A brief peek into Chettiar Banking system

One realises how much of economics and finances one has to undo as you keep going through material. It is amazing really.

Came across this interesting piece by Prof Malvika Nair of Troy University. She is a supporter of free banking and has written a few pieces on  free banking in India.

In free banking literature, there are these debates on whether banks should have a 100% reserve system or a fractional reserve banking system? Fractional reserve is when banks just keep a fraction of deposits as reserves and lend the rest. 100% reserve system is when banks maintain the entire amount and do not lend anything. The former ones are often credited as responsible for the crisis as depositors cannot get their full deposits at anytime. The latter one are seen as safer and do not have any such problems with deposits.

This piece is on how Chettiars operated their banks following a fractional reserve system:

Would banks operating under laissez faire adopt a 100 percent reserve ratio or a fractional-reserve rule that would allow them to affect the money supply? The Chettiar banking system in late-nineteenth-century India functioned without any government regulation, and there is strong evidence that its bankers kept fractional reserves on interest-bearing checking deposits (explicit debt contracts that were redeemable on demand), although their ability to affect the money supply was not very large.


It is quite an interesting piece and gives one a broad view of the indigeneous banking system which has just been brushed aside from our books. The end result is most of us don’t realise how today’s so called reforms are just a spin from the past. Just for info sake, the recently licenced payments banks follow a 100% reserve system. The recent entities have been given a payment twist. And then most of these indeg bankers ran a hundi system which was quite efficient in making payments. Of course, the technology and overall development was much poorer then. So most modern banking revolutions are mostly to do with technology and not banking really..

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