THE BANK OF THAILAND

​^๑Chapter I.

Introduction

One of the resolutions passed by the International Financial Conference that met at Brussels in 1920 was that “in countries where there is no Central Banks of Issue one should be established.” In the several countries where this recommendation was adopted, the setting up of a Central Bank was part of a scheme for the stabilization of the currency and the prevention of inflation which, during and after the World War of 1914-18, had led to grave economic and social disorders. The establishment of the Bank of Thailand in 2485 (1942) was due on the other hand to political rather than economic factors. A latent feeling in political circles that the country should possess a Central Bank had indeed been in evidence since 2475 (1932); and open advocation of the establishment of such an institution had occasionally made an appearance. The aims of the enthusiasts were sufficiently divergent. The young looked forward to the forming of a Central Bank as a panacea for the agricultural depression, which, it was alleged, could be cured by granting loans right and left to peasant ​​หมายเหตุ ข้อความภาษาอังกฤษที่จำลองมาตีพิมพ์ไว้ทั้งสองหน้านี้ ได้ถ่ายทอดออกมาจากต้นฉบับลายพระหัตถ์ เท่าที่ได้ทรงร่างไว้เกี่ยวกับการจัดตั้งธนาคารแห่งประเทศไทย ​ cultivators. The old harked back to the past and suggested the adoption in toto of the British Bank Act of 1844 and a real live gold currency, with what object was not clearly stated. The Treasury was provided gratuitously with a translation of the Act. On another occasion the National Economic Council was faced with a proposal so palpably absurd that it did not fail to convince the lay mind of its absurdity. The proposal was in fact to create a Central Bank for the primary purpose of facilitating an inflation of the currency.

“It is no exaggeration to say that to the vast majority even of enlightened people the principles of finance and the theory of money are a closed book”. If this observation of the Macmillan Committee were true of the British people in 1931, the extraordinary ideas that circulated in Thailand are not to be wondered at. With the circulation of such ideas it is also not surprising that the Treasury adopted an attitude of absolute opposition. It argued that a Central Bank in Thailand could in fact render no services whatever. The Bank could admittedly be made the Currency Authority with the object of removing the currency from the orbit of political interference. But if the Bank only had this function to perform, no Bank was really needed; for such result could be secured by the creation of a Currency Board, independent of Government and managing the currency under strictly defined statutory conditions. The great need for Thailand, it was contended, was an organized system of agricultural credit, a problem which a Central Bank must not touch. Furthermore, Thailands banking business was for the most part in the hands of branches of foreign banks which would not use the Central Bank at all; and, without holding the cash reserve of the commercial banks, the Central Bank could not function. The pre-requisite for a central bank must be a national banking system. Finally, it was pointed out that there was not a single Thai with banking experience; the only Thai bank being under foreign management. ​The view of the Treasury was of course technically sound; but some doubts may be expressed as to the wisdom of the attitude which it took up. An absolute and unyielding opposition to current ideas, supported apparently in influential political circles, may successfully be maintained for a certain period of time; but danger lies in the fact that the Treasury’s hands may be forced into a scheme devised in the blissful depth of uninstructed enthusiasm. A Finance Minister may resign upon the issue; another more favourable to the new ideas will be found. Experience proves that to the lay mind, names and labels count for a great deal and wisdom would seem to indicate some concession to prevailing political opinion. By adopting a sympathetic attitude and undertaking some harmless concessionary measure with a well-selected label, danger of political pressure is likely to be allayed or minimized.

It is of course impossible to say whether such pressure would have crystallized or not; for the Treasury itself took the initiative in October 2482 (1939) by the establishment of the “Thai National Banking Bureau”, a description of which will be given in its proper place. Suffice it to say here that the Bureau, which was proclaimed to be a nucleus from which a Central Bank might subsequently develop, was in fact only an executive department of the Treasury charged with the business of the issue and management of Government loans and the accepting of monies deposited by Government departments. The banks, including the branches of the foreign banks, subsequently deposited part of their cash balance with the Bureau for the purpose of check clearing. The Thai National Banking Bureau might have gone on with its grandiose name and its modest functions for a considerable number of years had not external political considerations intervened only two years after its establishment. One of the principal means employed by Japan for founding the “Greater East Asia Co-prosperity Sphere” appeared to be the establishment of Central Banks of Issue. The Central Bank of Manchou and the Central Reserve Bank ​of China had already been set up prior to the outbreak of the war in Asia. Preparations for the establishment of a Central Bank in Burma and the Philippines were commenced soon after Japanese occupation of those territories and the Bank of Burma opened its doors in 1944 much to the joy, it was said, of the Burmese people. The Bank of Manchou, be it observed, is provided with a Japanese Governor whilst the Bank of Burma employs a Japanese adviser and deputy adviser. As for Thailand, not many weeks had gone by since the entry of the Japanese millitary forces when the Japanese Embassy presented the Government with a memorandum suggesting that a Central Bank be established at once. The Bank was to be furnished with a Japanese adviser and Japanese heads of departments. This memorandum, it may be added, was presented in the usual manner, that is to say, delivered by hand and unsigned.

It is often wise to grasp the bull by the horns. There can hardly be any doubt that hesitation on the part of the Government would, in view of what happened later in Burma and the Philippines, have been met with pressure; and an institution fully equipped with a Japanese staff might have been set up to control Thai currency. On the other hand, graceful acceptance of the suggestion and adoption of it as ones own would certainly prevent pressure and might consequently avoid foreign control of the national curreney. The Government took the latter course and, as sole Adviser to the Ministry of Finance, -my British colleague, from whom I had much to learn, having of course left the service – I was charged with the duty of drawing up a charter for a Central Bank to be ready for promulgation into law as soon as possible. Credit for choosing the right course must be given to the Finance Minister.

Central banking is complex enough even to the initiated. Central Banks established in Europe and America since the War of 1914 – 18 were formed with the advice of the Bank of England which is regarded as the main repository of the accumulated wisdom ​and experience of the past in matters of banking. In drafting a Bank charter for Thailand, non-availability of such expert advice was unfortunately added to total lack of experience. I was determined however that if it so happened that the Bank could not serve the general interest of the community, – except negatively in that it may prevent foreign control of monetary affairs, – it should not be in a position to cause any harm. Herein lay another danger. In view of the extraordinary ideas prevailing in recent years, it appeared possible that the Charter might, during its legislative stage, meet with such well-intended modifications as would have resulted in the birth of a bastard Bank. Other difficulties were unavoidable. Because of the war, the international monetary position was in an unsettled condition; the Thai currency system was in a state of flux. As for commercial banking, outside Bangkok practically no facilities existed; Bangkok itself was provided with four Thai Banks, three of them established only within quite recent dates. A branch of the Yokohama Specie Bank confined itself to foreign exchange business and a branch of the Banque de l’Indo-Chine languished on apparently for the sake of prestige. There was nothing that could by any stretch of the imagination be called a money market.

The urgent political need to set up a Central Bank and the no less urgent desire to avoid dangerous modifications of the Bank charter during its legislative stage led to the embodiment of the Charter in two separate documents, the Bank Act and the Royal Decree. The Bank Act, which had to pass through the Assembly, was given the form of an “enabling” Act. It provided for the establishment of a Central Bank for the purposes of taking over the management of the note issue from the Treasury; and it empowered the executive to prescribe, by Royal Decree, the kinds of business which the Bank might transact. By early promulgation of the Act, made possible through such relegation to the Royal Decree to be subsequently issued, the Government was able quickly to give concrete evidence of the declared intention itself to set up a Central Bank. quipped with this evidence, the Economic Mission ​to Japan, of which I was a member, was able in April 2485 (1942) to persuade the Japanese Government of the inadvisability of having foreigners in a national institution of a sovereign State. Furthermore by the executives power to issue the Royal Decree, any infusion of dangerous ideas into the Bank charter was successfully avoided.

Conceived in war and politics, the Bank of Thailand was born on December 10th 2485 (1942); premature, no doubt, but sufficiently lusty to prevent foreign usurpation of the monetary crown.

Chapter II

The Thai National Banking Bureau

The middle of the year 2481 (1938) found a new Finance Minister installed in the Treasury and, upon his initiative, the question of establishing a Central Bank was again taken up. All the previous arguments against such establishment, outlined in Chapter I, still held good; but it was finally decided that at least some gesture should be made for political reasons and opportunity taken to train young men in the routine business of deposit banking. The question was the form that the gesture should take. Meanwhile the Government had decided to launch a programme of long-term internal loans for the purposes of financing the co-operative credit movement, developing local industries and assiting municipalities in the construction of water-works. The total amount to be borrowed within four years was Baht 60 millions repayable in 30 years. Machinery was required to manage the issue and service of these loans.

​This marriage of a political reason and an administrative need gave birth in October 2482 (1939) to the Thai National Banking Bureau. The law for its establishment was a brief one, containing but four substantive sections. It provided that the “That National Banking Bureau” should be set up in the Ministry of Finance for the purposes, first, of transacting such kinds of business of a Central Bank as may be specified by Ministerial Regulations; and, secondly, of making preparations for the establishment of a Bank or regulate the issue of currency with a view to securing monetary stability. The Bureau was to be provided with a capital of Baht 10 millions payable from the profit and interest accrued to the currency reserve and from the Treasury reserve. Another section of the Act contained a pious hope; it provided that the “Thai National Bank” might subsequently be established by an Act.

As regards the capital of the Bureau, it may be mentioned that upon the eve of the European war the Treasury had, as a precautionary measure, converted the U.S. dollar proceeds of the sale of silver Baht coins held in the currency reserve and also part of the Sterling balance of that reserve into gold at about 148s. 6d. per fine ounce. After war broke out, this gold was re-valued at the new Bank of England valuation of 168s. per fine ounce and the re-valuation profit, which amounted to about Baht 10 millions, was available for use as the Bureaus capital. Baht 10 millions were consequently transferred from the currency reserve.

The kinds of business which the Bureau was to transact were prescribed by Ministerial Regulations issued in March 2482 (1940). These were, first, the accepting of money on deposit from and the making of loans to public bodies and banks; and, secondly, the issue and management of loans on behalf of the State and public bodies. A general clause also appeared in the Regulations to the effect that the Bureau might transact any other business approved by the Finance Minister. ​So much for the law. On 24 June 2483 (1940) the Thai National Banking Bureau opened its doors.

The activities of the Bureau were modest. It began by taking charge of the issue, on tap, of one of the three internal loans already authorized, viz., the 4½% Co-operative Loan of 2483. For this business the Bureau received some remuneration from the Treasury. This particular activity was useful in that it provided an opportunity for the training of a small staff to transact the routine business of the issue and management of loans. It enabled the Bank of Thailand at a subsequent date to deal in an efficient manner with the issue and service of several loans.

The next step taken by the Bureau was the accepting of deposits, payable on demand. It had been the practice of Government departments to deposit with the Treasury certain sums under their care, such as money deposited with them by way of security and subscriptions to certain funds. These Departments were now made to deposit such sums with the Bureau and they were soon joined by some municipalities and a few of the semi- official commercial concerns which had recently begun to spring up like mushrooms overnight. A word here regarding the banks check clearing business would not be out of place. The practice hitherto had been somewhat similar to that prevailing abroad in days before clearing houses were dreamt of. Each bank sent a clerk to all the other banks with cheques drawn on them; and every bank kept with other banks an account, called a clearing account, to which the sums due to it were credited. For the frequent liquidation of these clearing accounts a cheque had to be drawn and cash carried from one banks to another. But soon after the Bureau started its deposit business, the banks found it convenient to keep a balance with the Bureau and book transfers began to replace the carrying to and fro of cash. Thus the banks were added to the list of the Bureaus depositors.

​Supplied with quite substantial funds by way of public, bankers and other deposits, the Bureau invested in the new Government loans and allowed, with the Treasurys approval, overdrafts to a few semi-official commercial concerns. Being however under no obligation to pay any interest upon its deposits, the Bureau had no strong incentive to acquire large earning assets and was at all times in a very liquid position. Its cash assets formed part of the Treasury working balance.

The third principal business of the Bureau was the financing of the trade with Japan. Under the Sterling exchange standard, the banks were entitled at any time to acquire Baht from the Treasury against Sterling or to obtain Sterling from the Treasury against Baht. The trade with Japan had for some time been in Thailands favour and substantial sales of Sterling to the Treasury had been made by the Yokohama Specie Bank. But with the entry of the Japanese forces into South Indo-China and the consequent freezing of Japanese assets by Great Britain and the U.S.A., the Yokohama Specie Bank had no more sterling to offer. The political relationship with Japan and existing circumstances required-the continuation of exports to that country and the difficulty was solved by the sale of gold to the Currency Department of the Treasury by the Japanese bank. Pending the arrival and sale of the gold in Bangkok, the Bureau gave the Yokohama Specie Bank an advance in the form of an overdraft, which was liquidated with the proceeds of the sale of the gold. With the outbreak of the war in Asia, transportation of gold became impracticable and the further overdrafts allowed, both for trade and military purposes, were liquidated with gold earmaked to the Bureau with the Bank of Japan. The gold so acquired was sold by the Bureau to the Currency Department. These overdrafts, it may be observed, were of short duration and of not too large amounts. The Bureau was consequently at no time under any danger of being unable to meet its demand liabilities.

The last activity undertaken by the Bureau, only five months before its absorbtion into the Bank of Thailand, was ​the initiation of a system of foreign exchange control, with the object of concentrating in the hands of the Treasury any specified foreign currency, supervising the requirements of such currency and limiting or denying its use if necessary in the general interest. The difficulties of initiation were substantial. There was no one with any experience whatever of any system of exchange control; indeed none was available who had practical experience of exchange banking. Furthermore there were some who were doubtful as to whether the Japanese bank, which was the only bank doing foreign exchange business, and the Japanese firms, who were the only importers and exporters, would toe the line. Credit is due to the heterogeneous band of officers who taught themselves the technicalities of the business and gave the control a good start. The Japanese bank and firms, be it also said, showed no signs of ignoring the law; the bank indeed co-operated to the best of its ability.

With the opening of the Bank of Thailand in December 2485 (1942) the Bureau was closed and its assets and liabilities were transferred to the Bank, provision to that effect having been inserted in the Bank Act.

Thai National Banking Bureau

Liabilities and Assets on date of transfer to Bank of Thailand

(8th December 2485)

​In its short life of two and a half years the Bureau had certainly served a useful purpose. It made itself into a serviceable machine for the issue and management of public loans. It laid the foundation of a system of control of foreign exchange transactions. In carrying out its banking business it maintained a high degree of liquidity and scrupulously avoided all forms of competition with the banks, thereby earning their confidence and attracting to itself a part of their cash reserve. The way was consequently paved towards centralization of banking reserves, without which central banking would not be possible. Its cash assets, forming part of the Treasury balance, were useful to the latter at times when revenue lagged behind expenditure. Finally, it was an instrument whereby a small staff of young men were trained in the routine work of banking and other business. When it became necessary urgently to set up a Central Bank, a nucleus of the requisite machinery was already in existence. One of the difficulties in the establishment of a Central Bank had been solved.

Chapter III

The Bank Charter

Mention has been made in Chapter I that the charter of the Bank of Thailand is to be found in two documents, the Bank of Thailand Act, B.E. 2485 and the Royal Decree regulating the Affairs of the Bank of Thailand, B.E. 2485. The reasons that led to this division have also been given. It is proposed in this Chapter to explain and comment upon the principal provisions of that charter and, in particular, to mention the reasons underlying those provisions. In so doing, the two documents will for the sake of clarity be treated as one.

​Relations between the State and the Bank

The International Financial Conference of Brussels (1920) recommended that “Banks, and especially bank of issue, should be free from political pressure and should be conducted solely on lines of prudent finance”. It is generally recognized nevertheless that independence does not mean that the State has no concern with the Central Bank and many foreign charters provide that the Government should have some influence in respect of the governing body of the Bank. In drafting a charter for the Bank of Thailand, however, the problem was how to secure any degree of independence at all. First, it was quite certain that few Thai nationals if any would be likely to invest money in an institution which did not aim at the making of profits. On the other hand enquiry had been made privately whether the Bank of Japan would be allowed to hold shares in the Bank. The lack of Thai investors and the desire to make the Bank a purely national institution led inevitably to the decision that the Bank should be owned entirely by the State. Secondly, the Bank was being established at a time of war. In such a period the State must assume the right to acquire purchasing power for itself and the Bank of Issue cannot but comply. Such right had indeed been assumed by many if not all States at times of national emergency. Thirdly, with commercial banking still in its early age and the absence of a short-term money market, the Bank had no means of controlling credit, save through the use of the legislative power for which it must rely upon the Government. Finally it must be remembered that no institution of any importance had ever been conceived that was independent of Government. It is still no exaggeration to say that such independence is beyond the conception of most minds.

It was the last of the factors above-mentioned that made it appear imperative that, whatever the circumstances may be, as high a degree as possible of independence should be provided in the charter; for unless the ground were broken and independence attained ​as from the beginning it appeared unlikely to be attained at all, at least not for some considerable time. The aim of the charter was therefore to secure for the Bank full independence in the administration of its own affairs and to allow it to come under Government control only as regards its general lines of policy. To this end the Bank Act provides that the Bank shall be a juristic person, whose affairs are to be managed by the Governor under the general control and superintendance of the Court of Directors with the Governor as ex officio chairman. The power of the Finance Minister, is so far as administration is concerned, was confined to that of general supervision of the affairs of the Bank. Taken together these provisions should mean, and have already been construed by the Court of Directors as meaning, that the Bank is not subservient to the Treasury or any other executive authority. General supervision means merely the duty and authority to survey or review the affairs of the Bank. In exercising this supervision, the Minister can issue no directions or orders; his only remedy lies in the taking of steps to remove the Directors from office. A certain safeguard against inclination towards subserviency in administration, if any should appear, lies in defining the personal liability of the Directors themselves. They are personally liable to the Bank for any expenses or loss happening to the Bank in the case where such expenses or loss are incurred through their own wilful act or default or gross negligence.

The Governments control of the general lines of policy is secured by the power of appointment of the Governor and other Directors. The Act provides that the Governor and Deputy Governor shall be appointed or removed from office by the Crown upon the recommendation of the Government and the other Directors by the Counci of Ministers upon the recommendation of the Finance Minister.

There is finally one unusual provision which it is hoped may never be applied. The provision is to the effect that in the case where the Governor disagrees with a decision of the majority ​of the Directors, the question shall be referred to the Finance Minister for decision. As it stands, this provision does give the Minister executive power, though qualified, over the administration of the Bank. As already mentioned, the idea of an important institution being independent of Government is an innovation. Certain minds are liable to fly to extremes; and it did not appear inconceivable that some Directors might put an undue emphasis upon independence at the expense of co-operation with the Government in an important question connected with policy. The provision was consequently intended as a safeguard against such danger if it should ever arise. The weight of responsibility is placed, as it should be, primarily upon the Governor who, by this provision, has a suspensory veto over his colleagues on the Court.

No written constitution has ever truly achieved all that it sets out to achieve, inspite of all the checks, balances and safeguards that it contains. Whether and how far the Bank of Thailand will remain free from politics depends primarily upon the Directors and ultimately upon the Government. If a tradition of an independent administration can be established and maintained, the Bank should be capable of carrying out a national policy.

The duties which the Bank carries out for the Government are defined in the charter. They include inter alia the management of Government accounts and the National Debt. The custody of Government money, free of interest, gives the Bank control of large sums which form the working assets of the Bank.

Capital, Profits and Reserve Funds

The Charter provides that the initial capital of the Bank of Thailand shall be Baht 20 millions, which sum shall be assigned to it by the State as a grant. It further provides that the capital ​may be increased or reduced upon the approval of the Government, provided that the total capital shall not at any time exceed Baht 100 millions. In practice Baht 20 millions should be adequate for the purposes to be served, namely, to provide a fund which the Bank may utilize for carrying out its operations or draw upon to meet the claims of its creditors in the event of losses on those operations. The provision regarding the reduction or increase of capital is political and is not expected to be applied. It may be noted in passing that, as the Baht 20 millions is provided wholly by the State, the capital is not divided into shares.

The provisions of the charter relative to the distribution of profits and reserve funds are designed primarily to strengthen the position of the Bank, profits to the State being a secondary consideration. To this end the charter provides, first, that with the transfer to the Bank of the assets and liabilities of the Thai National Banking Bureau, the surplus of assets over liabilities so transferred shall be appropriated to the ordinary reserve fund of the Bank. By this provision the Bank opened its doors with an ordinary reserve fund of approximately Baht 13 millions or over 50% of its initial capital. Secondly, an annual sum equivalent to 25% of the net annual profits, after making provision for bad and doubtful debts, depreciation in assets and such expenses as are usually provided for by bankers, is to be appropriated to the ordinary reserve fund. Thirdly, when the ordinary reserve fund amounts to 100% of the capital, or more, it is within the discretion of the Court of Directors alone to reduce or not the amount of the annual appropriations. Fourthly, the Bank may, with the approval of the Minister, establish reserve funds, other than the ordinary reserve, for particular purposes. It is after deduction of the appropriations to all the reserve funds that the remaining net profit is to be paid to the general revenues of the State.

Audit and Supervision

The importance of the duties entrusted to a Central Bank makes it desirable rigorously to scrutinize its operations. ​The Charter consequently decrees, not only that the Court of Directors shall appoint auditors whose powers and duties are carefully defined, but that the Minister, charged as already mentioned with the power of general supervision, may at any time appoint any person he thinks fit to examine the accounts of the Bank. Further, the accounts of transactions affecting the currency reserve, of which more hereafter, are to be audited by the President of the State Council.

In order to establish a tradition of sound management, the Bank is bound by the Charter to submit to the Finance Ministry, for publication in the Government Gazette, weekly returns of the Issue Department and of the Banking Department and an annual balance sheet and profit and loss account. The Directors are also to submit an annual report on the working of the Bank.

Note Issue

The theory that the Central Bank should be given the sole right of note issue is nowhere in dispute. Experience proves that if the Government itself has the right of note issue, political considerations and the pecuniary needs of the State rather than considerations of a sound monetary economy are likely to become the determining factor. In Europe and elsewhere a Central Bank with the sole right of note issue is an accepted feature of the banking system. In periods of national emergency however the doctrine has been violated even in England where, during the war of 1914-18, the Government took upon itself the issue of additional notes.

In framing the Charter of the Bank of Thailand, the abnormal conditions that prevailed could not be left out of account. It was apparent that the revenue deficit of B.E. 2485 would not be covered either by extra taxation or by loans. Legal provision had already been made to ​enable the Government to issue notes for its own expenditure. Furthermore, large sums would be required by the Japanese military authorities for expenditure in Thailand. These sums the Government would have no means to provide, save by the issue of notes against such assets as could be obtained from the Japanese Government. Failure to provide the sums required would inevitably lead to a resumption of the use of military scrips which had already been put in circulation during the early days of the war. In view of these two factors, renunciation by the Government of the power to issue notes was impossible to secure. A compromise had to be made. The Charter consequently confers upon the Bank the sole right to issue notes; and renunciation of such right by the Government is implicit in the provisions which transfer the management of the note issue together with the currency reserve from the Finance Ministry to the Bank. On the other hand, the Charter provides that, until such time as the international monetary position has become sufficiently clear and stable, the issue and management of notes by the Bank shall be governed by the existing Currency laws. This latter provision enables the Government legally to obtain the notes required.