The Great War and Evolution of Central Banking in India

by Tehreem Husain, The Express Tribune


Post global financial crisis, there has been increased importance on exploring financial history of advanced economies and emerging markets to identify episodes of boom, crisis and regulatory responses from which parallels can be drawn today. In this blog, Tehreem Husain discusses an episode from early twentieth century Indian financial history which narrates the tale of a crisis and the evolution of a regulatory institution-the central bank in its wake.

The importance of India amongst the pool of emerging market economies can be gauged from the fact that it contributed 6.8 per cent to global GDP on PPP basis in 2014. Sustaining this growth track requires robust financial regulatory frameworks which can only come with a thorough understanding of its history and the events which led to the evolution of its crucial building block-the central bank. Researching early twentieth century Indian financial history suggests that the onset of the Great War and the financial crisis that ensued in India gave impetus to the creation of a central banking institution in the country.

The Great War, one of the most expensive wars in history, caused untold loss of human life and damages to economic and social resources. Britain at the forefront of the war went through insurmountable stress to meet financing needs of the war. Stephen Broadberry and other eminent economic historians have estimated that the cost of the Great War to Britain exceeded one-third of the total national income of war years. As the war continued in Europe, its stress spilled over the boundaries of mainland Britain and British colonies also became entangled in human and financial costs. For instance, not only did India contribute approximately 1.5 million men recruited during the war, but Indian taxpayers also made a significant contribution of £146 million to Britain to finance the war.

War times impose huge costs on the entire economy but more so for banks, due to the key role that they play in financing it. The National Bureau of Economic Research published a special volume on the effect of war on banking in 1943. One of the chapters, ‘Banking System and War Finance’, highlighted the crucial importance of commercial banks for Treasury borrowing. Banks constituted the largest purchasers of government obligations in addition to being the single most important outlet for the sale of government obligations to the public during World War II. Going back, similar to the experience of other countries, during the Great War Indian treasury borrowed heavily from the banking system. Debt archives from 1918 show that Rs 503.3 million were raised in the form of loans, Treasury Bills and Post Office Cash Certificates. At the same time government continued to issue fresh currency notes, which contributed to extraordinary liquidity flushing the banking sector (evidenced by a high cash-to-deposit ratio).

Studying the Indian economy during that time period using macro-financial indicator analysis, the relation between the British involvements in the Great War and the evolution of central banking is explored in India. Evidence suggests that exigencies of war-finance and government resorting to banking system to finance expenditures, the latter came under huge strain. A stressed macro and financial environment during the war years further weakened the fragile and fragmented Indian banking system. It led to a contagion like financial crisis accelerating bank failures in the war years and beyond. This crisis went unabated due to lack of a formal regulatory structure.

The near absence of regulatory oversight leading to financial crisis gave impetus to the creation of a central banking authority. Although the idea of a ‘banking establishment for India’ dates back to 1836, as a consequence of this episode, restructuring and reforms process ensued. This led to the introduction of a quasi-central banking institution, the Imperial Bank of India in 1921 and finally the creation of a full fledged central bank – the Reserve Bank of India, in 1935. In general, as argued by economists Stijn Claessens and M. Ayhan Kose (2013) deficiencies in regulatory oversight[1] leading to currency and maturity mismatches and resultant financial crisis are applicable to this episode as well.

Interestingly, this episode was not unique to India. In the presence of no regulatory institutions, management and resolution of financial crisis becomes increasingly complex. Historian Harold James has written that the global financial panic of 1907 demonstrated the necessity to America the need to mobilize financial power themselves in the form of a central bank analogous to the Bank of England. The Federal Reserve was created in 1913.

To conclude, one can argue that absence of a formal central banking institution in India resulted in many stressed scenarios for Indian financial system and missed opportunities for the imperial government. This meant that at that time there was no liquidity support available to the failing commercial banks, no control and coordination of credit creation (i.e. no reserve requirements), no mechanism or support for price discovery of the securities to be traded in the primary and secondary markets, etc. A similar argument was given by Keynes in his book ‘Indian Currency and Finance’ supporting the idea of an Indian central bank. Had there been a central bank in India it would have performed three essential functions: (a) assist the government in flotation of bonds or other government securities to the commercial banks, (b) provide direct lending to treasury in the form of ways-and-means advances or by purchase of government securities, and (c) provide reserves to the commercial banks to help them buy government obligations and offer them guidance and support to carry on as much of their traditional task of financing trade and industry as was compatible with a maximum war effort.

This article was based on the working paper ‘’Great War and Evolution of Central Banking in India”.

[1] Claessens, S., and Kose, M.A, 2013,” Financial Crises: Explanations, Types and Implications”, IMF Working Paper WP/13/28

How to win the EHS New Researcher Prize

As the Society’s New Researchers prepare to submit their final papers for our conference in March, Anne Murphy gives some invaluable tips on how to win the highly coveted prize for the best ‘new researcher’ paper. Excellent advice for first time and new scholars presenting everywhere ….


Don’t skip the Friday afternoon of the Economic History Society Conference, that’s when the New Researchers Sessions are scheduled and it’s often the most interesting part of the weekend. Adding to the excitement is the tension in the air because everyone knows that the presenters are competing for one of the Society’s prestigious New Researcher prizes, awarded each year to the best one or two (and sometimes three) papers.

Between 2014 and 2016 I was lucky enough to be the Chair of the Committee. Hence I got to read dozens of New Researcher papers, to observe numerous panels at the Conference and to hear and read the deliberations of my colleagues on the Committee. I concluded that, although we sometimes disagreed about the merits of a particular paper, what we were looking for was not in dispute and could be summed up in five points. I offer these points here as advice for future New Researchers but with the caveat that, as with any advice, it’s easier to deliver than to act upon!  

1) The Committee wants to know why they should care about your argument and findings.  

This point shouldn’t come as a surprise. Your PhD supervisor will have told you many times that you need to position your thesis carefully within the existing historiography to demonstrate your original contribution to scholarly knowledge. You need to do this in a conference paper too. Tell us why your work is important. The Committee won’t just know because they won’t all be experts in your field. Also, never assume that you are writing about something so obvious that all scholars rooted in economic history automatically will see its significance. They might but they will still want to know what you are bringing to the debate.

2) The Committee wants you to demonstrate your credentials as a historian.  

To do this ensure that your paper provides details on your data, sources and methodology. Are you the first to use the source or are you using your data or sources in a new way? It is true that your footnotes might demonstrate this but you should also reinforce these points through your argument. Also discuss your methodology but with a focus on what you are doing that will make a contribution to the literature or on establishing the appropriateness and relevance of your techniques. Do remember though that your paper should not just focus on your methodology, the Committee expects to see historical context and a strong conclusion.

3) The Committee wants to read work that is clear and well-written.  

The Committee will be reading lots of papers and will appreciate well-written work. Again this won’t come as a surprise, you have probably done some teaching, and marking, so will already know the joy of coming across beautifully crafted prose. To generate a clear piece of writing you should remember that you can’t, and shouldn’t, cram your entire thesis into 2,500 words. Pick a representative aspect of your work, something that illustrates its totality but is compact enough for you to present a tight argument based on sound evidence. Pay attention to the way that you say things, not just what you want to say.

4) The Committee wants you to deliver an excellent presentation  

Everyone understands that you might be giving your first paper at a big conference and you might be presenting in front of people whose work you admire (or indeed question). We know that is nerve-wracking. But, the prize is not just awarded for the written paper, it’s expected that the presentation at conference will be excellent too. So be clear, confident, pay attention to timing and engage your audience. With regard to content, you should highlight your research question, establish your scholarly contribution, focus on your argument and analysis and present your conclusion.

5) The Committee will expect you to give good responses to the questions  

You will be asked questions at the end of your presentation and the Committee will be taking note of how well you address those questions. They will be concerned chiefly with how you defend your argument so make sure you have thought about what sort of things you might be asked before the presentation. Do defend your position and do so calmly, politely and firmly. Be precise and concise. Remember that the time allocated to questions will be short so don’t use it all explaining one point.

If these are the things the committee is looking for, how can you maximise your chances of delivering them? 

• Pay attention to the criteria for the New Researcher papers: especially the word count and time limit. 

• Write a new paper, don’t just cut down a chapter and think that will do. It won’t!

• Get feedback. Show your paper to your supervisors before you submit.

• Act on the feedback. It might be right; it might be wrong. If you believe the latter, consider why your reader misunderstood or was not convinced by your point. Maybe you need to explain more clearly and evidence more effectively.

• Read previous winning papers:

• Rehearse your presentation to ensure that you can present well and that you keep to time. And then rehearse again!

• When presenting be confident, speak clearly and loudly enough to be heard.

• Face the audience: do not turn around and speak to the PowerPoint. If you’re using your PowerPoint as a prompt then look at it on the computer screen or better still have some prompt cards in your hand.

• Ensure that your PowerPoint presentation is neither too text-heavy nor too sparse.

• Don’t have dozens of slides, a good rule of thumb is one for every two minutes.

• Keep to time!

• Make eye contact and smile (even if you feel like weeping)!

And finally… ..Good Luck! And remember to practice your gracious winner/loser face for the conference dinner… 

Anne L. Murphy  

University of Hertfordshire

From convergence to divergence: Portuguese demography and economic growth, 1500-1850

by Nuno Palma (University of Groningen) and Jaime Reis (ICS, Universidade de Lisboa)

When did Portugal’s economy diverge from the European core? This paper constructs the first time-series for Portugal’s per capita GDP for 1500-1850, drawing on a new and extensive database. Starting around 1550 there was a highly persistent upward trend on per capita income, which accelerated after 1700 and peaked 50 years later. At that point, per capita incomes were high by European standards. Portuguese per capita GDP was about as high as that of Britain, Italy and the Netherlands, and higher than that of France, Spain, Germany and Sweden. But as the second half of the eighteenth century unfolded, a phase of economic decline was initiated.


Throughout 1550-1750, the population did not catch up with the growth that resulted from increasing opportunities in the colonies and in exports, and from the introduction of highly productive crops resulting from the Columbian exchange, notably maize. The colonial empire also offered opportunities to migrate. But as the second half of the eighteenth century advanced, these sources of growth were becoming increasingly depleted and the decline of Brazilian gold remittances coincided with the beginning of a phase of economic decline. By the late eighteenth century almost all recent per capita GDP and real wage gains had been lost, and their level had become considerably lower than those of Britain and the Netherlands, although still not low by continental standards. As the right conditions were not in place for Portugal to industrialize in the nineteenth century, the country was left behind relatively to the continental European economies that did. Portugal would not experience modern economic growth until mid-twentieth century.

Click here for the full paper

From VOX – British wellbeing 1780-1850: Measuring the impact of industrialisation on wages, health, inequality, and working time

by Daniel Gallardo Albarrán, appeared on 22nd May 2016


Repost – Gentlemen and capitalism: some questions

by Dave Postles, University of Hertfordshire

Consequent upon Wiener’s and Rubinstein’s research respectively into culture and industrial capital and ‘men of wealth’, Cain et al. embarked upon the elucidation of ‘gentlemanly capitalism’, which has become a paradigm of English entrepreneurship, status and the performance of the economy.(1) Perhaps, however, we can illustrate a dichotomy by reference to contemporary literature and ethnographic writing. Ostensibly, Henry Wilcox represents this ethos of gentlemanly capitalism, although his company is a commercial enterprise rather than industrial. We should recollect, however, that, although he purchased the Onibury estate (Clun, Shropshire), he really was not enamoured of the countryside, visited the estate rarely, and abandoned it when an unpleasant incident occurred there. Nor was he especially attracted to his wife’s Howards End. His countenance of both arose from expectations of status and family rather than a desire to enjoy the lifestyle of the country elite. His natural environment was the City.(2) In contrast, Jack London excoriated the 400,000 gentlemen in the 1881 census, ‘of no occupation’ and ‘unprofitable’.(3) Such a number could not have been composed of either retired industrialists or ‘men of wealth’.

Read the full article here:


From WSJ – The Fall of the Unions Paved the Way for Donald Trump

Working-class whites once had a political home at the union hall; now they’ve found solidarity in a new populist movement

“There are two great material tasks in life,” declared John L. Lewis, the autocratic yet beloved head of the powerful United Mine Workers, to his followers during the 1940 presidential campaign. “The first is to achieve or acquire something of value or something that is desirable…The second task is to prevent some scoundrel from taking it away from you.”

The cheers and loyalty that such sentiments long evoked across the Rust Belt are worth recalling in the wake of Donald Trump’s shocking victory. Pundits across the ideological spectrum are busily repeating the obvious: White working-class men and women vented their frustrations at global elites, well-educated liberals, a condescending media and a capable but sometimes dissembling Democratic candidate in a pantsuit.

You can read the rest of the article on the Wall Street Journal online:





From Positive Check – Danger to the Old Lady of Threadneedle Street?

by Patrick O’Brien (Professor Emeritus,
London School of Economics)  and Nuno Palma (Assistant Professor,
University of Groningen)
– Friday 21 October 2016

NEW EHES Working paper

The Bank Restriction Act of 1797 suspended the convertibility of the Bank of
England’s notes into gold. The current historical consensus is that the suspension was a result of the state’s need to finance the war, France’s remonetization, a loss of confidence in the English country banks, and a run on the Bank of England’s reserves following a landing of French troops in Wales.

Read the full post here:

The working paper can be downloaded here:



What happened to immigrant earnings during the Great Depression?

by Chris Minns, Economic History Department, LSE


The Great Depression devastated North American labour markets for a decade, with about a quarter of the work force unemployed at the peak of the crisis. It is well known that the headline figure conceals the extent to which the burden of the Depression was shared unequally. In addition to sharp differences in employment patterns between cities and regions, it was less-skilled workers who saw demand for their labour fall more than those able to access white-collar work. Older men who lost their jobs were particularly vulnerable to falling into the trap of long-term unemployment. There is some evidence to suggest that the Depression may have exacerbated ethnic differences in the labour market, with black men in the United States were affected more heavily than their white counterparts. How was the Depression experienced by the foreign-born population who had settled in large numbers in both Canada and the United States up until the early 1920s? A recent research paper by Kris Inwood, Fraser Summerfield, and myself sought to answer this question using statistical evidence drawn from new digital samples of the Canadian Censuses from 1911 to 1931.

There are three reasons we were particularly interested in this topic. First, while some social historians have argued that immigrants suffered greater exposure to labour market discrimination when jobs were rationed in the 1930s, there is surprisingly little published evidence to confirm or contradict this contention. Second, by focusing on the earnings of immigrants over a twenty year period, we wanted to see whether the experience of the Depression had implications for the long-run labour market adjustment of immigrants relative to native-born Canadians. Third, Canada offers an excellent laboratory in which to conduct this research. The Depression experience in Canada was comparable to the United States in terms of unemployment trends in the early 1930s, and the country was a leading destination for European immigrants from the late 19th century. A unique feature of early 20th century Canada was that Census questionnaires asked respondents to report their earnings beginning in 1901. This means that our measure of attainment can reflect changes in pay within occupations and the effects of spell of unemployment on total earnings.

Our analysis of Census earnings yields a striking pattern: immigrants experienced “reverse assimilation” in Canadian labour markets, with the gap in pay between immigrants and the native-born growing between 1921 and 1931. Figures 1 and 2 show predicted earnings for immigrants relative to otherwise identical native-born Canadians for young, recent migrants (Figure 1), and older migrants with longer tenure in Canada (Figure 2). Free migrants had unrestricted access to Canada, and came mainly from the United States and the United Kingdom and Ireland. Preferred and non-preferred migrants hailed mostly from Continental Europe. The figures show that the relative decline of immigrant earnings was strongest among older men, even among those who had lived in Canada for decades when the Depression hit. We also find that the effects are focused almost entirely among immigrants from continental Europe who were not native English speakers, with American and British migrants experiencing no reversal in relative earnings.

Figure 1: Predicted relative immigrant earnings, born 1886, arriving 1911



Figure 2: Predicted relative immigrant earnings, born 1871, arriving 1896


The evidence of reverse assimilation is not a statistical artefact due to selective return migration of European migrants, or selective outmigration of Canadian residents to the United States; international migration flows were much lower in the early 1930s than the late 1920s, despite the government encouraging the return of indigent migrants to their home countries. Nor are the problems of migrants accounted for by a skills mismatch created by the differential shocks of the late 1920s and early 1930s, with immigrants having the misfortune of being concentrated in the jobs that were hit hardest. One factor that does account for a large share in the earnings gap is unemployment; immigrants in the 1931 Census were more likely to have lost time out of work than their native-born counterparts. This suggests that one way in which ethnicity mattered in the Depression was that those who were most obviously foreign were the first to lose their jobs and the last to be rehired. But unemployment does not fully account for reverse assimilation, as non-English speaking immigrants from continental Europe experienced a significant decline in weekly earnings between 1921 and 1931, relative to their native-born counterparts.

Our findings point to a disturbing conclusion: apparently well-integrated immigrants were more vulnerable to the adverse effects of a sustained recession than native-born workers with similar skills.  Whether this pattern has been repeated in immigrant receiving economies during the recent crisis is an important question for future research.