Banknote books replace coins Currency crisis deepens

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By D.C. Ranatunga The continuous shortage of coins in the early part of the 20th Century forced the Government to find a solution which came in the form of banknote books. In 1923 a banknote book consisting of one rupee notes was issued. Each book contained 25 notes. Four years later a banknote book with 25 Rs. 2 notes was released followed by a book of 25 Rs. 5 notes in 1930. With the increasing shortage of coins later year saw the issue of Rs. 50, 25, 10 and 5 cent notes. An interesting feature was the splitting of the 5 cent note into two by a row of small punctures with one half being used as two cents and the other half as three cents. It also shows the value of a few cents in that era. Under the currency board system, a 100% reserve system was in operation with the Indian rupee as the reserve currency. India maintained its reserves by means of the Sterling Pound. The Ceylon rupee was thus bound with the Indian rupee directly and the sterling pound indirectly. This meant that the amount of local coins and banknotes that could be issued at any given time had to be equivalent to the amount (in Indian rupees) in the possession of the Ceylon Currency Board or deposited in the Indian Reserve Bank. Due to World War 1 (1914) and the Great Depression (1929-32) the Currency Board had to face huge challenges. The terms of trade were devastated due to the depression while foreign reserves were drained. Thus the money supply contracted. , In the meantime, the gradual emergence of a local English speaking capitalist class who got involved in the plantation industry which was dominated by the British was seen. Although there were a few banks in operation here, it was difficult for the locals to obtain loans. The highly influential Chettiar traders from South India stepped in as intermediaries and started controlling a large proportion of the native financing business. The merchant of Colombo got his supply of money from India direct by means of the Nattu Kotte Chettys who were agents of large Indian houses in Madras and other towns. They acted as bankers in those days and supplied the British merchant with cash for his bills of exchange on Madras, Bombay and Calcutta, which they remitted in payment of grain and other local goods. The majority of banks were owned by the British at the time and they did not give long term loans for agriculture. On 23 November 1932, the State Council Member for Kandy, George E. de Silva presented a lengthy report on the difficulties faced by local businessmen in getting loans and proposed the setting up of a local bank to help them. A commission was appointed and on its recommendation the Bank of Ceylon was established on 1 August 1930. With the steady expansion of the local banking system the Ceylon Currency Board was authorised to exchange the local rupee directly with the sterling pound under the 1944 Currency Act. As the years went by, it was evident that there was a great need for an independent organisation to oversee the country’s economic activities and provide informed guidance. The setting up of a Central Bank was proposed to replace the Currency Exchange Board system which was in operation for 65 years. The idea of setting up a central bank was mooted in the 1940s. State Council member for Mannar, J. Tyagaraja proposed the setting up of a Central Bank on 7 November 1945. After lengthy discussions the proposal was accepted but the search of an expert to advise on the establishment of a Central Bank dragged on. On a request made to the Federal Reserve of the United States economist John Exter arrived here on 28 December 1948. His preliminary report was presented on 7 June 1949. It included guidelines for the primary plan, the organisation of the bank and the foundations of primary management. The full report was presented on 4 November 1949 under title ‘Report of the Establishment of Central Bank of Ceylon’. The report was debated and passed in Parliament in November 1949 and the Monetary Law Act No. 58 of 1949 was passed. The Central Bank was established and operations started on 28 August 1950.