President Julius Nyerere greeted a crowd in downtown Dar es Salaam early on the morning of June 14, 1966. It was the inauguration of the Bank of Tanzania. They were eager to get their hands on the new currency notes.
“I have no intention of making a long speech as the opening time of banks is just about 10 minutes from now. I do not want to stand in the way of the Bank of Tanzania’s customers,” he said.
A central bank was a long-standing desire of his government. Beyond issuing the national currency, the Bank of Tanzania was essential to development aspirations by controlling foreign exchange reserves and influencing commercial credit. Encouraging citizens to follow suit, Nyerere opened the doors and exchanged his old colonial money for the new notes.
Tanzania was not alone in seeing central banks as a foundation for sovereignty. From the 1950s, colonised Africans won their independence and the political rights of citizenship. They also promised development with rising incomes, expanded infrastructure and commercial opportunities. If the end of empire was to matter, it had to be a path towards new economic ties.
Unfortunately, the economic self-determination would be more difficult to secure than political independence. In East Africa, the notion of uhuru wa bendera (superficial independence) named the partiality of decolonisation. Ghana’s Kwame Nkrumah called it neo-colonialism: political control was ceded but economic subordination remained.
Tanzania’s politicians were explicit about this. When Paul Bomani, Tanganyika’s Minister of Finance, spoke at the International Monetary Fund in 1962, he talked of how far his country had to go.
Tanzanian President Julius Nyerere with First Vice-President and Zanzibari President Sheikh Abeid Karume during celebrations marking the sixth anniversary of the island’s revolution.
Photo credit: File | Nation Media Group
“Tanganyika became of age last December when it achieved independence,” he declared, adding that poverty meant initiation into the world of states was incomplete.
Tanganyika’s development was inhibited by what Bomani called the “established rules of the game”, designed by colonial officials and incapable of meeting citizens’ real needs. In spite of being an “independent” state, he bemoaned: “We have only a partial and minority say in the control of our currency.”
Despite widespread views that finance is apolitical – best managed by independent central banks following so-called laws of economics – the rules of money are decided by relatively small circles of mostly men. In the era of African decolonisation, one man held unparalleled sway over African currencies. Working as an adviser to the Bank of England, he impeded the control new nations would have over their finances, trying to maintain Britain’s economic dominance.
As the Bank of England reckons with its legacy and African states are mired in debt, we might learn from this history: there is nothing inevitable in monetary matters. Systems can be redesigned to improve development outcomes.
Currency was at the core of Bomani’s concerns because the new nation was stuck in the colonial monetary regime. Legal tender remained the East African shilling, issued by the East African Currency Board and not controlled by the government of Tanganyika. The Currency Board of 1962 was largely unchanged from the system installed in 1919, part of a newly expansive imperial effort in East Africa.
As political scientist Wambui Mwangi demonstrated, this was a monetary means of securing European dominance. One result was to replace the Indian rupee – until then the region’s prevailing currency – with the shilling.
The East African shilling facilitated tax collection and the exploitation of African labour. By eliminating the rupee, it also ruptured East Africa’s historic ties to Indian Ocean trade in favour of closer integration with London’s finances. In doing so, the EACB secured the profits and power of Europeans, especially the settlers in Kenya whose plantation crops were exported to Britain.
The Currency Board was designed to favour British commercial interests through two mechanisms. First, every shilling issued in East Africa required a matching deposit of British sterling in London. Second, the shilling and sterling were freely convertible, allowing money earned in the colonies to be transferred to Britain. Imperial administrators said this instilled “confidence” and avoided inflation. Large British traders and banks took advantage, shuttling profits out of East Africa instead of re-investing.
This arrangement mattered even more as Britain struggled to rebuild after World War II. As the Bank of England and Treasury tried to blunt the rising US dollar, colonies helped prop up the sterling. Easy movement of capital from the colonies also helped restart Britain’s economy because its factories and families needed inexpensive goods. The Colonial Office knew this came at Africa’s expense but told itself that sacrifice for the good of the sterling was good for development.
For critics, the Currency Board immiserated East Africa, channelling enormous sums to London’s money markets. British banks would even store East Africans’ savings accounts in London. The result, in the words of one economist, was “a process of exporting capital from underdeveloped countries of East Africa for use in a developed country”.
Capital export only increased as decolonisation advanced. The first round of negotiations concerning Kenyan independence provoked panicked settlers to send £900,000 out of the colony in one March 1960 week alone. The figure grew to £5 million by early July. Without substantive changes, like including limiting convertibility, little could be done. Britain and its Currency Board were unwilling to do so, and ensuing years witnessed massive capital flight.
In response, East Africa’s leaders demanded increased economic power. They were appalled by the capital flight and the way it limited credit. They wanted to contain wealth within their borders. Neither goal was compatible with an institution designed to do little more than exchange shilling for sterling.
What was needed was a central bank. Such institutions were common in Europe and America and fast becoming standard post-colonial statecraft. Central banks controlled foreign exchange flows and regulated commercial banks, thereby influencing credit allocation. They could create autonomous financial conditions.
They could also steward government reserves of foreign currencies, opening investments that furthered African goals.
Though Tanganyika was politically independent, and Uganda would follow in October 1962, they lacked monetary sovereignty. The East African Currency Board remained under Britain’s sway – in fact, almost entirely directed by one man, John B. Loynes, who worked to curtail reforms.
Against African frustrations about the pace of development, he counselled caution and the conservative orthodoxy known as “sound finance”. Loynes worked against what he saw as the undue haste of African politicians, insisting that the time was not right to end the Currency Board.
“We must accept that no central bank, however elaborately endowed, can make bricks without the straw of the right financial surroundings,” he said at the end of 1960.
Loynes scorned those who rushed towards central banking as naively taken by “mystique and prestige”.
“We are dealing with real life, not fairy tales,” he said, reflecting the imperial prejudice that Africans operated through superstition, not economic rationality.
As he told the Kenya Economic Society in 1961, “in the wrong hands,” a central bank was “the finest instrument not only for inflation but also for giving inflation a spurious air of respectability”. Whose hands were “wrong” would have been clear to the white audience.
Before East Africa, Loynes had a number of a roles at the Bank of England. He joined as a clerk in 1928, not even 20 years old, before joining the Overseas and Foreign Department a decade later.
As an adviser to Bank governors, Loynes held senior roles in the Gold Coast (now Ghana), Nigeria, Sierra Leone and Gambia. He was an ambiguous civil servant in close communication with the Bank of England but under few strict mandates. A Bank of England colleague referred to him as “James Bond Loynes” for his extensive contacts and ability to secure information “that sometimes White Hall did not have.”
An unpublished internal history notes with curiosity that the institution “lent its name and prestige” to Loynes who worked “on a highly personal basis.”
Even as the end of formal empire turned African “natives” into rights-bearing citizens, Loynes aimed to maintain his nearly single-handed power over the East African Currency Board. As decolonisation accelerated after 1960, a new crop of professionals challenged his monopoly on currency expertise.
Officials from the World Bank and IMF supported African states’ more assertive monetary policies, casting doubt on what Loynes’s orthodoxy insisted was a necessary status quo. Against his wishes, Tanganyika hired German central banker, Erwin Blumenthal, in 1961 to advise on reform.
Against Loynes’s insistence he remain in Tanganyika, Blumenthal visited Uganda and Kenya, consulting officials, politicians and businessmen.
Across the region, he found readiness to depart from the Currency Board. His report faulted the board for its restrictions on investment, lacking exchange controls and tolerating a price fixing cartel among British banks in East Africa.
Blumenthal’s view was that East Africa should establish a central bank, not unlike Germany’s Bundesbank, to steer development by administering currency controls and banking regulations. Whatever the region’s particularities, these were hardly unfounded proposals. Independent countries used central banks in this way. Ironically, the Bank of England had been nationalised in 1946 to better use monetary authority for public policy.
Nevertheless, Loynes resisted the timely achievement of monetary independence. While he outwardly acknowledged the eventual utility of a regional central bank, he wanted it designed on his terms and timeline.
Fearful that Blumenthal’s arguments would catch-on, Loynes lobbied extensively – with Blumenthal, his supervisors, the IMF and officials in London, Entebbe and Nairobi. Loynes called Blumenthal’s proposal naïve and preposterous, unsuited to African conditions. He tried to delay and influence the findings.
“The main need is really to buy time,” he wrote while strategising against Blumenthal’s momentum.
Instead of a central bank, Loynes proffered an evolved Currency Board. Expanding its functions, he reasoned, would benefit the region’s economy while buying time against the demands of Bomani and colleagues. As he told a British banking executive, it would “reduce pressure for the premature creation of a central bank endowed with all the normal powers and duties”.
The Central Bank of Kenya (CBK) headquarters in Nairobi.
Photo credit: File | Nation Media Group
He stage-managed the transition, brandishing the “central banking look” without its full functions to avoid appearing “in any way to drag my feet.”
Even changes that were more than cosmetic had limits. For instance, in 1955 the board began issuing a small amount of currency without corresponding sterling deposited in London. In theory, relaxing these strictures would free up capital for economic development, including infrastructural spending.
However, colonial administrators depicted it as a danger because “money spent on roads and bridges does not turn over”. Economic infrastructure were disparaged as prestige projects. Instead, the money went to short-term loans for the export of coffee, sisal, cotton and other crops to Britain.
Loynes thus hewed to the ideology of sound finance against ambitions for longer-term investments, stacking the deck in favour of some economic outcomes over others. Convertible currency may have avoided volatile exchange rate swings, but it also imposed austerity on Africans. This was an effort to secure property and wealth produced by colonialism, and accumulated European wealth required specialised legal and financial institutions to tie the hands of African policymakers and citizens.
Continuing the East African Currency Board was desirable because its undemocratic design limited the authority of otherwise independent states.
“If they look ahead at all, they are concerned with opportunities to grab land or to get jobs previously reserved for non-Africans,” Loynes he wrote of Africans.
At best, he saw African reformers as well-meaning and naïve; more often, they were incapable and untrustworthy.
A financial straight-jacket was easy enough to maintain under British rule. Yet, as independent Africans assumed political office, such a racialised monetary regime became harder to sustain.
Tanganyika and Uganda were willing to preserve the Currency Board for a while, hoping it could be converted into an East African Central Bank under a federation. Yet, as Kenya’s independence was delayed and dreams of political unity faded, the status quo seemed an ever-greater burden for the two countries.
The East African shilling not only facilitated the easy export of capital to Britain, it also funnelled wealth to Nairobi. Neither was palatable.
In March 1964, Nyerere told Loynes that his country “must now control our credit and our economy”.
Tanganyika was in the throes of escalating capital flight: European farmers and plantation owners, as well as South Asian merchants, were sending money to Nairobi and onwards to London. The Currency Board’s free convertibility meant the putatively independent state could do nothing to stem it.
Dr Milton Obote when he was sworn in as President in 1980.
Photo credit: File | Nation Media Group
Tanganyika was haemorrhaging resources. Every shilling exported was wealth not directed to national development. Uganda’s Prime Minister Milton Obote agreed the next month, asking: “What is it that the common man in Tanganyika or in Uganda will gain if all the industries are going to be centred around the facilities available in Nairobi?”
Worse, he complained that Kenya’s major industries remained in the hands of settlers and foreign businesses.
Loynes worked tirelessly against what he deemed separatism. From London, he advocated continuing the Currency Board, hoping a political agreement could emerge. He drew on conservative colonial officials who remained in the independent civil service, counselling sound finance.
As Loynes wrote to one, Tanganyika’s plan “only makes sense if Tanganyika is determined to inflate, impose exchange controls and generally run its currency into the ground for the sake of development”.
As 1964 progressed and economic nationalism gained the upper hand, Loynes moved to protect what he called the key territory financially: Kenya.
If his prior advocacy framed the currency stability and convertibility as virtues for East Africa, his final efforts reflected a belief that they mattered nowhere more than in Kenya.
As Tanzania moved unilaterally, he made a last-ditch effort to keep Uganda in the currency union with Kenya – a project aimed principally at benefiting Kenya.
However, his preference for Kenya was not a preference for all Kenyans. Loynes wrote to a Bank of England colleague that his work to “safeguard Kenya’s interests is worth doing above all for the sake of helping the whites”.
“These are sad days for the Europeans. The process of dismantling the European economy of the country will cost a lot more,” he wrote.
Of course, there was no such thing as the European economy. What he meant was a system predicated on the seizure of Africans’ land, the exploitation of their labour and the exhaustion of their soil.
Insofar as this disproportionately benefited Europeans, Loynes was right that the currency regime was its firmament.
During colonialism, it served British capital and settlers, and the Currency Board remained an escape valve for European profits accruing in Kenya.
When East African states finally established central banks in 1965-66, one of the first tasks was to reign in capital flight. This was a key objective, but in some ways, it was too little, too late.
Considerable wealth had already fled, including to newly established tax havens.
Moreover, foreign exchange controls were shaped by the ongoing influence of the Bank of England. It sent staff to assist in the technicalities, but Loynes again advocated on behalf of the wealthy. He advised a Tanzanian official that the exchange controls be managed liberally, “lest the confidence of your public as well as investors overseas be diminished”.
Technical assistance was part of Britain’s effort to shape African money in London’s interest. Lest they lose their influence – to more developmental World Bank and IMF officials, let alone the Soviets – the Bank of England repositioned itself as a training ground for post-colonial technocrats.
The need was real, since colonial policy had denied Africans such education. But rather than impartial expertise, what Bank of England staff called its “education and propaganda” course was designed to manage Africa’s independence.
Its goals included supporting the sterling and assisting London bankers whose declining status vis-à-vis New York made the former empire an essential market. The idea was to ensure the Bank of England had “an old boy” in places like the Bank of Tanzania.
Lectures at Threadneedle Street worked to influence how independent central banks operated while cushy visits to English sights and nightly entertainment worked to build transnational technocratic alliances.
For his part, Loynes’s involvement was limited. He retired in mid-1969 only to meet an untimely death at 60, swimming off the English coast.
Nyerere and his peers across East Africa used opening ceremonies to remind citizens that central banks could only facilitate development if factories, farms and offices were productive.
Despite Loynes’s disparaging rhetoric, African statesmen did not expect central banks to be a silver bullet. Indeed, they were not. For one thing, investment capital remained limited. East Africans directed money to exports, public services and factories, but were hobbled by the legacies of empire. In 1961, fewer than 100 Tanganyikan Africans were university graduates. Moreover, central banks operated in a highly unequal international monetary order. While the Bretton Woods regime established in 1944 may have been better than the disorder that followed its collapse in the 1970s, it was still designed without African input and privileged industrialised states.
Still, the central banks were part of meaningful successes in the following decade. In Tanzania, there were substantial gains in literacy, life expectancy and real incomes. The three countries had periods of strong economic growth and were able to expand credit to priority sectors.
Monetary authority was important for this. Had British officials not prioritised the wealth of Kenyan settlers, the solvency of the United Kingdom and cheap goods for their industry and consumers, Africans may have had monetary sovereignty earlier – at the very least alongside political independence.
Instead, they were offered at best a partial decolonisation. It is a legacy that lasts to this day.
Kevin P. Donovan is the author of Money, Value, and the State: Sovereignty and Citizenship in East Africa, from which this essay is drawn. His other work is available at http://kevinpdonovan.com
