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How free banking ended in India

Under British rule, banks in India initially issued notes competitively. That changed because of James Wilson. Wilson is best known today as the founder of the Economist magazine, but he was a man of many accomplishments, including being a successful factory owner; a founder of one of the corporate ancestors to today's Standard Chartered Bank; and member of Parliament. One of his daughters married Walter Bagehot, who would later become the third editor of the Economist and who wrote a fine appreciation after his father-in-law's death.

In 1857 and 1858 the Sepoy Rebellion against the British East India Company nearly overthrew British rule in India. In response, the British government took over the rule of India from the company. It inherited a fiscal mess. The rebellion had reduced tax revenues while requiring a large increase in expenses for its suppression. The British government needed somebody to straighten out India's government finances, and it picked Wilson because during his time as a member of Parliament he had worked capably in bodies dealing with Indian affairs and finance. Wilson was appointed Financial Member (like minister of finance) in the Indian colonial government and sailed to Calcutta, then the capital of India, in 1859.

Wilson proposed spending cuts, tax increases, reforms in budgeting procedures, and a government monopoly of note issue. Wilson’s case for a government monopoly of note issue was that (a) notes enabled a considerable saving of cost over using coins; (b) the government would reap a large part of such savings; (c) the savings for all would be largest if the notes were legal tender; (d) it would be inappropriate for bank-issued notes to be legal tender; (e) government notes could be issued according to procedures that would make them secure, in fact more so than bank-issued notes; (f) a uniform, reliable, legal tender currency would contribute to government revenue both by promoting faster economic growth and by generating seigniorage; and (g) issuing notes was not a necessary part of the business of banks.

Earlier in his career, in the book Capital, Currency, and Banking, Wilson had defended freedom of note issue in Scotland, but had also stated the view that  issuing notes was not a necessary part of the business of banks. In India at the time he proposed a government monopoly, note issue was quite small compared to coinage in circulation and notes were little used outside the three main centers of British administration–Calcutta, Madras, and Bombay. Wilson evidently considered that the benefits of a government monopoly of note issue were preponderant in the Indian case.

Wilson died, apparently of a tropical ailment, in 1860 and was buried in Calcutta. His unmarked grave was rediscovered nearly a century and a half later by an Indian tax official with an interest in history. Wilson's successor as Financial Member adopted Wilson's proposal in slightly modified form in Act 19 of 1861 and note issue became a government monopoly in India starting March 1, 1862.