CHAPTER 9

(Excerpted from N.U. JAYAWARDENA The first five decades)

NU, aged 26, published his first important article on the Sri Lankan economy, in the Ceylon Observer Centenary Issue of 4 February 1934 – two months before he was to begin work at the Banking Commission. It was a sweeping 100-year survey of the economy between 1834 and 1934, written in his clear style. As he stated:

“One of the arresting features of the economic history of Ceylon during the last hundred years is the phenomenal growth of her trade. Between 1834 and 1926, when the peak was reached, the value of trade increased nearly two hundred fold. In the same period there also occurred a complete change in its character and distribution. From a few staple articles, the schedule of imports and exports has expanded into a numerous list, which, particularly in regard to imports, is continually increasing.”

The article not only described imports and exports over the period and issues concerning the balance of trade, but also the fluctuations in the economy, and cyclical recessions, including the collapse of the coffee industry in the late 1870s. NU wrote about the five-year recession (1880-85) caused by the coffee crisis, the “annihilation of capital values,” and the collapse of the Oriental Banking Corporation in 1884, one of the country’s early ventures in banking. The period 1900 to 1913 he styled the “Good Years,” a unique period of “universal progress and real prosperity”; and he claimed that there was “no comparable period in the history of Ceylon trade,” in tea, rubber, coconut and graphite. NU, who would soon be involved in analysing the need for a national bank, described the crash of that banking corporation in 1884 as follows:

It was one of the most terrible blows that ever fell on Ceylon. The effect was disastrous for a time, but the courageous action of the Governor in guaranteeing the discredited notes of the defunct bank saved the country from far more serious evils.

“Afghan” man (Pathan)

What NU called an “unparalleled development” occurred from 1886 to 1900 when tea, coconut and minor products flourished with “the rush of tea” becoming “a veritable stampede,” resulting in large exports and increased imports. This boom “of the first magnitude” ended with the First World War of 1914-18 which was a “cataclysm” and “universal upheaval.” The rubber and graphite industries, which had soared due to wartime demands, “fell headlong” in 1918. This was followed by what NU referred to as “the craziest boom in history,” with a “terrible orgy of spending” occurring between the decades 1919 to 1929, when the value of both exports and imports soared. But fluctuations continued and the “Good Years” ended in the Depression of 1929-33:

The Wall Street Crash in the summer of 1929 heralded the advent of the depression. In the next five years it raged in full force; tea, rubber and coconut all withering before its icy blast. The destruction it wrought and the misery it fostered form recent history and require no repetition. Trade shrank in value to pre-war figures…

The bottom was not reached until 1932, when exports receded to what they were 22 years ago. (ibid)

He concluded by asking the question: “Is this only a passing ripple before a gathering storm or an omen of better times to come?”

The Economic Depression of 1929-33

NU would have been profoundly affected by the Depression. He not only witnessed the impoverishment of his country through economic collapse, but would also have seen the value of his rubber holdings fall sharply. ‘From rags to riches’ was a phrase NU often used (speaking of himself ), but the period 1929 to 1933 was a case of the opposite – as the country descended from the ‘boom years’ of the mid-1920s, to the hard times of the Depression. The following figures from H.A. de S. Gunasekera (1962, p.165) vividly illustrate the extent of the drastic fall in the prices of tea and coconut as well as the “ruinous slump in the rubber industry” (ibid, p.66).

Another adverse consequence of the 1929-33 Depression was linked to imports – mainly foodstuffs and manufactured goods. The fall in the prices of Sri Lanka’s exports – mainly primary products – was greater than the fall in the price of industrial goods, leading to a serious adverse balance of trade (ibid, p.174).

As Gunasekera (ibid, p.174) comments: “The largest deficit occurred in 1932 when the value of exports declined to nearly onethird of its value in 1926 while the value of imports had fallen only one-half.”( The prices of exports in this period, taking 1925 as the base year, were calculated by Professor Das Gupta (quoted in Kumari Jayawardena, 1972, p.311)

The Depression resulted in grave financial difficulties for local capitalists, who had few sources of credit. These difficulties were a cause for concern since foreign banks were also reluctant to give credit to locals. In 1929 the labour leader A.E. Goonesinha said, “never since British rule has the country been faced with such a terrible plight” (K. Jayawardena, 1972, p.310). He was not exaggerating. All classes – capitalists, landowners, clerks and workers – were hit by the dramatic slide in the economy, and the country was exposed to the worst hazards of the trade cycle. As a consequence, plantations and factories were forced to close down, and government and private firms had to lay off employees, resulting in severe unemployment among skilled, unskilled and white-collar workers. This created many social problems.

Some consequences of these events included the increase in communal clashes fuelled by trade union leaders, who in a situation of unemployment, raised slogans calling for the ‘deportation’ of workers from Kerala (Malayalis), who were part of the Colombo workforce. Moreover, ethnic tensions spread to the middle classes who, affected by the Depression, denounced the South Indian Chettiars for their grip on credit facilities.

The Chettiar Phenomenon

The need for a national Bank of Ceylon was keenly felt in the years of the Depression. The British banks did not think locals were creditworthy, and as there were no national commercial banks at this time, Sri Lankan borrowers were dependent on a rather primitive credit system run by the Nattukottai Chettiars. As W.S. Weerasooria, in his book on the Chettiars, wrote:

For most Ceylonese the Chettiars were the only source of credit, whether long term or short term. They made loans for the purchase and development of estates as well as for trade, production and consumption… Whatever

Ceylonese enterprise existed was largely indebted to the assistance provided by the Chettiars. Ceylonese exporters and importers, retailers and small ‘boutique-keepers’, estate owners, coconut millers and arrack renters… had to obtain accommodation from the Chettiars… [who] were responsible for the thin trickle of credit which found its way to internal trade and production. (Weerasooria, 1973, p.28)

Weerasooria notes the “alliance” between the British banks and the Chettiars. These banks loaned the Chettiars over Rs. 25 million in the years between 1900 to 1925, and “the Ceylonese who borrowed from the Chettiars paid high interest rates referred to in business

circles as the ‘Chetty rate of interest’” (ibid, p.xv). The emergent local capitalists, merchants and plantation owners – who up to the 1920s had done well – were also heavily dependent on Chettiars for credit from the 19th century onwards. Lavish weddings were held and large dowries given with loans obtained from Chettiars, and often at these weddings the Chettiar had an honoured place. As H.A. de S. Gunasekera (1962, p.196) commented, the Chettiar was: …ready to accommodate the genuine businessman… the speculator and spendthrift. He lent as readily to the exporter of desiccated coconut as to the impecunious landowner trying to raise a dowry for his daughter.

In fact, many government servants – some from the highest levels of government – were reliant on the Chettiars for loans. According to Vernon Gunasekera (1981, pp.34-35), in the 1920s and early 1930s it was not an uncommon sight to find Chettiars waiting outside government or mercantile offices, in Colombo or provincial towns, to lend money or collect repayment. The problem became so acute that the first State Council of 1931 amended legislation, making it a penal offence for moneylenders to demand payment in person at anyone’s residence or place of work. This was initiated after “a plaintiff-creditor tried to serve writ on a legislator entering the Council.”

NU at his desk

The managerial staff of the foreign banks was European, while the clerical staff consisted of Sri Lankans. The Banking Commission reported on the social distance between local investors and the foreign bankers:

An ordinary Ceylonese has no opportunity to meet a European bank manager or even a junior officer, in his daily life, but a European merchant can almost daily meet his banker in the club or on the sports field.” (Weerasooria, pp.30-31, quoting from the Ceylon Banking Commission Report)

The problems culminated in 1925 when a Chettiar firm collapsed, the banks stopped giving loans to Chettiars. During “The Chetty Crisis,” as it was called, the Chettiars began to foreclose on local borrowers. Weerasooria (p.xvi) referred to:

…the spate of litigation initiated by the Chettiars against their Ceylonese borrowers who had defaulted in payment. Many a Ceylonese landowner lost his property to the Chettiar and many a Ceylonese debtor ended up in the Insolvency Court at the instance of his Chettiar creditor.

The “Chetty Crisis” of 1925 revealed not only the dangers of indiscriminately advancing unsecured loans, but also the gross inadequacies of the prevailing credit system and the need for a national bank.

The Banking Commission

H.A. de S. Gunasekera (1962, p.200) has observed that:

At a certain stage in the history of every colonial country, there grows up an indigenous capitalist class increasingly anxious not only to take over political responsibility, but also to play a larger role in the economic life of the country.

There was a public outcry at the worsening economic situation, inspired by growing national sentiment among politicians, local traders and landowners. In the State Council, George E. de Silva, the member for Kandy (known for his reformist and nationalist leanings), proposed in November 1932 that a commission be appointed “to go into the system of commerce, banking and insurance of this island.” This resulted in the appointment of the Ceylon Banking

Commission with Sir Sorabji N. Pochkhanawala, an Indian banker, as chairman, along with Sir Marcus Fernando and Dr. S.C. Paul as members. Professor B.B. Das Gupta served as Secretary, and N.U. Jayawardena as Assistant Secretary to the Commission. Pochkhanawala had worked as an accountant in two banks in Mumbai, the Bank of India Ltd – a private bank established in 1906 – and another private bank named the Central Bank of India Ltd, Bombay, founded in 1911.

He belonged to the Parsi community of India which, from the 19th century onwards, dominated the local entrepreneurial, banking and managerial sectors in India, and were renowned for their pioneering activities in Indian capitalist development in colonial times. Amiya Bagchi writes that the Central Bank of India Ltd.: “was the outcome of the Herculean efforts of… S.N. Pochkhanawala, who prevailed upon Sir Pherozeshah Mehta to be its chairman.

” By 1923 this bank was “the biggest Indian joint-stock private bank in terms of capital and reserves” (Bagchi, 1997, p.103). By 1934 Pochkhanawala, who had been knighted for his services to the banking sector, had become the managing director of the Central Bank of India Ltd., and in later years became its chairman. Pochkhanawala was to help Sri Lanka launch its first national bank. Pochkhanawala’s earlier “Herculean efforts” were, no doubt, qualities that inspired NU, who worked closely with him in the arduous work of the Banking Commission.

Public sittings of the Banking Commission were held, during which evidence was taken from 287 individuals and institutions. Many moving accounts of bankruptcy, indebtedness and financial ruin were related at those sittings, providing NU with an in-depth exposure to the hardships endured at that time. The findings and evidence contained in two volumes were published as Sessional Papers Nos. XXII and XXIII in November 1934.

George E. de Silva, who had proposed the establishment of this Commission, gave important evidence at the sessions, voicing the concerns of all classes of Sri Lankans during the Depression years – including the entrepreneurs, merchants and government servants. Speaking as a nationalist politician, his main grievance was the foreign control of banks in Sri Lanka and “the tremendous price the country is paying in allowing their banking to be done by foreigners.” In his words:

It is curious that none of the banks working in Ceylon is owned by Ceylonese. I should be surprised if Ceylonese held shares in these banks. These banks have not brought capital from abroad but are working here by collecting and utilizing the money of this country. They pay a small rate of interest on their deposits and that money is again lent to people of this country through the intermediary of Shroffs and Chettiars at a high rate of

interest, sometimes 15 to 18 per cent. The interest that is ultimately paid by the borrower is so high that his business or production can hardly bear it. The result of this system could be nothing but collapse and failure in the end. (Banking Commission, 1934, vol.2, pp.419-21)

George E. de Silva also criticized the absence of a “national policy,” and the failure of the banks to train locals, and elaborated on the lack of investment and therefore of economic development. He stated:

The existing banking system lacks national policy, which would certainly be in the forefront if the institutions were in our own hands. There would then be the desire to assist in the growth of our economic resources. The present bankers have not that patriotism to guide them. Their object is merely to make money and assist the trade and industries of their countries… [They] have deliberately kept out people of the Island from responsible posts. It would have been something if they had realized their responsibility to Ceylon and tried to train our own men in the banking profession. (as quoted in Ceylon Banking Commission, vol. 2, 1934, pp.419-21)

The impact of the economic depression on local investors was deplored by de Silva. He also blamed the policies of the foreign-owned banks during these years of crisis. If national banks had existed then, they “would have adopted more sympathetic policies,” he added. Gunasekara notes that this problem was common in a colonial situation:

The failure of foreign banks to integrate themselves fully with the internal economy has been a common phenomenon in countries which have been the field of capital investment by overseas countries. (Gunasekera, pp. 204-5)

The problems and hardships facing the local plantation owners were described by de Silva:

Our people borrow money for developing estates and they pay exorbitant rates of interest. As soon as the estates approach bearing point they find themselves in difficulties and cannot meet their obligations. Ultimately the land has to be sold and the borrower loses all his inheritance and life savings.

The plight of low-income groups such as clerks was also referred to by de Silva:

The people are heavily in debt. Moneylenders, particularly the Afghan [Pathan] type, do a thriving business charging poor unlucky persons sometimes over 100 per cent by way of interest. Mostly poor people and clerks

get into their clutches and they are ultimately ruined. (as quoted in Ceylon Banking Commission, vol. 2, 1934, pp.419-21)

An “Invaluable Document”

The Ceylon Banking Commission Report, according to Weerasooria, “is looked upon as one of the best and most authentic and authoritative accounts of the financial and economic condition of the island at that time” (Weerasooria, 1973, p.xvii). Gunasekera (1962, p.201), describes the Commission Report as: an exhaustive analysis of every aspect of credit in Ceylon, ranging from the organized credit institutions such as the commercial banks and the State Mortgage Bank, to the Chettiars, pawnbrokers, ‘boutique keepers’ and Afghan moneylenders who were the main suppliers of credit to the Ceylonese population.

The Commissioners acknowledged the work of NU, stating at the end of the Report that they “wished to place on record our appreciation of the able help that we have received from our Assistant Secretary with his knowledge and experience of Government Departments.” NU claimed that “the brunt of the work” of the Commission fell on him, especially as the Secretary, Das Gupta, served only on a part-time basis. Interestingly, as NU progressed upwards in his career, he would work again with Das Gupta in different capacities, first in the University College of Ceylon and then later in the Central Bank, when NU became Deputy Governor.

NU not only contributed to the work of the Banking Commission but also would have learned much from this important exercise, benefiting from interaction with Pochkhanawala and Das Gupta and also from listening to the evidence presented from a variety of sources. For NU, whose Economics degree had given him a theoretical understanding of the subject, the shocking stories of financial ruin of Sri Lankans during the Depression exposed him to the practical economic problems that people faced. It was a lesson in the economic realities of colonial rule, the backward nature of the economy, the need for local financial institutions, the class structure of Sri Lankan society and the role of foreigners – both British and Indian – in controlling credit. Being associated with a key commission on banking would have further bolstered NU’s interest in the banking sector, with which he remained closely involved for the rest of his life.

For NU, the experience was of tremendous value. Many years later, in 1961 as a Senator, NU, in a debate on the Budget and the Bank of Ceylon, would refer to the Banking Commission as being
the place where he cut his “financial teeth.” (N.U. JAYAWARDENA The First Five Decades Chapter 8 can read online on https://island.lk/early-career-and-londondegree/)

By Kumari Jayawardena and Jennifer Moragoda ✍️
Such financial teeth as I possess were cut with the Commission that was appointed to examine the banking system of this country – the Pochkhanawala Commission – of which I was Assistant Secretary.(N.U. Jayawardena, Senate Debate, 3 Oct. 1961, Hansard, p.832)