Like with all great crashes, some had noticed the cracks. “… cash balances (of banks) seem, from the available indications, to be hopelessly inadequate; and it is hard to doubt that in the next bad times they will go down like ninepins.
Photograph: Francis Mascarenhas/Reuters
If such a catastrophe occurs, the damage inflicted on India will be far greater than the direct loss falling on the depositors,” said John Maynard Keynes in his May 1913 work “Indian Currency and Finance”, written before his path-breaking work in macroeconomics laid the foundation of dealing with global crises.
Keynes had started his career as a clerk at the India Office in 1906.
“… every banking institution has to work with extreme caution in selecting its investments,” warned Indian Specie Bank chairman Vithaldas Thackersey.
His own bank collapsed by 1913. The bank had speculated in pearls and gambled in the share market. Other bank failures were round the corner.
Many brokers whose dealings were tied to these banks were swept up in the turmoil.
Jahangir Byramji, a key member of the exchange, saw his fortune collapse with bank failures.
Photograph: Francis Mascarenhas/Reuters
He had large holdings in Manekji Petit Mill, valued at ₹3,200 a share at their peak.
But now prices were falling fast. Stock-exchange officials feared a contagion if markets were allowed to crack further.
They persuaded brokers who had sold Manekji Petit Mill shares at ₹3,200 to buy them back at ₹2,600 to stabilise prices.
The market price had fallen to ₹2,000.
“… the Board begs leave to declare that all members should without disputing anything in voice back their purchases and sales with their own parties, whereby the Board believes all confusion in the shares of Manekji Petit Mill for the Moorat settlement will be removed,” said the resolution on October 27, 1913.
The brokers cooperated but it came with a cost.
They ultimately sold their shares between ₹1,800 and ₹2,000 and faced heavy losses.
Photograph: Francis Mascarenhas/Reuters
No bank that may have typically picked up the other end of the trade was willing to do so, except the Central Bank of India.
In some ways, the root of the crisis can be traced to the partition of Bengal in 1905.
The Swadeshi movement, which took shape from agitations surrounding the move, led to attempts at forming Indian-led financing institutions such as banks.
Many were small and inadequately regulated and insufficiently capitalised.
The banks competed for deposits and raised interest rates to attract capital.
They speculated with the money mobilised because there was no other way to pay high interest to depositors.
They punted on pearls and bullion. They lent money for long-term businesses by repeatedly rolling over short-term loans — all without adequately checking on the prospects of the businesses they were lending to.
No surprise then a dozen banks collapsed in 1913.
Another 42 followed the next year, when World War I broke out.
But the war turned the tide. While banks continued to be under stress, increased demand to meet the needs of the conflict boosted profits and market indices.
Photograph: Danish Siddiqui/Reuters
Indian companies made money by supporting the war efforts through supplies and capital flowed into the stock market.
The value of a membership card on the Bombay Stock Exchange (as it was then called) rose from ₹2,900 in 1914 to ₹48,000 in 1921.
Keynes had advocated a central bank for India, among other things, to develop more prudent banking practices in the country.
The debates on a central bank had been going on since the 1800s.
The Reserve Bank of India finally came into being in 1935.
