It remains isolated, out of touch with the India – and looks at India through colonial viewing glasses.
First things, first …
RBI and the Colonial India Government initiated many reports on the ‘condition’ of the Indian economy. Based on these reports, they passed many of the laws restricting money lending activities. These reports - Central Banking Enquiry Committee (CBEC) report (1929) and its associated Provincial Banking Enquiry Committee reports (of Assam, Bombay, Burma, Ceylon, Central Provinces, Bengal, Punjab, et al) of which the Madras Provincial Banking Enquiry Committee (MPBEC) report is cited by lazy academics and out-moded bureaucratsas authoritative – even in post-colonial era.
Western economies have been hiding their economic stagnation for the last 10 years by handing out loans to voters, industry and banks. For how long can this system work? Cartoon by Michael Ramirez. Click for larger image.
Based on these reports co-ordinated by the RBI, Debt Conciliation Acts were passed between 1933 and 1936 by the governments of Assam, Bengal, Central Provinces and Berar, Madras and Punjab; the Punjab Regulation of Accounts Act (1930) and the Debtors Protection Acts of 1935 and other such burdensome laws buried the money lender in mountains of paperwork and licenses. These laws required money lenders to comply with extensive and prolonged compulsory licensing and registration – and extensive recording of transactions and accounts.
What these laws achieved was what was desired – a license for police and other ‘inspectors’ to start an extortion racket from money lenders (these days called corruption). A bureaucrat from colonial Punjab, Malcolm Darling (1925) shedding crocodile tears stated “the Indian peasant is born in debt, lives in debt and dies in debt” became a by line for tarring the money lender – while the cause was extractive, colonial revenue practices.
While the world was reeling under a crisis of the Great Depression, these restrictions on money lending foreclosed the liquidity option for the Indian peasant, which would have averted the gold outflow from India and the impoverishment of the Indian peasant. With this legalized persecution, money lenders’ activities were curtailed all over India.
RBI joined in this hounding of the money lenders – which continues to this day. The Bengal Burma link of the ages was broken. Chettiar money lenders were thrown out of Burma. From being a granary of Asia, Burma started declining – and there was no rice for exports. Result – The Bengal Famine of 1943. Tally – 40-50 lakh deaths. Similarly, the role of Chettiars in Singapore was wiped clean.
Subhash Chandra Bose's diplomatic initiatives left the British War efforts nervous and anxious. (Image sources - hindustantimes.com). Click for source image.
After the fall of Singapore, and the rapid Japanese advance, with Subhash Chandra Bose in the vicinity, a revolt by Bengal would have had catastrophic effect on the colonial administration. Howard Fast, in his novel ‘The Pledge’ believes that the Bengal Famine was deliberate creation – possibly to weaken the local population.
Firstly, the answer to your curiosity cannot come from the West. And since, the Indian English press (especially), depends on the West for cues, they miss out some vital elements. For instance, how the Indian economy was used to meet Britain’s Post WW1 liabilities. To ‘dampen’ gold demand for India, the Indian rupee was put on fixed overvalued rate vis-a-vis the sterling.
Indian exports crashed, imports ballooned. Indian accounts would be settled at ‘official’ silver prices, with inflated silver released by the US under the Pittman Act. Gold prices were deflated – and Indians would therefore have to pay more in gold. Thus with with a combination of inflated silver price, deflated gold price, high interest rates and an overvalued Indian rupee, the Indian economy was strangled. Few Western writers or books identify this - unwittingly, or deliberately.
RBI was a pawn in this game – and it remains true to its DNA.
India funded the post WW1 recovery
The mechanics and the development of this plan are laid out in a better book, John Bullion’s Empire by By G. Balachandran. This book traces how much of India’s poverty was a result of economic policies between the two World Wars co-ordinated by these four central bankers.
On October 27th, 1931, the Ramsey Macdonald led “National” Government (Conservatives and Liberals coalition, fearful of the rising Labour Party) in Britain won a huge majority of 554 MPs of 615. The economic crisis of September 1931 (misnamed as the Indian Currency Crisis) was a result of this economic policy which reduced Indian economic activity – resulting in bankruptcy of the Colonial India Government.
Parallel Great Depression era problems in the US, the Weimar Republic problems – and other issues pushed this ‘National’ government to ram through a series of measures (page 130-131) that inflated silver prices, depressed gold prices and raised interest rates in India. The Indian rupee was pegged at a high exchange rate vis-a-vis the sterling. Indian exports crashed. To ensure that Indian farmers had no options, Indian money lenders were regulated and licensed into paralysis. Further the Lees Mody Pact, gave few options to the Indian producers.
Indians were paid, with inflated and abundant silver stock, instead of gold. This silver was the same silver released by the Pittman Act. The silver buffer solution to the gold drain to India was seen as the “only buffer to protect Western gold reserves against the Indian drain (was) a silver buffer.” Of course, later the British Raj decided to settle Indian debts with promissory notes – and not even silver. It was this Indian ‘sacrifice’ which enabled the recovery of the West.
The yawning trench between talk and walk makes Western economiuc theory suspect.
Crash in silver prices
New mines and increased silver production saw a crash in silver prices. US silver coinage was being depreciated due to increasing supplies of silver. On the other side, Britain had a large debt due to WW1. Britain and America stuck a deal at the cost of the Indian subjects of the British Raj. The US passed the Pittman Act which mandated silver sales at more than a dollar per ounce – double the 50c per ounce prevailing price of silver. Britain agreed to settle all Indian debts with silver. Gold prices were deflated. Interest rates in India were increased. Restrictions on gold imports on were placed and gold demand in India was ‘normalized.’
Impoverishment of India
With crashing exports and increased imports, the Indian citizenry had no option but to pay for all essentials and taxes with gold. As a quid pro quo, for this silver for gold scam, the US lent gold to Britain in 1926, which allowed Britain to revert back to the pre-War old standard.
Done over the protests by Gandhiji, trade bodies and merchants and threats of resignation by the Viceroy and his Executive Council , the resulting ‘money famine’ (page 155) had the Lord Willingdon ecstatically say ‘Indians are disgorging gold’ (page 156). Neville Chamberlain pitched in with his classic statement “The astonishing gold mine that we have discovered in India’s hordes has put us in clover.”
Looking back, it was clear that this achieved nothing but the impoverishment of India. In 1948, Montagu Norman had to admit that with these maneuvers “We achieved absolutely nothing, except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”
The RBI was a vital element of this plan.
Ceterus paribus …
Today, in similar situation, the RBI, a colonial era body, continues with these colonial anti-Indian policies. They keep ever-greening and recycle colonial policies. Old laws with new labels and different wordings are made – with the same intent. Kill the money lender. While all this was happening, Indian agriculture and the peasant suffers.
The tragedy is that RBI is not alone. The IAS (a successor to the ICS) and the Planning Commission are the other two. Compare that with the brilliant track record of modern Indian regulators and organizations like the SEBI, TRAI.