No sooner had the RBI come into being than the conflict between the governor and the government began, writes TCA Srinivasa Raghavan

As Raghuram Rajan demits office a look back at RBIs first Governor who was forced to quitPTI
Features Books Sunday, September 04, 2016 - 10:50

By TCA Srinivasa Raghavan

All governors, since the first one, have confused the independence of monetary policy with the independence of their post. They assume that only they can conduct monetary policy and that the government has no say in it. It might be a good idea, therefore —when they sign the register taking over as governor— to remind them of Montagu Norman’s view. The governor of the Bank of England from 1920 to 1944, Norman was powerful enough to bring down governments. According to him, the RBI had to be like a wife in a Hindu joint family who advises but does exactly as she is told. He also believed that the relationship between the RBI and the Bank of England should be that of a ‘Hindoo marriage’, wherein the former was the dominant spouse and the latter, the subservient wife.

His advice went unheeded. No sooner had the RBI come into being than the conflict between the governor and the government began. Sir Osborne Smith had been used to having his way as the managing director of the Imperial Bank of India, which in 1956 became the State Bank of India. He refused to do as bidden by Delhi. Sir John Grigg, who was the equivalent of the present-day finance minister, had a simpler formula for judging a governor’s attitude: where he stood on the exchange rate and the tariff rate. Sir Osborne was implacably opposed to the exchange rate of one shilling four pence as he was convinced it would be deflationary. He also wanted a lower bank rate. The government would not budge on the former and was scornful of the latter.

Sir Osborne could be outspoken when not required. From the very start of his chairmanship of the Imperial Bank in 1928, he had been at sixes and sevens with government policy. In fact, once after receiving some instructions from the secretary of state in 1930, he had complained that ‘anyone would assume that the Imperial (Bank) was a department and a very inconspicuous department of the government’.

In a fit of anger, Sir Osborne had also once told the government that ‘as long as I run the Imperial Bank, I will not be run by London or anywhere else, … I would not tolerate interference with my business’. In 1936, he had written in a letter that he was ‘sick to death’ of the government’s attempt to ‘dominate the RBI’.

But it was not only over the interest and exchange rates that Grigg and Osborne fought. There were two other issues. When Osborne opposed the gold drain from India and wanted to impose an export tax on gold, the government opposed him tooth and nail. Then, when Osborne wanted to appoint A.D. Shroff, an ICS officer, as deputy governor, Grigg dismissed the suggestion calling Shroff ‘a perfectly frightful man and intimate crony’ of Sir Osborne.

Overall, the British officers in India regarded him as a colonial who sympathized with the natives. All that could have still been ironed over, but when he called Viceroy Lord Linlithgow ‘a weak ass’, it was the last straw. He had to go.

So in July 1937, just two years after taking over as the first governor, he was forced to resign. Ironically, he had been appointed instead of some ICS officer or British banker, precisely to give the impression that the RBI was independent.

The British civil servants’ view of Osborne was coloured also by the fact that he was praised by Indian businessmen. The Indian Merchants’ Chamber wrote a very critical letter to Grigg after he resigned. And just as is happening now, the Congress demanded full disclosure.

The government simply remained silent hoping that the controversy would die down, which of course it did. But the episode left a very bad aftertaste, which has persisted till today, because nobody really knows what happened. As the late S. S. Tarapore, one of the greatest central bankers India has produced, had demanded, ‘The RBI owes it to posterity to release a dedicated volume on the Osborne Smith episode — warts and all.’ It may show that nothing has changed. As now, then too the government wanted a subservient governor.

Excerpted with permission from “A Crown of Thorns”, by TCA Srinivasa Raghavan published by Westland through Mikros. 
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