Creating a Central Bank for India

Abstract

Keynes’s pioneering contributions to the theory and organisation of central banking were made in the course of the prolonged discussions of the case for establishing a central bank for India. They are all the more remarkable considering his total lack of practical exposure to central banking, which unlike any other branch of macroeconomics, requires a uniquely complex amalgam of institutional as well as theoretical knowledge. Keynes had no formal connections with any central bank, except for his short and rather nominal stint as a Director of the Bank of England during the last five years of his life (1941–6). The nearest he came to any assignment as adviser to any central bank was in 1920 when he was approached by General Smuts to visit South Africa for two months to assist in formulating monetary policy and drafting legislation for a central bank. Keynes could not accept the invitation due to other commitments. Instead, he recommended Henry Strakosch who, together with Arthur Gillet, later drafted the legislation to establish a central bank for South Africa.¹ Again in 1920 Keynes was requested by Smuts to serve on a selection committee with Strakosch, to choose a Governor for the new South African Reserve Bank. Keynes, while agreeing to serve, wrote later to Smuts that ‘it is a difficult post to fill, and well qualified candidates are scarce; but we met yesterday and there are good prospects, I think, of a strong appointment (CW, XVII, pp. 200–201). Eventually, W. H. Clegg (a Bank of England official born in Bloemfontein, South Africa) was appointed to the post. The South African episode is instructive as the only recorded instance of Keynes being approached to formally advise on the creation of a central bank.

‘Central banks … must be quick to adapt their methods to suit the changing economic structure … they must be perspicacious and versatile.’ R.S. Sayers (1948)

‘where banking habits touch only a minor part of the economy, the contribution that a central bank can make to development is more important than what it can do in the way of stabilization’. Ursula Hicks (1962)