Published by EH.Net (June 2017)

Wadan Narsey, British Imperialism and the Making of Colonial Currency Systems. Basingstoke, UK: Palgrave Macmillan, 2016. xv + 356 pp. $115 (cloth), ISBN: 978-1-137-55317-1.

Reviewed for EH.Net by Kurt Schuler, Center for Financial Stability

There must be few cases of a publication by an active scholar so long delayed as this book. Wadan Narsey wrote the bulk of it as his dissertation at Sussex University (England), completing it in 1988. That was at the beginning of his career as a university professor in his native Fiji. His retirement, hastened by the military dictatorship of which he was an outspoken critic, gave him the leisure to revisit and revise the dissertation for publication. The result is a work that has at least as much interest as when it was first written. There were many critics of the world monetary system then; there are at least as many now. It is all the more important, then, to know whether previous incarnations of the world monetary system worked better than the present one, or whether they had hitherto neglected disadvantages that should weigh against them.

The central argument of the book is that the British government arranged colonial monetary systems much more for its benefit than for that of the colonies. The British government’s ability to commandeer colonial financial reserves in London was crucial to enabling the Bank of England and the London financial market to avoid a number of crises. Among Britain’s colonies, those with a white majority or a large white minority received more advantageous treatment than majority nonwhite colonies, contributing to their faster economic development.

After an introduction laying out the author’s arguments and how they differ from conventional views, the book discusses how Britain adopted the gold standard; the general outlines of the currency policies it established for its colonies; case studies of currency policies in India, the Straits Settlements (present-day Singapore and Malaysia), West Africa, and East Africa; how Britain used colonial currency reserves to support the often weak pound sterling, especially after World War I; British government influence on economists’ debates about currency boards in the period of decolonization; differences between imperial currency policies in white and nonwhite colonies; and a conclusion. There is much more material than a brief review can cover: the introduction specifies no fewer than nineteen misconceptions that the author aims to dispel. I will therefore focus on matters closely related to the central argument.

It may be useful to begin by describing the attitude of Britain and other modern colonial powers toward currency policy in their colonies. (This paragraph is a combination of facts Narsey discusses and my own observations.) All the colonial powers considered currency policy to be a power reserved to the imperial government, not left to the choice of local officials either appointed or elected. The colonial powers jealously guarded the prerogatives of minting coins, setting the legal value of foreign coins, chartering banks, and regulating note issues. The frequent result of their centralizing impulses was shortages of currency. Colonists tried to alleviate shortages by expedients that they hoped would escape imperial attention but that usually did not. All the colonial powers used currency policy to promote imperial ties over regional ties to countries outside the empire. At least for its larger colonies, every colonial power established a note issue and often a coinage distinct from its own. Doing so created the possibility of separating colonial from metropolitan currency policy in case of war or other exigencies. Also, given that the central banks of the nineteenth century colonial powers were privately owned, separating colonial from metropolitan note issue avoided giving the central banks even more influence than they already had. None of these points is typically mentioned in textbook accounts of money or even in many historical accounts of the world monetary system.

The book touches on the British monetary debates of the early nineteenth century, but to my taste gives insufficient attention to how they influenced British colonial currency policy. The first currency board was established in New Zealand in 1847 by a governor who had absorbed the ideas of what came to be called the Currency School of British economists. In keeping with the Currency School’s dislike of multiple note issuers, he persuaded the legislature to replace private competitive note issue with a government monopoly. Similarly, James Wilson, though a member of the opposing Banking School, contended when he became the top finance official for India that note issue was no necessary part of banking, and likewise replaced private competitive issue with a government monopoly that began in 1862. After that, government monopoly of note issue gradually spread to other British colonies in accord with the largely unexamined assumption that, like the minting of coins, it was properly a prerogative of the state.

Narsey spends considerable time arguing that the coinage system of most British colonies was disadvantageous to the inhabitants because there were no local gold coins, so redemption was in fiduciary silver coins having unlimited legal tender or funds in a London bank. He claims that the British government wanted the colonies as a dumping ground for British silver coins. I am unclear why that was such a big benefit, and who it benefited. The largest producers of silver were countries outside the British Empire. If the Royal Mint were the intended beneficiary as the producer of the coins, would it not have been more profitable to issue token coins? And from some theoretical standpoints, such as Knut Wicksell’s ideal of a pure credit economy, redemption in London funds seems superior to redemption in gold coins.

Narsey is on firmer ground with his criticism of note issues. By the time of World War I, currency boards had become the standard imperial prescription for colonies where private competitive issue had never taken root or was considered desirable to replace. Narsey assembles figures and damning archival evidence showing that over time, the British Treasury increasingly required colonial currency boards to concentrate their London reserves in low-yielding assets. Over the protests of colonial administrators and the Crown Agents, a government body that managed the London reserves of many colonies, reserves formerly invested in the securities of other British colonies, British municipalities, or long-term British government securities were shifted to short-term British government securities and bank deposits earning little or no interest. There was no justification in portfolio management for such concentration in short-maturity, low-yielding assets; it was simply a way for the British government to forestall a buildup of British liabilities to the colonies that they might at some point want to redeem for foreign currency.

Although Narsey focuses his analysis of London reserves on currency boards, he explains that there were also other types of colonial funds that combined were even larger. Colonial savings banks often invested in British securities. To enforce prudent finance, colonial governments had to hold reserves in London equal to a certain percentage of average revenue. The British government also expected marketing boards and other colonial entities with surplus funds to hold a large portion in London. As with colonial currency boards, over time the British Treasury required these bodies to hold increasingly large concentrations of short-maturity, low-yielding assets. Even aside from the question whether such large London reserves were necessary in the first place, low yields significantly reduced the amounts colonial governments earned, which they might have used for spending on roads, schools, public health, or other things having high economic returns.

It is well known that after World War II the British government was quite worried about the possibility that British colonies might want to exchange their sterling reserves for U.S. dollar reserves, on such a scale that Britain would be unable to satisfy the demands for redemption. Narsey contends that even before World War I, the stability of the London financial market and the Bank of England relied heavily at times on colonial reserves and the British government’s ability to direct them into channels that did not produce the best returns for colonial governments. His evidence is provocative but, because it is outside of his main focus, necessarily incomplete. If correct, it would upend the longstanding view of the Bank of England as a pillar of stability under the pre-World War I gold standard.

The imperial government allowed more latitude for local influence on currency policy in white colonies (or colonies with a large minority white population, notably South Africa) than in nonwhite colonies. White colonies were more often allowed to have private competitive note issue; substantial local asset backing for government note issue, rather than 100 percent external assets; gold coins; and their own mints. Narsey attributes the faster economic development of white colonies in part to currency policies that required less holding of foreign assets. I am skeptical that currency was a big factor. Countries populated mainly by the descendants of British settlers are not just among the most successful colonies that have ever existed, they are among the most successful nations. They are so successful that I doubt they are the proper standard of comparison. The long-independent countries of Latin America, or the countries of Central Europe that became independent after World War I, had even more autonomy than the white British colonies, hence even more possibility for making currency policy promote economic development. Most failed miserably, suffering episodes of exchange controls and high inflation that retarded their financial systems and did nothing to promote growth in the wider economy. The same is true in most former British colonies that have replaced currency boards with central banks. What under currency boards were often one-to-one exchange rates between the local currency and sterling frequently depreciated to rates of hundreds, thousands, or, in the case of Zimbabwe, trillions of local currency units per pound sterling. Hence despite the justice of Narsey’s criticisms about overconcentration of reserves in low-yielding assets, I suspect that currency boards were probably only modestly worse than the best available option and considerably better than some options for exchange rate policy and the structure of the monetary authority.

The book is right up my alley, but even taking that into account, I have more heavily underlined it and scribbled in the margins than anything I have read in years. Read it if you are or aspire to be a scholar of the world monetary system of the nineteenth to mid-twentieth centuries; the role of sterling in the system; British imperialism; or currency boards. You may find a substantial amount that you disagree with, as I did, but it will stimulate you. Reflecting its origins as a dissertation, the prose can be dense and repetitive, but it is because the subject matter is complex and not because it is laden with jargon or passive voice.

An old joke claims that there are two kinds of people, optimists and realists. Continually asking, as Narsey does, “Who benefits?,” is one of the marks of a realist. Economists are always in need of a dose of realism to remind ourselves that there are more things in heaven and earth than are dreamt of in our textbooks.

Kurt Schuler is Senior Fellow in Financial History at the Center for Financial Stability in New York. In the 1990s his writings on currency boards, mainly with Steve Hanke of Johns Hopkins University, influenced the establishment of currency board-like systems in Estonia, Lithuania, Bosnia, and Bulgaria. His most recent book is The Bretton Woods Transcripts (with Andrew Rosenberg, 2013). These are his personal views.

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