Ceylon Currency British Period by B. W. Fernando
Chapter VII.

1884-1936

VII.-1884-1936. FAILURE OF THE ORIENTAL BANK CORPORATION AND THE RE-ESTABLISHMENT OF A STATE NOTE ISSUE.

57. Bank suspends Payments.

The Oriental Bank Corporation which had had a prosperous run for 33 years closed its doors on May 3, 1884, causing a collapse of credit and bringing the trade of the Island to a stand. still. Its note issue at the time amounted to Rs. 3,211,085. The note issue of the Chartered Mercantile Bank, the only other bank which issued notes, amounted to Rs. 921,495. The notes of the Oriental Bank therefore formed an integral part of the Island's currency, and when these suddenly lost their value the panic among all classes of the community was immediate and severe. Taxes could not be collected, Courts of Justice approached, labour employed, nor even provisions bought without considerable difficulty. It was even found necessary to suspend for 24 hours the payment of Post Office orders.

58. Governor guarantees Bank Notes and recommends a Government Note Issue.

Sir Arthur Gordon, with statesmanlike courage and promptitude intervened and in order to arrest the growing panic and restore confidence, undertook on May 5, 1884, to transfer to the Colonial Exchequer the obligations of the insolvent bank in respect of the notes then in circulation in the Island. In informing the Secretary of State of the under taking given, the Governor requested him not to concede the privilege of a note issue to any bank that may be about to replace the Oriental Bank, and proposed the establishment of a Government Note Issue, submitting a draft ordinance and urging, inter alia, as follows :

"The Oriental Bank Corporation has enjoyed the privilege of a note issue in Ceylon; it has had the advantage of a very large portion of the banking business of the local Government; every provision that ingenuity could devise to secure its stability was included in its Charter and imposed on it by law; yet on the 3rd instant it suspended payment with disastrous consequences. What has happened in the case of this bank, may, and probably will, happen again in the case of any bank that may take its place with the privilege of a note issue. We shall again see the paper currency of the country depreciate in a day 50 per cent. within a stone's throw of the bank itself, and rendered wholly valueless in more distant places; we shall again see a universal dislocation of all business and a total collapse of credit, including that of the Government itself, threatened.
"We shall again be brought face to face with the fact, on the one hand of the people being unable to buy food and, on the other, with that of the chetties who are the principal rice dealers in the country trooping to the Solicitor-General for leave to use fire arms in the defence of their stores; and again will Government inevitably be compelled to intervene with a guarantee,-fortunate if by such intervention, it may avert at the risk of heavy pecuniary loss still graver disaster and calamity.
"Is it wise, is it right, is it possible, willingly to invite" a repetition of such events? Is it worthwhile to incur such perils for the sake of adherence,-I am inclined to say a pedantic adherence-to general rules laid down some 30 years ago, under conditions wholly different and with a view to circumstances altogether dissimilar? These dangers will be risked, and the scenes of last week in all human probability be repeated, if the privilege of a note issue be granted to the successor of the Oriental Bank. They will certainly be avoided, so long as Ceylon remains a Crown Colony, if the note issue be undertaken by the Government."

59. Home Authorities take exception to Guarantee.

The Secretary of State (Lord Derby) and the Lords of the Treasury, while being deeply impressed with the difficulties of the situation, however, took exception to the guarantee given, the latter observing,

They also pointed out that the issue to be decided was one of those which by the Royal Instructions and by special Circular Dispatch of August 18, 1875, have been expressly reserved for the decision of the Home Government upon whom the responsibility ultimately rests whatever course of action be taken on the spot by the Governor.

Nevertheless, while the Secretary of State was disposed to think that in some details the measure might perhaps have been differently treated, he was not prepared to censure the Governor for the decision he took in the face of a crushing disaster, the full nature and gravity of which it was difficult to appreciate correctly at such a great distance from the scene of action.

60. Councils support the Governor.

Both the Legislative and Executive Councils, however, strongly supported the Governor, the former presenting an Address of Appreciation, and the latter submitting a memorandum to the Home Government explaining that any attempt to act as was suggested by the Lords Commissioners of the Treasury would have rendered the Government practically bankrupt, a result which must inevitably have followed in any case but for the guarantee which, by maintaining confidence and giving currency to the notes of the Oriental Bank, had the effect, among others, of averting it. It was further pointed out that the notes of the Oriental Bank had been virtually guaranteed by the local Government at an earlier period, the reference being to Sir Henry Ward's Minute of December 28, 1855 (paragraph 56, supra).

61. Governor's Explanation.

Sir Arthur Gordon's reply may best be stated in his own words :

"It is not my intention to offer any reply to the observations of the Lords of the Treasury beyond the remark which I think it due to myself to make, that I do not admit either their justice or their accuracy; and that they very plainly show that their Lordships are in great measure unaware of the facts of the position in which the Colony was placed on the 3rd of May, and fail to realize what position it would now occupy had the guarantee not been given. That this should be the case is very probably in a great degree my own fault, in having failed to describe with sufficient strength and vividness the actual state of affairs. I have not much leisure for careful writing, and it is quite possible that I have been too far influenced by my reluctance to paint highly coloured and sensational pictures.
" Knowing myself what I do know of the danger incurred I am still fully convinced that had the guarantee not been given calamities would have ensued, the effects of which would have been long and disastrously felt by the Colony, and which it was my duty to avert even at the risk of misconception and censure."

62. Lords Commissioners of the Treasury approve Government Note Issue.

Neither Downing street nor Treasury Chambers made any further adverse comments regarding the guarantee. The Lords Commissioners of the Treasury were, however, not quite satisfied with the position of affairs. But in view of the exceptional circumstances of the case and the peculiar situation created by the guarantee, they gave their assent to the establishment of a Government Note Issue on the model of that already existing in Mauritius, after pointing out to Lord Derby that they did not think that the failure of a bank in Ceylon, and the natural but perhaps exaggerated alarm of a Governor not specially versed in economic subjects, justified a reversal of a policy found .ed on approved authority ². Arrangements were made to cancel the powers of note issue granted to the Chartered Mercantile Bank by the existing Charter when it came up for renewal on its expiration in 1888 ; and the Governor was empowered to introduce the necessary legislation to give effect to the proposals as amended by the Commissioners of the Treasury.

63. Law Regulating the Government Note Issue.

The present Government Note Issue is regulated by Ordinance No. 32 of 1884 (cited as the principal Ordinance), as amended by Ordinances Nos. 12 of 1886, 13 of 1901,6 of 1903,11 of 1909, 33 of 1914, and 1 of 1917 (Appendix L). Important sections of the principal Ordinance and subsequent amendments are summarized below. (a) Board of Currency Commissioners created.-Section 3 establishes a Board consisting of the Colonial Secretary, the Treasurer, and the Auditor-General.

Amending Ordinance 12 of 1886 creates the Board of Currency Commissioners a " corporation" with continuance for ever, under the name and style of "The Ceylon Currency Commissioners" (a) with full power and authority to have and use a common seal, the said seal to be fixed to any instrument in the presence of at least one of the commissioners and (b) with power to appoint officers or agents for recovering dividends, interest, &c. This amendment became necessary as under section 15 of the principal Ordinance all investments in Indian Government Securities had to be made in the names of the Commissioners and each time there happened to be a change in the personnel of the Commissioners, a fresh power of attorney was required to authorize an Agent in India to collect interest. There was also a serious omission in section 18: it enacted that dividends, &c., should be paid to such person as shall be nominated, but did not say by whom such person should be nominated.
Gazette notification dated July 6, 1931, substituted the Financial Secretary for the Colonial Secretary the Deputy Chief Secretary for the Treasurer and the Commissioner of Stamps ³. for the Auditor General.

(b) Commissioners to issue Government Promissory Notes.

Sections 4-6 as amended by Ordinance No. 13 of 1901 empower the Commissioners to issue currency notes payable to bearer on demand at the office of the Commissioners in Colombo for the respective sums of 5, 10, 50, 100,500, and 1,000 rupees in exchange for silver rupees of India or gold coin which is legal tender in Ceylon but no other coin; every such note is to bear the signatures or facsimiles of the signatures of any two of the Commissioners holding office at the date borne on the note.

Amending Ordinance No.1 of 1917 gives the Commissioners the power to treat a credit at the Bank of England as equivalent to a deposit of gold. It also empowers them to issue one-rupee and two rupee notes.

(c) Notes legal tender.

Section 7 makes every currency note legal tender for the amount expressed thereon.

Amending Ordinance No.1 of 1917 makes every currency note legal tender in Ceylon for the payment of any amount.

(d) Exchange of Oriental Bank Notes for Government Notes.

Sections 8 to 10: After 31st March, 1885, the Bank's note issue in circulation on May 3, 1884, shall cease to be recognized as equivalent to money by the Government; and after February 15, 1885, and until March 31, 1885, the Commissioners shall issue currency notes in exchange for bank notes, provided they were in circulation on May 3, 1884. The said notes shall be deposited in the Treasury.

(e) Issue of currency notes in exchange for gold coin

legally current is authorized except when it appears inexpedient to the Commissioners to increase the amount of gold coins held as reserve-section 11 as amended by Ordinance No.6 of 1903.

(In 1920 the gold coins were taken out of the reserve, when they ceased to be legal tender as from August 7. Vide Proclamation in Gazette No. 7,121 of August 7, 1920.)

(f) Currency Reserve.

Sections 12-14 as amended by Ordinance No. 13 of 1901:

Commissioners are empowered to retain a reserve in silver rupees or in gold coin of one half of the amount of currency notes in circulation-section 12; and to invest the other half in Indian Government and United Kingdom or Colonial (except Ceylon) Government Securities, provided that not more than one-half of such sum shall be in Indian Government securities except by sanction of the Secretary of State-section 13. The reserve in coin and securities is to be set apart to satisfy notes-section 14.

(At one stage, the metallic portion of the reserve included subsidiary coins. These were taken off the reserve in 1916.)

(g) Sale or Exchange of Investments.

Sections 15-16: The Crown Agents along with a nominee of His Majesty's Secretary of State for the Colonies are appointed as trustees in respect of investments made in England. The Indian securities are to be in the names of the Commissioners. Power is given to both to sell or exchange investments as directed by the Governor. Securities are to be sold, if the specie reserve falls below one-third of the value of the notes in circulation; and no further investment is to be made until that reserve shall amount to one-half at the least of the amount of notes in circulation-section 17.

Amending Ordinance No.1 of 1917 suspends the operation of the above requirements as from December 30, 1916, and also the limit of the proportion of the value of notes in circulation which may be invested in securities under section 13 of the principal Ordinance.

(This was done as a war measure but the suspension still stands.)

(h) Revenue from securities. Section 18:

Dividends, interest, and other revenue from investments shall be credited to general revenue, excepting 1 per cent. which shall be appropriated annually on the whole amount of such investments, to be separately invested and to form part of the reserve set apart to satisfy notes. The Governor may with the Secretary of State's sanction order the discontinuance of such appropriation at any time wholly or partially.

In 1896 the Secretary of State sanctioned the discontinuance of the 1 per cent. appropriation until such time as the market value of "Reserve and Depreciation Fund" securities together falls below no per cent. of the cost price of" Reserve" securities alone. Amending Ordinance No. 11 of 1909 abolished the" Depreciation Fund" and authorized the transfer of the proceeds to "Reserve Fund" ; but laid down that account should not be taken of the amount of such proceeds in computing the investments under section 13 of the principal Ordinance.

(i) Accounts

Showing profits, expenses, &c., shall be published annually in Government Gazette-section 19 ; and an abstract showing notes in circulation, reserve. nominal value, as well as the latest known market value, and the cost price of the securities shall be prepared on the 10th day of each month and published as soon as may be in the Gazette section 20.

(j) Maximum Penalty.

20 years' imprisonment for counterfeiting notes-section 21;

5 years' for possession of counterfeited or incomplete notes-section 22; and 5 years' for possession of paper, moulds, &c., for manufacture of notes-section 23.

Amending Ordinance No. 33 of 1914 provides for the issue of a certificate under the hand of the Treasurer (now Deputy Financial Secretary) which would be conclusive evidence in any Court of law as to the spuriousness of a currency note.

64. Note Circulation.

The Ceylon Government currency notes were brought into circulation in January, 1885, notes of the denominations of Rs. 5, Rs. 10, and Rs. 50 being the first to be issued. The Rs. 100 note followed in October. The Rs. 1,000 note was issued in August, 1899; the one-rupee note and the two-rupee note in May, 1917, as a war measure; and the Rs. 500 note in April, 1927. Booklets containing 25 one-rupee notes, 25 two-rupee notes and 20 five-rupee notes were introduced in 1923, 1927, and 1930, respectively. The Rs. 500 note has a very small circulation. The one-rupee note has become so popular that it has driven out of circulation almost entirely the silver rupee, the standard coin of the Island. At the end of the first year of issue the note circulation (gross) amounted to Rs. 4,192,165. At December 31, 1888, it stood at Rs. 5,529,705. Its steady rise since then and its decline after the great depression will be seen from the table below which shows also the position of the currency reserve.

		Reserve.
Date.	Gross Circulation.	Metallic.	Securities at cost.
	Rs.*	Rs.*	Rs.*
1. 10. 1898	11,278	5,665	5,613
1. 10. 1908	15,007	6,371	8,636
1. 10. 1918	37,340	18,029	19,311
1. 10. 1928	57,436	22,509	42,477
1. 10. 1936	44,334	14,158	36,137
	* 000 omitted.

The note circulation reached its "peak" level in 1926 when it stood at Rs. 62,868,615 on November 5. The "per capita" circulation which stood at Re. 1.77 in 1886 steadily rose to Rs. 10.68 in 1920. It fell to Rs. 8.55 in 1923, shot up to Rs. 12.23 in 1926 (the highest figure on record), and declined to Rs. 7.76 in 1933. It stood at Rs. 7.87 in 1936.

65. Currency Reserve and Profits. At September 30, 1936, the proportion of the metallic reserve to the note circulation was 31.93 per cent; and the market value of securities amounted to Rs. 42,482,000. The currency profits for the 7 years ending September 30, 1936, amounted to Rs. 11,199,701, or an annual average of Rs. 1,599,957. In the 7 years ending December 31, 1891, the profits amounted to Rs. 467,878 or Rs. 66,839 per annum on an average.

66. Design of Currency Notes.

The notes of the denominations of Rs. 2 and over are printed on watermarked mould-made paper. They bear the facsimiles of the signatures of two of the Commissioners and serial numbers with a prefix letter over a prefix number thus: P/90 25657. Notes of the earliest issue bore no facsimile signatures but were signed at time of issue. The watermarks are as follows : ⁴.

Rs.	Left	Centre	Right
2	Dagoba	TWO RUPEES	Dagoba
	Elephant	GOVERNMENT OF CEYLON	Elephant
5	Dagoba	FIVE	.3 long and
Uniface	Elephant	RUPEES	1 short
	Flower	GOVERNMENT OF CEYLON	wave lines
5	.do.	5	.do.
>1925		CEYLON
10	Dagoba	TEN	.3 long and
Uniface	Elephant	RUPEES	1 short
	Flower	GOVERNMENT OF CEYLON	wave lines
10		10	.do.
>1925		CEYLON
50	Dagoba	FIFTY	.3 long and
	Elephant	RUPEES	1 short
	Flower	GOVERNMENT OF CEYLON	wave lines
100	.do.	ONE	.do.
		HUNDRED
		RUPEES
		GOVERNMENT OF CEYLON
500	.do.	FIVE	.do.
		HUNDRED
		RUPEES.
		GOVERNMENT OF CEYLON
1000	.do.	ONE	.do.
		THOUSAND
		RUPEES
		GOVERNMENT OF CEYLON

The size of notes differs according to denominations as indicated below.

Rs.	Inches				Inches
1	4½	X	2½
2	5	X	3
5	6¾	X	5¼	reduced in 1930 to	5½	X	3½
10	7¾	X	5	reduced in 1930 to	6	X	4
50	9¼	X	5	reduced in 1930 to	6	X	4½
100	8½	X	5⅝
500	9 3/16	X	6
1000	9¼	X	5¾	reduced in 1930 to	8	X	6

In order to afford greater security against counterfeiting a multi-colour protection rainbow tint was added to Rs. 5 and Rs. 10 notes as from 1925, and to Rs. 50 and Rs. 1,000 notes as from 1930. A design was also printed on the back of the one-rupee note in blue; Rs. 2, Rs. 5, and Rs. 50 notes in green; Rs. 10 note in mauve, and Rs. 1,000 note in brown. In the earlier issues the serial number appears only on the two top corners of the notes. In later issues the number is printed on the four corners, except in the case of the Re. I note where the number appears on the left bottom and right top corners only. As a further mark of difference to catch the eye the number is printed in black on the one-rupee note; in dark green on the Rs. 2 note; in, red on the Rs. 5 note, Rs. 500 note and the Rs. 1,000 note; in blue on the Rs. 10 note; and in dark red on the Rs. 50 note and the Rs. 100 note.

• 1 In the Straits Settlements where the Colonial Government abstained from following the Ceylon precedent, the other Banks in self. defence took on themselves the onus of cashing the Oriental Bank's notes in local circulation. "History of Currency in the British Colonies" by Robert Chalmers, p. 36.
• 2 The Imperial Government had traditionally preferred private issues and never favoured the issue of Notes by Colonial Governments and, until 1884, Mauritius afforded the only example of a State Issue in Crown Colonies.-" History of Currency in the British Colonies" by Robert Chalmers.
• 3 Notification dated January 17, 1939, substituted the Deputy Financial Secretary for the Commissioner of Stamps.
• 4 The Uniface Rs 5 and 10 dated before 1925 had the same type of watermark as the Uniface Rs50, Rs 100, Rs500 and Rs1000 described in BWF table except for Denomination in center of the Note and the watermark of the older Uniface Rs 5 and 10 were missed out and have been added to this table.

Ceylon Currency British Period 1796-1936 By B. W. Fernando, Chapter VII.
1939, Ceylon Government Press p.26-34
Contents Next APPENDIX A

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