Explain the main features of money and credit policies in India during the pre-Independence era.

Pre-British Monetary and Credit Systems

Before the arrival of the British, India had a well-developed, albeit localized, monetary and credit system. The predominant currency was metallic – silver rupees, gold mohurs, and copper coins. Indigenous banking systems flourished, including:

• Hundis: Bills of exchange used for trade and remittances.
• Mahajans: Indigenous bankers who provided credit to merchants and agriculturalists.
• Chettiyars: A prominent banking community in South India, specializing in lending to traders and landowners.

Credit was largely informal, based on personal relationships and community ties. Interest rates varied depending on risk and local conditions.

Monetary Policies under the East India Company (1757-1858)

The East India Company’s initial focus was on revenue extraction. Their monetary policies were largely geared towards facilitating this. Key features included:

• Currency Manipulation: The Company initially relied on existing coinage but gradually introduced its own coins, often debasing the currency to increase profits.
• Minting Control: The Company gained control over mints, allowing them to regulate the supply of coins.
• Limited Banking: The Company established its own banks, like the Bank of Hindustan (1773) and the Bengal Bank (1784), primarily to finance its trade and military operations. These were not accessible to the general public.
• Drain of Wealth: The Company’s policies led to a significant drain of wealth from India, as bullion was exported to Britain to pay for goods.

Monetary and Credit Policies under the British Crown (1858-1947)

After the Sepoy Mutiny of 1857, the British Crown assumed direct control of India. This led to more structured monetary and credit policies.

Currency Reforms

• Standardization of Currency (1861): The Indian Currency Act of 1861 introduced a unified currency system based on the silver rupee, establishing a mint in Calcutta.
• Gold Standard (1898): India was placed on the gold exchange standard, linking the rupee to the British pound. This aimed to stabilize the currency but also made India vulnerable to external shocks.
• Paper Currency: The introduction of paper currency, initially issued by the government and later by the Reserve Bank of India, gradually replaced metallic currency.

Banking Developments

Bank	Year of Establishment	Significance
Bank of Calcutta	1806	First modern bank in India, primarily serving European merchants.
Bank of Bombay	1843	Focused on financing trade and commerce in Western India.
Bank of Madras	1843	Similar to Bank of Bombay, serving Southern India.
Imperial Bank of India	1928	Merged the three Presidency Banks; served as a central bank before the RBI.
Reserve Bank of India (RBI)	1935	Established as the central bank of India, responsible for currency issue, banking regulation, and monetary policy.

Despite these developments, banking penetration remained low, particularly in rural areas. Indigenous bankers continued to play a significant role in providing credit.

Credit Policies and their Impact

• Limited Credit to Agriculture: The British government and banks were hesitant to extend credit to the agricultural sector, viewing it as risky. This contributed to rural indebtedness and agrarian distress.
• Urban Bias: Credit was largely concentrated in urban areas, benefiting merchants and industrialists.
• Land Revenue System: The imposition of various land revenue systems (Permanent Settlement, Ryotwari, Mahalwari) often led to increased indebtedness among farmers.
• Development of Financial Markets: The establishment of stock exchanges in Bombay (1875) and Calcutta (1901) marked the beginning of organized financial markets in India.