The day the banker’s bank opened

By D.C. Ranatunga

The Central Bank hitting the headlines virtually every day over the past week or so made me delve into the history of the place a bit. I thought the ‘Central Bank Retrospect’ – the publication put out by the bank in 2010 to commemorate the completion of 60 years – will be the best source.

Designed in the form of a collection of newspaper pages, it’s attractive and well printed. The two pages covered for each year carrying clippings from newspapers mainly dealing with news relating to financial and economic matters coupled with general news along with advertisements make interesting reading.

But one thing I found missing were the dates which I thought are important. I couldn’t even locate the date of the opening of the bank although the first headline story was about the ‘Birth of a great institution’. The opening paragraph only referred to “formal opening of the Central Bank at noon yesterday”. When yesterday was, I couldn’t find.

K.D.G. Wimalaratne’s ‘Directory of Dates and Events’ came to my rescue and I found the date as 28 August 1950, two-and-a-half years after Sri Lanka gained Independence.

Quoting Prime Minister D.S. Senanayake, the newspaper report says: “With the establishment of the Central Bank, we are very frankly taking a step which will enable us to take much more of our financial future into our own hands.” He spoke after Finance Minister J.R. Jayewardene had unveiled a tablet to mark the formal opening of the bank.

Pointing out that that there was a good deal of misunderstanding about the functions of the Central Bank, the Prime Minister said it’s a banker’s bank and will not make loans to the public. “It will be concerned with such things as the volume of money in circulation, our balance of payments, the general level of prices and interest rates, and even with problems of public finance.”

He added that according to the Act, the Bank will regulate the supply of money, the cost of money and the international exchange of money in the country in such a way as to raise the level of production and employment and to promote the development of the country’s resources. 

Elaborating on what he referred to as its great possibilities for harm as well as good, he said: “We were fully aware that Central Banking had been abused in many countries in the past. We need only remind ourselves of how excessive use of Central Bank credit reduced the real value of currency and resulted in the dissipation of foreign exchange reserves in countries like China and Greece after the war. But we must also recognise the great contribution Central Banks have made to the development of many countries notably the Dominions of Canada, Australia and New Zealand. The wisdom that these countries have shown in the management of their monetary affairs has been an important factor in the steady rise of their standards of life.” 

Finance Minister Jayewardene hailed the day as marking “the birth of a great institution which, in the years to come, will work for the welfare of the people of Ceylon.” He reminded that money which can be of much use to mankind can also be a bane. “I trust that you will remember that money was made for man and not man for money,” he said.

In his welcome address, the Governor of the Central Bank, John Exter referring to the simple ceremony which marked the opening, said they were sobered by the thought of the great responsibility they have towards the people and that shouldering the responsibility did not see to call for any celebration. “The time for celebration is 10 or 15 years later when the Central Bank of Ceylon will look back on achievements. At this moment we can only be filled with high hopes and good intentions.”

Lender of the last resort

Exter, who was facilitated by the American Government to advice on how the Central Bank could be established, was offered the post of Governor after former Chief Justice Sir Arthur Wijewardene declined the offer on ground of health, according to the media. Exter was the Economist of the Board of Governors of the Federal Reserve System in Washington at the time he came in January 1949.

Prior to the opening of the Central Bank, he was quoted as saying that there were no financial sleight-of-hand tricks by which the standard of living of the people of Ceylon could suddenly be raised. However, he said, the Central Bank should be able in the long run to assist Ceylon considerably in the development of its natural resources.

He stressed on the need to develop a banking system which could adequately serve domestic business. “To this end one of the first tasks of the Central Bank will be to attempt to devise ways and means of reducing the risks of mending money in Ceylon. In this way, the commercial banks, the mortgage lending institutions and the cooperative credit movement will be able to make more credit available for the expansion of Ceylon’s agriculture an industry.”

He emphasised that as “lender of the last resort” the Central Bank would be ready at all times to lend to the commercial banks and thus make the banking system more vulnerable in times of crisis. This, together with the bank’s supervisory function, should make it possible for the public to use the banking system with complete confidence, he said.

In this context, the Prime Minister too, in his speech, touched on the fact that the country would not, and should not, depend primarily on outside aid. “We have virtually reached the limit of expansion in our major industries, especially tea and rubber. We must now develop new industries to provide new avenues of employment for our people. To this end we must now rely mainly on our own initiative and enterprise and on our own capital resources,” he said.

Governor’s salary

Since the service of Governor Exter was for a limited period, the question of his successor was raised in the House of Representatives. Dr. N.M. Perera, Leader of the Opposition asked about the need to train a Ceylonese for the post of Governor and also about the salary of the expatriate Governor and whether a Ceylonese would be paid the same.

Saying that the matter would be considered at the appropriate time, Prime Minister Senanayake, in his reply, said that the Governor’s salary amounted to the basic salary and the overseas allowances paid by the Federal Reserve Board during the period of his services to the Ceylon Government as adviser, plus compensation for the estimated loss of increments and retirement and insurance benefits sustained by the terminating his employment with the Federal Reserve Board. The total salary per annum was 11,875 dollars, he said.

In the early part of 1953, John Exter notified the Government of his intention to leave to accept an appointment in USA and requested that he be released as early as possible.

Exter left in July 1953 and was succeeded by the first Sri Lankan Governor. That’s another story.