A history of modern shanghai banking the rise and decline of chinas financial capitalism

A HISTORY OF MODERN SHANGHAI BANKING Studies on Modern China CHILDREN'S LITERATURE IN CHINA From Lu Xun to Mao Zedong Mary Ann Farquhar CHINA'S LAST NOMADS The History and Culture of China's Kazaks Linda Benson and Ingvar Svanberg THE CHINESE NATIONAL CHARACTER From Nationhood to Individualilty Lung-kee Sun HAKKA CHINESE CONFRONT PROTESTANT CHRISTIANITY, 1950-1900 Jessie G Lutz and Rolland Ray Lutz A HISTORY OF MODERN SHANGHAI BANKING The Rise and Decline of China's Finance Capitalism Zhaojin Ji IMAGINING THE PEOPLE Chinese Intellectuals and the Concept of Citizenship, 1890-1920 Edited by Joshua A Fogel and Peter Zarrow INDUSTRIAL REFORMERS IN REPUBLICAN CHINA Robin Porter THE KWANGSI WAY IN KUOMINTANG CHINA, 1931-1939 Eugene William Levich "SECRET SOCIETIES" RECONSIDERED Perspectives on the Social History of Early Modern South China and Southeast Asia Edited by David Ownby and Mary Somers Heidhues THE SAGA OF ANTHROPOLOGY IN CHINA From Malinowski to Moscow to Mao Gregory Eliyu Guldin MODERN CHINESE WRITERS Self-Portrayals Edited by Helmut Martin and Jeffrey C Kinkley MODERNIZATION AND REVOLUTION IN CHINA June Grasso, Jay Corrin, and Michael Kort PERSPECTIVES ON MODERN CHINA Four Anniversaries Edited by Kenneth Lieberthal, Joyce Kallgren, Roderick MacFarquhar, and Frederic Wakeman, Jr READING THE MODERN CHINESE SHORT STORY Edited by Theodore Huters UNITED STATES ATTITUDES TOWARD CHINA The Impact of American Missionaries Edited by Patricia Neils A History of Modern Shanghai Banking THE RISE AND DECLINE OF CHINA’S FINANCE CAPITALISM ZHAOJIN JI First published 2003 by M.E Sharpe Published 2016 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2003 by Zhaojin Ji No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Notices No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use of operation of any methods, products, instructions or ideas contained in the material herein Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Library of Congress Cataloging-in-Publication Data Ji, Zhaojin A history of modern Shanghai banking: the rise and decline of China’s finance capitalism / Zhaojin Ji p cm “An East gate book.” Includes bibliographical references and index ISBN 0-7656-1002-7 (cloth: alk paper) Banks and banking—China—Shanghai—History Banks and banking, Foreign—China—Shanghai—History Finance—China—Shanghai—History I Title HG3340.S52 J5 2002 332.1'0951'132—dc21 2002029407 ISBN 13: 978-0-7656-1003-4 (pbk) ISBN 13: 978-0-7656-1002-7 (hbk) To my parents Xia Huiqin and Ji Zhitai Contents List of Illustrations, Photographs, and Tables Preface Acknowledgments Introduction Origins of Shanghai Native Banks The Origins of the Shanghai Native Banks Money and Native Banks Shanxi Banks The Ningbo and Shaoxing Financial Groups Shanghai Native Bankers Guild Native Banks and Merchants The Organization of Native Banks Native Banks’ Capital Management of Native Banks Functions of Native Banks Shanghai Native Bankers Clearing Association The Opening of Shanghai Foreign Concessions (1845) Xianfeng Inflation (1851-1862) Foreign Trade and Native Banks "Shanghai Conventional Currency" (1856) Creation of North and South Markets (1855-1862) The Rise of Foreign Banks, 1847-1894 Foreign Trade and Foreign Banks The Oriental Banking Corporation (1847) The Chartered Bank of India, Australia, and China (1858) The Hongkong and Shanghai Banking Corporation (1865) The Deutsch-Asiatische Bank (1889) The Yokohama Specie Bank (1893) Formation of a Comprador Class The Self-Strengthening Movement and Finance Early Industry in Shanghai Russell & Co and the China Merchants' Steam Navigation Company The Shanghai Railway The "Merchants' Management Under Government Supervision" System Financial Crisis of 1883 The Expansion of Foreign Banks and the Search for National Banks, 1895-1911 The Expansion of Foreign Banks Russo-Chinese Bank and Russo-Asiatic Bank (1895) Banque de l'lndochine (1898) The Boxer Indemnity (1900) The International Banking Corporation (1902) Banque Beige pour l'Etranger (1902) Nederlandsche Handel-Maatschappij (1903) The Search for National Banks The Imperial Bank of China (1897) The Hubu Bank (1905) and the Daqing Bank (1908) The Bank of Communications (1908) Early Private Banks: Xincheng (1906) and Siming (1908) The Shanghai Financial Panic and the Revolution of 1911 The "Discount Storm" (1897) The "Rubber Stock Crisis" (1910) Banking and the Revolution of 1911 The Reorganization Loan and International Banking Consortium The Golden Age of Shanghai Banking, 1912-1927 The Impact of Social Change on Banking and Finance The Bank of China (1912) Government Bonds (1912-1926) The Development of Native Banks Shanghai General Chamber of Commerce (1902-1929) The Growth of National Industry The Golden Age of Shanghai Modern Banking The "Three Southern Banks" The National Commercial Bank (1907) The Zhejiang Industrial Bank (1915) The Shanghai Commercial and Savings Bank (1915) The "Four Northern Banks" The Yien Yieh Commercial Bank (1915) The Kincheng Banking Corporation (1917) The Continental Bank (1919) The China & South Sea Bank (1921) Other Chinese National Banks New Organizations of Shanghai Banking The Shanghai Bankers Association The Banker's Weekly (1917) The Native Bankers' Monthly (1921) The Shanghai Stock and Commodities Exchange (1920) The Rise of Chinese Finance Capitalism New Foreign Financial Powers, 1915-1930 The Japanese Banking Group The Bank of Taiwan (1911) The Bank of Chosen (1911) The Sumitomo Bank (1916) The Mitsubishi Bank (1916) The Mitsui Bank (1917) The "Nishihara Loans" (1917-1919) The American Banking Group The National City Bank of New York (1915) The American-Oriental Banking Corporation (1917) The American Express Company (1917) The Equitable Eastern Banking Corporation/The Chase Bank The Underwriters Saving Bank for the Far East (1930) Joint-Venture Banks The Commercial Guarantee Bank of China The Banque Industrielle de Chine The Exchange Bank of China The Asia Banking Corporation The Chinese-American Bank of Commerce The Chinese-Italian Banking Corporation The Sino-Scandinavian Bank The Banque Franco-Chinoise pour le Commerce et l'lndustrie Causes of the Failure of Joint-Venture Banks Shanghai Banking and the Nationalist Government, 1928-1937 The Creation of Chinese State Banks Shanghai Bankers and Chiang Kai-shek The 1928 National Economic and Financial Conferences Tariff Autonomy The Creation of the Central Bank of China (1928) The Reorganization of the Bank of China and the Bank of Communications (1928) The Postal Remittances & Savings Bank (1931) The Farmers Bank of China (1935) The Central Trust of China (1935) The Currency Reform The Abolition of the Tael and the Adoption of the Silver Dollar (1933) The Silver Purchase Act (1934) The Shanghai Financial Panic of 1935 The 1935 Currency Reform Responses of Foreign Banks The British Response The American Response The Japanese Response Consequences of the Currency Reform Wartime Banking and Finance, 1937-1945 The Isolated Island of Banking and Finance Wartime Banking Organization and Financial Control Foreign Exchange Management The Exchange Stabilization Operation Currency War The Hua Hsing Bank (1939) The Central Reserve Bank of China (1941) The Pacific Wartime Finance and Inflation The Revival of Native Banks Wartime Inflation Collapse of the Nationalist Monetary System, 1945-1949 Postwar Banking Rehabilitation The 1946 Banking Laws Gold Scandals The 1947 Economic Emergency Measures Hyperinflation The 1948 Economic Emergency and the Issuance of Gold Yuan Collapse of the Nationalist Monetary System The Socialist Transformation of Shanghai Banking, 1949-1952 The People's Bank of China The Takeover of Bureaucratic Capitalist Banks Stabilizing the Renminbi State Monopolies on Purchase and Distribution The Unification of Economy and Finance The "Three Antis and Five Antis" Campaign The Merger of Native Banks and Other Private Banks The Socialist Transformation Conclusion Afterword Institutional Transformation Banking Recapitalization Banking Privatization Foreign Banking Opportunity Banking Globalization Notes Glossary Bibliography Index List of Illustrations, Photographs, and Tables Illustrations The Shanghai City Temple and its "Inner Garden" where 1.1 the guildhall of the Shanghai Native Bankers Association was located in 1872 1.2 The organization chart of a native bank 1.3 A native banknote (zhuangpiao) in the 1920s 1.4 Bao Kang's Daqing Qianpu, 1876 1.5 Token money during Xianfeng inflation in the 1850s 1.6 Samples of hubu guanpiao, 1853 1.7 Spanish Carolus dollar in 1789 and Mexican dollar in 1857 2.1 Banknote of the Hongkong and Shanghai Banking Corporation 3.1 Banknote of the Banque de l'lndochine The banking regulations of the Ningbo Commercial and 3.2 Savings Bank in 1923 Organization chart of the Shanghai Commercial and 4.1 Savings Bank 4.2 A cover of the Native Bankers' Monthly 5.1 Banknote of the International Banking Corporation Letter from Chiang Kai-Shek to the Shanghai Native 6.1 Bankers Association 6.2 Reply letter from the Shanghai Native Bankers Association 7.1 Japanese military note 8.1 Paper money of gold yuan Photographs 1.1 The renovated "Inner Garden " in Shanghai City Temple in 1995 1.2 The Yongchang cigarette and money shop in the 1930s 1.3 Hongkang Qiangzhuang in the 1930s 1.4 Ji Lezhi, a native banker and manager of Yuancheng Qianzhuang 1.5 Ji Zhitai, assistant manager of Yuancheng Qianzhuang in 1948 The bank building of the Chartered Bank of India, Australia, 2.1 and China in the 1930s The bank building of the Hongkong and Shanghai Banking 2.2 Corporation The bank building of the Deutsch-Asiatische Bank, which 2.3 became the bank building of the Bank of Communications 2.4 The Yokohama Specie Bank in the 1930s 3.1 Russo-Asiatic Bank in the 1900s 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 Nederlandsche Handel-Maatschappij in the 1920s Sheng Xuanhuai The Imperial Bank of China The Ninbo Commercial and Savings Bank building in the 1910s Insider Business Hall of the Ninbo Bank The old bank building of the Bank of China in 1918 Song Hanzhang Zhang Gongquan Li Ming Chen Guangfu Zhou Zuomin Outside of the Shanghai Gold Stock Exchange, 1930s The Bank of Taiwan, 1930s The American Asiatic Underwriters and the Asia Life Insurance 5.2 Company were in this building in the 1930s 5.3 Asia Banking Corporation, 1920s T.V Soong and Mrs Soong welcome Sir Frederick Leith-Ross 6.1 and Mrs Leith-Ross to Shanghai on September 21, 1935 7.1 T.V Soong and Secretary Morgenthau in January 1942 A run on a bank in Shanghai between December 1948 and 8.1 January 1949 Tables 2.1 Tonnage of Shipping Entered and Cleared in Shanghai 2.2 Total Import and Export Trade Deposits Received by the Hongkong and Shanghai Banking 2.3 Corporation, 1865-1930 Dual Role of Compradors as Foreign Employees and 2.4 Native Bankers 3.1 List of the Boxer Indemnity List of Major Shareholders in the Ningbo Commercial 3.2 and Savings Bank Domestic Bonds Issued by the Beiyang Government from 4.1 1912 to 1925 4.2 Average Capital of Shanghai Native Banks, 1912-1926 8.1 The Issuing of Gold Yuan (August 1948-May 1949) Preface Perhaps it is cultural bias, perhaps it is hometown affection Having been away from Shanghai for more than fifteen years, I could not help but miss it This emotion has stimulated me to write about the people, the city, and the history, in particular, Shanghai's banking history This history amazes me and has a special meaning to my family My grandfather devoted his life to Shanghai banking for more than a half-century, my father has worked and observed Shanghai's changing banking industry for the past half-century, and I have committed myself to writing about Shanghai banking in the twenty-first century This study of the modern history of Shanghai banking over the past 150 years grew not only from family interests but also from work experience and research seminars in Shanghai and Washington, DC When I worked at the Shanghai Academy of Social Sciences between 1983 and 1985, I learned old stories about Shanghai and its economic history When I attended a research seminar at the Paul H Nitze School of Advanced International Studies of the Johns Hopkins University in the spring of 1994, I found that there were only a few comprehensive books on the subject during my preliminary research I decided to commit myself to writing a book on Shanghai banking This book starts with a search for the origins of Shanghai qianzhuang (native banks) and their subsequent rise and fall in modern Chinese history Some may question the importance of writing about native banks, considering them the product of a "feudalistic" society that belongs to the past However, the phenomenon of native banks still exists today in terms of the relationship between private entrepreneurs and individual financial lenders The pre-modern history of native banks provides many sources for understanding the development of China's modern banking and finance At the same time, the pre-modern history of native banks also reflects the influence of Chinese traditional culture and the impact of Confucian values on economic life This book illustrates the intricacy of international relations in modern China by showing the cyclical nature of foreign banking and finance in Shanghai The rise of foreign banks was a result of foreign trade and foreign loans (in terms of railways, telegraphy, and political indemnity) Under the protection of several unequal treaties signed in the mid-nineteenth century, foreign banks enjoyed extraterritorial rights in China, which included the freedom to issue their own banknotes Shanghai's modern financial market has been closely related to world financial markets since the 1850s With the adoption of the gold standard in Germany and the discovery of Nevada silver mines in the United States in the early 1870s, the value of silver in Shanghai depreciated quickly China was forced to abolish the silver standard and to adopt a managed foreign reserve system after the onset of the world economic depression and the U.S Silver Purchase Act in the early 1930s Finally, Shanghai financial markets were very sensitive to London financial markets because telegraphy services had closely linked both cities since 1871 Thus, the concept of "globalization" is not new to Shanghai It emerged early as a real theme, and then as reality in Shanghai in the modern era With the rise of foreign trade and foreign banks on the Huangpu River Bund after the opening of Shanghai to the West and by the West, a growing class of compradors, the local agents employed by foreign businesses in China, played important roles in both political and economic life As the modern Chinese bourgeoisie was created, national industry and capital grew They formed Chinese private banks in the style of foreign banks The Chinese bourgeoisie were unable to solve the dilemma of having a strong government or having a laissez-faire society throughout the whole modern period Faced with a weakening nation amid insufficient capital and foreign economic infiltration, they desired strong national capitalism However, when a strong Nationalist government interfered in banking and business, they hoped to have a laissez-faire society that would provide freedom in forming enterprises and operate banking according to economic law The dream of Chinese bourgeoisie could not be realized because of the consecutive civil and Sino-Japanese wars With the victory of the Communist Party in China, all private banks were nationalized at the end of 1952 Will Shanghai banking history start a new cycle when China enters the World Trade Organization? Will private banks reemerge? To study Shanghai's banking history is not to study China's banking history alone, but also to study China's modern history and international relations The history of modern Shanghai banking acts as a mirror to reflect modern society and international relations According to Georg Wilhelm Friedrich Hegel (1770-1831), the German philosopher, the historical process is the self-actualization of spirit or reason, "What is rational is real and what is real is rational." The existing history of Shanghai modern banking is not a spirit movement but a rational process in a real world, in which we can investigate the rise and decline of China's finance capitalism in the modern period Zhaojin Ji January 2002 Washington, DC Acknowledgments In the years I spent writing this book, I have received continued encouragement and assistance from my friends and colleagues in the United States I am indebted to Nathaniel B Thayer, Ralph Clough, Don Oberdorfer, James Riedel, Diane Whaley, Frederick Starr, George Packard, Edward Baker, Thomas Thornton, Anne Thurston, David Brown, Carla Freeman, Ruth Kling, Kindra Tully, David Everett, Frank Shima, Aubrey Kuan, Kiyohiko Fukushima, Kei Karasawa, Hak-kil Pyo, John Schidlovsky, Robert Elegant, Joanne Brainerd, Dan Wright, Liu Lei, Mason Denton, Zheng Hongbei, Mark Fung, Bian Hongwei, Sanjay Srikantiah, Tung Chen-yuan, and especially, the late A Doak Barnett I owe intellectual debts to David M Lampton, Pieter Bottelier, Jim Robinson, Frank Fukuyama, Ka-Che Yip, Toby Wahl, and Phyliss Waldman for reading the original manuscript and providing valuable comments A special thanks to Lyman Miller for his inspiring research seminar that directly led me to write this book and for his comments on the original manuscript My thanks also go to Candace Miller in S AIS public affairs for scanning pictures for the book, Laura Wong in the Library of Congress, and many members of the SAIS library staff who supported me through all the process of research My friends and old colleagues in China and in the Shanghai Academy of Social Sciences have assisted me through the research; they are Fang Xiaofeng, Shao Junwei, Yu Xintian, Zhu Minyu, Dang Mingming, Huang Hanmin, Yang Songping, Jimmie Wang, Ma Jun, Zhu Min, Li Qun, and Jiang Xiaoyan Special thanks to Ding Richu, Du Xuncheng, Shen Zuwei, and Hong Jiaguan for their expert advice, as well as Qian Zonghao at the Shanghai History Museum, and Shao Qin and Ma Jinghua at the Shanghai Municipal Archives My gratitude to my father Ji Zhitai and sister Ji Zhaoyu, whose sustained support for me cannot be adequately expressed A special thanks also goes to my uncle Ji Zhiqing for a precious historical picture And most of all, I am deeply indebted to my husband, Quan Lu, for his love, passion, support, and for contributing his artwork for this book My twin sons John Lu and Tom Lu have been giving me double joy, magnifying my energy and responsibility to complete this book Finally, thanks to editors Doug Merwin, Patricia Loo, Angela Piliouras at M.E Sharpe, and to Therese M Malhame for her careful editing of my manuscript Introduction The history of modern banking in Shanghai presents a unique and fascinating history of a dynamic banking system that functioned in an international financial center from the late nineteenth century to the middle of the twentieth century Shanghai, a great metropolis located on the eastern coast of China, combined a traditional agrarian economy with modern Western commercial activities to create an interacting "dual economy" phenomenon in modern economic history The controversial nature of the dual economy manifested the transitional features of moving from a pre-modern economic society to a modern economic system Here, I adopt the historic periodization that uses the year 1842 to separate the pre-modern China from modern China after it opened its door to Western powers Complex international relations combined with weak national financial systems in the late Qing dynasty and the early Republican era paved the way for a tortuous road of banking development in Shanghai Three types of banks coexisted in modern Shanghai: native banks, foreign banks, and modern-style Chinese banks This book illustrates that a coherent native banks structure endured in the economic autarky of pre-modern China The rise and fall of foreign banks reflected global trade and world wars integrating banking and finance and international relations in Shanghai Although modern-style Chinese banks have existed for a relatively short period, various Chinese models for these modern banks have been created This book also assesses the Chinese government's intervention in banking and finance during special periods, the importance of foreign reserves to China, and the concept of "state capitalism" as the ending point of the banking development It is important to learn from these historical experiences, particularly in an epoch of reconstitution of China's contemporary banking and finance Now, through the progress of economic reform and China's entry into the World Trade Organization (WTO), China's banking and financial markets have reopened to foreign banks and investors What did the old Shanghai banks look like? How did these banks operate in the past? What kinds of stories and lessons should we learn from the past? To answer these constructive questions, this book provides a comprehensive historical background or an outline of the history of modern banking in Shanghai, depicting the complete cycle of the rise and decline of finance capitalism in China In writing this book, I hope to stimulate some critical thinking about contemporary developments in banking and finance in China This book first examines the organization of native banks that existed long before the opening of China, in order to provide an understanding of the different roots of modern banks in Shanghai With the defeat of China by Britain in the Opium War, the destiny of Shanghai substantially changed— previously an inwardly self-sufficient city it became an international treaty port What was the primary cause of this change? Was it geography, war, or commerce? In fact, each of these causes contributed to the transformation of Shanghai into an international metropolis Shanghai's geographic location makes it well situated to serve as an international port Ships from overseas can transit through Shanghai and connect with the interior via the Yangtze River and Grand Canal system According to the Treaty of Nanking, Shanghai was formally opened to foreign trade in 1843 as one of five treaty ports The rapid growth of trade stimulated the development of capitalism to meet the demands of high-volume trade for high velocity of capital In coping with the unexpected increase in foreign trade and commercial activities, native banks adjusted their business patterns to meet the market demand By the same token, the temptation of Shanghai's geographic location attracted many foreign bankers who seized this great opportunity to enter the Chinese market by setting up their headquarters or branches in Shanghai Furthermore, the opening of the Suez Canal in 1869 shortened the distance for global trade from the western to the eastern hemisphere Moreover, beginning in 1871, the new technology supported submarine cables transmitting daily information about new science and technology and world financial news from London to Shanghai Shanghai was built upon trade and finance By virtue of handling nearly half of China's imports and exports, Shanghai collected and accumulated abundant commercial capital to become a capital-rich city This commercial capital further transformed into industrial capital constructing China's first industrial base to meet the future needs of commercial and economic development, and investing in the capital market to develop banking and finance Shanghai's function as a finance center, again, contributed to the establishment of a great urban society During the process of constructing a modern Shanghai, it experienced unimaginable conflict between traditional thinking and how to use Western technology and money in early industrial development But Shanghai adapted very well to Western technology and management skills, and also borrowed foreign funds to build railways and other infrastructure Shanghai was also built upon human capital, an ancient Confucian culture and an old generation of native bankers performing business based on trust and fidelity The same culture combined with a new Western educational system cultivated a young generation of leaders in the political, economic, and banking sectors The cultural approach to understanding Chinese bankers are very important, because the profession has combined personal value and interests with national interests to serve society These bankers have participated in many national anti-imperialism movements Liberal ideas and democratic thoughts emerged in the modern city While Shanghai bankers assisted the Nationalist government at the beginning of the regime, they also challenged its authority because of its corruption and faulty monetary policy Thus, the bankers added invaluable human capital to the great city When Shanghai's private banking was discontinued after the socialist economic transition and banking nationalization, it lost its unique banking status for about four decades Now, Shanghai has restored its ambition to become a great international metropolis again The remaining historical international finance sentiments made it possible for Shanghai to reemerge rapidly as an international banking and finance center Why is the financial environment in Shanghai so attractive to both domestic and international investors? What is the underlying essence that enables Shanghai to meet international financial challenges, assimilate cultural differences, resolve business conflicts, and even share in the fashionable concept of "globalization"? Perhaps the justification of historical continuity is "essentially inherent in all human history," as Alexander Gerschenkron indicated Historical continuity logically extends to the banking and finance fields A study of banking history would not be complete without the mention of various nonbanking elements that contributed to the dynamic social changes and development in Shanghai Thus, the impact of war and international relations was reflected in the development of Shanghai banking The combination of foreign invasions and domestic turmoil forced the Qing Court to decentralize political power and finance, which ultimately left the Chinese government in a state of decay Externally, the Opium wars and foreign economic expansion destroyed China's self-sufficient agrarian economy and native financial system As more international conflicts emerged, so did the specter of government financial collapse in terms of enormous indemnities Yet, when the collective indemnity payments were sent to Shanghai and waiting for settlement, the banking and finance markets grew oddly through handling the transfer of funds into urban commercial activities Internally, the Taiping Rebellion (1851-64) drew many migrants from the lower Yangtze Valley to Shanghai, The rich brought gold and silver with them; the poor brought only their hands and eagerness to work For example, when the rich landlord Chen's family moved from Suzhou, a famous cultural city about sixty miles west of Shanghai, they carried 100,000 silver taels with them.2 Using this money, they formed the Yantai Qianzhuang (Yantai Native Bank) in Shanghai Then, the Yantai Qianzhuang produced several other native banks by diversifying the family wealth These migrations not only provided sufficient funds to enhance Shanghai's native money market, but also provided a large number of cheap laborers to build the infrastructure of a modern society When the poor arrived in Shanghai, they lived in poverty and toiled in newly founded factories or service industries Like New York, Shanghai is a migrant city with residents from all over the nation and the world Using an extension of the modern political science term citizenship,3 there would be a special term of residentship to describe the status of people who lived in Shanghai This residentship can be divided into two levels: nominal residentship and substantive residentship Nominal residentship applies to a person who currently lives in the city, but might have originally migrated from another place Substantive residentship applies to those immigrants, whose natural inclination, despite living in the city, determined their attitudes toward inherent lifestyles, business circles, and political judgments The attempt to keep native-place identity and maintain substantive residentship in certain business circles was typically reflected in the existence of various native-place associations and business guilds The Shanghai Native Bankers Guild was an example of such a self-regulated organization established to provide guidance to the subguilds that were grouped by native townships such as Ningbo, Shanxing, Zhengjiang, and others Native-place sentiments became one of the most important driving forces in modern Shanghai society from the late Qing to the early Republican eras.4 Although the phenomenon of substantive residentship appeared very strongly among older generations of immigrants, as time passed, pan-residentship has gradually replaced substantive residentship through social interactions, such as intermarriages among different native groups, interbusiness communication, and the intercultural education of younger generations Eventually, a mixed cultural identity of "Shanghainess" has come to characterize the people who live in the urban region For example, while most members of the Shanghai Bankers Association came from nearby Zhejiang and Jiangsu provinces, they shared the common goal of promoting the Chinese banking industry The common goals led young bankers to go beyond the boundary of substantive residentship to become the general representatives of "Shanghainess" and Shanghai bankers Native banks, foreign banks, and modern-style Chinese banks were three major banking forms coexisting in modern Shanghai Native banks had dominated the local financial market before Shanghai opened as an international financial market After recognizing the value of foreign trading power, native banks developed interbank relations with foreign banks by issuing native banknotes, short-term credits issued by the native bank and accepted by foreign banks enabling merchants to purchase goods Foreign banks were established in the middle of the nineteenth century soon after Shanghai opened as a treaty port By issuing temporary loans, called "chop loans," to native banks, foreign banks established special business relations with native banks The "chop loan" was usually guaranteed by the foreign bank's Chinese employee or the comprador's personal credit, and issued by the bank to native banks at times when money was easy to obtain in the international market and tight in the Chinese domestic market Compared to native banks and foreign banks, China's modern-style banks emerged relatively late in the development of Shanghai's financial markets By imitating Western banking institutional frameworks, Sheng Xuanhuai, a noted Qing officer, established the first modern bank, the Imperial Bank of China, in 1897 The Imperial Bank of China was created as a joint state and private bank because the government did not have sufficient capital to operate the bank With the rise of nationalist sentiments after the May Fourth Movement in 1919 and the May Thirtieth Incident in 1925, Chinese modern banks and bankers gained in financial power Each private bank in China had its own fantastic story to illustrate difficulties in establishing and developing the bank In late 1935, the Nationalist government-controlled Central Banking Group finally declared its victory over native banks, foreign banks, and some private banks through "currency reform" and the reorganization of China's banking The scope of banking and finance control extended through the Sino-Japanese War and civil war period It was then that the modern governmental monopoly of banking originated I not know whether or not the prevailing thought of John Maynard Keynes in the 1930s influenced Chinese finance ministers Song Ziwen and Kong Xiangxi, but Chinese monetary policy reflected influences that emphasized government control of banking and finance and intervention in private business Several main political thoughts and economic themes are integral to the development of Shanghai banking The most important themes include: the conflict between "state and society," between officials and bankers; the political economic policy of guandu shangban (merchants' management under government supervision); the "borrowing of foreign capital"; foreign currency control and management; and the ideal of "national capitalism." These themes are vital to Chinese economic society, because the vestiges of these themes have been demonstrated repeatedly since China opened to the world The Conflict of State and Society Shanghai was a special treaty port with extraterritorial status Outside the Chinese walled city, it was divided into two districts, the International Settlement and the French Concession, each with dissimilar political, economic, and cultural atmospheres The Qing Court and early Republican governments had limited administrative control within the walled city, and little influence in the International Settlement and French Concession While conflict of state and society in the relationship between the Chinese government and Shanghai bankers was not very distinct during the Qing dynasty, it captured greater attention in the Republican era with the rise of a Chinese middle class With the growth of modern industries and banking in Shanghai, the emerging Chinese bourgeoisie played an increasingly important political and economic role They participated in all important political affairs, including the 1911 revolution For example, Shen Manyun, the manager of the first modern-style private Xinchen Bank, contributed a large sum of funds to finance the revolutionary army, despite the bank's weak financial situation This case showed the strong political commitment of the Chinese bourgeoisie to the Republican Revolution Furthermore, the Shanghai bankers exercised de facto independence by being able to resist the unsound executive orders emanating from the central authority When the president of China, Yuan Shikai, restored the monarchy, his premier ordered the Bank of China and the Bank of Communications to cease the remittance (cash) of banknotes, in order to collect funds for the inauguration The Shanghai Branch of the Bank of China unilaterally announced its rejection of the administrative order and continued carrying out the remittance of banknotes Society greatly appreciated the Shanghai bankers' independence (i.e., their self-management and their willingness to accept responsibility for their own risks and credit) These events stirred civic consciousness and prompted greater social responsibility that placed the middle class and the new bourgeoisie in a special position in Shanghai, where they exercised greater autonomy from the central government After the Nationalist government established its Central Banking Group in the early 1930s, the role of free enterprise in private banking began to decline By ending a series of unequal treaties, the Nationalist government built up a strong government image and established a central government banking group in Shanghai from 1928 to 1937 The native banks met their downfall after the unification of Chinese currency in 1933 Furthermore, all private banks lost the special rights to issue their own banknotes after the 1935 currency reform The power of the state began to eclipse that of society through the control of banking and finance According to the view of Chinese scholars,6 the attitudes of Shanghai capitalists toward the Nationalist government changed in several phases At first, they supported the Nationalist government's efforts to unite the country with patriotic feeling and hoped the government would establish a sound new economic order However, when they found that the government's interests conflicted with their own, they resisted the government's increasing powers Finally, Shanghai capitalists gave up their resistance and submitted to the government But the temporary capitalist submission did not mean that they had abandoned their ambitions and entrepreneurial spirit Under the high-handed monetary policy imposed by the Nationalist government, particularly after the imposition of the economic and financial emergency in 1948, some of them fled the country, while some joined the third political force seeking a democratic coalition government, and others approached the Communists After the revolution of 1949, the People's Republic of China exercised decisive state power over society All native banks and private modern banks were either dissolved or transformed into the socialist planned economic and banking system by the end of 1952 The classical theory of the conflict of state and society has not been obvious since then, but it was still valid when China's private banks reemerged in the society The “Merchants’ Management Under Government Supervision” Policy Historically, the economic policy of "merchants' management under government supervision" (guandu shangban) was a very important political instrument that deserves special attention in understanding Chinese banking history This policy arose initially in the 1870s, when the Qing government attempted to construct an early Chinese industrial base.7 Underlying this concept was the government's lack of sufficient funds and professional managers to operate modem industrial and state enterprises Overriding the central government's power and recognizing the Chinese merchants' role in developing the economy, Li Hongzhang, the superintendent of foreign affairs and advocate of yangwu yundong (promoting foreign affairs and industrial modernization), appointed merchants with professional experience to manage state enterprises under government supervision Following the original political economic policy, Sheng Xuanhuai, a prominent progressive Qing official and industrial entrepreneur, extended the concept of merchants' management in his proposal to create the first national bank in 1897 He proposed the formation of a national bank along the Western model, similar to the Hongkong and Shanghai Banking Corporation Sheng suggested that the new bank follow the route of "merchants' management under government supervision" policy He suggested that the new bank headquarters be set up in Shanghai, away from the watchful eye of Beijing This suggestion caused a stir among the higher officials in the Qing Court, because it proposed giving the bank greater autonomy by keeping geographical distance between the bank and the central government Although Sheng was able to found the Imperial Bank of China in Shanghai, the Treasury Board (Hubu) of the Qing Court was not satisfied with a national bank beyond its direct control In 1905, the Qing Court established its own bank in Beijing, called "Hubu Bank," to handle national fiscal transactions By the end of the Qing dynasty, the "merchants' management under government supervision" policy had evolved into "government and private merchants' joint ventures" (guanshang heban) which created an equal partnership between government and merchants in China's banking industry, However, the fact that the official supervision had recognized government authority over the private bankers in the initial stage, created the precedent of government participation in Shanghai banking Both the guandu shangban and guanshang heban systems met many difficulties in practice, due to their lack of clarity with respect to job responsibilities, inefficient bureaucratic systems, improper personnel appointments, and insufficient government capital In order to gain control over the decision-making process, some private shareholders increased their shares in the banks These themes are particularly important, because they still serve as the fundamental guideline in China's economic reform today Keeping the sound elements of "merchants' management under government supervision," the government should establish stable regulations and laws to govern the joint state and private enterprises, and give more autonomy to private entrepreneurs The “Borrowing Foreign Capital” Policy Traditionally, borrowing money was regarded as "losing face" in a self-sufficient state Through sharp debates and painful experiences, China has undergone a national psychological transformation from a traditional unwillingness to borrow foreign capital to a position where it was compelled to seek foreign loans to meet war indemnity payments Later, borrowing foreign capital became fashionable and a conscious effort was made to develop national industry and to build a navy before the first Sino-Japanese war From 1853 to 1894, the internal debates over "borrowing foreign capital" characterized the intense struggles between conservatives and reformers Under mounting pressures to meet the large indemnities and in an attempt to build a national industrial structure, the Qing Court decided to borrow money from foreign banks During the first period, the Qing Court contracted forty-three foreign loans totaling 69 million in silver dollars.8 Although the size of the foreign loans was not large by later international standards, it was enough to change the nation's traditional attitudes Furthermore, any hopes for self-sufficiency were destroyed by consecutive indemnities resulting from the first Sino-Japanese War in 1895 and the Boxer Movement in 1901 In order to find a way to finance the indemnity payments, the joint Russo-Chinese Bank was created as a political product of the first Sino-Russian alliance after the Sino-Japanese War As the largest foreign bank in China, the Hongkong and Shanghai Banking Corporation made several enormous loans to China Under the policy guideline of "borrowing foreign capital," the Qing Court contracted 112 foreign loans totaling 1.806 billion in silver dollars from 1895 to 1911 In the early Republican era, under the policy of "borrowing foreign capital," the Beiyang military government succeeded in taking 468 foreign loans worth a total of 1.348 billion in silver dollars.9 All these loans were secured by both China's salt tax and customs revenue By making loans to the Chinese government, foreign banks established their sphere of influence in different regions Russian banks dominated in Northeast China, while British banks controlled the Yangtze River basin and Shanghai, and Japanese banks exerted power in both Northeast and Central China by lending "Nishihara loans" to the Beiyang government After the Nationalist government took control in 1928, the new leadership was very cautious about borrowing foreign capital at the beginning As an alternative means of financing government expenditures, the Ministry of Finance issued several domestic bonds, allowing the government to borrow money from the domestic markets rather than from abroad However, the cautious attitude toward foreign loans changed out of necessity after the outbreak of the Sino-Japanese War and the Second Civil War From 1928 to 1949, the Nationalist government received twenty-nine foreign loans, totaling 3.027 billion (equivalent in silver dollars), which was close to the total of all foreign loans of the former governments.10 The road of building the Chinese banking industry and capital markets was by no means smooth Although the outbreak of World War I provided an enormous opportunity for capitalist development in light industries such as cotton mills and banking facilities in China, foreign competition quickly returned in the early 1920s Insufficient working capital and a slow return on investment forced many Chinese industries to depend on bank loans Industrial firms frequently requested foreign loans to maintain their productivity Although new Chinese modern-style banks attempted to finance some of these firms, limited capital prevented them from providing full-scale financing In short, China's capital markets were underdeveloped in the modern period The Control and Management of Foreign Currency Chinese experience with foreign currency control and management had its genesis in 1935 as a result of the currency reform undertaken in response to the global silver crisis The Great Depression caused a banking and finance crisis in the United States President Franklin D Roosevelt declared a "bank holiday" on March 6, 1933 Furthermore, the American government passed the Silver Purchase Act to buy international silver as reserves to restore the people's faith in banks Affected by the American silver policy, the world silver price rose sharply Huge quantities of silver were drained from China, either by sales of foreign banks in Shanghai or by smuggling in Northeast China under the protection of Japanese military forces The world silver crisis had destroyed the traditional Chinese monetary standard Without any alternative, China abolished the silver standard and issued a new paper currency known as fabi, a legal tender note The most important result of the currency reform was that China linked its monetary base with foreign currency reserves It abolished the fragile silver standard that had troubled China's monetary system by the nature of the commodity The new currency used foreign currency reserves against the issuing of notes To control foreign currency reserves, China created a series of monetary policies to develop the system of managing foreign currency reserves The maintenance of a high level of foreign reserves would not only keep the international trade balance, but also support the issuance of currency at the international standard During the Sino-Japanese War period, China used foreign reserves to purchase military supplies from the United States The foreign currency controls were protective measures while the country was affected by the global economic and financial crisis Psychologically, the Chinese still believe in holding large foreign currency reserves to reflect stronger international purchasing power In fact, China, Hong Kong, and Taiwan all maintain enormous foreign currency reserves Even though the Asian financial crisis shocked the eastern hemisphere in 1997, China still had foreign reserves of 139.89 billion U.S dollars, Hong Kong had 92.8 billion dollars, and Taiwan had 83.5 billion dollars by the end of 1997.11 The strong foreign currency reserves of the three areas helped to prevent them from being severely affected by the Asian financial crisis The Political Economic Thought of “National Capitalism” Fully aware of the weaknesses of the Chinese financial system, in 1924, Dr Sun Yat-sen advocated the concept of "national capitalism" to establish national industries and a central bank He vowed to terminate unequal treaties and to restore to China the financial power held by the foreign banks Under his famous "The Three Principles of the People," Sun advocated the regulation of private capital and the development of state capital.12 The concept of "national capitalism," however, was developed separately and distinctly by both Nationalists and Communists in China The Nationalists interpreted "national capitalism" to mean "national monopoly capitalism" formed by putting monopoly banking in the hands of a few families By contrast, the Communists interpreted "national capitalism" to mean the leadership of the working class, cutting short the period of building "national capitalism," and jumping into a "socialist transformation" by dissolving all private banks after the revolution The regulation of private capital and construction of national capitalism envisaged in Sun Yat-sen's idealistic model was never reached Besides these complex integrated political thoughts and economic development lines, native banks, foreign banks, and modern Chinese banks competed, conflicted, and coexisted throughout the modern history of Shanghai Yet, among these three types of banking institutions, foreign banks were always alien to Chinese society in terms of business culture and language The rise of foreign banks was the result of the opium trade and international war Although foreign banks had cooperative relations with native banks through granting short-term loans, foreign banks had more conflicting interests with the modern-style Chinese banks The competing interests were especially reflected in the setting of foreign exchange rates and the issuing of foreign banks notes in China In fact, without Chinese government permission, foreign banks circulated notes in China in violation of China's sovereign rights Compared to the performance of Chinese modern-style banks, native banks seemed very conservative in terms of organization structure and business behaviors Native bankers favored hiring employees by referral from old friends; reducing bank overhead expenses rather than expanding business regions; granting loans based on personal trust rather than requesting securities; and holding real estate instead of government bonds In contrast, the modern-style banks had progressive attitudes, opening bank branches all over the country, spending on advertisement and external relations, and creating new savings methods to attract deposits Although the native banks had excellent relations with merchants and a predominant position in trade, they were restricted by limited capital and gradually lost their leading position The modern-style banks, especially those supported by the government, gradually acquired the dominant banking role in Shanghai The abundance of human capital also contributed to the success of Shanghai banking in the modem period In addition to receiving traditional financial education in China, a younger generation also received foreign-language education either in Shanghai or abroad These "compradors" were bilingual professional managers who functioned as a "bridge between East and West." 13 The Hongkong and Shanghai Banking Corporation hired its first comprador, Wang Huaishan, a former native bank employee, in 1865 Because some compradors came from native banks, they facilitated connections between foreign businesses and native banks At the same time, native banks also evolved beyond their primary role as money changer by adding more commercial functions to deal with international trade A "comprador" character affected native banks when they were involved in foreign trade After gaining work experience in foreign banks, many compradors opened up their own banks by using the foreign bank system as a model, while others brought their management skills to the new Chinese national bank Many Chinese bankers who succeeded in the 1920s had received foreign higher education in finance before moving into managerial positions Foreign education sharpened their skills in the Shanghai banking and capital markets, as well as raised their concern about world political affairs They organized the first Shanghai Bankers Association to represent both their banking interests and national interests The following chapters will show how a group of outstanding Chinese bankers, including Zhang Gongquan, Chen Guangfu (K.P Chen), Qian Yongming, and Li Ming, contributed to the development of modern Shanghai banking Besides discussing these main themes, as its subtitle indicates, this hook also provides an analysis of the pattern of the rise and decline of China's finance capitalism Here I choose the concept of "finance capitalism" by emphasizing the capitalism developed in China's banking and finance area, which may be abstracted or analyzed as native finance pre-capitalism, integrated finance capitalism, and state finance capitalism Native Finance Pre-Capitalism China's finance capitalism originated and developed from inside native finance markets having an indigenous character By definition, native finance pre-capitalism had the nature of a family-based or native-place small, rationally financed organization (e.g., native banks); was a sole ownership or partnership that did not separate business and household capital; did rational bookkeeping and accounting; had a personal approach to borrowing and lending; had a cultural approach to human capital; and took an authority approach to decision making However, this kind of finance capitalism was preliminary and immature, because it occurred in a self-sufficient economic and commercial system without capital challenge from the outside world Furthermore, this pre-capitalism was fragile and lacked the rule of law Although the self-regulated native bankers' association provided some regulations to the market, these regulations were easily changed by rule of man Therefore, this type of native capitalism is imperfect, immature, and fragile An investigation of the family-based financial unit and the commercial relationship between merchants and native banks reveal that it is still in a pre capitalism development period Native finance capitalism has a small scope of capital structure derived from the native banking and finance market Integrated Finance Capitalism After China opened to the West in the middle of nineteenth century, Western commercial activities and finance capital entered China's market In order to develop its commercial and finance interests, Chinese native banking and finance integrated with Western finance capitalism By virtue of this finance capitalism, it separated business and household capital; introduced rational finance organization and banking facilities and professional managerial skills; and used law to protect banks' and customers' interests It took a market approach to rational banking and finance operations to maximize profits, and a managerial approach to professional decision making Culturally, however, it mixed Chinese customs with the thought and practice of Western capitalism Modern China's finance capitalism was not imported from the outside world, even though it was strongly influenced by Western capitalist methodology and practices, as the rise of modern-style banks in China has demonstrated Integrated finance capitalism combined native finance capitalist elements with Western management skills to cultivate a new Chinese capitalist class This class was very small and financially weak in terms of Chinese economic society While it conflicts with foreign financial strength and unequal competition, it has become a national capitalism State Finance Capitalism State finance capitalism reached the highest stage before it declined in modern China The root of state finance capitalism began with the government-led "foreign affairs movement" and its "guandu shangban" or "merchants' management under government supervision" policy in the later Qing dynasty The nature of state finance capitalism resulted from the state monopoly on banking and finance; bureaucratic control of human capital; both rational and irrational bookkeeping and accounting; a bureaucratic approach to borrowing and lending; and the combination of power and money to create official corruption State finance capitalism derived largely from the bureaucratic banking system during and after the Sino-Japanese War The nationalization of all private banks in China was the final result of the abolishment of state finance capitalism Instead, a state-planned banking and finance monopoly was established under the dictatorship led by the working class Thus, modern China's finance capitalism was destroyed and it declined In short, native banking and financial practice created a basic tone for developing China's finance capitalism Foreign capital and management skills added oil and engine for promoting the integrated finance capitalism Moreover, the traditional merchants' management under government supervision added official colors and further led to state capitalism Native finance, foreign capital, and state power combined to form a modern China's finance capitalism In present reality, native finance pre-capitalism can be related to past experiences but still have great influences on grass root financial lending State capitalism has proved to be inefficient and corrupt, yet the bureaucratic system still affects banking operation Among the three types of financial capitalism, the integrated finance capitalism is worthy of deeper study, because mixed-economic system and multinational banks coexist in contemporary China To really understand the current state of Chinese banking and finance, any attempt to ignore native financial practice and any naive attempt to play down state capacity to intervene in banking and finance would prove to be incorrect China's finance capitalism originated inside of native financial markets and was integrated with foreign capitalist practice with the full support of Chinese government in the past This book is composed of nine chapters in a linear framework In chronological order, it describes general banking history against the backdrop of modern Chinese history, international conflicts, civil wars, foreign trade, and industrial development The subsections of each chapter discuss how the integration of these political and economic movements contributed to forming and developing the structure of modern Shanghai banking and financial markets The first chapter investigates the origins of Shanghai native banks Shanghai native banks, familybased or partnership-based financial institutions, existed in the pre-modern period before 1840 The structure of the native bank organization reveals a quasi-Confucian system of social order A social hierarchy was clearly implied in the small financial kingdom with the manager at the top and apprentices at the bottom The traditional financial institution was characterized by simplicity, coherence, and generality The second chapter describes the rise of foreign banks between 1847 and 1894 After Shanghai opened as a treaty port, various financial services were needed to increase foreign trade Because of their prominent trade status, British banks dominated the Shanghai foreign banking market These foreign banks not only dealt in discounting and rediscounting bills on cotton and opium, but also issued banknotes in China In the late nineteenth century, Western powers shifted their pattern of economic expansion from merchandise to capital export This expansion was not limited to trade, warehousing, and transportation, but also penetrated into insurance and financial institutions In addition to Britain, Germany and Japan participated in Shanghai's capital market, while Russia, France, and the United States also established banking branches there The expansion of foreign banks established a complex and competitive international financial network in Shanghai The third chapter examines the economic period from the end of the first Sino-Japanese War to the collapse of the Qing dynasty Loans to the Chinese Imperial Government by foreign banking firms expanded rapidly after the Sino-Japanese War To resist the continuous expansion of foreign banks, the Chinese people began to search for a new way to accumulate national wealth The Qing Court approved the establishment of the Imperial Bank of China, the first modern Chinese bank in Shanghai Furthermore, the Qing Court issued a series of new laws aimed at structural reform of the government, which included the creation of the Ministry of Finance, and proposed to establish four types of banks: central, ordinary, commercial, and savings Many private banks were formed nationwide in China, encouraged by the spirit of the central government's banking reform Most of these provincial banks set up their representative offices or branches in Shanghai These modern-style banks acted as a third financial power along with native banks and foreign banks in the Shanghai financial markets The fourth chapter discusses the "golden age," a period from 1912 to 1927 in Shanghai banking.14 The 1911 Republican Revolution opened new opportunities for the Chinese bourgeoisie Because of the regional war between militarists, the weakness of the new Republic government, and the outbreak of World War I, Shanghai capitalists took advantage of this decentralized political opportunity to develop the local economy and finance They also organized the Shanghai Bankers Association in 1918 Under the banner of social democracy and freedom, Shanghai bankers published their own magazines, Banker's Weekly and Native Bankers' Monthly The fifth chapter describes the new foreign banking and financial powers that arose in Shanghai from 1915 to 1930 After World War I, Japan and the United States became the two most important financial powers in Shanghai Although Japan was a capital-importing country before the war, it became a capital-exporting country (to China) by exporting war supplies to Europe The American banking group also played an important role in China after the U.S Congress passed the Federal Reserve Act in 1913 The sixth chapter examines Shanghai banking under the rule of the Nationalist government from 1928 to 1937 With personal experience working as a stockbroker in the Shanghai Stock Exchange for a while, Chiang Kai-shek had a keen awareness of the importance of controlling financial resources Under financial support from Shanghai bankers, Chiang Kai-shek completed his "Northern Expedition" campaign, and began to build state monopoly capitalism A state central banking system called "four banks and two bureaus" was established in the early 1930s When China opened to the world, it also experienced the international financial crisis Under attack from speculation in world silver prices, a disastrous financial panic occurred in China from 1934 to 1935, causing an enormous outflow of silver Many commercial firms and enterprises went bankrupt China carried out a new currency reform to abolish the silver standard, despite a currency war among Britain, Japan, and the United States The seventh chapter illustrates wartime banking and finance in Shanghai during the "isolated island" period and under Japanese occupation In July 1937, the outbreak of the Sino-Japanese War destroyed Chinese efforts to build a strong nation The Ministry of Finance organized a joint central banking group to meet the financial challenges of the war In the first period of wartime finance, a noncash settlement system was introduced to resist the Japanese military and financial invasion At the same time, China's foreign currency control methods worked well with the assistance of British and American banks After the outbreak of the Pacific War, the Japanese military forces took over the Chinese government banks, as well as British and American banks Wartime inflation emerged The eighth chapter analyses the worst period of inflation in Chinese economic history from 1945 to 1949 The financial strain of war and inflation undermined the already weakened national economic situation while the continuing civil war exhausted national financial resources Official corruption was a prominent feature of the postwar reconstitution of banking For example, gold scandals linked the minister of finance and exposed insider trading in the Nationalist government People lost confidence in the Nationalist government because of official corruption, political autocracy, economic backwardness, and civil war Subsequently, hyperinflation caused the Nationalist monetary system to collapse The ninth chapter reviews the socialist banking transformation Following the Communist Party's victory in China and the outbreak of the Korean War, new wartime financial controls were introduced in Shanghai All private banks were gradually phased out after the socialist transformation took place The People's Bank of China eventually became the sole powerful government bank in China Although October 1, 1949, marked the new era of the People's Republic of China, the transformation of the existing economic and financial structure required time The old finance capitalism existed until the end of 1952 By January 1, 1953, the People's Republic of China had adopted the economic and financial model of the Soviet Union, and established a socialist economic planning system with the issuance of the First Five-Year Plan The final chapter of this book offers an afterword A retrospective examination of Shanghai banking shows a glimpse into the future as Shanghai is poised to reassume its role as the banking and financial center for China in the twenty-first century The practices of Shanghai banking 100 years ago can still provide valuable insight into current Chinese social customs, savings behavior, and emphasis on business relations, which continue today The history of Shanghai banking from 1842 to 1952 encompassed a huge historical cycle from infancy to prosperity to decline The cyclical changes coincided with the rise and decline of China's native banks, foreign banks, and national capitalist banks Moreover, the trilateral relationship among native banks, foreign banks, and national banks characterized the vibrant financial life of modern Shanghai The cycle ended with the nationalization of China's banking system at the end of 1952 Following the end of this cycle, the spirit of free enterprise has been slightly dampened for more than three decades Will Shanghai banking history repeat itself? What will the differences be? Shanghai is again in the spotlight today The waves of banking and finance globalization are lapping the city of Shanghai Now, as the planned economy yields to the market economy, banking reform becomes the most critical area in demonstrating successful economic reform Some have argued that banking reform is an "unfinished economic revolution" subject to Chinese modernization.15 Will private banks be reestablished? How are foreign banks carrying on business in China? Will native banks be restored? Will a new bourgeoisie class emerge to play an important role in contemporary Chinese banking history? History offers some answers to these questions In addition to the historical lessons, however, a philosophical consideration is worth bearing mind: to infer the future from the past is to assume that knowledge is based upon something other than experience While some knowledge of the future is inferred from the present or the past, it is incomplete We must use our critical thinking to deal with history The primary sources used in this study come from original Chinese materials in local Shanghai newspapers, magazines, economic statistics, banking reports, bank yearbooks, bank archives, personal interviews, memoranda, telegraphs, and some files of the Shanghai Native Bankers' Guild and the Shanghai Bankers Association in the Shanghai Municipal Archives Secondary materials include various studies of Chinese banking and finance in both English and Chinese I have paid special attention to those who have devoted a lifetime of service to China's Maritime and Customs Service and who are longstanding figures in Chinese banking and financial studies Other supplementary materials are from the documents in the Foreign Relations of the United States, foreign banking history books, as well as from the history of Japanese banking, which had close financial relations with Shanghai banking during the period covered My most valuable source has been my father, a former Shanghai banker, who gave me important suggestions about the structure of the book and told me many interesting stories A History of Modern Shanghai Banking Origins of Shanghai Native Banks The significant growth of commerce in the lower Yangtze River region during the Ming and Qing dynasties created excellent banking opportunities and accelerated the development of native banks in Shanghai Shanghai had developed its own indigenous banking system well before the Western political and economic intrusion of mid-nineteenth century The rise of modern Shanghai banking can be traced back to the origins of native banks (qianzhuang) or "money shops." These native banks, with roots in a longstanding agrarian economic society and a Confucian cultural background, retained small business size and self-regulation, as well as simplicity, coherence, and generality The native banks emerged in response to the commercial integration of Shanghai urban society Most native banks were originally family-based or established through partnerships among family members and friends for the purpose of facilitating money exchanges between copper cash and silver ingots, as well as settling interregional trade Based on the Confucian ethics of family values, a native bank manager acted as a "father," overseeing all internal business and devising strategies to deal with external affairs The manager could efficiently operate the institution with a relatively small amount of capital by utilizing his friendship network Thus, building good friendship networks was critically important to the manager in carrying out business, because borrowing and lending was based on personal trust and fidelity In 1843, Shanghai formally opened as a treaty port The influx of foreign trade and capital gradually penetrated China's major cities, drastically transforming the nature of the autarky economy However, China's traditional agrarian system sustained its self-sufficiency, and was less influenced by foreign trade for a long period As the old and new economic patterns coexisted, native banks acted as the intermediary for transactions The Shanghai native banks performed both a traditional banking role in the domestic market and a new role as a mediating financial institution, handling international trade settlements between domestic merchants and foreign trade companies The Origins of the Shanghai Native Banks The native banks first emerged in China during the middle of the Ming dynasty when silver was used as money to settle business transactions among merchants around the country These native banks functioned primarily using precious metals, including copper coins, silver ingots, silver dollars, and gold, which were all part of the multi-standard currency system in both the Ming and Qing dynasties Later on, native banks expanded their functions to include private money deposits and loans to merchants At the same time, a similar form of native banks emerged in Northern China where these were alternatively often called "Shanxi banks, silver shops, or piaohao."In Shahanghai the term qianzhuang prevailed Shanghai, as its Chinese characters indicate, is "on the sea," located on the seaward bank of the lower Yangtze Delta, where extensive water routes of inner river systems gather into a knot and flow into the Huangpu River and then into the East China Sea Before the thirteenth century, Shanghai was a small market town However, three important historical events changed Shanghai's fate When the lower Yangtze River basin was settled by an influx of migrants from North China during the Yuan dynasty, the court elevated Shanghai from a small town (zhen) to a county (xian), converting Shanghai into a political and economic entity in 1292 Two hundred and fifty years later, when Shanghai was constantly attacked by overseas pirates, the Ming dynasty court decided in 1553 to build a wall to protect Shanghai In addition to its practical role of defense, a wall symbolically divides urban and rural areas Thus, Shanghai became a walled city where urban population and commercial activities increased The last and most significant event was the opening of Shanghai by British soldiers on June 19, 1842, as a result of the first Opium War Through the Treaty of Nanjing, Shanghai was formally opened to foreign trade on November 17,1843 These events gradually transformed Shanghai from a native town into a walled city, and thereafter into a metropolis and international port Shanghai's native banks formalized and developed as the city's Illustration 1.1 The Shanghai City Temple and its "Inner Garden" where the guildhall of the Shanghai Native Bankers Association was located in 1872 (Shanghai Library: Shanghai Fangzhi, 1872) Photo 1.1 The renovated "Inner Garden" in Shanghai City Temple in 1995 (Author) commercial activities intensified The earliest recorded literature kept in the guildhall at the "inner garden" of the Shanghai Native Bankers Guild indicated that the guild had registered 106 native banks between 1776 and 1796.1 This record also indicated that Shanghai native banks had passed the initial development period of forming a professional organization to lead and regulate the native banks Beyond this record, many unregistered native banks existed Therefore, the origins of Shanghai's native banks can definitely be traced back to earlier than 1776 The earliest forms of native banks evolved from small grocery stores where retail transactions took place These stores sold rice, beans, grain, silk, and even coal A famous story tells of a man from Shaoxing, now a city in Zhejiang Province, who operated a coal shop in the southern part of Shanghai He loaned his profits from coal sales to neighboring shops Gradually, his coal shop became one of the original Shaoxing native banks.2 By reason of such origins, some Shanghainese called this type of native bank a "money and rice shop" or a "money and clothing shop." The exchange of goods and money in such shops provided the accumulation of start-up capital needed to form a native bank These origins also underscored the importance of native banks' strong ties with Chinese merchants, and this kinship existed through the whole modern history of Shanghai banking The cradle of the Shanghai native banks was in Nanshi, a market located in the southern part of the city.3 Many small markets sold rice, beans, grain, and cotton along the market's narrow cobblestone streets The reason for Nanshi's commercial success was its large natural port, Shiliupu, which could accommodate many ocean-going boats and other vessels from Guangdong, Xiamen, Ningbo, and Dalian, as well as berth smaller river-going ships from the lower Yangtze River basin Because of these capacities, Nanshi became the commercial center for virtually all of Shanghai during the premodern period Small boats and ships crowded into Nanshi's harbor every day, carrying agricultural products from the hinterland to Shanghai and transporting chests of tea and silk overseas A sea of masts provided a magnificent view of the southern part of the city each day All of this trade generated countless business transactions, and, in this environment, Shanghai native banks were born Money and Native Banks Reviewing the history of China's monetary system is useful in gaining a better understanding of the origins of native banking During Qianlong's reign (1736-1795), a bimetallic currency system of copper coins and silver ingots with differing degrees of weight and purity was in operation The standard measure of silver was called the "tael," and copper coins were measured by the "string." The standard copper coin was a round brass or bronze coin with a square center hole with a diameter of about nine-tenths of a Chinese inch If a person presented 100 loose cash coins and requested a string worth 100, he would be given a string containing only 98 or 99 coins in return The shortage of one or two coins paid the moneychanger for his service The usual exchange rate was tael of silver for 1,000 copper coins.4 Thus, small transactions and retail business were conducted in copper coins, but large transactions and wholesale purchases were conducted in silver ingots Silver and copper coins had two fundamental functions: as a medium of exchange for goods and services, and as a commodity for sale in financial markets As commodities, silver and copper money were bought and sold according to weight, quality, and market supply and demand The value of the money was relative and uncertain because of the nature of the silver or copper standard In order to standardize the value of different shapes and purity of silver, family-based handicraft shops of silver smelters (lufang or yinlu) melted diverse forms of circulating silver into standard silver ingots The process of melting silver was simple Smelters weighed small chunks of silver and put them into a pot Then, they put the pot into a simple furnace and melted the silver After removing impurities from the surface of the pot, they then poured the molten silver into ingot molds By the beginning of the nineteenth century, the standard sizes of silver ingots were tael, 10 tael, 50 tael (the "shoe of sycee"),5 and one tael Although the technique of melting silver resolved the problem of measurement, large business transactions of several thousand taels required heavy labor For convenience, merchants put a stamp on a paper note to save the trouble of carrying silver ingots This stamp declared and guaranteed the quantity and quality of the silver ingots the note conveyed Local native banks assumed the role of remitting these native notes The interbank transactions created linkages between Shanghai's native banks and others throughout the empire Shanxi Banks Shanxi banks originated in Shanxi Province, which is located west of the Taihang Mountains and east of the Yellow River Beginning in the North Song dynasty, border wars between the Han residents and minorities often interrupted normal agricultural production there The Han people frequently engaged in business instead of seeking a scholar's career or doing farm work in Shanxi By the beginning of the Qing dynasty, most pawnshops in the country were owned by Shanxi people Shanxi businessmen were also involved in border trade from the northeast provinces to Mongolia, Xinjiang, and even to Russia and Korea They made fortunes distributing salt and iron from their own province to the whole nation and also traded rice, tea, and silk from the southern to the northern and western parts of China Shanxi merchants contributed capital and business experience to the creation of local banks, Shanxi piaohao or Shanxi banks The first person to create a system of remittance was reportedly Lei Lutai (1770-1849), a Shanxi dye merchant in Tianjin who, because of difficulty in transacting business, created a money transfer system for himself and other merchants in 1831.7' Lei had established close personal relations with Qing officials, for whom he had transferred funds for the Bureau of Revenue.8 Lei held deposits of this money without paying interest to the government Because the Qing Court did not have official financial institutions to handle additional government revenue, Shanxi banks served as institutions for the transfer of various funds such as lijin, transit tax on goods traveling across the country to the capital,9 following the Taiping Rebellion This role continued until the establishment of the Hubu Bank in 1904 According to available records, China had 32 Shanxi banks with more than 400 branches in 1893 with paidin capital of 30 million tael This amount, added to the deposits and notes of the native banks, came to total capital of 200 million tael.10 Shanxi banks had numerous branches serving the Shanxi merchants who were engaged in longdistance trade throughout China They granted loans to Shanghai native banks in order to establish business connections and get a foothold in new localities.11 Normally, a Shanxi bank's capital amounted to 100,000-500,000 liang, five times that of the average Shanghai native bank at that time Due to regional differences, the Shanghai branches of the Shanxi banks were not directly involved in local private lending, but granted funds to local native banks Local native banks took advantage of the source of capital to speed up money circulation In this sense, the Shanxi bank functioned as a native banker's bank in the late Qing period Because the Shanxi bank's fortune and finances depended on the Qing Court, the bank collapsed after 1911 when the court was overthrown by the Republican Revolution Other reasons contributed the decline of the bank, including increased competition from local small banks and foreign banks The old management behavior and traditional crony system of Shanxi banks were no longer able to meet the new financial challenges The dynasty's demise plunged banking into chaos: private savings were withdrawn, no official deposits were made, and loans were not repaid Compared to the fate of Shanxi banks, Shanghai native banks survived by virtue of geographic location, independence of money lending, and prudent management skills The Ningbo and Shaoxing Financial Groups Beginning with middle period of the Ming dynasty, Shanghai benefited from the development of commercial activities between the countryside and urban areas spurred by large domestic migration People spoke different dialects and lived various lifestyles in Shanghai Residence in Shanghai, or "residentship," can be divided into two categories: nominal and substantive Nominal residence applies to a person who lives in the city but who originally migrated from another place and adapted to the prevailing city culture and customs Substantive residentship applies to immigrants whose native-place inclinations, despite living in the city, dominate their attitudes toward the inherent lifestyles, business circles, and political judgments in Shanghai The attempt to keep native-place identity and maintain substantive residentship in certain business circles was typically reflected in the existence of various native place associations (tongxianghui) and business guilds (gongsuo) Typical of the latter, Ningbo and Shaoxing financial groups predominated in the early stage of the Shanghai financial markets Having immigrated from Zhejiang, they were known as the "Zhejiang financial group" and owned a large percentage of native banks with interbanking activities among themselves in Shanghai, People in this group were related by clan and kinship, or simply by speaking the same dialect It was axiomatic that "there is no business without Ningbo." Located south of Shanghai, at the mouth of Hangzhou Bay in eastern Zhejiang, Ningbo was an entrepôt center in China's foreign and coastal trade as early as the tenth century 12 The Southern Song dynasty's establishment of its capital in Hangzhou stimulated the people of Ningbo to trade porcelain, silk and tea with overseas merchants As time passed, a general commercial consciousness grew in the area In the late Ming and early Qing periods, the residents of the small islands around Ningbo were twice forced by the Imperial government to move to outlying areas around Ningbo city Preferring to go to Shanghai to look for commercial opportunities rather than stay in the new settlements to open up wasteland, men from Ningbo brought their trade experience and accumulated capital and began to conduct business in Shanghai According to a quasi-Confucian concept that states, "if you want to manage national affairs, you should deal with family or local affairs first," these men never forgot their hometown and relatives When they remitted money back to relatives in Ningbo, their abundant capital resources became fertile ground for the growth of local native banks Insofar as the local people could not utilize all the money that was remitted back, the money ultimately became lending capital for the country Hence, the Ningbo native banks became famous throughout the Shanghai financial world The Shaoxing banking group was another important part of the Zhejiang financial group in Shanghai Also known throughout China for its famous wine, Shaoxing is an ancient cultural and commercial city located about fifty miles from Ningbo Men from Shaoxing established various businesses in Shanghai well before the time of the Ming dynasty As mentioned above, one legend states that a Shaoxing man created the first native bank in Shanghai by lending the profits from his coal business to neighboring shops Compared to the Ningbo group, the Shaoxing group had larger capital resources One indication of the Shaoxing group's financial power was its effective effort to block the extension of northern native banks in the Shanghai region during the Qing dynasty According to statistics, in 1921, thirty-eight out of sixty-nine native banks in Shanghai were operated by the Shaoxing group, and sixteen by the Ningbo group Capital controlled by the Shaoxing native banks amounted to 48 percent of the combined capital of all of the Shanghai native banks, and their capital accounts recorded a silver total of 7.3 million tael, out of total capital of 15.29 million tael The Ningbo native banks in 1921 accounted for 3.92 million tael, 25 percent of total capital.13 The native-place identity of native banks was obvious from the fact that the Shaoxing and Ningbo financial groups together comprised 78 percent of the membership of the Shanghai Native Bankers Guild and held more than 73 percent of the capital in 1921 The predominant township origin and specialization were special characteristics of the first period of modern Shanghai banking history Shanghai Native Bankers Guild The Shanghai Native Bankers Guild was established during the Qianlong reign as a self-regulating guild of the native banks.14 The earliest guildhall was built in the "inner garden" in a Ming-style garden connected to the city temple of Shanghai The Shanghai Native Bankers Guild played a leading role in the Shanghai financial markets in determining the daily interest rate (yinzhe) and the monetary exchange rate (yangli) A native bank could obtain prestigious rights and share equal opportunity when it became a member of the guild An applicant for membership required 30 tael of silver as a membership fee, which was called "entering the garden."15 A committee meeting deciding on the admission of new members was normally held on the thirteenth day after the lunar new year On this designated day, all directors of the board and managers (or a management representative) of the membership of native banks met together in the guildhall to discuss current banking issues, new applications for membership, and revisions of the guild's regulations Generally, a guild meeting passed a proposal by voting with white or black Chinese chess pieces placed in a ballot bowl The black pieces counted against the proposal and the white pieces counted in favor of it I was very impressed when I saw this record as I was doing research in the Shanghai Municipal Archive I not know over how many years this tradition had existed, but I would call it an indigenous "oriental democracy" to determine the direction of business In addition to handling the banking business, the director of the guild also acted as legislator, moderator, and administrator As a legislator, the guild could set conditions of apprenticeship, new entry, credit control, and regulation of the native banks As a moderator, the guild resolved disputes among its members, and represented the group's interest in disputes arising between its members and those of other guilds As administrator, the guild could fine a member bank if it did not follow the established interest rates A very sound financial institution was built upon a high degree of selfregulation and a self-fulfillment system The revenue of the guild was derived from self-imposed annual membership fees and from fees on banknotes cleared by its members and foreign companies The guild's control was strengthened by the tacit support of the Shanghai government and by its ability to communicate with other guilds to join in united action against any threat to its policies The guild included the Ningbo and Shaoxing financial groups, as well as those of Suzhou, Zhenjiang, Guangzhou, Shanghai, and others Although these groups competed among themselves, a common interest in banking and finance bound them together With the advance of urban economic and financial development, the guild also took on new roles in political affairs involving various local events, and, later, supporting the Republican Revolution 16 Even during the Qing dynasty, sometimes the power of the guild superseded the Qing government's circuit attendant (daotai), who administered Shanghai Native Banks and Merchants Originally, the rise of Shanghai native banks was a response to the acceleration of trade and commercial activities Because agricultural products were the main commodities in the commercial trade of the late Qing period,17 the native banks had numerous business relations with the hinterland and established local businesses—shen zhuang—to handle cash flows and remit native banknotes In the late 1800s, as Shanghai's urban population absorbed agricultural products from Jiangsu and Zhejiang, the notes of Shanghai's native banks became the prevailing money in circulation in the provinces along the lower basin of the Yangtze Delta Relative to the developing commercial society, interest rates changed periodically according to the seasonal variation of agricultural production Normally, the interest rate would be higher when new tea, silk, and grain were collected in May, but the rate would drop in summer Then, the interest rate would rise steeply again from August to November with the autumn harvest of cotton and rice Finally, it would decline again after December These phenomena corresponded to the typical seasonal pattern seen in market forces As the customers of native banks were mostly local merchants and members of other guilds, the native bank manager usually knew them well Some native banks were better informed about the financial conditions of certain merchants than even the merchants themselves, but the granting of a l oa n was ultimately based on trust and a belief in the personal character of the borrower Interpersonal relations played an important role in financial lending Some owners of the native bank enhanced their relations with the merchant society through the intermarriages of their children Some merchants created partnerships by investing commercial surplus in native banks For example, Shen Ruizhou, a wealthy tung oil merchant, became a major owner of the Yuancheng Qianzhuang in this way This interdependence on personal relations permitted persons deemed trustworthy to obtain capital without providing collateral In the prevailing social context, native bankers felt more comfortable with a personal contact than with legal business contracts To ask for collateral to issue a loan was regarded as vulgar The quasiConfucian concepts of "fidelity" and "rightness" among friends reinforced their business preferences Although this kind of personal lending involved high financial risks, traditional business morality prohibited immoral speculation or absconding with money, and such unwritten moral contracts between native bankers and merchants were usually effective The Organization of Native Banks Shanghai native banks gradually formed a distinctive system of banking organizations either as a sole proprietorship or as a partnership having unlimited liability A sole ownership native bank was formed on a family basis Several brothers might work together under the father's leadership Such a family business could be continued for several generations Partnership native banks usually formed among more distant relatives, close friends, or persons from the same hometown, such as Shaoxing or Ningbo One initial motivation among such partners was the desire to get an easy loan to finance their other businesses For example, Rong Zongjing, the older brother and the head of the Rong enterprise in Shanghai, once said that if he invested 10,000 yuan in several native banks, he could borrow 100,000 yuan or even 200,000 yuan from them.18 In fact, he did so to promote his textile and flour business in the early stages of China's industrialization Rong Zhongjing devised this business strategy from his personal business experience, because he was an apprentice at the Yuyuan Qianzhuang when he was fifteen years old, and then became a "street runner" (paojie) at the age of nineteen He opened his own partnership native bank at the age of twenty-three On the basis of these experiences, Rong Zongjing and his brother opened the largest chain of flour mills and cotton mills in Shanghai at the beginning of the twentieth century As soon as the shareholding owners established a native bank, the appointment of a manager became a key issue because the shareholders themselves did not deal with the daily business A qualified manager had to be able to take sole responsibility for the entire business, including the internal organization, interbank relations, and relations with local firms A manager was usually selected by the shareholders from among a group of close friends, based on the person's character as well as his social and organizational skills The starting capital of a native bank collected by the partners varied from 20,000 to 60,000 tael of silver in the late Qing period, A unique business name and address were required in the drafting of the agreement to establish a native bank.19 Names of the bank usually had meanings associated with luck, wealth, and saving, such as "Wealth and Prosperity" ( Fukang) and "Initial Success" (Yuancheng) The establishment of a new native bank normally followed a strict process First, the new business had to invite a well-known banker as a guarantor Next, it required a formal agreement among the shareholders, had to apply for membership in the Shanghai Native Bankers Guild, and had to seek the support of its directors Third, the prospective native bank had to announce all relevant information one month before opening, including the name and address of the new business, the names of the shareholders, the manager, and the guarantor, the number of shares held by each partner, the value of these shares, the total capital held, and so on.20 In most cases, becoming a new member of the guild required large amounts of capital and a two-thirds vote from the board of directors Thus, not every newly established native bank was able to join the Shanghai Native Bankers Guild Native banks were usually divided into five different types, according to their capital and areas of operation: (1) native commercial banks (huihua zhuang); (2) secondary commercial banks (yuanzi zhuang); (3) credit unions (hengzi zhuang)', (4) exchange houses (lizi zhuang); and (5) grocery shops with money exchange (zhenzi zhuang) Customarily, the name "zhuang" indicates a place of business operating within a continuous and self-fulfilled system The native commercial banks possessed larger capital because they dealt with the largest business circle They had the authority to issue bank promissory notes (zhuang piao) to trading companies and to act as clearing houses in exchanging other banknotes These native banks, as members of the Shanghai Native Bankers Guild, were often called "native banks that had entered the garden" (ruyuan qianzhuang) They had stronger capital reserves and credit ratings, hence, higher prestige to circulate their promissory notes in both merchant circles and money markets The secondary commercial banks maintained less capital and a smaller range of business Although they were not accepted as members of the Guild, they accepted native banknotes and entrusted a native commercial bank with clearing these notes Credit unions, the third level of native bank, carried out light business in deposits and loans Exchange houses were also called "exchange native banks," and did not deal with direct deposits or business loans, but with small wholesale businesses and the exchange of various monies The last category of Shanghai native bank was the "grocery shop," which dealt only with retail transactions and the exchange of silver dollars and copper coins.21 Therefore, the most influential native banks in Shanghai were the native commercial banks, which created and maintained the unique clearing system of modern Shanghai banking history until the 1930s Hereafter, we examine mainly this type of native bank in tracing the history of Shanghai banking I also choose this type of native bank as a model to study the general nature of Chinese native finance pre-capitalism When studying the nature of capitalism, we must first deal with the capital components of the native finance institute Native Banks’s Capital The capital of a native bank was the foundation of its business Usually, the native bank had two types of capital: basic capital (chengben) and supplementary capital (fuben) Basic capital referred to the capital originally paid by the founder and the shareholders of a native bank; supplementary capital referred to the capital later added to the original capital In order to develop the bank's business, supplementary capital was derived from the requirement that shareholders deposit money in the bank as a performance fund in a current account.22 Normally, the shareholders received to percent interest annually on their invested capital According to a 1926 statistical survey among 112 native banks, the basic capital of a single native bank ranged from 20,000 to 360,000 tael Among them, 24 native banks had capital of 100,000 tael each; 18 had 120,000 tael; 11 had 200,000 tael; and another 11 had only 60,000 tael Initial capital was normally divided into 10 shares among each of the partners The 1926 survey also cited that 86 out of 112 adopted this method, and among the remaining 26, only were solely owned, while the rest were partnerships.23 This survey indicated that while Shanghai native banks still had limited capital, they began to separate household capital from business capital Most native banks made a transition from unlimited responsibility to limited corporate organization Dividends were distributed at the end of the lunar year based on the total amount of shares held After a certain portion of profits were retained as reserves in an accumulation fund, two-thirds of the remaining profits were distributed to the shareholders, while the remaining one-third was distributed among the native bank employees.24 For example, the original contract establishing Shanghai Xieyuan Qianzhuang recorded in 1885 that Chen's brother owned all twelve shares of 20,000 tael of fully paid-in capital However, the dividend would be divided into seventeen shares at the end of three years Excluding the twelve shares divided among original owners, the remaining five shares were divided among the overseer, manager, assistant manager, and other staff members 25 Profit sharing motivated the hard work of employees and encouraged their loyalty to the native bank Rational bookkeeping and the financial-incentive system were well established Management of Native Banks Choosing the right person to be manager was a key factor, adding human capital into the elements of success of a native bank Because later native banks were mostly formed as partnerships, there was separation of ownership and management A native bank manager took sole responsibility and had complete power over decision making and the operation of the native bank The only power the owners had was the option of withdrawing their investment at the end of a certain accounting period In some cases, the owners might appoint an overseer who kept them informed of the native bank's operation and business, but the overseer had no formal power to influence policy.26 A manager and owners frequently had ties over family and friends through generations They were often from the same hometown, and, insofar as a manager's position could pass from father to son or grandson, their relationship crossed generations For instance, at the Chungde Qianzhuang, established in 1876, the position of manager passed from the grandfather, Zhang Rongzhuo, to the father, Zhang Wenbo, and then to the son, Zhang Qimei.27 The value of the native bank manager cannot be understated A manager accumulated experience in his local money market and knew the families of his customers across many generations These relationships created a generational network among various business fields A good manager could promote business simply by his personal reputation even if his bank lacked strong initial capital By contrast, a less reputable manager could bring a business down even if it had strong initial capital Therefore, a manager who ruined his personal credit would have difficulty finding employment with other native banks This expectation that managers should maintain their trustworthiness was codified in native bank regulations by the early twentieth century Because a manager had sole responsibility over his native bank, he established a paternal-type authority over his staff and often had an assistant manager The chart on the following page illustrates a possible organizational structure.28 In this structure, the manager supervised all institutional affairs, including the monitoring of deposits based on the daily exchange rate and the granting of loans at prevailing interest rates The assistant manager supported the manager in coordinating routine operations In addition, assistant managers sometimes acted as brokers operating in the money market or as street runners dealing with various commercial firms When the manager was sick or out of town, the assistant manager served as the acting manager The street runner had a special position in the native bank because he obtained all kinds of information concerning the customer and business performance, as well as daily exchange and interest rates Familiar with potential customers and their business, the street runner spent much of his day at the trading places of different businesses, picking up information from the merchants Hence, the information he obtained was crucial for the native bank, because many loans were made based on this information and without collateral The credit investigation of current and potential customers was of critical importance to the manager in making a loan decision The street runner's considerable influence on his manager's marketing decisions gave the street runner opportunities to profit from his job.29 Many merchants sought to establish friendships with the street runners because they could be helpful to the merchants' business operations Some merchants even invited street runners to be partners in organizing cigarette, silk, rice, or tea shops Accountants kept the balance of daily business transactions and compiled monthly and yearly financial reports to the shareholders Marketing clerks dealt with daily silver changes in various forms Clearing clerks were in charge of clearing all paperwork daily, including banknotes For the latter, the clerk went to each of Shanghai's two clearinghouses—one in the south, another in the north —twice a day The banking accountants handled foreign currency exchange and accounts with both foreign banks and Chinese banks These staff members were required to be familiar with foreign languages in order to carry out money transactions between native banks and foreign banks The correspondence clerk handled all correspondence and filed all business documents Depending on business size, some native banks hired a customer service representative to receive visitors, handle public relations, and take care of miscellaneous tasks The silver deliverer was in charge of delivering all notes and silver tael and picking up receipts The deliverer's role was critical not only because he picked up the silver tael, but also because he had to assess its purity or value at the time of pickup He did not receive a regular salary from the native bank, but made a living from the fees charged on the money transactions he handled.30 Apprenticeship was a very popular practice in native banks, which culti Illlustration 1.2 The organization chart Of a native bank (Chinese Source: Pan Zhihao, Zhihao, Zhongguo Qianzhuang Gaiyao [Essentials of Chinese Native Banks], pp 54-65; author's illustration) Photo 1.2 The Yongchang cigarette and money shop in the 1930s (Shanghai History Museum) Photo 1,3 Hongkang Qiangzhuang in the 1930s (Shanghai History Museum) Photo 1.4 Ji Lezhi, a native banker and manager of Yuancheng Qianzhuang (Ji Zhitai) vated a skillful bank employee in three to five years To become an apprentice a person had to be introduced to the manager by their friends or relatives According to custom, the apprentices entered the native bank on the fourth evening of the lunar new year in a special ceremony, because the fifth day had been regarded as the first business day of the Shanghai native bank Once apprenticed, the individual would always be known as the pupil of the manager under whom he had learned the business His relation with the manager and his wife was likened to that between parents and a son according to traditional Chinese Confucian moral standards.31 Even though an apprentice went through a difficult period of learning, the experiences benefited the apprentice's whole career The manager of the Yuancheng Qianzhuang, Ji Lezhi (1886-1957), had several apprentices who resided on the third floor of the bank.32 Typically, around eleven o'clock at night, the manager would make sure that the apprentices had returned home safely If someone did not return on time, the manager would ask for a reason the next day Gambling and visiting prostitutes were strictly forbidden for all bank staff To provide entertainment to relieve the apprentices' Spartan conditions, however, the manager occasionally invited them to his office to play mahjong, 33 and provided wine and other refreshments.34 Among its benefits, this native bank provided lunch and seasonal clothes to its staff In education, it encouraged staff to read economic and financial news, as well as participate in night school for self-fulfillment.35 Photo 1.5 Ji Zhitai, assistant manager of Yuancheng Qianzhuang in 1948 (Ji Zhiqing) A future native bank owner or manager usually received three training phases: apprentice, accountant, and street-runner Each training phase is viewed as integral in developing professional character No exceptions were made for sons of bank owners, who exchanged their sons to different native banks so that the younger generation would learn basic business management skills The lunar year holiday was the time for announcing promotions and determining the pay scale for the coming year 36 All employees, including apprentices, received a monthly salary that was supplemented by small bonuses and profit sharing Although employees were free to spend all their salary, saving was encouraged and regarded as a virtue Hard work and thrift were always highly appraised in Chinese society A cultural approach to understanding the behaviors of saving and investment in native banks further illustrates how the Chinese accumulate original capital from savings Functions of Native Banks As native banks developed, they evolved from their original role as "money shops" into more self- sufficient and effective financial institutions The general functions of a native bank fell into six categories: receiving deposits; granting loans; discounting bills; issuing native notes; buying and selling gold and silver; and exchanging bimetallic currency and foreign banking notes The efficient performance of these tasks linked native banks with foreign banks and modern-style Chinese banks through the entire modern history of Shanghai A native bank received deposits from various financial sources based on its own creditworthiness and relationships These deposits could be used as performance funds for the native bank, in contrast to early forms of deposit, which were used only to hold traveling traders' cash as security for other purposes, as floating capital for local merchants The native bank did not have the right to use these monies and charged the depositor only a small storage fee This role arose with the surge of commercial activities in the middle Qing period Only later did the native bank begin to use deposits as funds available for loans and to pay interest to the depositors Two kinds of deposits were accepted; regular deposits and fixed deposits Regular deposits could be withdrawn at any time with the interest rates decided by the Native Bankers Guild at the beginning of each month The formula was 0.95 percent plus various interest rates in the given month divided by the days of the month, equaling the average daily interest rate on current deposits Fixed deposits were held for a specific period, such as three months, six months, or one year The interest rate on fixed deposits was fixed on the day the deposit was made Native banks also granted six types of commercial loans: call loans; fixed loans; fiduciary loans; collateral loans; consigned credit; and overdrafts Call loans were loans that the native bank reserved the right to redeem at any time These loans were usually limited to a one-year term By the end of the term, the borrower had to pay off the loan However, if he could not pay off the loan, then he had to accept a new interest rate that was substantially higher Fixed loans were granted for a specific time period, usually three, six, or twelve months Fiduciary loans were not based on any collateral security, only on faith in the borrower's credit Collateral loans required security 37 The borrower had to send gold, silver, notes, bonds, or a deed to the native bank as collateral security in order to get a loan Consigned credit was a loan granted to the borrower by the guarantee of his guarantor or a bank This was another type of fiduciary loan, but it was issued based on trust in the guarantor Overdrafts on existing accounts were loans secured by money the borrower had in existing accounts with the native bank or some other collateral in the native bank The borrower then had to agree to the overdraft of a certain amount of money over a certain period The guidelines for granting loans were safety, productivity, profitability, and enough liquidity for the loan to be easily recalled.38 Discount notes formed the third category of functions Native banks preferred to purchase these redeemable short-term notes or bonds before their maturity at a discounted face value with relatively low risk Because notes were discounted before their redemption, the discount interest would be used to earn compound interest Therefore, the business of discounting was more secure than either loans to commercial firms or personal loans Buying and selling gold and silver was the fourth category of native bank function Because hardcurrency trading generated high profits, the native banks would buy it as reserves while the price of gold or silver was low, and then sell it for profits when the price of gold or silver rose Issuing native notes is the last category to bring major profits to the native bank In the early days of Sino-Western trade, native banknotes had a period of redemption of ten to twenty days, but after the 1860s, this period shortened to five to ten days The most common notes issued by the native bank were native banknotes, money orders, and checks The native bank note was similar to the modernstyle banknote, and could be either short-term or long-term Redemption of short-term notes could occur immediately with another native bank Long-term notes, however, could not be redeemed before the date marked on the note, but they could be discounted before their maturity A money order was a triple-binding note sent by one native bank (or a merchant) through a merchant (or a native bank) to another native bank Money orders could eliminate the inconvenience of carrying silver dollars and ensure safety for a merchant in purchasing of goods A check was also a triple-binding note that served in cash transactions In short, the native banknote was the most powerful note in circulation during this period It filled an important role in foreign trade and in the emergence of the modern Chinese economy Although the native bank was limited to exchanging foreign notes after the rise of modern banks, it nevertheless performed the exchange of the bimetallic currency system in China efficiently because the native banknote could serve as guaranteed funds and as a short-term check for dealing in foreign trade Shanghai Native Bankers Clearing Association As a mature financial institution, the Shanghai Native Bankers Guild ran the clearing system efficiently beginning in the middle of the eighteenth century The settlement of interbank promissory notes (zhuangpiao) was one of the most important roles of the Native Bankers Guild In the early stage of this clearing process, members of the Native Bankers Guild exchanged notes and checks daily in the guildhall The nonmember small native bank had to entrust a member native bank to exchange notes on its behalf Since the clearing took place inside of the guild, there were no extra fees associated with clearance This clearinghouse function served as an effective means of increasing efficiency among native banks Later, with the development of native banks and increasing business volume with foreign banks after Shanghai opened up, the Native Bankers Guild established a professional organization called the "Shanghai Native Bankers Clearing Association" in 1890 This association created a specially designed voucher (gongdan) system Under this voucher system, two steps were established for clearance First, various native banks sent their notes and checks to each other and received vouchers in the early afternoon Then, each native bank sent its representatives to the Association to settle these vouchers in the evening For instance Bank A receives Bank B's notes for 1,000 yuan, Bank A then returns these notes back to Bank B at 2:00 p.m., and upon Bank B's recognition of these notes, Bank B signed a 1,000 yuan voucher at 3:00 p.m In this same way, Bank B sent Bank A's notes back to Bank A, and received Bank A's voucher Every day at 7:00 p.m., all the native banks sent their representatives to the Association building to clear each other's vouchers Each voucher was designated/denominated for 500 yuan If a voucher totaled less than 500 yuan, it would be treated as a remainder for clearance the next day.39 Although the Hongkong and Shanghai Banking Corporation had maintained a clearinghouse among the foreign banks, their business with Chinese merchants or native banks required them to go through the Shanghai Native Bankers Clearinghouse Later, the modern Chinese private banks and even state banks, in the early stages, also went through the Shanghai Native Bankers Association to clear their notes and checks until the Joint Reserve Committee was established between native banks and modern banks The prestigious role of the Shanghai Native Bankers Guilds clearing system was changed in 1931, when the Chinese Nationalist government interfered with and disrupted the clearinghouse by suspending its business Under the supervision of the Nationalist government, on January 10, 1932, the old clearing system was reorganized into an officially supported institution called the "Shanghai Clearinghouse" (Shanghai piaoju jiaoyisuo) In assessing the origins and nature of Shanghai native banks, most of them resembled full-fledged banks in terms of their organization and operations in Shanghai's native financial markets The native bank possessed a simple and cohesive business style that followed the seasonal cycles of the agrarian economy in adjusting interest rates and the cycles of demand and supply in the financial markets However, although this was the indigenous financial institution, many native bankers did not separate their business and household capitals, and used a personal approach in borrowing and lending money without required security or property mortgage So these native banks took many financial risks to compensate for market fluctuations and speculations They were fragile and easily affected by outside financial crisis This financial institution, in its pre-capitalist stage, was not fully prepared for the competition of free banking from the outside world Ultimately, they performed only a vital banking function in a closed economic society Illustration 1.3 A native banknote (zhuangpiao) in the 1920s (Shanghai Library) With Shanghai opened as an international treaty port in 1842, native banks began to lose their predominant financial positions Faced with the challenge of strong foreign capital inflow, the native banks had to adjust their market However, instead of changing their traditional banking patterns and business behaviors, the Shanghai native banks added the new role of mediating financial institutions to handle international trade settlements between local merchants and foreign trade companies The old business behaviors and limited financial resources thus prevented the native financial institution from progressing, and native banks eventually lost their leading position as competition intensified with the rise of foreign banks The Opening of Shanghai As a turning point in modern Chinese banking history, the opening of Shanghai shaped the destiny of the city politically, commercially, and financially The Treaty of Nanking was signed on August 29,1842, as the result of China's defeat by Britain in the First Opium War This treaty was ratified in Hong Kong ten months later, after formal approval by Queen Victoria and Emperor Daoguang (18211850) According to Article il of the treaty, China was forced to open Guangzhou, Xiamen, Fuzhou, Ningbo, and Shanghai as treaty ports for foreign trade The Treaty of Nanking was the first of the unequal treaties imposed on the Qing government by the Western powers in the nineteenth century The treaty included clauses ceding the island of Hong Kong to Britain; requiring payments of million silver tael as compensation for the opium destroyed in 1839; million tael in settlement of outstanding Cohong debts; and 12 million tael as war reparations The total indemnity of 21 million silver tael had to be paid in four installments before the end of 1845, with a percent interest charge per annum on late payments The United States and France also made similar treaties with China based on the Treaty of Nanking The first treaty between the United States and China was the Treaty of Wanghsia, signed on July 3, 1844 This treaty contained the basic most-favored-nation clause in Article II: Citizens of the United States resorting to China for the purposes of commerce will pay the duties of import and export prescribed in the tariff, which is fixed by and made a part of this Treaty They shall, in no case, be subject to other or higher duties than are or shall be required of the people of any other nation whatever And if additional advantages or privileges, of whatever description, be conceded hereafter by China to any other nation, the United States, and the citizens thereof, shall be entitled thereupon, to a complete, equal, and impartial participation in the same.40 This treaty laid the foundation for American foreign and trade policies toward China The reference to the most-favored-nation clause actually was also a nondiscrimination clause for the purpose of commerce Although various trade negotiations between the Untied States and China have been held numerous times, in the end, the basic spirit of promoting international trade and low tariff rates was the same In addition to the most-favored-nation clause, a clear definition of criminal extraterritoriality was contained in the Treaty of Wanghsia Extraterritoriality was one of the most important rights foreigners had enjoyed in Shanghai The legal concept of extraterritoriality placed crimes committed in China under the jurisdiction of foreign national law Hence, extraterritoriality, which gave foreigners advantages in business, personal security, and property rights, was accepted by all powers and administered by foreigners in their own consular courts China had lost its sovereignty in terms of the right of extraterritoriality Before long, a similar treaty between France and China, the Treaty of Whampoa, was signed on October 24, 1844 British gunboat diplomacy forced China to open its doors and a series of unequal treaties enforced the open-door policy The required payments of war indemnity started to squeeze the limited Qing revenue and destroyed its self-regulated and sufficient financial structure In addition to political and financial changes, foreign concessions were established in the newly opened land, and extraterritoriality changed the landscape of the judicial system in Shanghai These factors combined with weakened Qing finances and limited native banking resources provided opportunities to establish foreign banks in Shanghai Foreign Concessions (1845) Shanghai opened residency to foreign merchants based upon the Supplementary Treaty of Nanking On November 29, 1845, the Shanghai governor (daotai) signed the first set of land regulations to build up the British settlement in Shanghai.41 These regulations gave foreigners the right to lease land within a small area set apart from the outside walls of Shanghai city The British leased 1,080 mu42 in 1846, which increased to 2,800 mu in 1848.43 While foreigners enjoyed extraterritoriality in the settlement, China retained sovereignty in the inner city of Shanghai The area of foreign leaseholds was expanded later by successive agreements on developing the greater part of the conurbation in Shanghai According to the Treaty of Whampoa, the French government established its own concession, a primarily residential area on the west side of the walled city on April 7, 1849 In 1861, 1900, and 1914, the French successively enlarged the concession to 15,150 mu.44 In addition, an American settlement was set up on the north side of the city in August 1854 In the American settlement, all foreigners enjoyed equal rights agreed to by the representatives of the various powers The British and American settlements were merged during the disturbances of the Taiping Rebellion The 1853 uprising of the Shanghai Small Sword Society caused a great migration of Chinese refugees into the settlement Furthermore, the political disturbances of 1861 created another enormous influx of Chinese into the settlements On June 25, 1863, an agreement merged the American and the British settlements into an International Settlement for all foreigners By 1893, the International Settlement had leased a total of 7,856 mu.45 It was an important step forward in Shanghai's municipal development The Shanghai Municipal Council, a major administrative organization of the foreign governments in Shanghai, had responsibility for maintaining order within the International Settlement Replicating the Shanghai Municipal Council model, the French established their own Municipal Council to govern the French Concession The Chinese government retained sovereign rights over the walled city These three municipal forces maintained a balance of power under international law in the later nineteenth century Taxation, however, remained an unresolved issue until 1899, when it was finally agreed that other than maritime customs dues and the land tax collected within the foreign concessions, no other Chinese taxes collected.46 The Qing Imperial government thereby lost all control over foreign concessions, which further weakened its sovereignty in Shanghai Xianfeng Inflation (1851–1862) The finances of the Chinese Imperial government were extremely weak under the attack of foreign trade expansion combined with gunboat diplomacy from the Western powers In addition, the suppression of the Taiping Rebellion caused the government to spend millions in silver on military expenditures By the 1850s, the government was in very difficult financial straits China's bimetallic monetary system also contributed to the difficulties In the bimetallic system, both silver tael and copper coins circulated at the same time with the value of each fixed in terms of the other The metals were pegged to one another This created a relatively weak and fragile monetary standard that could be destroyed during periods of political and economic crisis The great inflation during the Xianfeng reign (1851-1862) demonstrated the vulnerability of the bimetallic monetary system Historically, China was not a silver-producing country Zhang Qian, an official in the Han dynasty (206 B.C.-A.D 24), was the first person to introduce silver into China as a medium of exchange during his commercial missions to many countries in Western Asia He traded Chinese silk and tea in exchange for silver payments China has had connections with the silver-using countries of the West since then In the late Ming dynasty, the Spanish Carolus dollar entered China's stream of commerce from the Philippine Islands when Spain annexed the Philippines These dollars had flowed in exchange for Chinese porcelain, tea, and silk At the same time, Chinese silver bullion had been in circulation with the Spanish dollar due to the increasing silver demand of foreign trade At the beginning of the nineteenth century, however, Chinese silver bullion and silver dollars began to flow out with the devastating effects of opium trade When China tried to stop the opium trade, its failure in the war further drained huge silver payments as indemnity Illustration 1.4 Bao Kang's Daqing Qianpu, 1876 (Peking University) The silver problem placed the `Qing Imperial government in an unfortunate position after it adopted silver as the monetary base The national silver reserve and silver supplies depended upon the policies of foreign governments, especially Mexico and other South American countries As a result of China's dependence on silver supplies from other countries, its monetary base was very fragile and subject to fluctuation Beyond its lack of control of silver supply, the Qing government also had a disadvantage in copper supply Because the majority of raw copper was produced in South China, its supply lines from Yunnan to Beijing were cut off when the rebel army occupied these areas during the Taiping Rebellion With the shortage of copper supplies and increasing military expenditures to suppress the Taiping Rebellion, the Qing Court had to mint "big coins" as token money in circulation According to Bao Kang, whose writing was published in 1876: In 1853 (the third year of the Xianfeng reign), military expenditures increased sharply because the supply of copper for coinage was cut off from Yunnan due to the military blockade of the Taiping army The Secretary of the Qing Court requested the Board of Reserve to cast big bronze coins as token money, which counted as 10, and also to cast some iron coins Then, the accounting department of the Board of Reserve responded by casting bigger bronze coins with face values of 50 and 100 Moreover, the Minister of the Board of War began to cast ever bigger coins with face values of 500 and 1,000.47 Illustration 1.5 Token money during Xianfeng inflation in the 1850s The copper cash values were 10,100,1,000 and 10 from right to left Bao Hang's Daqing Qianpu, 1876 (Peking University) By reason of the copper shortage, the official size of the token money shrank dramatically For example, the first issue of token money, for 10, was issued in a diameter of 1.50 inches, but it was soon reduced to a diameter of 1.20 inches and then to 1.00 inch Paper money was issued as an alternative to meet the shortage of copper and reduce the pressure from the circulation of silver dollars The "Great Qing Secured Notes" (daqing baochao) and "Board of Reserve Official Notes" (hubu guanpiao), as they were called, were issued in four denominations —500, 1,000, 1,500, and 2,000 The Great Qing Secured Notes could be substituted for copper coins to pay the official land tax and other taxes, and the Board of Reserve Official Notes could be substituted for silver tael in circulation The exchange rate between the two was 2,000 notes in Great Qing Secured Notes to one liang silver in a Board of Reserve Official Note Illustration 1.6 Samples of hubu guanpiao, 1853: on the left is a standard sample, and on the right, the stamps were valid as a ten-liang silver note With insufficient reserves to cast the tokens and issue paper money into circulation, the real value of money depreciated sharply, and triggered the Xianfeng inflation from 1853 to 1862, The Board of Reserve had issued large amounts of paper money, the conventional "chaopiao" to paper money in general terms, and also indicated it was depreciated From 1853 to 1861, when the total revenue of the Qing was only 86,670,000 in silver tael, the Board of Reserve issued paper money with a face value of 60,290,000 tael or 69.5 percent of the total revenues.48 The severity of the Xianfeng inflation was evident when tael of silver could be exchanged for 4,000 in copper cash in Beijing in 1853, but skyrocketed to 30,000 in copper cash by 1861.49 The Xianfeng inflation reached unprecedented levels and almost destroyed the bimetallic monetary system in China But, in the midst of domestic political chaos and economic inflation, Shanghai native banks managed to generate profits from differences in the daily exchange rates of the silver tael, silver dollar, paper money, and copper cash By handling frequent exchanges between the silver tael and official paper money, native banks could accumulate processing fees They also generated profits through the Native Bankers Guild's domination of the daily silver exchange rates in the bimetallic system Thus, native banks coped with inflation and grew with the increasing foreign trade in Shanghai Foreign Trade and Native Banks Although Xianfeng inflation caused the exhaustion of the Qing Court's finances, the boom in international trade in tea and cotton brought unpredicted foreign capital inflows in the Shanghai market Once foreign agency houses and financial institutions were established in Shanghai, they began to lash out at the traditional economic order and native banking system Because local native banks could not handle large foreign trade transactions by themselves and foreign banks needed a local distributing network, a cooperative financial relationship was gradually established between native and foreign banks Faced with the intricate bimetallic monetary system and language barriers, foreign merchants were unable to adapt to the Chinese monetary system and business customs As a result, they were forced to rely on local native banks to conduct trade transactions For example, all trade with North China was conducted indirectly through Shanghai because of its network of special commercial agents, the comprador system The rise of the comprador class will be discussed in the next chapter Shanghai native banks benefited from handling bimetallic money exchange and dealing with foreign trade Some primary native banks started their business as small money shops (qianpu) to sort, grade, and string different shapes of copper coins and silver tael The basic weight was the liang (tael), sometimes referred to as the Chinese ounce, which was theoretically divided into the following units: liang = 10 qian = 100 fen = 1,000 li.50 The actual exchange rates, however, fluctuated during different periods For example, the Spanish Carolus dollar enjoyed a one-to-one exchange with the Shanghai tael in 1856, but "compared with the copper coin of the country the Carolus dollar gradually rose in nine years from being worth 1,150 to about 1,500 in copper cash,"51 during the Taiping Rebellion period If the rising price of silver in terms of copper raised the wholesale price of commodities, that increase was reflected in the retail copper price of those commodities This meant that the native banks had to react to a shifting monetary exchange market Beyond the exchange business, the most significant relationship between foreign trade and the Shanghai Qianzhuang resulted from foreign banks accepting native banknotes as credit for business transactions Chinese merchants deposited the native banknotes in foreign banks as security to finance foreign trade For example, for a Chinese merchant to purchase foreign goods in Shanghai and sell them in Anhui, the foreign company required that the merchant deposit native banknotes Thus, the Chinese merchant had to ask a native bank for a ten-day loan in the form of such a note, and send it to the foreign company, which would cash this native note on its date of maturity The Chinese merchant had to repay the loan to the native bank in ten days If he could not pay it back on time, the native bank would still cash the native banknotes for the foreign company and charge the Chinese merchant a penalty for late payment.52 In return, the foreign bank used its surplus funds as "chop loans" to finance native banks.53 A chop loan was usually an instant loan bearing the stamp of a native bank and signifying that there would be one day's grace within which to pay the cash to the native bank The chop loan did not require security, but required deposit of a native banknote granted by the bank The interest on a chop loan was the same as the rate for interbank loans among native banks Thus, capital flows between native banks and foreign banks were very frequent and flexible.54 Although international trade transactions and remittance of trade payments required special cooperation between foreign trade and Shanghai native banks, some native banks gradually lost their original identity and put themselves in a dangerous position by over-reliance on foreign "chop loans" to extend their business Shanghai later experienced several financial crises that demonstrated the dependence on foreign capital and the financial weakness of Shanghai native banks These financial crises caused chain reactions of businesses failures and ultimately resulted in massive bankruptcies among Shanghai native banks “Shanghai Conventional Currency” (1856) Introduced by international merchants to China, the Spanish Carolus dollar was the common coinage of the world by the end of eighteenth century.55 Because of its purity and unity, the Spanish dollar was accepted as a standard silver coin in adjusting the balances of trade The Carolus dollar was largely favorable to Shanghai in the 1850s In a pamphlet issued in Shanghai, an anonymous writer described the situation in 1856: When this port was opened to foreign trade in 1843, it was found that here as at Ningpo, and at the great commercial centers of Soochow and Hangchow, a short way in the interior, the Carolus dollar had long been in general use Much of the smaller business of buying and selling in shop-keeping was transacted in it, although the great staple articles of the native trade here, such as beans, raw cotton, cotton cloth, etc., were still bought and sold, not by dollars as the gauge of price, but by tael of silver The progress of the dollar in banking business had been more rapid and decided—the notes in common circulations for the most part specifying dollars Thus both dollars and ingots of silver were in current use here, and most of our first sales were for payment in sycee (uncoined) silver at the premium of the day.56 Illustration 1.7 Spanish Carolus dollar in 1789 and Mexican dollar in 1857 Both circulated in China's market in the nineteenth century (Author's collection) Amid the chaos in the old city caused by the Taiping Rebellion and the Small Sword Society, many refugees collected Carolus dollars for money safety Therefore, the price of the Spanish dollar was very high The demand for Carolus dollars increased its price to 80 percent above its intrinsic worth Although tremendous volumes of Carolus dollars were imported by various foreign traders, the demand for this kind of silver dollars still exceeded the supply The supply of silver dollars was especially tight in Shanghai's money markets These monetary conditions affecting the trade of China produced sharp fluctuations in the exchange of Carolus dollars An ineffective effort to solve this problem was made by introducing a Mexican dollar to compensate for the deficit.57 However, this attempt failed because Shanghai business circles supported by public opinion, rejected dependence on foreign silver dollars Instead, people chose the Shanghai tael as the silver standard for conducting business T.R Jernigan, a noted expert on China's commerce, observed: Foreseeing the danger to commercial interests lying in the further use of a rapidly disappearing coin as a standard of account, the market rate for the Carolus dollar being now equivalent to the Shanghai tael, the banks and foreign merchants acting in concert determined to change the unit Accordingly, on a prearranged day, every bank and every merchant doing business in Shanghai changed the headings of all accounts from dollars to taels, the figures remaining the same No difficulty was experienced in the alteration, and the local tael has continued satisfactorily the standard of buying and selling ever since The actual intrinsic value of the two was in the proportion of 72.43 to 100, the Carolus dollar having thus attained to a premium of upward of twenty-seven percent.58 As an alternative currency, Shanghai tael were minted into oval ingots weighing about 50 tael, which were called the Shanghai "shoe of sycee" (yuanbao), and strongly resembled a Chinese shoe The "shoes" of Shanghai were inscribed in ink by the Assay Office of the Settlements as weighing 49.94 tael The mint stamped the "shoes" with the place, the name of the establishment, and the number of the furnace.59 Shanghai Chinese called these shoes "27 bao" or "I-chang xin," which indicated they were minted in the Foreign Settlements The value of the Shanghai tael was based on three elements: the weight, the quality, and a conventional rate of the silver The weight of scale was the Chaoping tael of 565.65 grains of silver reduced to a fineness of 0.944, and the conventional rate was that 98 tael of the weight and fineness settled a liability of 100 tael "Shanghai conventional currency." 60 In general terms, Shanghai tael could also be classified as both real and nominal types A real tael weighed 565.65 grains at a fineness of 0.944, and so it actually contained 533.97 grains of pure silver in the physical sense If it were nominal, the premium of 2.75 per shoe had been added, and then divided by 0.98 in the accounting terms.61 The value of the Shanghai tael was defined as 0.98 liang of a standard Shanghai sycee Thus, the origin of Shanghai "98 Guiyuan" can be understood as "Shanghai conventional currency," which was adopted both as legitimate banking and trading currency and as the dominant standard of international exchange in the Shanghai financial market from 1856 to 1937.62 In the early 1870s, to give American merchants an advantage, the U.S Congress authorized the minting of an extraordinary silver coin, the U.S "trade dollar," specifically for use in Asia This huge silver coin that contained 420 grains of 900 fine silver was larger and heavier than Spanish reales (i.e., the Spanish Carolus dollar) It was designed by William Barber, one of the most famous engravers in the history of the U.S Mint The obverse features Lady Liberty seated with a bale of cotton and shaft of wheat to symbolize "trade," while the reverse depicts a heraldic American Eagle.63 Its quality and size made it the most popular silver dollar in the Shanghai market Many native banks received it with pleasure Although the American "trade dollar" was treated with respect, it was rarely seen in circulation because it was minted only from 1873 to 1885 in the United States Some private companies re-minted these dollars in China for profit, so they became rare silver coins in China Creation of North and South Markets (1855–1862) Affected by the 1853 Small Sword Society uprising, many native banks moved from the southern walled city into the International Settlement in north Shanghai Gradually, another native financial market was formed in Shanghai—the north market The north market prospered along with the growth of the foreign trade center and population in the International Settlement In 1843, British merchant vessels were given an anchoring place near Wusong, which enabled foreign trade to be conducted more efficiently than at the south market However, because the south market had been the "cradle" of Shanghai native banks, it was sustained by its own traditions and old business relationships Comparing to the business operations of the two markets, the interest rate was usually lower in the north market than in the south market because of more abundant financial resources in the International Settlements and quick money circulation in the north market from the newly established commercial center However, the rate of exchange between silver tael and silver dollar was lower in the south market than in the north market because of the abundant silver reserves and smaller business expenditures of the traditional native banks Corresponding to the two markets were two native banker guilds One was the traditional Native Bankers Guild in the south and the other was the North Native Bankers Guild Each had its own guildhouses where bankers met twice a day to discuss interest rate and exchange rates In their early stages, each market determined its own interest and exchange rates Later, the south market waited for the north market to announce its rates before deciding what its own rates would be They set only slightly different interest rates, which created competition among the native banks in the two markets Eventually, the north market rates dominated the Shanghai native financial market because many native banks in the south market relocated to the north market.64 There were 105 native banks in Shanghai in 1876 Among them, sixty-three were in the north market and forty-two were in the south market.65 The ratio of native banks between the north and south markets was 3: By 1910, the ratio had changed to 9: with seventy-four of ninety-one native banks in the north and seventeen in the south The reduced ratio of the south market reflected the impact of social changes and the two financial panics of 1910 The decline of the south market demonstrated the great limitations of traditional business relationships which were unable to compete with the new challenges of increased foreign trade and finance, China had been opened to the world, but the native banks retained their conservative mentality, perceiving themselves within the framework of a traditional value system and models of behavior that had been established several hundred years earlier The limited capital of the native banks caused their decline from dominant financial power in the domestic market to a defensive position in competing with foreign capital intervention Psychologically, they were not ready to accept those challenges Their conservative business manner was also reflected in the preservation of traditional institutions instead of continuing change and the development of native banks in the south market The family- or partnership-based Shanghai south native banks were the foundation of money and finance in the pre-modern society with pre-capitalist characteristics However, in an open financial world with foreign capital flows, the south native banking institutions had to accept the reality that, even reluctantly and slowly, they would have to change their traditional business ways and to cooperate with the north financial market, which included both native banks and foreign banks, in the interest of mutual benefits The north market, then, had developed a new type of financial coexistence between native banks and foreign banks Therefore, different capitalist elements contributed to the formation of cooperative or integrated finance capitalism in Shanghai 2 The Rise of Foreign Banks, 1847–1894 The rise of foreign banks in Shanghai in the middle of the nineteenth century reflected the effects of increasing British trade after the opening of China, substantial international conflicts such as the Second Opium War or the Arrow War of 1857-60, and the first Sino-Japanese War in 1894-95, A British bank, the Oriental Banking Corporation, established its branch in Shanghai in 1847, thus opening the first chapter of foreign banking operations in Shanghai Commercial interests were always the fundamental motive of Western powers in forcing China to enter treaty relations and to open more treaty ports during the Arrow War period After defeating China in 1895, Japan's ambitions toward China's natural resources and markets grew, as did its sphere of influence In addition to international trade and conflicts, domestic rebellions further weakened the central political power and reduced the financial strength of the Qing dynasty Although the Tongzhi Restoration had been a concerted effort to reconstruct the order of Chinese society, it was not successful Furthermore, the Self-Strengthening Movement failed dismally as a result of the unanticipated backwardness of Chinese military equipment and the weakness of military organization The treaties of Tientsin were the result of international conflicts and further reinforced the Treaty of Nanking by opening ten more Chinese cities to foreigners and providing more trade opportunities in the 1860s.1 In signing the treaties, the British obtained a lower tariff, the privilege of trading in the Yangtze valley, and an indemnity of million tael in silver as war reparations from the Arrow War At the same time, France enlarged its sphere of influence in the southern part of China, and received an indemnity equal to that of England The treaties provided for wider trading areas, lower tariffs, increased extraterritoriality, and special rights of foreign residence in the concession areas In the International Settlement at Shanghai, the trade center and banking buildings were designed to assure foreign merchants places to trade and conduct business Land within the settlements was sold for an average of 50 pounds per acre in 1852, and, thereafter, sold for an average 10,000 pounds per acre in 1862.2 Besides the increasing demand for land in commercial development, there was a political reason for the steeply rising land prices was the Small Sword Uprising, Under the leadership of Liu Lichuan, a partner of Taiping Tianguo, the Small Sword Society captured the walled city of Shanghai from the Qing government in September 1853 Many refugees moved from the walled city to the International Settlement After the Small Sword Society had captured the old city, Shanghai's governor Wu Jianzhang became a refugee in the British settlement To gain foreign support in suppressing the rebellion and to retain part of the tariffs collected from foreign trade, Wu met with three consuls—R Alcock of Britain, R.C Murphy of America, and B Edan of France—to establish a joint customs office on June 29,1854 This conference nominated Thomas F Wade of Britain, Lewis Carr of the United States, and Arthur Smith of France as the three inspectors who would form the board of the Imperial Maritime Customs House in Shanghai.3 As a result, China lost sovereignty over international trade policy and custom revenues From that time until 1941, all international trade was conducted under conditions laid down by foreign governments rather than the Chinese government In October 1858, a Shanghai Tariff Conference reaffirmed the percent ad valorem tariff on both imports and exports Although the export tariff discouraged export trade, the Qing Court still imposed it for revenue purposes The low import tariff, however, stimulated a free enterprise atmosphere and encouraged the growth of foreign trade and financial transactions in Shanghai In 1863, Robert Hart, a "patient, hard working Englishman"4 was appointed as customs inspector-general in the Customs House He held this post until he retired in 1908 During his forty-five-year tenure as inspectorgeneral, Hart introduced the modern system of custom administration into China, and directed the publication of annual reports of the Maritime Customs of China on returns of China's trade beginning in 1864 This publication was interrupted by the War in the Pacific (1941-45), but was eventually restored in 1946 and continued until 1949 These statistical reports covered all Chinese treaty ports open to foreign trade and were carefully and systematically compiled.5 Although some shortcomings existed in the evaluation methods of the customs data, these data are still regarded as a reliable resource for economic researchers and historians.6 Foreign Trade and Foreign Banks Commercial interests and increased foreign trade were the main stimuli to the rise of foreign banks in Shanghai in the middle of the nineteenth century When foreign merchants transferred their trade and opium traffic from Guangdong to Shanghai, they saw the new port as access not only to the whole Yangtze River basin but also to the hinterland and the North China regions The absence of good deep-water ports in North China made Shanghai an international port, as well as a domestic distribution center for the hinterland and the Yangtze River basin The title of the earliest English newspaper in Shanghai, the North China Herald, predicted that trade would be targeted to North China.7 Many foreign trade companies, such as Jardine, Matheson & Company and Dent, Beale & Company, established their agency houses in Shanghai as early as 1843 The activities of foreign trade and business operations consciously or unconsciously introduced a complete commercial capitalist system to China Seeking maximum profits through trade and commercial activities was the main function of commercial capitalism High return was associated with high risks The foreign agency houses engaged in opium trade and the cotton business not only through the former East India Company relations with the British colonial countries, but also through Chinese local merchants to build up and expand the distribution networks Commercial capitalism was developed before finance capitalism in China Because international trade dealt with the balance of payments, many foreign agency houses had their own banking and financial departments to handle trade transactions before the rise of professional foreign banks on the Huangpu Bund Foreign trade greatly expanded in Shanghai after the 1850s In 1907, Commissioner of Customs and Statistical Secretary of the Inspectorate H.B Morse wrote "my thirty-three years in China debar me from presenting those first impressions which are always the most vivid."8 He thought the commercial history of the Shanghai port could be shown "by figures better than by any narrative."9 The tonnage of international ships in Shanghai port from 1864 to 1904 is shown in Table 2.1 The growth of shipping in Shanghai ports multiplied as trade grew exponentially The figures in the table show that British shipping in 1904 was 2.83 times higher than in 1884 or 6.58 times higher than in 1864 American shipping in 1884 was about the same in 1864, but decreased by 1904 German shipping in 1904 was 15.3 times higher than in 1884 and 13.8 times higher than in 1864 However, Japanese shipping was negligible in 1864, but grew rapidly after the Meiji Restoration Other foreign shipping in 1904 was 7.24 times higher than in 1884 or 8.8 times higher than in 1864 Table 2.1 Tonnage of Shipping Entered and Cleared in Shanghai British American 1864 1884 1904 991,786 548,175 2,306,036 544,032 6,524,801 394,659 German 116,945 105,458 1,614,027 Japanese 756 206,473 495,292* Other foreign 130,397 158,060 1,143,970 Chinese steam — 704,439 2,009,049 Total 1,788,059 4,024,498 12,181,798 Source: H.B Morse, The Trade and Administration of the Chinese Empire, p 242 *These tonnages of shipping were cleared in the Chinese Customs’ tael, except the 1904 Japanese tonnage was cleared in Shanghai tael The Shanghai tael was worth 10 percent less than the Customs’ tael, in which these trade values were expressed Table 2.2 Total Import and Export Trade Year Imports tael Exports tael Total tael 1864 58,064,248 54,923,258 111,987,506 1874 89,636,343 101,253,001 190,889,344 1884 86,812,326 98,869,413 185,481,739 1894 150,282,278 158,867,473 399,149,751 1904 342,959,615 339,771,524 664,648,350 Source: H.B Morse, The Trade and Administration of the Chinese Empire, p 244 In the same period, the whole distribution trade of Shanghai measuring in silver tael was as shown in Table 2.2 Analysis of the table shows exports in 1904 were 6.2 times those of 1864 In 1904, the original exports from Shanghai were silk, raw cotton, and rice Silk and silk products accounted for 33.411 million tael; raw cotton for 16 million tael; cotton cloth from steam manufacture 747,000 tael, and that from handlooms 5.92 million tael; factory-spun cotton yarn 4.15 million tael; and rice 5.1 million tael.10 However, opium trade comprised the major balance of general commodity exports Opium trade was legalized in the Treaty of Tientsin with the humiliated emperor of China losing his power to prohibit and control the opium traffic Morse commented on the issue: "The loss of prestige by the Imperial government not only inspired the smugglers with greater activity and less fear of the consequences, but caused the officials along the coast to throw off such modest feelings of restraint as they may have felt before."11 Official corruptions became by-products of the opium traffic According to the Imperial Maritime Customs records, the import of opium was 50,087 picul 12 in 1863, 60,948 picul in 1867, 82,927 picul in 1879, and 82,612 picul in 1888.13 The only restriction imposed by China on the opium trade and accepted by the foreign powers was contained in the Supplemental Treaty of 1880 between the United States and China In this treaty, two governments "mutually agree and undertake that Chinese subjects will not be permitted to import opium into any of the ports of the United States Citizens of the United States will not be permitted to import opium into any of the open ports of China, to transport it from one open port to any other open port, or to buy and sell opium in any of the open ports of China."14 However, this prohibition had only limited impact because the American government had no control of the opium traffic, which was dominated by Britain In response to increased demand for settlements of opium trade and other commodities, a group of British banks established their branch and main office in Shanghai between 1847 and 1865 Western finance capitalism took root in the international trade and integrated with the local native banks to play an important role in the development of modern Shanghai banking The most important British banks were the Oriental Banking Corporation, the Chartered Mercantile Bank of India, London & China (1854), Agra and United Service Bank, Ltd (1854), the Commercial Bank of India (1855), the Chartered Bank of India, Australia, and China (1858), and the Hongkong and Shanghai Banking Corporation (1865) The British monopolized foreign banking and finance in China until the 1890s The Oriental Banking Corporation (1847) Originally, the Oriental Bank was founded as the Bank of Western India in Bombay in 1842 After it relocated to London in 1845, the bank was renamed the Oriental Banking Corporation and granted a royal charter 15 The Oriental Banking Corporation opened its branch in Shanghai in early 1847 to become the first foreign bank there under the Chinese name of "Lira Yinhang."16 According to the bank's prospectus, its main function was to conduct foreign exchange transactions and facilitate the finance of local trade In China, the priorities were to promote opium trade, discount long-term trade bills, and conduct foreign exchange The paid-in capital of the Oriental Bank was 600,000 pounds in 1851, however, it quickly increased to 1,260,O00 pounds in 1856 17 The doubled capital and its rapid appreciation created the bank's leading position in Shanghai The North China Herald characterized the Oriental Bank's position in the Far East as "the Bank of England in Great Britain."18 The establishment of the Oriental Banking Corporation branch in Shanghai signified that the foreign bank had taken over the banking and finance role from foreign agency houses, which began to separate the functions of handling commercial activities and financial capital transactions The modern Western capital concept was introduced to the Shanghai financial market's banking facilities and bookkeeping methods, along with the elements of modern finance capitalism The Oriental Banking Corporation held the leading position in handling bills of lading and foreign exchange in the 1860s It also actively engaged in loans and rediscount business to compete strongly with other foreign banks However, affected by fractured world silver prices in 1870s, the bank came into difficulties during the silver crisis, finally, being forced to shut down in 1884 Following the founding of the Oriental Bank in Shanghai, several other British banks also established branches or headquarters in Shanghai The most influential of these British banks are the Chartered Bank of India, Australia, and China, and the Hongkong and Shanghai Banking Corporation The Chartered Bank of India, Australia, and China (1858) In Shanghai the Chartered Bank of India, Australia, and China has always been known as the "Maijiali Yinhang"—"Maijiali" being the Chinese adaptation of the last name of John MacKellar, the first manager of the bank in the Shanghai office The prospectus of the Chartered Bank stated that engaging in foreign trade was the bank's priority among the British colonies including India, Australia, Singapore, and the East Indies The discovery of gold in Australia two years after the California gold rush opened up new vistas for world trade in 1851 A prospectus for the bank described "tea [that] was shipped from China; coffee and rum from Java, Ceylon and India; tobacco, spices and other products from Manila and the island of the East Archipelago."19 Because these articles of trade were common necessities of life, Australia could use its abundant gold products as payment directly to India and China as the nearest markets Beyond this buoyant commerce, the banking facilities in this area developed far from proportionately Because many of the East India houses had disappeared in the commercial crisis of 1847, it provided the opportunity for new financial institutions to advance in India and China with bills of lading that represented homeward-bound shipments Therefore, "it was with the object of entering 'this great unoccupied field' that the Chartered Bank of India, Australia and China was being established"20 with paid-in capital of million pounds in 1853 In the spring of 1857, the bank decided to open a branch in Shanghai because of the increasingly important role in international trade and finance The bank chose John MacKellar and J.W MacLennan as its Shanghai directors MacKellar was a Calcutta agent of the North Western Bank of India before he was chosen as general manager MacLennan later became an editor at the North China Daily News after serving as assistant manager to MacKellar at the Chartered Bank.21 Photo 2.1 The bank building of the Chartered Bank of India, Australia, and China in the 1930s (Shanghai History Museum) The Shanghai branch of the Chartered Bank began operations in August 1858 Its general business included receiving deposits, granting short-term loans, discounting approved bills, conducting foreign exchanges, effecting remittances, granting letters of credit, and circulating banknotes Initially, the bank's business dealt specifically with large volume discounting and rediscounting of opium and cotton bills Although opium cultivation was gradually extended in China, opium imports still increased from 50,087 picul in 1863 to 82,612 picul in 1888 Transactions in the opium trade generated substantial profits for the bank Apart from the opium trade, the import and export of raw cotton were another major source of business when the Chartered Bank opened its first Chinese operation The outbreak of the American Civil War gave not only India but also China an opportunity to export cotton The price of raw cotton in world markets rose from cents per pound to cents per pound In the last six months of 1863, the export of raw cotton from Shanghai reached 360,000 dan,22 which was worth million pounds.23 The subsequent boom in cotton provided rapid capital turnover for the bank and offered higher interest rates to businessmen dealing in cotton commodities At the same time, as business in cotton-padded clothing and textiles grew, new textile machines were imported from abroad, and general facilities were significantly enlarged Thus, the Chartered Bank developed in tandem with this growth in the cotton industry Under the protection of extraterritoriality, the bank began to circulate its banknotes and Mexican silver dollars in China in the 1860s.24 By the end of 1869, the opening of the Suez Canal shortened the voyage between England and the Far East, thus changing the strategic pattern of the eastern hemisphere and strengthening the British monopoly on trade and finance The Hongkong and Shanghai Banking Corporation (1865) The prosperity of the India and China trade attracted many British investors in the early 1860s A group of British businessmen, at the suggestion of Thomas Sutherland, formed a new bank in Hong Kong The new bank was the Hongkong and Shanghai Banking Company, a joint-capital bank institution This bank sought to combine banking with the tremendous business opportunities in trade and shipping between Hong Kong and Shanghai On July 28, 1864, the Hong Kong Daily Press announced the proposal to open the bank in Hong Kong The prospectus of the proposed bank was published with the names of a provisional committee formed by Thomas Sutherland of the Peninsular & Oriental Steamship Company and F Chomley of Dent, Beale & Company To differentiate itself from the banks in Bombay, the new bank focused its business geographically on Hong Kong and Shanghai The prospectus reflected the belief of the sponsors that the bank should not be merely an exchange mechanism, but also a full bank serving the needs of the local community and assisting the government in its plans to reform the currency and finance public services.25 The Chinese characters chosen for the Hongkong and Shanghai Banking Company were "Huifeng Yinhang," which was pronounced by the British as "Wayfoong" (based on Cantonese sound), meaning "abundant remittances."26 Photo 2.2a The bank building of the Hongkong and Shanghai Banking Corporation: The second generation building in 1874 (Shanghai Municipal Archives) Photo 2.2b The bank building of the Hongkong and Shanghai Banking Corporation: The third generation building was completed in 1923 This photo was taken in July 1995 (Author) Illustration 2.1 Banknote of the Hongkong and Shanghai Banking Corporation (Finance Studies Institute of the People's Bank of China) With paid-in capital of million dollars, the provisional committee launched the Hongkong and Shanghai Banking Company in Hong Kong, and commenced business on March 3, 1865 Two years later, the word "Corporation" was substituted for "Company" in the bank's name The Shanghai office opened immediately after the bank was established The Board of Trustees appointed David MacLean as the first branch manager He was "Scotch, shy, silent, but very kind hearty and very able; one of the best and strongest of the early bank managers."27 MacLean successfully managed the Shanghai branch from 1865 to 1873, and maintained a close friendship with Robert Hart, the inspector-general of Imperial Maritime Customs with whom he met frequently to discuss banking and finance The Imperial Maritime Customs deposited all its income in the Hongkong and Shanghai Banking Corporation, and the bank established branches where Imperial Maritime Customs had local offices Due to the nature of this special business relationship, the Qing government frequently borrowed from the bank and used the customs revenues as earnest money, or as collateral Beyond its functions as a commercial bank, the Hongkong and Shanghai Banking Corporation dealt extensively in government loans for political indemnities, national railways, and even for military campaigns For example, this bank granted a loan to the Chinese government for million silver tael for the Northwest campaigns in 1870 Hu Guangyong, a quasi-official merchant-agent representing General Zuo Zongtang, acted as a negotiator to obtain this loan The bank's Board of Directors authorized the chief manager to extend the loan at interest of 14 percent, secured by Imperial Maritime Customs.28 Although the Qing Court fully trusted the Hongkong and Shanghai Banking Corporation, its commercial growth in China was not smooth When the land speculation in the early 1860s caused problems in Shanghai's municipal construction, the Supreme Court ordered the creation of the Shanghai Recreation Fund in 1874 The Hongkong and Shanghai Banking Corporation supported this fund and declared the land in front of the British Consulate-General as a park for use only by foreigners.29 Financial problems emerged as the bank became involved in financing unprofitable investments Furthermore, between 1876 and 1882, the Hongkong and Shanghai Banking Corporation extended three major loans to the Chinese Imperial government—the 1877 Northwest Campaign Loan for 1,604,276 pounds at an interest rate of percent; the 1878 (or 1879) loan of 1,949,500 tael with percent interest; and an 1881 loan of 4,834,000 tael at percent interest.30 The Chinese Imperial government contracted twenty-six foreign loans from 1874 to 1890, of which the Hongkong and Shanghai Banking Corporation made seventeen These loans totaled 28,970,000 tael or 70.04 percent of all foreign loans during the same period.31 In this period up to World War I, Britain cooperated with Germany to maintain a balance of power against Russia and France in China This cooperation was also reflected in their financing of indemnity loans to the Chinese government after China's defeat in the Sino-Japanese War After a Russian-sponsored syndicate successfully concluded negotiations for the first indemnity loan on July 6, 1895, the Anglo-German group signed an agreemerit with the Chinese government for a second indemnity loan on July 27 Under pressure from both Britain and Germany, the Chinese government accepted a joint offer involving a series of loans totaling 16 million pounds at percent interest from the Hongkong and Shanghai Banking Corporation and the Deutsch-Asiatische Bank in 1896 This was a thirty-six-year term loan secured by the already encumbered Maritime Customs revenue These two banks joined financial forces again to grant a third indemnity loan for another 16 million pounds to the Chinese government in 1898 As the most important and influential foreign bank in China, the Hongkong and Shanghai Banking Corporation issued bank notes in 1,5, 10, 50, and 100 dollar denominations Under the bank's charter, shareholders had unlimited liability for note issues, so the bank was required to hold a one-third specie reserve at its headquarters.32 Although fluctuations in the silver exchange rates after the 1870s often caused problems of security for deposits, the bank continually issued and circulated bank notes, which brought prosperity to the business By the late nineteenth century, the Hongkong and Shanghai Banking Corporation had become the largest and leading foreign bank in China Acting as a proxy for the Chinese government in banking and finance, the bank used its access to London's financial markets to sell bond certificates Its foreign exchange transactions often accounted for 60-70 percent of total daily transactions in Shanghai financial markets For more than a half-century, China's financial markets set their daily foreign exchange rates based on Shanghai and the Shanghai interest rates set by the Hongkong and Shanghai Banking Corporation The bank effectively set the foreign exchange rate in China's financial markets until the mid-1930s The capacity to absorb deposits is an important indicator of a commercial bank's success The reputation of the Hongkong and Shanghai Banking Corporation attracted numerous private deposits Members of the imperial family and high-ranking officers deposited their personal wealth in the bank Table 2.3, a list of the deposits received by the Hongkong and Shanghai Banking Corporation from 1865 to 1930, shows the extent of its increasing dominance as China's leading financial institution The Hongkong and Shanghai Banking Corporation doubled its deposits about every ten years between 1865 and 1930 Abundant financial resources, including profits made in conducting foreign exchange, enabled the bank to finance the imports and exports of British merchants and to fund various railway projects in China At the opening of the bank's new Shanghai office building in 1923, British Minister Ronald Macleay praised the Hongkong and Shanghai Banking Corporation as one of the oldest, and, at the same time, one of the most Table 2.3 Deposits Received by the Hongkong and Shanghai Banking Corporation, 1865-1930 Year Deposit (Hong Kong dollars) Index 1865 = 100 1865 3,385.000 1.0 1874 17,555,000 5.2 1885 65,610,000 19.4 1894 104,300,000 30.8 1913 298,190,000 88.1 1920 451,060,000 133.3 1930 925,330,000 273.4 Sources: The Business Reports of the Hongkong and Shanghai Banking Corporations; Wang Jingyu, Weiguo Ziben zai Jindai Zhongguo de Jinrong Huodong, p 76; Hong Jiaguan, Zai Jinrongshi Yuandili Manbu, p 108 successful and notable models of British enterprise and financial genius in the Far East.33 The bank's role as custodian of Chinese funds continued until the Central Bank of China assumed the state bank's responsibility after the currency reform of 1935 In 1878, Robert Hart forecasted success for the bank as long as it demonstrated a more obliging disposition and better understanding of China The Deutsch-Asiatische Bank (1889) On May 15, 1889, the establishment of the Deutsch-Asiatische Bank was announced by the registrar of the Commerce Division in the Consulate General of Germany in Shanghai As a consortium bank representing virtually all German financial houses with interests in China, the Deutsch-Asiatische Bank focused primarily on Chinese industry and government finance, rather than trade Germany invested in China for two reasons One follows the classic theory of capital mobility where the abundance of German deutsche marks sought new markets to create added wealth As victor in the Franco-Prussian War, the new German Empire had received a war indemnity of billion francs from France Germany further accumulated capital from the rapid growth of industry The Deutsch-Asiatische Bank's priority was to finance Chinese imperial loans and industries, especially mines and railways in the German concessions of China With the support of the German government, thirteen German financial houses were involved in the founding of the Deutsch-Asiatische Bank These included the Diskonto-Gesellschaft, Deutsche Bank, Konigliche Seehandlung, and S Bleichroder & Co.34 The Deutsch-Asiatische Bank formally operated with paid-in capital of million tael in January 1890 In 1904, the paid-in capital had increased to 7.5 million tael Photo 2.3 The bank building of the Deutsch-Asiatische Bank, which became the bank building of the Bank of Communications after World War I (Shanghai Municipal Archives) In contrast to the other foreign banks that used the silver standard, the Deutsch-Asiatische Bank adhered to the gold standard It used silver dollars to pay off outstanding loans, transact interbank loans, and maintain current accounts, but kept all transactions within the gold standard This unique accounting system kept the bank out of the chaotic silver crises in Chinese financial markets up until the outbreak of World War I In 1896, the Deutsch-Asiatische Bank joined with the Hongkong and Shanghai Banking Corporation in extending the Chinese Imperial government an indemnity loan of 16 million pounds at percent interest Two years later, the Bank joined with the Hongkong and Shanghai Banking Corporation again to lend China another 16 million pounds These loans were secured by Maritime Customs Revenue as well as the salt gabelle and lijin taxes of many Chinese ports In the late nineteenth century, the German sphere of influence in China was predominantly in the Shandong Peninsula in Northeast China To expand its economic power, the Deutsch-Asiatische Bank invested in both the Shandong Railway Company and the Shandong Mining Company The bank invested 54 million deutsche marks to build 434 kilometers (255 miles) of railway line from Qingdao to Jinan after 1899 At the same time, it also financed 12 million marks to establish new mines in Shandong.35 In 1908, the Deutsch-Asiatische Bank joined with the Hongkong and Shanghai Banking Corporation to lend the Tianjin-Pukou Railway million pounds, and made a supplemental loan of million pounds at percent interest two years later The Jin-Pu Railway loan was secured by revenue of both the railway and Shandong Province The bank later joined with a British, French, and Russian consortium in 1910 to lend the Hu-Guang Railway million pounds, which was guaranteed by the salt gabelle and taxes of Hubei and Hunan provinces.36 To further enlarge its banking network, the Deutsch-Asiatische Bank also established branches in Berlin (1896), Calcutta (1896), Hong Kong (1899), Yokohama (1905), Singapore (1906), and Hamburg (1906) As a result, the Bank's headquarters in Shanghai became a financial center linking all overseas branches as well as conducting business with other foreign banks in China Among foreign banking relations, the Deutsch-Asiatische Bank showed special interest in cooperating with British banks rather than those of other countries, because of traditional relations of trust and cooperation Although there was competition in both the commercial and exchange areas, neither the Deutsch-Asiatische Bank nor the Hongkong and Shanghai Banking Corporation was willing to dissolve their cooperation in China until the outbreak of World War I The Yokohama Specie Bank (1893) As a tiny fishing village located on the east coast of Tokyo Bay, Yokohama was chosen as a free port to foreigners in the mid-1850s The Illustrated London News, May 7, 1853 reported U.S Commodore Matthew Perry's expedition to Japan and quoted the secretary of the Navy as stating "the opening of Japan has become a necessity, which is recognized in the commercial adventure of all Christian nations, and by every owner of an American whale-ship, and every voyager between California and China." 37 Yokohama followed a fate similar to Shanghai's as it evolved into a world trade center between West and East, and between the United States and China To meet the demand for banking services as international trade increased, the Yokohama Specie Bank was established with paid-in capital of million yen in Yokohama on February 28, 1880 38 The bank profited from foreign trade with low tariffs, and dealt in discounting trade bills and handling foreign exchange To promote trade with China, the Yokohama Specie Bank opened a Shanghai branch in May 1893 Photo 2.4 The Yokohama Specie Bank in the 1930s (Shanghai History Museum) Originally, the Yokohama Specie Bank was a private bank, but it soon became a semi-official bank of Japan An economic recession during the bank's early years almost forced it into bankruptcy The Japanese government reinforced the bank by providing million yen, and also by granting the bank a charter to handle foreign exchange reserves and to issue government notes This intervention left its imprint on the Yokohama Specie Bank that defined it as a semi-official Bank Before the establishment of the Yokohama Specie Bank, Japan also used a multi-metallic currency system based on gold, silver, and copper cash This complex currency system contributed to fluctuations in transactions of foreign trade and foreign exchange Between the 1850s and 1870s, huge amounts of gold flowed out of Japan due to the variable exchange rates of gold and silver in both domestic and world markets The Meiji government tried to adopt the gold standard as a currency base in 1871, but the effort failed due to insufficient gold reserves The exchange ratio between gold and the yen was 1.5 to 1, and between gold and silver, to 16 39 Japan's past experience indicated that its second best option was to control silver exchange rates From 1880 to 1889, the silver standard was adopted as the currency measure, but the Japanese government had to abolish this control because of the sharp depreciation of silver in the world market after 1890 The government then tried to restore the gold standard The opportunity finally came with the Japanese victory in the first Sino-Japanese War in 1895 The indemnity originally demanded by Japan was for 230 million tael of silver Under the circumstances of worldwide depreciation in the value of silver, Japan changed its original demand and called on the Chinese government to pay gold instead of silver In 1897, the Japanese government established the gold standard by using indemnity gold as reserves, setting the legal exchange rate at 0.75 gold units to yen At the same time, the exchange ratio between gold and silver was to 34.40 As the first Japanese national overseas bank, the Yokohama Specie Bank handled transactions involving the indemnity, and also used part of the gold as reserves to issue bank notes in Tianjin and Shanghai By 1900, the total paid-in capital of the bank had increased to 18 million Japanese yen,41 which was six times more than the starting capital twenty years earlier in 1880 when it had just been established As trade increased with China, the Yokohama Specie Bank became a strong competitor of the Hongkong and Shanghai Banking Corporation because of its privileged relationship with certain Japanese trading firms Because many Japanese firms in China settled their business with other countries only through the Yokohama Specie Bank, the bank gained a strong national identity within Japan During World War II, the Yokohama Specie Bank replaced the Hongkong and Shanghai Banking Corporation in handling the Maritime Customs Revenue, and served as Japan's official bank issuing military notes in China After Japan's unconditional surrender in 1945, the Yokohama Specie Bank was closed and later reorganized into the Bank of Tokyo on June 1, 1947 Formation of a Comprador Class When free trade replaced the exclusive Cohong system, which was a government-controlled trading system after 1842, foreign merchants and bankers encountered many difficulties in initiating direct contact with their Chinese counterparts due to the language barrier, distribution network, and complex monetary system In 1853, the chairman of the Oriental Banking Corporation clearly declaimed that banking business in China was uneasy: In China no banking business whatever is carried on by British subjects out of Hong Kong—the absence of sufficient law and security having hitherto rendered it unsafe, even had the habits of the people offered a reasonable prospect of success The Chinese themselves are abundantly served by native bankers with whom no foreigners can compete, while the European Merchants each keep their own shroffs to attend to their cash transactions, and would not find such advantage from altering their system.42 They needed a group of "compradors" as middlemen functioning as a bridge between East and West.43 These compradors were professionals who emerged from China's traditional economic order, spoke foreign languages, and acquired Western management skills They combined two cultures in a unique way and used them in their commercial and financial activities The Hongkong and Shanghai Banking Corporation began to recruit local compradors almost immediately after it opened its first branch office in Shanghai Wang Huaishan, a former street runner of a Shaoxin native bank, was hired as the first comprador at the office Wang became a comprador through his association with a British merchant The Englishman had borrowed money from Wang three years earlier and returned to England Thereafter he returned to Shanghai and informed Wang that he was now head of the new bank in Shanghai.44 Wang had come from Shaoxing of Zhejiang Province, and he introduced many native associates to the foreign bank, thus becoming one of the first generation of compradors in the banking business According to the description of W.F Spalding, a prolific writer on Eastern banking, a comprador's duties required him to transact business for the bank with other Chinese, to handle all the associated monetary affairs such as the receipt and payment of money and the collection of drafts and notes; to offer advice to the bank regarding the condition of local markets; to compile commercial information on the status of China; and to recommend, control, and guarantee the Chinese staff of the bank.45 By the late 1860s, after Wang Huaishan introduced the system, the Shanghai compradors were engaged in new business, helping the foreign banks to grant "chop loans" to native banks.46 As F.B Johnson at Jardine, Matheson & Co wrote in 1868: "I find that I can occasionally invest our cash balances in Chinese Banker's orders at short term say [to] days at rates of interest varying from 12 percent to 15 percent with, think, perfect safety, as I should not discount the paper of any Bank to a greater extent than Tls 10,000 or 15,000 I am aware that the success of such business will depend upon Table 2.4 Dual Role of Compradors as Foreign Employees and Native Bankers Comprador Foreign firm/bank Year Native bank Hongkong & Shanghai 1860s to 1870s — Banking Corp Tang Jingxing Jardine, Matheson & Co 1860s 200,000 Xu Jun Dent, Beale & Co 1860s ca 40,000 Hongkong & Shanghai Xi Zhengfu 1870s ca 50,000 Banking Corp Yan Lanqing Gore-Booth & Co 1870s ca 160,000 Deutsch-Asiatische Xu Chunrong 1890s to 1900s banks Bank Sources: Hao Yen-p'ing, The Comprador in Nineteenth Century China, p 115; Liu Kwang-Ching, "Tong King-sing," p 146; Shanghai Qianzhuang Shiliao, pp 743-746, 752; Jiu Shanghai de Waishang yu Maiban, pp 74-90 Wang Huaishan the acumen and trustworthiness of our Compradors."47 This new business brought marginal profits to the foreign bank Because the comprador was the guarantor of the "chop loan" to the native bank, he usually received percent commission after the loan had been settled In the late nineteenth century, the compradors linked the foreign trading houses with the native banks by guaranteeing native notes as a major form of business transaction The triangular role among the compradors, foreign employees, and native bankers often overlapped, in that some compradors were former native bankers and other compradors became native bankers later For example, the members of the Yan family from Dongting Mountain were compradors who accumulated wealth by working in foreign firms, and then became native bankers Historical records show that many noted compradors worked simultaneously as native bankers and foreign employees, playing a dual role in Shanghai's economic and banking development from the 1840s to the 1900s According to studies by Yen-P'ing Hao and other materials, the relationship between compradors and native bankers often overlapped (see Table 2.4) The comprador's bicultural professional background offered him many opportunities to accumulate wealth He was not only a salaried employee of the foreign bank but also a recipient of commissions from guaranteed transactions of native banks Although this dual role as employee and independent agent might cause confusion, in practice, the comprador had to work very hard to find opportunities A successful foreign bank in China required the presence of an energetic comprador To attract the top compradors, foreign banks even let them hold a relatively sizable number of banking shares For example, Wang Huaishan held 350 shares of the Hongkong Shanghai Banking Corporation at a time when other Chinese staff members were only able to hold a few 48 The experience of the Hongkong and Shanghai Banking Corporation showed that it owed some of its success to its comprador The comprador was a unique socioeconomic class that arose in the middle of the nineteenth century and later declined in the early twentieth century Being relatively rich, the compradors could purchase rank status from the government and thus become members of the gentry This higher social standing was not only useful in their economic pursuits but also helpful in minimizing official clutches Social status, in turn, brought them more wealth Wealth and status were closely associated because the purchase of rank was permitted in the late Qing dynasty Famous compradors such as Tang Jingxing (Tong King-sing), Zheng Guanying, and later Yu Qiaqing were examples of such self-made men.49 Beyond their important role in modern China's economic and banking development, compradors also played an important role in modern China's political reform and social revolutions They often sent their children overseas to study business and technology They were sometimes viewed as "alien Chinese" by ordinary Chinese because they were deeply influenced by foreign education and lifestyles Some of them even formed a commercial guard (shangtuan) to protect their business and commercial interests Nevertheless, the special class of comprador joined with the Chinese landlords and gentry, gradually forming a new social economic class—the Chinese bourgeoisie Shanghai was a center in the cultivation of this new urban upper class With a combination of Eastern and Western educational background and management skills, the comprador class began to develop its own economic and financial strength, thus becoming one of the major socioeconomic forces to influence modern Shanghai society It was also an important political financial force contributing to the rise of integrated finance capitalism in China The Self-Strengthening Movement and Finance The Chinese military defeat by Western powers stimulated a national Self-Strengthening Movement and later an economic reform known as the Yangwu Movement Both movements had profound influences on the creation of early Shanghai industries and financial markets Li Hongzhang, the famous imperial commissioner and general governor of the Jiangsu and Zhejiang Provinces, was one of the most influential figures in these movements, and also exerted direct control over the Shanghai government In assessing world affairs, Li Hongzhang saw that Western powers had advanced their colonies step by step from India to Southeast Asia and then to China The only way to change this trend was to develop self-defense industries China had to meet the challenges by adopting Western guns and ships Li also warned that if China did not catch up in shipbuilding and gun making, Japan would soon follow the West and take advantage of China 50 Among many efforts in this regard, Li Hongzhang bought an iron factory from an American company—Thos Hunt & Co for 60,000 tael Then he merged two gun and cannon manufacturing facilities to create the first government-sponsored foundry —the Jiangnan Arsenal—in Shanghai in 1865 51 The arsenal not only manufactured guns and cannons but also built ships The general budget for the Jiangnan Arsenal came partly from Imperial Maritime Custom revenues and partly from the Huai Army budget directly controlled by Li Hongzhang, But most early Chinese industries did not enjoy the direct support of such a powerful government official Beginning in the 1870s, reformers of the Self-Strengthening Movement attempted to build a series of industries, but most of them failed due to a shortage of funding Whether China should borrow foreign capital for modernization became a critical question that was debated among the Qing officials In 1880, Liu Mingzhuan, a general of the Huai Army and later governor of Taiwan, proposed that the Qing government borrow foreign capital to build Chinese railways His idea was attacked by conservatives at the Qing Court as "wicked thoughts."52 This argument lasted for several years until the Court adopted a compromise proposal from Ma Jianzhong, a diplomat who explicitly proposed the theory of "borrowing foreign capital" to develop Chinese industries, while not allowing foreigners to "hold the shares" in these industries Ma Jianzhong formulated the idea of borrowing foreign capital for developing national industries He believed that borrowed foreign capital "cannot be used for military purposes, but can be used for commercial purposes," because military expenses were nonproductive expenses for which interest had to be paid, and they increased the financial burden of the government.53 The history of borrowing foreign capital to build modern Chinese industries thus began with Ma With increased borrowing of foreign capital, China's market further opened to foreigners All financial activities, however, were conducted under the presumption of maintaining respect for sovereign rights Although foreigners could lend funds to developing Chinese industry, they could not control or even hold stocks during the 1880s and 1890s This situation changed at the end of the Qing dynasty By borrowing foreign capital, China purchased many advanced production facilities, and, at the same time, increased their technical competence Early Industry in Shanghai Under the government policy of allowing merchants to borrow foreign capital to establish industries, many Chinese officials and merchants had strong interests in the establishment of profit-oriented enterprises such as telegraph, shipping, and railways These efforts were called the Yangwu Movement, which paralleled the Self-Strengthening Movement If the Self-Strengthening Movement sought a strong Chinese nation, the Yangwu Movement sought a rich Chinese nation Foremost among the early Yangwu efforts in Shanghai were the Imperial Telegraph Administration, the Shanghai Cotton Cloth Mill, and the China Merchants' Steam Navigation Company Prior to the establishment of the Imperial Telegraph Administration in 1881, the Eastern Extension Australasia & China Telegraph Co., Ltd of Britain and the Great Northern Telegraph Co., Ltd of Denmark established telegraph services in Shanghai In 1866, the first telegraph in China connected the Shanghai office of Russell & Co with their warehouses on the Bund.54 Furthermore, the British Company laid a cable between Singapore and Hong Kong in 1871 In the same year, the Danish laid a line across Siberia, extended it to Nagasaki, through Shanghai, and, via Xiamen, to Hong Kong On April 18, 1871, the first telegram was transmitted through the sea cable between Hong Kong and Shanghai On June 3, the first telegram from Shanghai reached London On August 12, Shanghai telegrams reached Nagasaki.55 Thus, Shanghai entered the new age of telecommunications The Qing Court was not ready to set up an administration for telegraph communication until the early 1880s In 1879, Japan occupied the Ryukyu (Liuqiu) Islands, and, afterward, Russia's involvement in the Yili crisis in China's Far West caught national attention During this period of crisis, Chinese Ambassador Zeng Jize sent a telegram from St Petersburg to Shanghai in one day, but it reached the Qing Court about ten days later after being transferred from Shanghai to Beijing Shocked by this lack of capability to meet the national crisis, Li Hongzhang sent a memorandum to the throne advocating the establishment of an imperial telegraph administration in September 1880.56 Li pointed the urgent need for telegraph communication by troops moving from North to South and for the allocation of emergency supplies.57 So laying land cable between Shanghai and Tianjin became the first priority The Qing Court approved Li's request, and appointed Sheng Xuanhuai as general administrator in charge of the Tianjin General Bureau and Zheng Guanying to be in charge of the Shanghai branch The project was started in April 1881, and finished in November Direct communication between Tianjin and Shanghai began on December 24, 1881 The General Office of the Imperial Telegraph Administration was established in Tianjin first, but was relocated two years later to Shanghai as the real center of international communications and the telegraph administration The establishment of the Shanghai Cotton Cloth Mill signified the extension of the Yangwu Movement from military to civilian industry After the Arrow War, more Chinese cities were opened to foreign trade New mechanical technology invented in Europe had increased cotton cloth production for export Cotton clothing came through the newly opened Suez Canal at prices competitive with handmade Chinese cotton cloth The volume of imported cotton clothing increased from 4,250,324 bolts in 1867 to 11,644,846 bolts in 1876; however, the price of imported cotton clothing decreased from an index of 100 in 1872 to 75.5 in 1876.58 Li Hongzhang recognized the opportunity to open a Chinese cotton cloth mill in Shanghai because of the increasing demand for cloth produced mechanically by machine looms Li hired a formerly famous comprador, Zheng Guanying, to manage the mill After several years of preparation, the mill opened with capital raised from Chinese officials and private merchants The regulations of the mill were published in Shen Bao on October 13-15, 1988 These regulations announced that by law the mill belonged to the private entrepreneurs, although it was promoted and partially funded by officials.59 The Shanghai Cotton Cloth Mill finally began production on December 24, 1889.60 After the installation of all facilities was completed in 1893, the mill began to generate profits.61 With government policy and financial support, the mill enjoyed patent rights and a reduced tax rate Russell & Co and the China Merchants’ Steam Navigation Company In 1872, Li Hongzhang launched a new project to establish the China Merchants' Steam Navigation Company It was a Chinese government-sponsored company that succeeded the American Russell & Co as the most powerful shipping company on the Yangtze River Before discussing the China Merchants' Steam Navigation Company, it is useful to understand the background of the AngloAmerican steamship rivalry on the Yangtze River in the 1860s The main American player was Russell & Co., an American trading house based in Shanghai under the Chinese name of Qichang After its invention and introduction on the Mississippi River, the American steamboat was introduced to China quickly On September 30, 1852, 47 percent of all foreign shipping cleared through the port of Shanghai was under the American flag 62 American sailing vessels carried about half the foreign trade merchandise in Chinese treaty ports Russell & Co in Shanghai saw a great opportunity to introduce the steamboat to the new treaty ports along the Yangtze Basin The first person to promote the potential for the steamship business on the Yangtze was Edward Cunningham (1823-1889), the managing director of Russell & Co in Shanghai In a letter dated February 1, 1861, to Russell & Co President RS Forbes, Cunningham expressed an optimistic view "the amount of business is almost incalculable For one item, the cotton crop of the valley of the Yangtze is supposed to be much greater than the whole produce of the United States."63 Although Edward Cunningham did not have enough money to open a steamship company, he did rely on his friendship with Chinese compradors and merchants as well as some British companies to raise an initial fund of about 700,000 tael On March 27, 1862, the Shanghai Steam Navigation Company was founded with a total initial capital of million silver tael, an equivalent of 1,358,000 U.S dollars.64 When the Hongkong and Shanghai Banking Corporation was formed, it invited Russell & Co to become one of its most important shareholders because of its commercial interests in China By December 1866, W.H Forbes, the chairman of Russell & Co., was elected as director by virtue of this association Despite Russell & Co.'s comparatively large capital, it faced bitter rivalry and competitive pressures to be efficient and expand from British and other American firms Russell & Co lost its predominant position to a British company, Jardine, Matheson & Co., which had a more efficient management team under the leadership of a Chinese manager, Tang Jingxing 65 Jardine, Matheson & Co had comparatively abundant human resources Moreover, Russell's steam navigation company had a vulnerable structure which was organized as a joint-stock company, with ownership based on transferable share certificates.66 Because the Chinese and British jointly held the majority of the stock, Russell & Co gradually lost control of the enterprise From the outset, the joint-stock company experienced many difficulties because of insufficient funding for development The first Chinese shipping company entered the steamship business in 1872 The China Merchants' Steam Navigation Company was established as a "government-sponsored merchant undertaking." By 1873, this new company owned five steamers operating on the Shanghai-Tianjin route In the same year, Tang Jingxing resigned as Jardine comprador to become the manager of this Chinese company 67 He made strenuous efforts to help the company to compete with foreign companies by lowering fares The situation continued until the "American monopoly" finally ended when the Chinese government bought the company On January 2, 1877, the Chinese senior official Sheng Xuanhuai bought out the Shanghai Steam Navigation Co on behalf of the Imperial government with 2.4 million tael or about million U.S dollars at that time.68 The eighteen ships of Russell & Co had been merged into the governmentsponsored China Merchants' Steam Navigation Thus, the China Merchants' Steam Navigation had a total of thirty different-sized ships with 36.7 percent of the total tonnage of all ships (including all foreign ones) operating in China.69 Chinese shipping power thus dominated the Yangtze basin In buying out Russell & Co and promoting domestic navigation, the China Merchants' Steam Navigation borrowed a total of 3,149,000 tael from several foreign banks and native banks to add to the company's official capital and stock Among these debts, foreign capital was 44.77 percent and Chinese capital was 55.23 percent between 1877 and 1879.70 In this early stage of Chinese industrialization, the government-sponsored joint state and private capital company had already demonstrated its borrowing strength with government participation Later on, it became a tradition among certain types of Chinese industries to borrow capital under government guarantees At the same time, it provided the government opportunities to supervise and interfere in the business The Shanghai Railway Building the first railway in Shanghai was an inconceivably painful process in China's modern industrial history The introduction and building of railways in China began in 1863, when Li Hongzhang received a petition signed by twenty-seven foreign firms for the right to establish a railway from Shanghai to Suzhou This petition, however, was rejected because the railway was going to be built by foreigners, and thus deemed to be against China's national interest Despite disappointment over the rejection of this proposal, Jardine, Matheson & Co still tried to build a line between Shanghai and Wusong After an eleven-year effort, the line was eventually constructed as far as Jiangwan in June 1876 Accepting it as a fail accompli, the Chinese government finally agreed to allow completion of the line On December 1, 1876, Shanghai was connected by railway with Wusong Although the Chinese government was strongly opposed to its construction, it purchased the line from Jardine, Matheson & Co the following year Soon after the purchase, the government decided to close the road because the construction of railway had disturbed the "geomantic configuration of the nation," feng shui, which influenced the fortune of the country The rails were torn up, and the engines and rolling stock were transferred to Taiwan and dumped on the beach.71 In 1897, Von Hansemann of the Deutsch-Asiatische Bank put forward a plan to construct a Shanghai-Nanjing railway financed by a British and German syndicate in accordance with their 1895 agreement under the Chinese government guarantee.72 Von Hansemann proposed that the line be built and administered by a German registered company, the Deutsch-Asiatische Eisenbahn-Gesellschaft, to be founded especially for this railway and governed with equal participation.73 With conflicting spheres of interest, however, the British did not allow the expansion of German influence into the Yangtze Valley This conflict of interest blocked the construction of the Shanghai-Nanjing Railway for nine years In the spring of 1903, the Chinese government accepted the British position relative to the Yangtze Valley Sheng Xuanhuai, then the director-general of the Chinese Imperial Railway Administration, represented the government in negotiations with Jardine, Matheson & Co The Chinese government agreed to issue a loan for construction of the Shanghai-Nanjing Railway The Shanghai-Nanjing Railway was completed in 1908 By that time, total expenditures were 2.9 million pounds, of which the Hongkong and Shanghai Banking Corporation financed 2.25 million pounds Although the British and Chinese corporation held controlling interest in the line, the Chinese government appointed a chief manager of the railway In its effort to build Shanghai railways, the Chinese government made a number of complicated financial agreements with various foreign banks For example, the loan for the Lu-Han Railway of 4.5 million pounds in British pounds was borrowed from Belgian sources American banks made two loans for the Yue-Han Railway totaling 40 million U.S dollars The Hongkong and Shanghai Banking Corporation made the majority of railway loans to China, including 2.25 million pounds for the Shanghai-Nanjing Railway in 1903; 1.5 million pounds for the Guangzhou-Jiujiang Railway in 1907; 1.5 million pounds for the Shanghai–Hangzhou Railway in 1908; and 2.96 million pounds of an million pound joint loan with the Deutsch-Asiatische Bank for the Tianjin-Pukou Railway in 1910 In addition to these loans, the Hongkong and Shanghai Banking Corporation joined with the French Banque de 1'Indochine to finance the Beijing–Hankou Railway All foreign loans were guaranteed by the Imperial Maritime Customs revenue, salt taxes, or property rights of the railway The “Merchants’ Management Under Government Supervision” System The creative system of "merchants' management under government supervision" (guandu shangban) in the 1870s was a political compromise to the fragile financial structure of the government Because the financially weak government was incapable of operating large enterprises, it needed entrepreneurs, managers, and private funds to support government enterprises The policy of "government supervision" (guandu) embodied the political idea of maintaining central government control over business Central government leaders recognized the power of private finance and the role of merchants in the Chinese economy, and, therefore, they needed merchants to undertake the management of enterprises The "merchants' management under government supervision" system was an ideal model for building state capitalism in China The system, however, met with many practical difficulties Because Chinese officials desired to compete with the foreign navigation business domestically, the China Merchants' Steam Navigation company bought eighteen ships from Russell & Co without feasibility studies and even without document preparation This purchase had two immediate impacts on the company First, the company was drained of its capital and left without operational funds Second, the company did not have enough supplementary transportation to support the number of ships it owned Although the great enthusiasm for the new industries stimulated the efforts of Chinese managers, they still had to deal with the personal incompetence of appointed officials, the inefficiency of the bureaucracy, the lack of tariff protection, excessive internal levies, and the need for technical and financial facilities The bureaucrat designed shipping enterprises demonstrated their inefficiency at the early stage of China's industrialization Besides the "merchants' management under government supervision" system, there were two other types of industrial and mercantile enterprises: the "joint government and merchant enterprises" and "private enterprises." Among the "joint government and merchant enterprises," officials welcomed private capital but resented governmental control Private merchants could use the joint venture to gain profits, but they had to subordinate themselves to official supervision Compared to the joint enterprises, private enterprises had more freedom to their own business However, these private business areas were limited to challenge of foreign competition and by government controls In addition, they were usually small and middle sized and financially weak in terms of Chinese economic society The main reason that a middle class could not develop in modern China was the underdevelopment of private enterprises The "merchants' management under government supervision" system exemplified an initial expression of Chinese state capitalism The essence of state capitalism was to create a strong and rich nation able to protect itself against foreign military and economic invasion The promotion of the "merchants' management under government supervision" system was based on the support of a strong central government Once that condition was no longer met, the system collapsed The first wave of the Chinese "merchants' management under government supervision" system ended in 1911 when the Republican Revolution destroyed the Qing dynasty State or national capitalism, however, remained in the consciousness of Chinese politicians The ideal of national capitalism was further promoted by Dr Sun Yat-sen, and then by the Nationalist government; it ended with the start of the Communist regime Financial Crisis of 1883 Once Shanghai became an international trade center, its trade transactions brought financial dependence in the world Companies trading in raw silk and various silk products were major businesses in Shanghai, but circulation of the commodities was obstructed by the uncertainty of international trading companies, and combined with Chinese capitalist speculation, this caused a major financial crisis in 1883 Many native banks, under heavy pressure during the financial crisis, were forced to liquidate The financial panic began with the sudden bankruptcy of the major silk shop "Jinjiaji," which defaulted on a 560,000 tael silver loan early in the year About forty native banks were directly or indirectly tied into the debt The unexpected financial crisis forced all native banks to tighten their money supply and stop issuing new loans The tight credit status denied local merchants access to capital Therefore, more than twenty additional stores—including tea shops, sugar houses, and some small ship companies—closed their doors, which put another 1.5 million tael of debt in default The chain reaction caused financial chaos and quickly threw twenty Shanghai native banks into bankruptcy After the first wave of the panic, only fifty-eight native banks remained in business Taking the financial risks into account, the Hongkong and Shanghai Banking Corporation decided to cancel all "chop loans" (the overnight loans or short-term loans to native banks) in late 1883 This decision instantly had an enormous impact on the Chinese merchant, Xu Run, who had invested a huge amount of money in stocks and in real estate The shortage in capital flows immediately forced him into bankruptcy, with more than million tael in debt Also involved in financing Xu's business, another twenty-two native banks triggered a second wave of panic In addition, the failure of the greatest Chinese merchant and banker, Hu Guangyong, worsened the financial chaos even more A legendary figure in the early history of Shanghai banking, Hu Guangyong had a controversial nature as a native banker and an official merchant Although he was a "great friend" 74 of the Hongkong and Shanghai Banking Corporation, as described by Robert Hart, he refused the offer to become a comprador However, he accepted the honor of the Qing Court, "a red crown of the merchant," the highest rank of the official merchants He acted as representative for Zuo Zongtang in negotiating loans for the "Northwest campaign" in the Yili crisis and buying arms for the campaign He received huge commissions from his work, investing this money in many native banks He thought the world price of raw silk would rise in 1881, so he began to hoard large amounts of silk in his warehouse and attempted to drive the price up As a result, many foreign trading companies and foreign banks joined to boycott Hu's speculation Hu's funds in raw silk stagnated in two years When the bankruptcy of another silk merchant, Xu Run, worsened the financial panic, Hu Guangyong also lost the financial capability to recover his losses from speculation His major native bank, the Fukang Qianzhuang, was forced into bankruptcy on November 2, 1883 Thereafter, the rest of his native banks failed during a run on all the banks Hu's entire business and financial empire collapsed and he committed suicide soon afterward The tragedy of Hu Guangyong demonstrated not only the failure of speculation but also the financial limitations of Chinese merchants, which rendered them incapable of competing with foreign merchants Speculation and financial limitation caused this personal tragedy of the Chinese "red crown of the merchant." As a result of the 1883 financial crisis, 87 percent of Shanghai native banks closed their doors, and about 300 to 400 commercial firms went into bankruptcy The number of native banks fell from seventy-eight at the beginning of 1883 to only ten at the end of the year 75 Affected by Shanghai financial crisis, forty-five of a total sixty native banks in Zhengjiang and seventeen native banks in Yangzhou were out of business.76 The 1883 financial crisis exposed the weakness of the native financial institution and its immature pre-capitalism Because the sole-owned native bank did not separate business and household capitals, if the business failed, the banker had to commit suicide to settle his unlimited responsibility The ambitions of some native banks to pursue higher profits led to speculation rather than rational choices The financial limitations of native banks caused many of them to depend on short-term foreign loans rather than long-term savings deposits The total "chop loans" were often several times higher than the native banks original capital, which created a very fragile and vulnerable capital structure Once a foreign bank called these loans, many native banks were immediately driven into bankruptcy The contagion of the 1883 financial crisis wreaked havoc on the open commercial system And at the same time, it challenged the Chinese to think about national finance and the future of banks Thus, seeking independent financial resources and establishing a national banking infrastructure became the primary objectives of Chinese bankers in the next decade 3 The Expansion of Foreign Banks and the Search for National Banks, 1895-1911 Thrown into turmoil by its unexpected defeat by Japanese naval forces in 1895 and by the EightPower Allied Expedition of 1900, China plunged deeply into debt due to war indemnities and postwar finances In response to Chinese demands for postwar financing, many foreign banks that had been established in China in the preceding decades quickly expanded their businesses, opening new branches across China Before the end of nineteenth century, a total of 21 foreign banks with 101 branches were operating in China.1 The Hongkong and Shanghai Banking Corporation increased its assets from 13,396,655 pounds in 1865 to 211,457,723 pounds in 1900, which was almost 16 times higher than the original assets, and the Chartered Bank of India, Australia, and China multiplied its assets from 103,003 pounds in 1854 to 16,218,964 pounds in 1903, which was 157 times the original capital.2 Although the Shanghai branches of the two banks reflected only part of the total assets increase, the significance of foreign bank expansion was nevertheless apparent Under the protection of extraterritoriality, foreign banks were able to issue bank notes, absorb large deposits, and manage the Maritime Customs Revenue and other Chinese government transfers Some foreign banks also engaged in collecting information, receiving war indemnity, and even played critically important roles in representing their home governments in granting political loans to the Qing Court In response to the expansion of foreign banks, Chinese national banks began to emerge as the new forces in China's modern banking history The first modern Chinese bank—the Imperial Bank of China—was established in 1897 after a difficult period of preparation Furthermore, the Board of Revenue established the Hubu Bank in 1904 Under prevailing political pressures and economic realities, the Qing Court issued a series of orders for institutional reforms, which included founding the Ministry of Finance and the Ministry of Communications in 1906 These new institutions set government policies on banking and communications Although the initial banking regulations were rudimentary, they at least provided a basic standard for Chinese banking The new government policy for promoting commerce and banking encouraged many Chinese entrepreneurs to enter the private commercial banking business The Expansion of Foreign Banks At the end of the nineteenth century, numerous international conflicts among Russia, Japan, Korea, and China became the primary causes of the Sino-Japanese war In 1892 the Russian Trans-Siberian Railway was going to be extended past Vladivostok down the east coast of Korea Russia was eager to establish an ice-free port in the East to extend its commercial interests in Asia At the same time, Japan was looking for overseas development opportunities by targeting Korea Rivalry to establish predominant influence in Korea thereby became a critical issue in the national interests of both Russia and Japan When the Korean Tonghak Rebellion threatened the Yi dynasty court in the early summer of 1894, the Japanese took advantage of the disturbances, occupied the capital of Seoul, and deposed the king China, as the historical suzerain state to Korea, sent the Beiyang fleet to Korea in an attempt to expel the Japanese and reinstate the king The Chinese northern fleet was defeated by the Japanese navy in the war The Treaty of Shimonoseki between China and Japan was signed on April 7, 1895 The treaty not only marked the end of the tributary system of the Chinese Empire in East Asia, but also required China to pay a huge sum of war indemnity to Tokyo In the treaty, China recognized the independence of Korea; committed to pay an indemnity of 200 million tael in silver; and further opened Shanxi, Chongqing, Suzhou, and Hangzhou as new treaty ports Japan acquired Taiwan (Formosa) and the Pescadore Islands from China, and also obtained special rights on the Liaodong Peninsula Among these, the Japanese demand for the Liaodong Peninsula infringed on the interests of other powers in China, blocking the Russian advance to an ice-free port and interfering with German and French interests Based on its own interests, Russia joined with Germany and France to compel Japan to waive its claim to the Liaodong Peninsula in exchange for a payment of 30 million tael The total war indemnity that China had to pay to Japan was fixed at 230 million tael in silver Because of the world silver price depreciation, Japan demanded that China pay the indemnity in gold A more important reason for Japan's demand was that it had planned to use the indemnity to introduce the gold standard in its domestic markets Since Qing annual revenue was only 89 million tael in silver, it was obviously impossible for China to pay the indemnity China discussed the possibility of seeking a gold loan with the inspector general of the Imperial Customs Maritime Service, Robert Hart Hart suggested that the Chinese government could borrow the gold from the Hongkong and Shanghai Banking Corporation, and he began negotiations with the Hongkong Bank on China's behalf When the Russians learned this, they believed that the Russian bank should have priority in making the loan to China because Russia had united with France and Germany to force Japan to return the Liaodong Peninsula This dispute among the financial powers was finally settled by the extension of three large loans to the Qing government These included the Franco-Russian loan of 1895 for 15.8 million pounds (face value 400 million francs at percent interest), the Anglo-German loan of 1895 for 16 million pounds at percent, and another Anglo-German loan for the same amount at 4.5 percent in 1898 The Japanese demand that payment be made in gold worsened the Qing financial situation because it only had silver on hand Moreover, converting the depreciated silver into gold increased the cost, which forced the Imperial government to pay more than it had originally committed After Germany went on the gold standard and sold its demonetized silver reserves worldwide in 1871, Holland and Scandinavia followed suit; the world price of gold surged and silver plunged Moreover, the discovery of rich silver deposits in Nevada in America made the world price of silver plunge even deeper Vast quantities of silver and superfluous coinage were thrown on the market, causing constant fluctuations in the value of silver worldwide To find a way to finance the war indemnity, Chinese Imperial Commissioner Li Hongzhang took the opportunity to accept the invitation from the Russian Empire to attend the coronation of Tsar Nicholas II in St Petersburg During his trip to Russia, Li Hongzhang signed the Chinese Eastern Railway agreement with the Russian Empire According to the agreement, China granted Russia permission to construct a railway in Manchuria, connecting Chinese railroads to Russia's eastern Siberian railway system for both economic and security purposes Li Hongzhang also raised the issue of establishing a joint RussoChinese bank to finance the Sino-Japanese indemnity But Russia had already planned to establish a bank with French capital to finance the Qing debts with the Imperial Maritime Customs revenue as security According to Maurice Collis, "the ulterior motive [of the Russian plan] was to dislodge the British from their premier position as financial backers of the Chinese government With the customs revenue as security, the Russians hoped that they might be able to displace Robert Hart, the Inspector General, by a Russian."3 China, however, did not trust Russia alone to extend the indemnity loan To strike a strategic balance of power between Russia, Britain, and Germany, the Qing government took out a gold loan from the Russo-Chinese Bank, and also concluded two joint loans from the Hongkong and Shanghai Banking Corporation and the Deutsch-Asiatische Bank The Chinese government adopted an approach of "using barbarians to control barbarians" in taking out loans from the powers, diversifying its international debts and political risks Russo-Chinese Bank and Russo-Asiatic Bank (1895) From the beginning, the Russo-Chinese Bank was established as an international political bank representing Russian interests in China Following a payment schedule of the Sino-Japanese indemnity, China had to pay the first 50 million tael within six months of the ratification of the treaty When the Qing expressed doubt about how to finance the indemnity, an official from the Embassy of Russia informed the Qing Court that the Russian government's financial department had a solution: it would lend 400 million francs in gold to China with 62.5 percent of the capital from France.4 After receiving a positive response from the Chinese government, Russia immediately created a bank to issue Chinese government bonds and handle the transfer of payments The Russo-Chinese Bank was thus founded on December 10, 1895, in St Petersburg When Li Hongzhang returned home with a new treaty of alliance with Russia, he also brought back the proposal for joining the Russo-Chinese Bank On August 28, 1896, the Chinese government joined the bank as a partner by investing million tael of silver for the construction of the Chinese Eastern Railway The joint-venture bank in China was named the "Sino-Russian Righteousness Victory Bank" (Hua-E Daosheng Yinhang) This joint venture gave Russia opportunities to expand its financial influence in China By adopting the form of a joint venture, the Russo-Chinese Bank had permission to manage Qing funds, collect duties, cast coins, construct railways within Manchuria, and establish telegraph lines in these areas.5 In a few short years, the Russo-Chinese Bank emerged as the greatest competitor to the Hongkong and Shanghai Banking Corporation in China By the end of 1902, less than eight years after its establishment, the Russo-Chinese Bank became the second largest foreign bank in China While all British banks, including the Hongkong and Shanghai Banking Corporation, had a total of 33 percent of all foreign investment in China, the Russo-Chinese Bank alone had 31.3 percent of total foreign investment.6 Envious of the fast growth of the Russo-Chinese Bank, the British banks complained that the Russians had taken large stakes away from them Photo 3.1 Russo-Asiatic Bank in the 1900s (Shanghai History Museum) To develop Russian commercial interests in the Yangtze Valley, the bank set up a Shanghai branch in February 1896 Although its business in Shanghai dealt partly with French and German clients, the bank's foreign exchange operation generated high profits.7 Beside foreign exchange business, the bank also invested in local real estate and industry including the Shanghai Pulp and Paper Company.8 When the Russo-Japanese War broke out, the Russia government demanded that the bank pay for military-equipment imports by building up a large credit fund According to the Chinese Imperial Maritime Customs report of 1905, the Shanghai and Tianjin branches had issued bank drafts worth about 75 million Mexican dollars.9 The Russo-Chinese Bank assigned different roles to the Beijing and Shanghai offices The former engaged mainly in political activities, while the latter conducted the bank's main exchange operations The tsar approved a special fund of million rubles to the Beijing officer for external relations According to the declassified bank archives, the bank had sent Li Hongzhang five times a money gift totalling 170,000 rubles from 1897 to 1902 The 1900 banking record shows that Li owned 1,000 shares of the bank stock worth 126,000 rubles.10 Later, China lost its legal joint-venture position, which was directly or indirectly affected by official corruption Even though the Chinese government had invested capital of million tael in the bank, it actually had no hand in its operations When the bank was merged into the French Banque du Nord in 1910, China learned of the deal only when the Chinese consul-general in Vladivostok discovered the truth.11 The name of the Chinese partner had been removed from what was now called the Russo-Asiatic Bank China's million tael were also removed from the balance sheets and redistributed into reserve and liquidation funds.12 As a direct result, the Chinese government was humiliated by this joint venture The political banking performance destroyed the Russo-Chinese Bank business quickly after the Russo-Japanese War The bank lost most of the funds accumulated during the war through financing Russian government military expenditures Thus, the Russo-Chinese Bank had no alternative but to merge into the Russo-Asiatic Bank with the Banque du Nord in July 1910 The new bank continuously held and operated the Russo-French loan of 1895, the Boxer indemnity of 1902, and part of the Imperial Maritime Customs revenues and salt taxes in China The bank lost its domestic base after the Bolshevik Revolution because it had financed the White Russian Army's resistance of the Bolshevik regime during the Russian Revolution The Russo-Asiatic Bank was closed on September 26, 1926, after it lost million pounds in foreign currency speculation in the Paris financial markets The bank closed with a debt of 2.69 million yuan in silver dollars, of which 1.67 million yuan was owed in default to the Shanghai branch.13 Banque de l’Indochine (1898) The Banque de l'Indochine (Dongfang Huili Yinhang), was founded in Paris on January 21, 1875, with a primary interest in Indochina and South China Up to World War II, this bank experienced three phases of development From 1875 to 1888, it functioned as a colonial bank to help the French government manage its colonial properties in Southeast Asia Then, from 1889 to 1900, the bank shifted its main operations from India to China, particularly after the French established their "sphere of influence" in southern China Thereafter, from 1900 to 1941, the bank represented the interests of the French government in handling the Boxer indemnity and transacted international trade between France and China Illustration 3.1 Banknote of the Banque de l'Indochine (Finance Studies Institute of the People's Bank of China) During the first period, the Banque de l'Indochine enjoyed extraterritorial protection by circulating its banknotes in all French colonial territories, as well as in those foreign countries with which France had diplomatic relations The bank was greatly interested in engaging in the world silver trade Prior to the further fall of silver values in the mid-1870s, the new bank had changed a large quantity of francs into Mexican silver dollars to export to China, thus causing world silver prices to appreciate Unfortunately, when silver values fell again, this speculation cost the bank heavy losses Because of the speculation, it also caused silver shortages in the Indochina countries through the outflow of silver dollars In 1898, the Banque de l'Indochine began to build a banking network in China by setting up its first branch in Shanghai Seven other branches were subsequently established in Guangzhou, Hankou, Shenyang, Beijing, Tianjin, Zhanjiang, and Kunming The main operations of the Shanghai branch included accepting deposits, granting loans, remitting currencies, discounting bills, insuring guarantees and bonds, trading foreign exchange, and handling international trade settlements The Banque de l'Indochine had priority in financing the infrastructure of the French Concession of Shanghai, and especially the Shanghai Electric Power Company and Shanghai Railways By performing commercial banking roles, the bank had increased its original paid-in capital from million francs to 48 million francs, with 42 million in accumulated funds by 1910.14 After the Revolution of 1911, the Banque de l'Indochine represented the French government in the International Banking Consortium to underwrite the 25 million pounds in reorganization loans of the Republic of China under Yuan Shikai's regime 15 Its paid-in capital increased from 48 million francs in 1910 to 72 million in 1919.16 The Banque de l'Indochine became the political epitome of the French image in China The Boxer Indemnity (1900) At the end of the nineteenth century, the Qing government was beset with international crises The Germans used the pretext of an attack on their missionaries to occupy Qingdao The British took over the harbor at Weihaiwei and forced the Qing to sign a ninety-nine-year lease on Hong Kong The Russians stepped up their presence in Manchuria and occupied Lushun The French claimed special rights in Yunnan, Guangxi, and Guangdong The Japanese continued to put pressure on Korea and intensified their economic penetration of central China The Chinese feared the country was about to be "carved up like a melon" (guafen) A nationalist movement emerged By early 1899, a spontaneous antiforeign movement arose in Shandong that declaimed the righteousness of their country—the Boxers The Boxers responded to the Qing Court's tacit consent to the movement's antiforeign goals with the slogan "Revive the Qing, destroy the foreign." Qing officials in Shandong had sympathized with or even supported the Boxers The Empress Dowager Cixi played this movement as a political card in negotiations with the Western powers With unadorned antiforeigner emotion and having no knowledge of basic international law at all, the Boxers burned foreign churches and killed foreign officials The uprising extended to Beijing where it was finally suppressed by the Eight-Power Allied Expedition, which consisted mainly of soldiers from Japan, Russia, Britain, France, and the United States under the command of a German general The Boxer Protocol was signed in September 1901 Table 3.1 List of the Boxer Indemnity National Percentage Haiguan (tael) Germany 20.01567 Austria-Hungary 0.88976 Belgium 1.88541 Spain 0.03007 United States 7.31979 France 15.75072 Britain 11.24901 Portugal 0.02050 Italy 5.91489 Japan 7.73180 Holland 0.17380 Russia 28.97139 Norway and Sweden 0.01396 Miscillaneous 0.03328 Total 100.00000 Source: The China Yearbook, 1925-1926, p 769 90,070,515 4,003,920 8,484,345 135,315 32,939,055 70,878,240 50,620,545 92,250 26,617,005 34,793,100 782,100 130,371,120 62,820 149,870 450,000,000 Foreign currency Mrs Kr Fr Ps $ Fr £ £ Lire ¥ FI R £ £ 278,166,424 10,394,092 31,816,294 507,431 24,440,779 265,793,400 7,593,080 13,837 99,803,769 48,950,892 1,404,652 180,084,021 9,423 22,450 Note: With China’s declaration of war against the Central Powers in World War I, all repayments to Germany were suspended At the same time, the Allied Powers agreed to defer all payments on the Boxer indemnity for five years (except Russia, which agreed to suspend only a portion of indemnity payments) By this protocol, the Qing Court was forced to pay an indemnity for damages to foreign life and property of 450 million customs tael (about 67.5 million in British pounds or 333 million in U.S dollars at then prevailing exchange rates) The indemnity was arranged in thirty-nine annual installments at percent interest, resulting in an accumulated total cost, with principal and interest, of 982,238,150 tael in silver This payment was excessive considering that annual Qing Court revenue was only 88 million tael and the Maritime Customs revenue was 60 million tael in addition to it.17 To meet this indemnity, the Qing government reassigned the payment to provincial governments The Chinese population was then 450 million, which would in effect require every person to pay one tael in indemnity On June 14, 1902, the indemnity was divided among fourteen foreign countries as shown in Table 3.1 The foreign powers organized a joint banking committee in Shanghai to audit the financial allocation of the Boxer indemnity The Russo-Chinese Bank, the Deutsch-Asiatische Bank, and the Hongkong and Shanghai Banking Corporation were the designated protectors for repayment of the indemnity Among them, the Hongkong and Shanghai Banking Corporation was responsible for handling cash flows All portions of indemnity money collected from the Chinese provinces flowed into the Shanghai markets to be sent to the Hongkong and Shanghai Banking Corporation before the due date Thus, Shanghai financial markets held abundant floating funds that further contributed to the development of the capital market The International Banking Corporation (1902) Although trade between the United States and China had begun late in the eighteenth century, American banks did not enter China's financial markets until the beginning of the twentieth century American importers ran a trade surplus with China, but they could exchange only silver and opium for Chinese silk, tea, and porcelain A triangular trade and balance of payments relationship existed among Great Britain, the United States, and China "Although the United States exported more goods than it imported, the balance of payments was not in its favor, because of the charges paid to foreigners for transporting, financing, and insuring the merchandise."18 With no American banks in China, all trade remittances and transactions had to go through British banks In the 1850s, a consul general of America, Humphrey Marshall, pointed out that "Britain became the banker of America in Far East."19 After the American Civil War, the U.S economy was transformed from an agricultural society to an industrial and export-oriented economic structure The vision of 450 million Chinese purchasing "an additional inch of cotton cloth," became the dream of Western entrepreneurs American business leaders felt that the United States would become strong when the balance of payments was financially secure On September 6, 1899, American interests in China were expressed by Secretary of State John Hay in his "open door" notes.20 In these notes, the United States expressed its intention to maintain its share in the China market Identical notes were first sent to Germany, Russia, and England, and similar notes were sent to Japan, Italy, and France soon thereafter The Americans joined the EightPower Allied Expedition that entered Beijing in August 1900 Handling its share of the Boxer indemnity soon became a consideration of the United States government in choosing a representative bank in China In early 1901, Marcellus Hartley, a Connecticut industrialist, Thomas H Hubbard, a lawyer and businessman, and several others interested in promoting trade with the Far East organized the International Company under a special charter from the Connecticut legislature On December 19, 1901, according to the shareholders' decision, the company changed its name to the "International Banking Corporation," with special permission from the U.S government to conduct overseas banking business.21 The bank started its Far East network with a branch in Shanghai in May 1902, with a structure similar to that of the British overseas banks.22 The International Banking Corporation, known as the "Wanguo Baotong Yinhang" in Hong Kong, was chosen to represent the American government in handling the U.S share of the Boxer indemnity Since the American flag flew atop the bank building, ordinary Chinese called the red, white, and blue stars and stripes American flag "huaqi," which means "colorful flag." Therefore, the bank gained another name, "Huaqi Yinhang," in Shanghai The International Banking Corporation, acting as an agent of the U.S government, handled the transfer of Boxer indemnity payments and participated in the first International Banking Consortium to grant loans to the Qing government Since conducting international funds and remittances remained the priority of this bank, it obtained special permission to open for business in the state of New York in 1903 With paid-in capital of 3,391,500 U.S dollars in 1902, the bank had increased its assets to 12,563,027 dollars by 1905, and 20,392,792 dollars by 1911 23 In addition, the bank also started to issue notes in 1,5, 10, 50, and 100 dollar denominations in 1907 In that year the bank circulated notes worth 202,474 dollars, which had doubled to 477,760 dollars by 1912.24 American commercial interests gradually became the dominant interests in Asia after the U.S victory in the Spanish-American War and the acquisition of the Philippines Business and financial circles began to promote trade with the Far East In 1915, the National City Bank of New York acquired majority shares in the International Banking Corporation and reorganized the bank, but the structure of its overseas branches remained unchanged Banque Belge pour l’Etranger (1902) The Banque Beige pour l'Etranger, one of the oldest banks in Belgium, was founded by King Leopold in 1822 with its headquarters in Brussels This bank began business in international trade settlement and remittances in the middle of the nineteenth century Due to increasing international trade opportunities and the transfer of part of the Boxer indemnity, it set up a branch in Shanghai in 1902 The Banque Beige pour l'Etranger primarily engaged in long-term loans to Chinese railways Although Belgium was a small country, it was a center of international trade that had built up a highly developed industrial base by the early twentieth century Dependent on financial integration with the French and using French capital for patronage, Belgium exported working capital and materials, especially construction materials for railways, to China For example, the Longhai Railway from Lianyungang to Lanzhuo was built with Belgian capital The Belgian bank had very competitive interest rates for long-term industrial loans The project of Yuehan Railway from Guangzhuo to Wuhan, which had originally been contracted by an American company, was later transferred to the Banque Beige pour l'Etranger because of its more competitive interest rate From 1922 to 1923, the Banque Beige pour l'Etranger arranged a loan from the Société Beige d'Enterprise en Chine to supply railway materials worth up to million pounds.25 In line with its speciality, the Banque Beige pour l'Etranger increased its original paid-in capital quickly from million francs in 1902 to 50 million francs in 1917, and quadrupled it again to 200 million francs in 1930.26 By using extraterritoriality rights, the Belgian Bank also issued its own notes in China These notes circulated primarily within the Shanghai International Settlement and the French Concession The bank issued the greatest amount of notes in 1927, totaling 5,610,000 Chinese yuan The Belgian bank finally stopped issuing notes when the Chinese banks took power in 1933.27 Nederlandsche Handel-Maatschappij (1903) In 1824, the Dutch King Williem I founded a trading company, Nederlandsche Handel-Maatschappij, aimed toward promoting overseas trade, primarily with the East Indies The origins of the bank of Nederlandsche Handel-Maatschappij lay in the company's financial department, which handled a great variety of trade transactions The bank had paid-in capital of 80,000,000 guilder (about 6,666,666 pounds) with reserve funds of 13,769,181 guilder and special reserve funds of 22,660,000 guilder.28 In 1903, this bank established its Shanghai branch on the Bund Despite the fact that the Nederlandsche Handel-Maatschappij was not a large foreign bank in comparison to other foreign banks in China, it provided a great opportunity for Chinese bankers to work there, thus serving as the training ground for the future banking elite of China A famous Chinese comprador, Yu Qiaqing, not only brought local native business to the bank but also learned a great deal about banking management Later on, Yu formed his own private bank and became one of the most influential Chinese bankers in Shanghai The Search for National Banks Having lost a series of wars followed by payments of indemnity, suffered declining worldwide silver prices, and being unable to control foreign exchange rates domestically, Chinese top officials finally recognized the necessity of establishing a national banking system This new national awareness of the need for such national banks had been incorporated into a few proposals The first official proposal to create a national bank was made by the mayor of Beijing, Hu Yufen, who advocated a government bank that offered full banking functions but was under the control of the Board of Revenue in 1895.29 In the next year, Sheng Xuanhuai, a prominent progressive official who later became minister of communications and viceroy, proposed a more concrete plan to form a modern Chinese bank—the Imperial Bank of China, using Western banks as a model Photo 3.2 Nederlandsche Handel-Maatschappij in the 1920s (Shanghai History Museum) The Qing Empress Dowager Cixi, under foreign pressure and demands from domestic reformers, finally issued an edict announcing a draft constitution to restore the nation On November 6, 1906, the Qing Court declared a structural change in the government, which included the newly established Ministry of Finance and Ministry of Posts and Communications Two years later, the Qing Court received a memorandum from the Ministry of Finance on the subject of formation of a Chinese banking system In this memorandum, four types of banks were designated—central, ordinary, commercial, and savings The Qing Court accepted this proposal, ordered all provinces to organize provincial financial and banking institutions, and inspected the provincial currency system on May 24, 1909 A move toward a top-down banking establishment took place Many provincial banks therefore began forming representative offices in Shanghai Photo 3.3 Sheng Xuanhuai, the founder of China's first modern private bank in 1897 (Shanghai Academy of Social Science) The Imperial Bank of China (1897) Sheng Xuanhuai's motivation in founding the Imperial Bank of China came directly from his personal experiences After being appointed director-general of the China Merchants' Steam Navigation Company, general manager of the Imperial Telegraph Administration, and director-general of Hanyang Iron Manufacture and Pingxiang Coal Mining, Sheng Xuanhuai was appointed viceroy of railways in charge of building the Beijing–Hankou line in 1896 In the course of preparing to build this railway, he recognized that China should immediately have its own national bank to finance the railway project, because "profit from building a railway would be limited, but over a longer term the profits from founding a bank would be greater and quicker If we could combine both, we would have a chance of success."30 In a memorandum to the emperor dated November 1, 1896, Sheng wrote, "we are now building railways, which requires a heavy initial investment Unless we quickly establish a Chinese bank, we shall have no way to circulate the funds that serve as blood in our veins and no way to break the control of our economic life by foreign merchants."31 With the estimated 40 million tael in total cost of the railway project, Sheng thought that it was possible to raise million tael from private investors Moreover, those funds could be collected and handled by instituting a bank In the same memorandum, he recounted the reasons for the general plan of self-strengthening and called on China to end its financial dependence on foreign banks in the treaty ports Once China had its own bank, it could float domestic loans for the government at rates lower than those charged by foreign banks and without the additional burden resulting from the unfavorable exchange between silver and gold.32 In short, Sheng wanted to build a Chinese national bank to be linked with all government enterprises Sheng sent another memorandum to the Zongli Yamen, the chief executive office of the Qing Court, to suggest that the new bank be based on the general form of "merchants' management under government supervision" (the "guandu shangban" system) Sheng explained: Banking is a matter for merchants; if merchants not trust the government, the financial power of the country cannot be concentrated; and if this power cannot be concentrated, a bank will not be successful If we wish to begin carefully in order to get good results, we must accumulate small sums [from investors] to make a big fund I venture to request that a high official be appointed to select honest and reliable gentry and merchants from all the provinces and recommend them for service as directors [of the bank] They should raise Tls million of capital from Chinese merchants and establish a Chinese bank, first in Beijing and Shanghai and then with branches in other provincial capitals and trading ports Following Western business practice, this bank should be managed by the merchants.33 With great enthusiasm, he sent a detailed proposal for the establishment of the first Chinese bank to the Zongli Yamen However, Sheng received a reply from the Zongli Yamen, dated March 14, 1896, which listed nine objections to the draft The main point that dissatisfied the Zongli Yamen was Sheng's proposal to establish the bank's headquarters in Shanghai, which was considered beyond central government control, both politically and geographically The Zongli Yamen also demanded that 50 percent of the bank surplus be sent to Beijing after all regular payments and dividends Sheng rejected these objections by the Zongli Yamen He pointed out that the funds had to be raised from the mercantile community in Shanghai, particularly from "comprador capital," which originated in international trade, so the commercial bank should be established in Shanghai Sheng also rejected the demand for 50 percent the bank's profit by citing the example of Western banks, which paid no levies to their home governments, although the individual recipients of bank dividends might be taxed.34 Photo 3.4 The Imperial Bank of China, which later changed its name to the Commercial Bank of China in the 1900s (Shanghai History Museum) In addition to the Zongli Yamen's objections, a French counselor proposed to Sheng the creation of joint French-Chinese bank instead of the Imperial Bank When Sheng turned down the French proposal, an Austrian counselor proposed another joint-venture bank To resist the foreign governments' approach, Sheng sent a telegram to the Ministry of Foreign Affairs insisting that only China could be the master of the Imperial Bank "for the sake of face, we must have it."35 The establishment of the Imperial Bank of China began with extraordinary difficulty Sheng tried different ways to approach his goal through Li Hongzhang and Weng Tonghe, the eminent tutor of the emperor Finally, his project won support among influential provincial leaders Governors-general Wang Wenshao and Zhang Zhidong, who came out strongly for the bank under the principle of "merchants' management under government supervision." They argued that, as in the China Merchants' Steam Navigation Company, it should be the merchants' undertaking while the government supports and protects it profit and loss should be entirely in the sphere of the merchants Stated more simply they said, "power belongs to the officers, profits belong to the shareholders."36 The initial governmental policy of "merchants' management under government supervision" further developed into "joint government and merchants' enterprises" and "private enterprises" in terms of private shareholder interest After passing through the difficult preparatory phase, the Imperial Bank of China was finally established in Shanghai on May 27, 1897 The business methods pursued by the bank followed those of foreign banks—especially the Hongkong and Shanghai Bank Corporation, which was made the model for everything Sheng hired A.M Maitland, an Englishman and a former employee of the Hongkong and Shanghai Bank, to manage the Imperial Bank Chen Shengjiao, a comprador with various connections to native banks in Shanghai, was appointed Chinese manager While Maitland was in charge of the foreign staff, Chen was in charge of the Chinese staff of the bank The nominal capitalization of the Imperial Bank was initially set at million tael Because the Zongli Yamen's objections influenced the decisions of some private investors, the actually paid-in capital of the bank was only 3.5 million tael.37 Of that, the China Merchants Navigation Company and the Imperial Telegraph Administration supplied million tael; Sheng Xuanhuai and the board of directors had subscribed another million tael; and the remaining 500,000 tael was offered on the open market to Chinese investors The original sum of governmental funds designated for the new bank was reduced from million tael to million because the Chinese government had invested million in the Russo-Chinese Bank at that time Investors would receive a guaranteed annual return of percent plus a share of profits after deductions for dividends, bonuses, and the reserve fund The Imperial Bank did not get the business it expected in dealing with interprovincial transfer funds, and, specifically, it did not gain the right to issue coinage When Sheng asked Zhang Zhidong to support the bank, he gave up the right to issue coinage, which was in Zhang's purview However, in compensation for this loss, the bank had been granted the right to issue its own bank notes The Imperial Bank issued notes immediately after the bank opened, setting the maximum at 90 percent of the paid-in capital, and maintaining cash reserves equivalent to one-third of the value of the notes in circulation Since the Imperial Bank was the first Chinese modern-style bank, it experienced serious management problems Although the organization of the bank was "both official and merchant," its business was hardly carried out on an equal footing between officials and merchants Although the management system of the bank was Western in design, it constantly suffered traditional bureaucratic interference For example, the directors of the board were supposed to be elected by a meeting of shareholders But Sheng appointed almost all directors using his official authority and according to personal favor After the Revolution of 1911, the Imperial Bank of China changed its English name to the Commercial Bank of China, but its Chinese name remained the same The banking structure remained almost unchanged, but the decision-making power of the private shareholders increased while Qing officials disappeared in the bank The Hubu Bank (1905) and the Daqing Bank (1908) The founding of the Imperial Bank of China realized only in part the idea of forming a national bank It did not, however, create a central bank under the direct control of the Board of Revenue Particularly significant in this respect was the fact that the head office of the Imperial Bank was located in Shanghai, distant from the central government The issue of establishing a central bank had been raised in the famous 1898 reform movement Although the reform had failed, the suggestion caught the attention of Qing officials With increasing demands for reform of the Chinese currency system, the creation of a central bank became very important to the government Thus, Board of Revenue senior official Lu Chuanlin drafted a memorandum to the throne calling for the establishment of Hubu Bank.38 The Qing government approved this request in March 1904, and the Hubu Bank was formally inaugurated with authorized capital of million tael on September 27, 1905 Although it was designed as a central bank, its capital was not entirely provided by government Of the total capital, million tael was deposited by the Board of Revenue, and the other million tael was raised from public bonds with a guaranteed return of percent Without clearly differentiating the banking functions between a central bank and a commercial bank, the Hubu Bank in effect played both roles The bank had the right to issue coinage and to receive national fiscal revenues, and it had the authority to make agricultural loans and transfer remittances According to the constitutional reform of 1908, the Board of Revenue was split in two, becoming the Civil Administration and the Finance Administration While the Civil Administration was in charge of national revenue, the Finance Administration managed national expenditure The Finance Administration allocated national expenditures according to the revenues of the Civil Administration With this change, the Hubu Bank was renamed the "Daqing Bank." The Daqing Bank increased its capital to 10 million tael including million in additional capital over the original million tael from the Hubu Bank The capital was composed of shares 50 percent of which were owned by the government and 50 percent by the public.39 The bank's main responsibilities were short-term loans, discount or rediscount bills and drafts, gold and silver bullion purchases and sales, transfer of remittances, receipt of interbank bills and drafts, provision of safe deposit boxes, and issuing of notes.40 The Daqing Bank strengthened its dual roles as central bank and commercial bank It not only received the special right to issue paper notes from the Qing government, but also set up numerous branches and representative offices throughout the nation to handle local fiscal deposits and transfers In addition, it accepted private deposits and granted commercial loans The bank more than doubled its issuance of silver tael notes from 1908 to 1911 from 5,438,910 tael to silver dollar notes worth 12,459,907 yuan.41 The bank held deposits of 59,050,000 tael in July 1911, and its total assets increased to 83,460,000 tael The Daqing Bank created the image of a strong national bank for foreigners, and its tael notes were the only paper accepted by foreign banks In contrast to the Imperial Bank of China, which held deposits of about million tael each year, the Daqing Bank had a greater financial capability to absorb deposits and grant loans In March 1911, Ye Kuichu, the new governor of the bank, attempted to eliminate the dual role of the bank and focus only on its role as a real central bank However, the Revolution of 1911 prevented this attempt The Daqing Bank was reorganized into the Bank of China immediately after the revolution because of its relationship with the Qing dynasty The Bank of Communications (1908) With the goal of vigorously developing and promoting industry, the Ministry of Communications submitted a memorandum to the throne for permission to establish a national industrial bank aimed toward "uniting under one control the steamship line, railways, telegraphs, and postal facilities, and recovering certain profits."42 On March 4, 1908, the Bank of Communications was founded in Beijing with initial paid-in capital of million tael According to the prospectus, authorized capital was fixed at 10 million tael, 40 percent of which was to be from the government and the remainder to be offered to the public Thus, the Bank of Communications was founded as a joint merchant-official bank with a focus in the field of communications At the beginning, the bank operated efficiently and profitably It set up twenty-three provincial and city banks to maintain local administration of communications and to transfer remittances The Shanghai branch was founded in May 1908 It also set up several overseas offices in Hong Kong, Singapore, and Vietnam According to statistics, this bank absorbed 13,840,000 tael in deposits in 1909, 23,700,000 tael in 1910, and 13,230,000 tael in 1911 43 The paid-in capital increased from million tael in 1909 to 7.5 million tael in 1910 The financial resources of the Bank of Communications came mainly from the shipping, railways, postal, and electric companies Although it granted loans to some industries, the percentage of loans to those industries was usually about 25 percent of its total loan portfolio, which was much less than the rest of the investments in real estate mortgages and other commercial loans The most destructive element in the bank was its political interests To maintain a close relationship with the Qing government, the bank appointed the nephew of Li Hongzhang, Li Jingchu, as the first general manager and Liang Shiyi as the assistant manager Later, Liang Shiyi became a chief secretary of Yuan Shikai, the first president of the Republic of China Liang used his political ties to raise funds for the Bank of Communications Furthermore, he was appointed by the Department of Communications as the general manager of the Bank of Communications in May 1912 To enhance his personal power in the bank, Liang appointed his close friends as assistant managers, thus starting a factional base in the bank and creating many problems that would evolve slowly in the future The critically important thing Liang Shiyi did after he took power was to acquire equal rights with the Bank of China to enlarge its business sphere With special approval of the new Republic, the bank gained state bank rights that not only allowed it to handle all deposits from the Department of Communications as its regular business, but also gained special rights to issue bank notes, manage the national treasury, and transfer international remittances Although the Bank of Communications used the Bank of China's regulations as a model to revise its regulations in March 1914, business performance was essentially different between the two banks The Bank of Communications had close political interactions with the Beiyang government that cost the bank a high price later Early Private Banks: Xincheng (1906) and Siming (1908) The launching of the first private bank, the Xincheng Bank, indicated that a new Chinese bourgeoisie was finally entering the modern banking industry in Shanghai On April 28, 1906, the Xincheng Bank was founded with paid-in capital of 500,000 yuan in silver dollars, made up totally of private funds with limited shareholder liabilities The founder of the Xincheng Bank was Zhou Tingbi, an early industrial entrepreneur, who founded the Shanghai Shengchang Iron Foundry (1878), Suzhou Silk Company (1897), Sulun Cotton Mill (1897), and Yuchang Silk Mill (1904) His practical experience in modern industry made him keenly aware of cyclical capital requirements In order to meet these requirements, he designed a plan to open a savings bank to absorb deposits However, he changed his original idea after a business trip to Japan in 1905 Because the small savings bank would not be sufficiently able to finance commercial and industrial loans, he decided to organize a private bank that combined both functions—savings and commerce.44 Zhou Tingbi hired Shen Manyun as assistant manager of the Xincheng Bank Because the bank's capital was relatively small, its strategies toward business began from the bottom The bank specially set up a savings department to "convince small businesses and the working class to pool their small savings."45 Despite the small size of initial deposits, the bank gradually accumulated enough capital to become a significant financial power, enabling it to influence the money markets In the process of forming a private bank, Zhou Tingbi and Shen Manyun advocated the idea of establishing a Chinese bankers' association for promoting Chinese banking in 1909 However, this idea failed because the Chinese national banks and private banks were only in their formative stage Although the creation of a bankers association did not mature at that time, the idea was taken up by Zhang Gongquan of the Bank of China, and led to the establishment of Shanghai Banker's Association in 1917 Xincheng Bank was a small private bank with limited financial capital, but it represented the desire of Chinese capitalists to participate in the Revolution of 1911 Zhou and Shen contributed a secret fund amounting to 300,000 silver yuan to the revolutionaries Before the success of the revolution, however, the Xincheng Bank went bankrupt The main reason for its failure was that it overdrew banking funds to support the revolutionaries In 1908 the creation of the Ningbo Commercial and Savings Bank further strengthened the new Chinese finance capitalism The bank chose the Chinese name "Siming" after Siming Mountain located in Ningbo, which indicates the strong local bias of the bank With authorized capital of 1.5 million Photo 3.5 The Ninbo Commercial and Savings Bank building in the 1910s (Shanghai Municipal Archives) Photo 3.6 Insider Business Hall of the Ninbo Bank (Shanghai Municipal Archives) Table 3.2 List of Major Shareholders in the Ningbo Commercial and Savings Bank Name Cheng Xun Dong Xinsheng Mrs Cai Li Weiru Yu Qiaqing Lu Shaotang He Dazhuang Subaoshangtang Yan Zijun Li Houhuan Zhou Jinbiao Postition Capital (tael) Share, % 35,000 7.00 35,000 30,000 28,000 7.00 6.00 5.60 15,000 3.00 10,000 10,000 10,000 9,500 5,100 2.00 2.00 2.00 1.90 1.02 5,000 1.00 5,000 1.00 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Former Yunfengrun Yinhao manager and general manager of the bank Comprador Wife of Shanghai Daotai — Comprador of Nederlandsche Handel-Maatschappij Real estate broker Qianzhuang — Owner of Jiuzhang Silk Shop Owner of Xinji Junk Shipping Former director of Shanghai Chamber of Commerce and first president of the bank Director of Shanghai Chamber of Commerce Tu Yankun — Gong Sheng Tang Yishang Qianzhuang (native bank) Yu Qing Tang Yishang Qianzhuang (native bank) Zhu Xianbo — Yan Yuzhi Former secretary of Shanghai Tang Zhiqing Chamber of Commerce Siming Gongshe Charitable organization Yang Junqing — San Duo Tang — Yusongyinji — Sources: The Ningbo Commercial and Savings Bank Archives Hong Jiaguan, Zai Jinrongshi Yuandili Manbu, pp 146–7 Zhu Peizheng tael and paid-in capital of 500,000 tael, the bank opened on September 11, 1908 The directors of the board and the shareholders were all from Ningbo The capital was entirely from private sources According to a list from the bank archives, the shareholders who contributed paid-in capital above 5,000 tael are shown in Table 3.2 Those on the board and the managers or the bank included some of the most famous merchants in the Shanghai General Chamber of Commerce Among them was Yu Qiaqing, the comprador of Nederlandsche Handel-Maatschappij and the president of the Ningbo-Shanxin Shipping Company, as well as an associate manager of the Ningbo Commercial and Savings Bank, who played a vital role in the development of Chinese finance capitalism He also gained recognition as a financial supporter of the Revolution of 1911 Later, he became one of Chiang Kai-shek's major financial supporters during the Northern Campaign Expedition in 1926-27 This bank formulated very specific public banking regulations containing twenty-four items It covered the general rules for money exchange, checking accounts, savings deposits, and commercial loans The savings deposits included checkbook money, certificates of deposit, and specially designed deposits The commercial loans included mortgages, guaranteed loans, and interbank loans These general rules provided a basic banking framework to customs and let them choose the best way of borrowing and saving money With the birth of China's modern private bank, Chinese finance capitalism entered a new stage A free banking environment was provided to Chinese bankers because of the weak financial status of the government Free banking and competition became the major features of finance capitalism Although the finance capitalism was not mature in terms of the existing high financial risks and uncertainties, the expansion of banking and financial markets was rapid To test Shanghai's sustainability as a banking center in Asia, several financial crises occurred at the end of the nineteenth century and beginning of the twentieth century The Shanghai Financial Panic and the Revolution of 1911 With the passing of the 1883 financial crisis, Shanghai native banks revived for a time The number of native banks increased dramatically from 10 at the end of 1883 to 100 at the beginning of 1909 In an open economic and financial society, investors stampeded in and out of financial markets without limitation, which heightened uncertainties for the native financial institutes The nature of capitalists seeking high profits combined with the weakness of capital availability determined the toughness with which Shanghai native banks developed At the turn of the century, Shanghai experienced three financial crises, the "Discount Storm" in 1897, the "Rubber Stock Crisis" in 1910, and financial chaos in 1911 The “Discount Storm” (1897) In early 1897, the owner of the Xiehe Qianzhuang in Shanghai discovered a discount method of banking that could be easily used to collect short-term funds for the opium traffic The method was to issue a discounted note with a face value of 100 yuan by selling 90 yuan in silver dollars, maturing in fifteen days.46 In the beginning, the quick turnover increased the velocity of money and stimulated many investors Later, the frenzy of quick money made many native banks compete with each other by offering deeper discounts on the order of 20 percent, 30 percent, or even 50 percent to attract investors These discount houses did not require much paid-in capital, because they received cash immediately by expanding short-term credit Thus, new discount houses were all the rage There were fifty-one discount houses in the French Concessions alone and countless numbers in the International Settlement overall.47 Investors came from every level of society to seek quick money for high returns Many women even sold their jewels to buy discounted notes Illustration 3.2 The Banking Regulations of the Ningbo Commercial and Savings Bank in 1923 (Shanghai Municipal Archives) Within a short period, these discount houses were issuing notes totaling million to 2.5 million yuan Although some native banks handled their notes very well in the beginning, the overheated deep discount rate ultimately absorbed all their profits The abuse of credit finally caused a discount crisis in the same year (1897) On November 24, 1897, when some discount houses could not cash their discounted notes, people began a run on all discount houses Since the number of discount houses was so large, most of them did not have sufficient cash reserves to settle their promissory notes These discount houses found no way to take out short-term bank loans for the emergency, and they went bankrupt virtually overnight Within a month, the chain reaction of the financial crisis caused twenty-six native banks, which had done business with these houses or had directly engaged in the discount system, to close their doors, unable to repay mature discounted notes The "discount storm" exemplified the investors' lack of basic financial knowledge and the weakness of native banks and discount houses that had set the suicidal deep discount rates far beyond their ability to repay The limited paid-in capital of many native banks did not generate enough cash reserves to meet the immediate financial crisis There was also a serious conflict between the idea of quick accumulation of wealth and the reality of the inefficiency of Chinese traditional financial institutions The “Rubber Stock Crisis” (1910) Shanghai became an Asian financial center for international trade and finance because its excellent geographic business location and the convenience of telegraph communications linked it with the London and New York financial centers The Maritime Customs House in Shanghai received more than 10 million tael in tariffs each year Installments of the Sino-Japanese War indemnity and the Boxer indemnity came from all over the nation to Shanghai, and the floating cash amounted to more than 30 million tael each year 48 Foreign banks used the floating capital to grant overnight loans (or "chop loans") to Shanghai native banks Native banks, however, took advantage of these loans to increase the velocity of money By using extensive credit, a small native bank that had even less than 100,000 tael in capital could borrow more than 700,000 tael in "chop loans."49 Without any risk prevention tools, a potential financial crisis lurked behind the exaggerated credit expansion At the beginning of the twentieth century, the development of the rubber industry in Malaya attracted the attention of London investors The business newspaper Stock Exchange Official Intelligence listed many institutions considered "agency houses" and "issuing houses," which focused on commercial interests and financial investment in Malaya.50 The Malayan agent houses and the London issuing houses raised a large amount of overseas funds for rubber companies to purchase land for plantations The capital came not only from Great Britain but also from other countries such as China and from within Malaya In 1903, an Englishman founded a rubber stock company, the Langezhi Development Company, in Shanghai The company's business was slim for the first few years, even though it advertised its goals as developing the rubber industry and opening a new rubber house When the world price of rubber increased sharply in 1909, those who had invested in the rubber industry received huge returns by the end of that year The Englishman who founded the company jumped at this chance to promote the sale of rubber stock Common knowledge about investment in the planning for rubber in Malaya was associated with dreams of large returns Therefore, many investors rushed into the market The original face value of one share of Langezhi was 100 Netherlands guilder/florin (about 60 tael in silver) It began to rise immediately and continuously The value of stock was pushed up to 1,000 tael per share Speculation pushed the stock price to about sixteen times more than its original price The Langezhi Company did pay dividends quarterly at the early stage, showing its strong capital, and temporarily attracting more people to rush into the market Several prominent British agent companies, such as Jardine, Matheson & Co., and Saashon, played important roles in promoting the selling and buying of rubber stock Some foreign banks also accepted mortgages on speculators' properties to lend them cash for the stock In the end, many Shanghai native banks also oversubscribed to the stocks There was certainly no guarantee for the shareholders Once the information of uncertain returns came out, Western agency houses could not handle the pressure of the demand for redemptions Therefore, the overheated rubber stock crashed immediately after the Englishman suddenly disappeared in July 1910 As a result, rubber stock certificates were regarded as worthless overnight Those native banks that had oversubscribed to the stock fell into bankruptcy at once due to shortages of cash Foreign banks were also caught in the financial storm, dragging in Western agency houses involved in the panic The rubber crisis was a disaster for native banks engaged in speculation Zhengyuan, Qianyu, and Zhaokang were the first three native banks to declare bankruptcy, with debts of 1.4 million tael The chain reaction of the rubber crisis caused one of the most famous native banks—Yuanfengrun Yinhao —to close its doors with debt of 20 million tael.51 The Shanghai governor asked the Qing government to come to the rescue by borrowing 5.5 million tael from foreign banks to calm the rubber crisis.52 After the rubber crisis, foreign banks tightened credit to Chinese merchants and stopped granting "chop loans" to native banks The surviving native banks adopted a more conservative attitude in business performance The painful experiences taught "Shanghainess" lessons about dealing in discounted notes and foreign stocks A rational skepticism and cautiousness toward investment had been introduced to the Shanghai financial market As an indirect result, many Shanghai banks avoided involvement in a new credit crisis in the 1920s Banking and the Revolution of 1911 In October 1911, the Chinese Republican Revolution overthrew the Qing Imperial government The Republic of China was declared in December 1911 in Nanjing, and Sun Yat-sen, a British-educated medical doctor, was elected the first president of the provisional government in January 1912 However, the revolution did not totally destroy the base of the Qing dynasty Yuan Shikai, a major northern warlord, held the real power among the imperial military forces In the early stages of political upheaval, Sun Yat-sen, who was more an idealist than a politician, declared that he would resign if Yuan could force the emperor to abdicate 53 Under pressure from Yuan, the Qing abdication occurred on February 12, 1912 The following day, Sun Yat-sen resigned from the presidency of the republic Yuan Shikai was nominated in his place on February 15, and his election was confirmed by the new legislature on March 10, 1912 The Revolution of 1911 was followed by a structural change of the whole society The demise of the Qing dynasty plunged Chinese banking and finance into chaos The Shanxi banks totally collapsed The Imperial Bank of China changed its name to the Commercial Bank of China The Daqing Bank was reorganized as the Bank of China However, because the Bank of Communications had close relations with the Yuan Shikai government, its organization did not change greatly The regime change caused political chaos followed by a run on banks, a halt in commercial deposits, and default on most loans Many native banks did not survive the revolution There were 100 native banks in 1909, but only 51 remained in 1912.54 The Shanghai private banks directly involved in the revolution were the Xincheng Bank and the Ningbo Commercial and Savings Bank During the financial chaos, these two private banks temporarily halted their business Because the Xincheng Bank was deeply involved in financing revolutionaries, it could not withstand the financial crisis and closed its doors permanently before the final victory However, the Ningbo Commercial and Savings Bank and the National Commercial Bank survived the revolution The Reorganization Loan and International Banking Consortium The newly founded Republic of China faced heavy liabilities in repaying loans in 1912 Among these loans, imperial loans amounted to 4.25 million pounds, provincial loans to 2.87 million pounds, and other payments near maturity of 3.5 million pounds Besides these old loans, the government also had new financial demands related to repaying imperial troops million pounds, meeting current expenses of the administration at 5.5 million pounds, and paying for the reorganization of the Salt Administration at million pounds These items required roughly 21 million pounds for operations of the new government.55 Under the pressure of these heavy financial difficulties, the new government had to use its diplomatic relations with foreign powers in order to gain financial support The Reorganization Loan was created under these political circumstances The loan was negotiated by what is now called the "Old Consortium." The Old Consortium originated as a British, French, and German banking association formed during the early stages of negotiations of loans to build railways in Hunan and Hubei provinces in 1909 In May 1910, an American banking group, formed by J.P Morgan & Co., Kuhn, Loeb & Co., the First National Bank, and the National City Bank of New York, insisted on being admitted Thus, a four-power Banking Consortium was formed The initial goal in forming the consortium was to monopolize the Chinese loan market After its funding, the four-power Banking Consortium granted two loans to the Qing government, the "Currency Reform" loan of 10 million pounds in April 1911, and the Hu-Guang Railways loan of million pounds in May 1911.56 Japan and Russia strongly opposed the "Currency Reform," which was initially planned for currency reform in Manchuria, because they considered it their sphere of influence When the consortium had nearly concluded negotiating the loan, Japan and Russia made strong demands for a place in the group On June 18, 1912, an Interbank Conference Agreement was signed in Paris among the six-powers, now with the admission of Japan and Russia, which became known as the "New Banking Consortium." The New Banking Consortium expressed its goals and rights in the second article of the agreement This agreement relates to the Reorganization Loan [60 million pounds] and to the future business hereinafter in this clause mentioned and is made on the principle of complete equality in every respect between the parties hereto and each of the parties hereto shall take an equal share in all operations to consign all contracts and shall bear in equal shares all changes in connection with any business (except stamp duties and any charges of and in connection with the realization by each of the parties hereto in their respective markets of its share in the operations) and each of the parties hereto shall conclude all contracts with equal rights and obligations as between themselves and each party shall have the same privilege, rights, prerogatives, advantages, responsibilities, and obligations of every sort and kind.57 The New Banking Consortium issued further loans by subscription on the London market Each power in the consortium was represented by several of its own banks For instance, the Hongkong and Shanghai Banking Corporation was entrusted with one-third of the British share Four other British banks, Baring Brothers, Westminster, Parr's, and Schroeder & Co., were invited to handle the other two-thirds.58 After nearly a year of negotiations, the Reorganization Loan was finally signed on April 27, 1913, in the amount 25 million pounds at percent interest, secured by salt tax revenue and part of the Maritime Customs revenue The New Banking Consortium appointed the Hongkong and Shanghai Banking Corporation, the Deutsch-Asiatische Bank, the Banque de l'Indochine, the Russo-Asiatic Bank, and the Yokohama Specie Bank to handle servicing and repayment of the loan No American bank was included The United States resigned from the New Banking Consortium on March 18,1913, mainly because President Woodrow Wilson opposed it He thought that some of the control provisions of the agreement unduly interfered with the internal administration of the Chinese government The president pointed out that the consortium's responsibility "which would be implied in requesting the bankers to undertake the loan might conceivably go the length in some unhappy contingency of forcible interference in the financial, and even the political, affairs of that great Oriental State, just now awakening to a consciousness of its power and of its obligations to its people."59 The president emphasized the American "open door" policy as "a door of friendship and mutual advantage This is the only door we care to enter." 60 This withdrawal was regarded by many Chinese as a friendly gesture In the long run, it had a positive impact on Sino-American relations In 1933, famous political economist C.F Remer pointed out that, "the Reorganization Loan was finally signed by a group whose common interest was in the international political problems of China rather than in the business of investment banking."61 The consortium was vigorously discussed in London on the grounds that it was not judged for its economic effects but for its political consequences Political interest to the country typically presented capital exports to China For example, Japan was a capital importer that undertook direct investment abroad It was understood that Japanese cotton mills in China had a clear economic motive; however, Japanese participation in the Reorganization Loan did not make economic sense but was for political reasons.62 When the Reorganization Loan was announced in China, the domestic mass media expressed strong antigovernment sentiment and demanded that Yuan Shikai's government abolish this loan immediately However, the Chinese government was neither able to abolish the loan nor manage domestic banking and finance The weakened political status of the government stimulated the rise of Chinese economic or national capitalism It also contributed a laissez-faire economic enterprise and banking environment that allowed the Shanghai bourgeoisie to enter a golden age 4 The Golden Age of Shanghai Banking, 1912-1927 The rise of a modern economy in Shanghai inevitably subjected traditional banks to structural adjustments and stimulated the emergence of integrated finance capitalism By the beginning of the twentieth century, Shanghai had already developed into a modern city with a complete urban infrastructure of road, gas, water, electricity, postal services, and telephone communication Contributing to the Shanghai metropolis were land development, investment firms, insurance companies, and all sorts of financial institutions that connected these public facilities Financial consciousness was associated to scientific and technological developments and public utility services that penetrated the daily life of Shanghai citizens In addition, political indemnity funds, industrial loans, and most international trade bills were remitted to Shanghai for final settlement The silver reserve in the Shanghai treasury increased from 25.73 million tael in 1917 to 62.10 million tael in 1925 The short-term interest rate even dropped to percent.1 The emergence of integrated financial resources provided easy money to the markets Such easy money again provided the excess funds needed to establish new banks and financial facilities Free banking and easy money appeared in the second decade of the twentieth century The Qing dynasty and traditional monarchical power collapsed immediately after the 1911 Republican Revolution China was divided into several regions under the control of regional warlords The resulting domestic anarchy, however, provided a free entrepreneurial environment in which the Chinese bourgeoisie could develop private industries and banking Furthermore, the outbreak of the World War I in 1914 provided another tremendous growth opportunity for the Chinese bourgeoisie Financial pressure from foreign consortiums lessened, foreign imports decreased, and domestic exports increased dramatically In addition, increased foreign demand for war supplies stimulated the growth of Chinese national products and shaped a new form of Chinese national banking In contrast to the development of China's national industries and domestic banking, foreign banks dwindled with the departure of numerous banks and the decline of capital flow The Hongkong and Shanghai Banking Corporation was trapped in financial difficulties caused by the trade deficit It even had to take out short-term loans from the Bank of China in order to maintain its regular business Moreover, the assets of the Deutsch-Asiatische Bank were frozen during the war, and German financial influence in China diminished thereafter Although Japan and the United States set up some banks and financial institutions in Shanghai after World War I, the new foreign financial powers had not yet completed their networks The general weakness of foreign capital provided new opportunities for the development of China's private banks Beginning in 1912, Shanghai bankers took advantage of their good fortune and entered into a golden age of integrated finance capitalism The Impact of Social Change on Banking and Finance The dynastic change created a loose political environment for developing Chinese capitalism Private economy and finance grew rapidly in terms of the growing number of private enterprises and banks The Shanghai General Chamber of Commerce was established in response to increased international trade and need for regulations A group of foreign-educated professionals applied Western capitalist thoughts and democratic concepts and rule of law into Chinese society They published various newspapers and magazines that included weekly banking reports and daily economic news The whole national sector of light industry developed by means of private, domestic, and foreign investment The Shanghai financial markets developed further by issuing government bonds and establishing stock and goods exchange markets The old government supervised, and privately managed banking institutions changed ownership by increasing the amount of private capital in these banks This free banking environment encouraged a young generation of bankers to get into the market to compete with the old-style native banks and foreign banks In the 1920s, an integrated finance capitalism was formed in China The Bank of China (1912) The Revolution of 1911 disrupted the organization of the imperial Daqing Bank On January 24, 1912, the Private Shareholders Association of the Daqing Bank sent a proposal to the provisional government headed by Sun Yat-sen to suggest the reorganization of the Daqing Bank The new bank was named the Bank of China and was to inherit the original 50 percent of private shares and the transfer of 50 percent of the shares of the former Imperial government to the new government in compensation for losses in the revolu-tion.2 Sun approved this proposal and also appointed Wu Dingchang as superintendent to supervise the process of transformation The Bank of China retained the old address of the Daqing Bank, on Hankuo Road in Shanghai, and opened for its first day of business on February 5, 1912 Political instability, however, contributed to frequently changing bank policies After SunYat-sen resigned as president of the Republic of China, the Yuan Shikai government appointed Xiong Xiling as minister of finance Wu Dingchang was reappointed as supervisor of the Bank of China Under Wu's direction, the bank eliminated all former government shares and changed all private shares into current accounts by paying percent annual interest over a four-year term Authorized capital for the Bank of China was set at 30 million yuan in Chinese silver dollars, with the Ministry of Finance depositing 500,000 yuan as paid-in capital One month later, however, Zhou Xuexi succeeded Xiong Xiling as the finance minister Zhou disagreed with Wu about the recapitalization and attempted to reorganize the Bank of China as a "central bank," according to which the bank would be chartered for thirty years to operate as a department of the central treasury, with the right to buy and sell public bonds upon approval from the minister of finance On April 15, 1913, the government issued thirty regulations regarding the Bank of China The bank was granted new authorized capital of 60 million yuan in silver dollars and paid-in capital of 19,760,000 yuan, of which the government deposited only million silver dollars or percent of the authorized capital, with the rest from private investors Thus, private shareholders became the predominant power in the Bank of China On May 23, 1913, the Ministry of Finance sent a letter through the Ministry of Foreign Affairs to inform all foreign banks that the Bank of China was a real "central bank of China."3 For political considerations, Beijing was chosen as the headquarters of the Bank of China instead of Shanghai The old main office building in Shanghai became a branch of the bank in 1913 Although the Bank of China was nominally the "central bank of China," the disunited regional forces kept their own fiscal revenues, tax income, accounting systems, and regional currency The Bank of China had to adopt a special district system for the issuing of banknotes by local branches For example, the Bank of China Shanghai office issued "Shanghai notes of the Bank of China" while the Beijing and Tianjin offices issued their own notes As a nominal "central bank," the Bank of China did not have the real power to exercise its functions It did not even have the power to unify its system for issuing banknotes A certain fee was charged for regional money transactions within a given bank according to a standard value in the local money market Although the bank's approval of its regional banks issuing different notes was an oddity in the history of Chinese banking, it prevented the abuse of central administrative power and limited the ability of regional powers to intervene in banking business Therefore, the Bank of China performed its business independently for a long time Photo 4.1 The old bank building of the Bank of China in 1918 (Shanghai Municipal Archives) Having combined the new management of modern banking with old tradition, the Bank of China hired from the Daqing Bank most of the staff and they provided invaluable experience in directing the bank and making profits The manager of the Shanghai branch of the Bank of China was Song Hanzhang (1872-1968), a native Yuyao Zhejiang, who began his financial career in the Imperial Maritime Customs House before joining the Imperial Bank of China in 1900 Song became the manager of the savings department of the Hubu Bank in 1906 After the Hubu Bank changed its name to the Daqing Bank in 1908, Song was promoted to general manager of the Shanghai branch.4 Song was a righteous man and a conservative banker who had strong professional ethics During the Revolution of 1911, Revolutionary Army General Chen Qimei arrested Song because he had refused to disclose customer account information and to provide financial aid to the army Song Hanzhang stood firmly by his position as a banker to protect customers' rights, consequently winning great respect in Shanghai banking circles Photo 4.2 Song Hanzhang, the Shanghai branch manager of the Bank of China (Shanghai Municipal Archives) Zhang Gongquan (1889-1979), deputy manager of the Bank of China, known by his English name, Chang Kia-Ngau, was another important figure in Chinese political and banking circles With high regard for the Japanese Meiji Reform and the organization of Japan's financial institutions, Zhang studied in Japan from 1906 to 1909, majoring in banking and finance at Keio University After his return to China, Zhang served as secretary to the Assembly of Zhejiang Province and the General Political Council of the Republic of China in Beijing.5 Zhang Gongquan was interested in the initial Chinese election system, and became a member of the Progressive Party Other important figures in the Progressive Party included Li Yuanhong, Liang Qichao, Zhang Jian, and Wu Tingfang Although Zhang Gongquan later denied his interest in a political career, his experience working in the Progressive Party shaped his view of Chinese political finance His older brother, Zhang Junmai, a noted philosopher in China, was a close friend of Liang Qichao, an eminent political reformer at the end of Qing dynasty and the early republican era Zhang Gongquan became acquainted with Liang Qichao in Japan through his brother When Liang became minister of finance in 1917, he invited Zhang Gongquan to be vice governor of the Bank of China Before this promotion, Zhang was appointed deputy manager in the Shanghai branch during the 1913 reorganization of the Bank of China Compared with Song Hanzhang, Zhang Gongquan was more interested in political reform He had many strategies to deal with intricate political situations One typical case showed Zhang to be an excellent organizer during the 1916 banknote redemption crisis When Yuan Shikai betrayed the republican political system to reinstate the monarchy and claim the throne at the end of 1915, many provincial republicans rose up against Yuan's monarchy militarily The political chaos and the enormous expenditures for monarchical ceremonies and for military resistance of the revolting forces caused the government to incur huge budgetary deficits Yuan Shikai died shortly after he declared he would abandon the monarchy, but the government defaulted on its debts to both the Bank of Communications and the Bank of China On May 11, Prime Minister Duan Qirui adopted Liang Shiyi's suggestion, and ordered the two banks to cease redeeming banknotes According to the writings of Zhang Gongquan, "when Song Hanzhang and received a telegram from Beijing, we were frightened out of our wits After careful study, we thought that if we carried out the Duan government's order, the Bank of China would be completely discredited Counting cash reserves in the Shanghai branch, it had liquid assets exceeding 60 percent of its liabilities that made it possible for the bank to handle the run for a few days."6 So, Song Hanzhang and Zhang Gongquan decided to refuse to carry out the government order Considering the political consequences of their action, for which the government might dismiss or even arrest them, Song Hanzhang went to Public Court in the International Settlement to meet with a foreign lawyer By law, if the bank clients accused the bank of infringing on the rights of customers, the court could accept this lawsuit and freeze the property of the Shanghai branch of the Bank of China The Chinese government could not dismiss and arrest the managers during the legal proceeding Immediately after Song returned from the court, Zhang Gongquan went to visit Ye Kuichu, the president of the National Commercial Bank, Jiang Yizhi, a board member of the National Commercial Bank, Li Ming, the general manager of the Zhejiang Industrial Bank, and Chen Guangfu, the general manager of the Shanghai Commercial and Savings Bank After reaching a consensus, Jiang Yizhi, Li Ming, and Chen Guangfu represented their banks in accusing the Shanghai Branch of the Bank of China of intending to cease the redemption of banknotes.7 Consequently, the Public Court accepted the lawsuit and froze the property of the Shanghai Branch of the Bank of China Photo 4.3 Zhang Gongquan, general manager of the Bank of China (Shanghai Municipal Archives) To avoid government retaliation after the legal proceedings, Song Hanzhang and Zhang Gongquan held an emergency conference for the Shareholders Association of the Bank of China to protect their rights At the emergency meeting, five suggestions were made to rescue the bank First, nominate two supervisors to audit the bank's business to assure that the government would not be allowed to take money from the bank and that everything would be done according to the regulations of the general commercial bank Second, send the Shanghai branch files containing all information about the bank's assets and liabilities to a foreign lawyer's office, and ask the lawyers to represent the shareholders in managing the bank under the shareholders supervision Third, prepare enough cash reserves to maintain convertibility of the banknotes and to take full responsibility for the bank's customers Fourth, redeem all matured notes And fifth, take full responsibility for dealing with the government if the bank's customers lost the case.8 The concerted attitude of the Shanghai office was so strong that it almost amounted to declaring independence from its headquarters in Beijing The epic struggle of the Shanghai office won the support of many customers, Shanghai financial groups, and foreign banks The National Commercial Bank mortgaged its property to provide ready cash to support the Shanghai Branch of the Bank of China Many local native banks helped the Bank of China to handle cash redemptions The Shanghai Foreign Banks Association also held a luncheon on May 15 at the Chartered Bank and decided to allow the Bank of China to overdraw its credit to maintain the Shanghai branch's obligations on its banknotes' convertibility Although the Hongkong and Shanghai Banking Corporation agreed to lend overdraft credit to the Shanghai Branch of the Bank of China for million pounds, the Shanghai branch had not used it all by the time the crisis calmed down The final victory of the Shanghai Branch of the Bank of China in resisting Beiyang government intervention showed the great political wisdom of the Shanghai financial capitalists The managers of the branch cleverly used the legal proceedings of the International Settlement to protect the shareholders' interests and customers' rights The Shanghai branch set up an independent banking model for other provincial branches The Nanjing and Hankuo branches followed suit and redeemed their banknotes For a long time, this event was held up as the model of the uprightness of the Chinese young bourgeoisie against the warlord's government The concept of rule of law was thus introduced to the banking industry Government Bonds (1912-1926) Amid the frequently changing rivalry for political power in the early Republic of China, the government experienced numerous extreme financial difficulties The annual revenues of the maritime tariffs and salt taxes were used as security to repay former imperial loans, and local warlords retained all the regional land taxes that the central government had expected to receive Therefore, the current government usually received annual income of only one tenth what it expended.9 The central government's financial situation steadily deteriorated In 1925 the annual income of the Duan Qirui government was million yuan, while its expenditures had increased to 116.1 million yuan.10 Under weakened central financial circumstances, the Beiyang government maintained its various expenditures by depending on foreign loans and by issuing banknotes and government bonds in the domestic market Although the International Banking Consortium granted a Reorganization Loan of 21 million pounds to the government, this amount was obviously insufficient to cover government expenditures The Beiyang government wanted the Bank of China and the Bank of Communications to serve as the government treasury The central government constantly overdrew and borrowed money from both banks Because the Bank of Communications was controlled by Liang Shiyi, a loyal follower of Yuan Shikai, the bank lent most of its money to the government The Bank of Communications issued 8.93 million yuan in notes in 1914, and 37.29 million yuan in 1915, four times more than the previous year These notes were 94 percent of its total loans and 72 percent of its total deposits.11 By the end of March 1916, the Bank of Communications had bitter fruit to eat because the huge loans to the government were in default Due to insufficient cash reserves, the nationwide branches of the bank confronted runs beginning in April 1916 The bank could not recall its loans from the government, nor receive any aid from other financial institutions, so it finally stopped redeeming its banknotes in May 1916 In contrast, the Shanghai Branch of the Bank of China continued to redeem its notes, winning the highest respect of all society From 1912 to 1925, the Beiyang government issued government bonds totaling 872,392,228 yuan in Chinese silver dollars Because the national maritime customs revenues and salt taxes served primarily as the securities to pay various Imperial government loans and the Reorganization Loan, the only securities that could be used to issue further domestic bonds were secured by the remainder of maritime customs revenue (guanyu) or the remainder of salt taxes (yanyu) In order to pay back the former bonds at maturity, the government repeatedly had to issue new bonds Since these new bonds were unsecured promises of payment, issuing them caused major national financial problems The bonds in Table 4.1 were all issued by the Yuan Shikai and subsequent Beiyang governments and were used largely for interregional war expenditures and maintaining the government treasury These bonds were issued through Chinese banks, thus developing the financial market and enhancing banking capital, but not much had been transferred into industrial capital for developing the national economy In addition, the frequent issuing of government bonds constantly discounted the government credit to its people, because the government depended on issuing bonds to maintain its expenditures Through handling the sale of government bonds, however, the modern banks and native banks generated huge profits Native banks soon recovered from the financial crises of the end of the Qing dynasty, and national industry and international trade flourished Although some competition existed Table 4.1 Domestic Bonds Issued by the Beiyang Government from 1912 to 1925 Year Bond name 1912 Patriotic Bond percent Military 1912 Bond 1912 percent Bond 1914 Domestic Bond 1915 Domestic Bond 1915 Savings Bond Issuing amount (yuan) 30,000,000 Supplement to treasury 100,000,000 Military expenditure 200,000,000 24,000,000 24,000,000 10,000,000 1916 Domestic Bond 20,000,000 1918 Long-term Bond 45,000,000 1918 Short-term Bond 48,000,000 1919 1919 1920 1920 56,000,000 40,000,000 60,000,000 54,392,228 percent Bond Short-term Bond Consolidated Finance Consolidated Bond 1921 Relief Bond 1921 percent Bond 1921 Vehicle Bond 1922 percent Short-term Purpose 4,000,000 30,000,000 6,000,000 10,000,000 Bank of China fund and others Adjustment of finance Land loans and others Supplement of government expenditures Payment of government budget deficit Additional capital for Bank of China and Bank of Communications Supplement payments Supplement budgets Supplement revenues Consolidate finance Consolidate domestic bonds and interests Relief funds for North China Clearing short-term bonds Supplement vehicles Government emergency funds 1922 percent Treasury Bill 96,000,000 Repayment of short-term bonds 1925 percent Bond 15,000,000 Government emergency funds Total 872,392,228 Sources: "A Survey of Chinese Government Domestic Bonds," Banker’s Monthly, no 11 Bank Magazine 3, no 2; and Zhang Yulan, Zhongguo Yinhang Fazhanshi, p 62 between the modern banks and the native banks, in general, they coexisted and prospered in the golden age of Shanghai banking The Development of Native Banks Unlike the Shanxi banks, which had overly close financial relations with the Qing dynasty and collapsed totally after the Revolution of 1911, Shanghai native banks survived the dynastic change Oil September 7, 1912, the North China Herald reported that after the abdication of the Qing Court, large quantities of capital flowed in from the hinterland to Shanghai to be deposited in native banks and foreign banks.12 Although the main cause of capital influx was a matter of security rather than operations, the long-term deposits strengthened the capital of native banks The Shanghai native banks consistently performed their traditional banking role of exchanging various forms of money In addition, they granted many loans to small and medium-sized local merchants Because of their special relations with merchant society, native banks handled their business and cleared all trade bills through the Native Bankers Associations clearinghouse Even though there were only twenty-eight Shanghai native banks remaining in 1912, they restored their business quickly and constantly developed native banking The number of native banks increased to eighty-nine in 1924 Kinship between the native bank and local merchants was the critical factor in their survival Although foreign banks had cut off the "chop loans" to native banks after the revolution, the tradition of granting confidential loans to local merchants based on personal trust placed some native banks in an advantageous position after the dynastic change Compared to modern Chinese banks, which granted loans based on collateral in the form of property mortgages, native banks emphasized personal connections and trust, which was regarded as more important than banking documentation In the old business value system, many guilds and merchant businesses could not business without native banks A noted banker, Zhang Naiqi, even indicated that modern Shanghai bankers contributed less to society than the native banks He thought that if native banks stopped doing business, the Shanghai commercial world would collapse But if the modern banks stopped doing business, it would not have made a big difference to the merchants in society because the modem banks separated themselves from the traditional merchants' business world.13 The fact that the Shanghai Native Bankers Guild controlied interbank clearance among all Chinese financial institutions and between the Chinese banks and the foreign banks increased the credibility of native banks Since 90 percent of import and export business was handled by the foreign banks and native banks, it was easy for them to circulate promissory native banknotes during business transactions These native banknotes circulated about billion tael each year, which was considered a huge quantity of circulation in money markets at that time.14 The traditional role of the Shanghai Native Bankers Guild in controlling the clearing system and transferring native banknotes guaranteed priorities and financial profits to the native banks Moreover, the Native Bankers Guild also determined interest rates and exchange rates based on the performance of the daily domestic markets and the world financial markets After World War I, Chinese national industry grew quickly Industrial profits in certain areas, such as cotton mills and dyestuffs, were sufficient not only to pay back the native bank loans, but also to invest as additional paid-in capital in the native bank For example, the owner of Dafeng Cotton Mill, Table 4.2 Average Capital of Shanghai Native Banks, 1912-1926 (in silver dollars) Year Native banks Total capital (1 yuan = 715 tael) 1912 28 1,488,000 1913 31 1,684,000 1914 40 2,049,000 1915 42 2,161,000 1916 49 2,829,000 1917 49 2,829,000 1918 62 4,390,000 1919 67 5,295,000 1920 71 7,768,000 1921 69 8,431,000 1922 74 10,797,000 1923 84 14,502,000 1924 89 16,625,000 1925 83 16,659,000 1926 87 18,757,000 Source: Shanghai Qianzhuang Shiliao, p 191 Index Average capital per bank 100.0 113.1 137.7 145.2 190.0 190.0 295.0 355.8 522.0 567.0 725.6 874.6 1,117.2 1,119.5 1,260.6 53,000 54,300 51,200 51,500 57,700 57,700 71,000 79,000 109,400 122,000 145,900 172,600 186,700 200,800 215,600 Xu Chunrong, who was also the comprador of the Deutsch-Asiatische Bank, used the surplus from his cotton business to invest in four native banks.15 The average capital of the native bank increased from 53,000 yuan in 1912 to 215,600 yuan in 1926, The increase in the average capital of the Shanghai native banks between 1912 and 1926 (capital in silver dollars) is shown in Table 4.2 During the golden age, the total registered capital of native banks increased from 1,488,000 yuan in silver dollars in 1912 to 18,757,000 yuan in 1926, that is, 12.6 times higher The number of registered banks rose from twenty-eight in 1912 to eighty-seven in 1926, or by 3.1 times Average capital also increased about times within fifteen years In addition to its rapidly enlarged capital structure, the organization of the native bank had become more institutionalized in terms of its regulations and management It also participated in social and political movements in order to protect its own interests The original Shanghai Native Bankers Guild further developed into the Shanghai Native Bankers Association, with its own publication, the Native Bankers' Monthly In summary, the experience of the native banks in overcoming financial crises at the end of the Qing dynasty enabled them to develop better risk-management methods and to avoid the unsound extension of credit The implementation of the risk-management measure was exemplified by the ability of the native banks to avoid a credit crisis in 1921 In 1920, the reform of the Shanghai General Chamber of Commerce elected the president of Native Bankers Association, Qin Runqing (1877-1966), as vice president of the chamber Qin brought the voice of the native bankers into Shanghai business circles, and also organized native bankers' subsequent participation in various political movements, including the preceding May Fourth Movement (1919) and the May Thirtieth Incident in 1925 The native banks' finance pre-capitalism fully developed as financial capitalism in terms of rapidly enlarged capital structure, professional institutions, risk-management skills, and political attitude toward national affairs Chinese native capitalism became an independent force of political finance that merged other national capitalism and foreign financial power to form integrated finance capitalism in Shanghai Shanghai General Chamber of Commerce (1902-1929) The earliest chamber of commerce in China was the Shanghai Commercial Convention Association that was established in 1902 to meet the emerging government's needs in negotiating with foreign businessmen In the spring of 1902, the representatives of the Qing Court started trade negotiations with British, American, and Japanese delegations regarding the supplement of the 1900 Boxer indemnity When the British representative James Lyle MacKey arrived in China, he handed a list of questions to the Qing Court that British businessmen in Shanghai had requested The negotiating agenda for the discussions was: (1) exemptions from transportation taxes for British cotton mills consuming Chinese cotton, and 50 percent discounts in transportation taxes for imported cotton; (2) a 10 percent new import duty to include all local and government taxes; (3) transfer among provinces of goods for which import tax had already been paid without paying any additional fee; (4) duty-free imported cotton; and (5) no priority of Chinese cotton mills over foreigners' cotton mills.16 Facing unexpected challenges from the foreigners, the Chinese officials, Lu Haihuan and Sheng Xuanhuai, did not know how to responded They lacked the necessary commercial organization and political strategies to meet the challenges Sheng recognized the immediate need to found a Chinese chamber of commerce He ordered the Shanghai circuit commissioner, Yuan Shuxun, to meet with several eminent Shanghai businessmen, including Yan Xinhou, Zheng Guanying, and Zhu Baosan, to form a chamber of commerce With government encouragement, the Shanghai Commercial Convention Association was rapidly planned and established.17 Yan Xinhou, a native Cixi of Zhejiang, was introduced to Li Hongzhang by Hu Guangyong, and then became an official buyer for the late Qing government He operated his own native bank with a million tael in paid-in capital in Shanghai After he was appointed chief organizer of the Shanghai Commercial Convention Association, he used his own money to rent a house that would serve as a meeting place The first meeting, held on February 22, 1902, enlisted eighty members and laid out six regulations for the organization Yan was elected president of the Shanghai Commercial Convention Association At a second meeting on February 24, the members focused on import tariffs and transportation taxes They concluded that the Chinese government should "abolish transportation taxes and increase import duty" (caili jiashui), and suggested that the appropriate rate for the import duty should be 15 percent.18 This suggestion was adopted by Chinese officials The negotiations between the Chinese and British governments finally resulted in an agreement to abandon transportation taxes and impose a new import duty of 12.5 percent and export duty of 7.5 percent The new import duty of 12.5 percent, the mid-point between the British proposal of 10 percent and Chinese proposal of 15 percent, showed the progress resulting from the suggestion of the Shanghai Commercial Convention Association in the negotiations If the Shanghai Commercial Convention Association was a political organization prompted by government suggestion in 1902, then the Shanghai Commercial Affairs General Council was a selfgenerated and independent political and economic organization, established in 1904 and based on the preceding association Its previous two years of experience in dealing with local and international commercial affairs gave the members of the council political skills that prepared them to handle international conflicts of a wider scope After the American government issued the Chinese Exclusion Act in 1904, the Shanghai Commercial Affairs General Council called for a boycott of American goods to protest discrimination against Chinese immigrants in the United States Furthermore, in 1909, the council prohibited the export of spoiled tea and raw silk in order to protect Chinese trademarks Domestically, the Shanghai Commercial Affairs General Council actively engaged in all political and financial activities When the rubber stock crisis occurred in 1910, this council borrowed million tael from the Hongkong and Shanghai Banking Corporation and put it into the Shanghai market to reduce chaotic financial effects During the Republic Revolution of 1911, the Shanghai Commercial Affairs General Council sent its business defense force to attack the Qing local government, and used its special position to ask foreign forces to remain neutral When foreign warships cruised the Huangpu River to show their neutrality, they actually stopped the Qing supporting forces that were coming in from the sea After the revolution, the Shanghai Commercial Affairs General Council was renamed the Shanghai General Chamber of Commerce in 1912 As an independent commercial organization, the Chamber of Commerce supported the Shanghai Branch of the Bank of China in disobeying the Beiyang government order to cease the redemption of banknotes, and called on its members to circulate banknotes even more vigorously In response to the 1919 May Fourth Movement, members of the Chamber of Commerce at large went on strike to support the students' patriotic movement However, the radical attitude of the Chamber of Commerce toward foreigners gradually changed with increasing business contacts with foreign, especially Japanese, companies The majority of leaders became more conservative in dealing with foreign affairs, particularly when they were related to the interests of the members of the chamber In 1920, a younger generation joined the leadership of the Shanghai General Chamber of Commerce under the spirit of "vigorously developing industry to save the country" (shiye jiuguo) As a result of the election, sixteen of the total thirty-five directors were elected from the areas of industry and banking and were headed by Nie Yuntai (1880-1953), a grandson of Zeng Guofan and the general director of the Hengfeng Cotton Mills.19 This election shifted the emphasis of the chamber from trade and retail businesses to development of national industries and finance In July 1921, the General Chamber of Commerce Monthly was published in Shanghai The monthly publication provided news and information on business, trends in foreign trade, and methods for improving business management skills.20 This publication promoted business cooperation with various business guilds and economic academic research, and provided general economic news to the public In addition to commercial activities, the Chamber of Commerce also participated in Chinese political reform It made three suggestions to the Li Yuanhong government: disarmament, reorganization of the financial system, and institution of a Chinese Constitution during 1922-23 However, these suggestions were not ultimately realized because the warlord Cao Kun staged a coup d'état to overthrow the Li government in June 1923 Facing a Beijing government controlled by the warlord Cao, the Shanghai General Chamber of Commerce called for "citizens autonomy" (guomin zizhi).21 Reflecting on this issue, Mao Zedong (1893-1976) commented that the "citizens autonomy" call was "one voice that surprised all" (yiming jingren), and highly praised the Shanghai businessmen's participation in politics.22 Although Mao did not like any critics of government after he came to power later, he thought at that time that a new China could be built from general citizenship by granting local autonomy During the May Thirtieth Incident in 1925, the General Chamber of Commerce played a critical role as negotiator between the Chinese workers' union and the court in the International Settlement Based on its own interests, however, the chamber consolidated seventeen conditions raised by the students and workers into thirteen points These thirteen negotiating conditions were much softer than the initial ones, because the leaders of the chamber hoped to gain seats and judicial rights in the International Settlement as well as limit new taxes levied on Chinese business institutions located in the foreign concessions This modification did not satisfy the Chinese workers, but it was accepted by the International Court The Chamber of Commerce represented the newly emerged Chinese bourgeoisie whose interests conflicted with those of mass workers, foreign powers, and the Nationalist government The liberal views of the chamber and its overly active involvement in political movements were objectionable to the Chinese government After Chiang Kai-shek established the Nanjing government, the Shanghai General Chamber of Commerce was dismissed in 1929 and replaced by a "Shanghai Municipal Chamber of Commerce," which was instituted under the supervision of the Nanjing government on June 21, 1930 The Growth of National Industry When the Chinese domestic anarchy provided circumstances favorable to free enterprise and led to domestic economic growth, the outbreak of World War I created another big opportunity for Chinese capitalism and industrialization The growth of flour mills in Shanghai was a typical case illustrating this situation Basically, China was a flour importing country before 1914, but the sudden outbreak of World War I changed that situation The import of flour to China was reduced from 2,197,000 picul in 1914 to 170,000 picul in 1915 In the following year, the demand for war supplies led to orders from Europe, which stimulated Chinese production of wheat and flour China constantly increased its export of flour from 200,000 picul in 1915 to more than million picul from 1918 to 1921,23 shifting China's role from a flour-importing country to a flour-exporting country From 1912 to 1914, a total of thirteen flour mills existed in Shanghai, of which six mills were owned by Chinese, and three of those by the Rong brothers, Rong Zongjing and Rong Desheng, In 1921, the Rong brothers expanded their flour mills to eight, and rented six more to produce flour to meet the growing demand for exports The productivity of the First Fuxin Flour Mill increased from 245,000 dai (1 dai = 25 kg) in 1913 to 1,660,000 dai in 1918 The goods index rose from 100.0 to 677.6.24 The Rong brothers owned a total of 301 flour machines with an average daily production of 76,000 dai This level of productivity reached 31.4 percent of all Chinese flour mills, and 23.4 percent of the total flour industry (including foreign-owned flour mills) in China.25 Besides the boom in the Chinese flour industry, the cotton mills, silk facilities, match manufacturers, iron foundries, and cement mills also contributed to an economic miracle in Shanghai Taking advantage of economic growth, the Rong brothers created an integrated complex among their flour and cotton mills In 1915, they opened the First Shengxin Cotton Mill, with 12,960 spinning reels in production Several years later, the Shengxin Cotton system expanded to four mills, with 134,907 spinning reels producing in 1922 The raw cotton production of the First and Second Shengxin mills, which was 9,811 jian in 1918, increased to 36,300 jian in 1921.26 During the expansion, which involved building new mills, merging small mills, and renovating old mills, the Rong brothers faced extreme difficulties in floating capital Having been an apprentice in a native bank, Rong Zongjing knew how to borrow banking capital He used the Shengxin Company's name to invest 250,000 yuan in the Bank of China, and 200,000 yuan in the Shanghai Commercial and Savings Bank in which the Rong brothers held 20 percent of the bank's shares They later increased their investment to 450,000 yuan, becoming the largest shareholder in the Shanghai Commercial and Savings Bank.27 Once the Rong brothers became the largest investors, they could borrow from the bank easily Shanghai capitalism began with the commercial capitalism that accumulated its wealth through trade The formation of industrial capitalism was the second phase of the development of Chinese capitalism With the development of modern industries, Shanghai modern banks absorbed banking capital from these industrial tycoons, granting periodic loans for the companies to use in buying raw materials at seasonably adjusted interest rates Commercial capitalism, industrial capitalism, and finance capitalism all had a place in modern Shanghai society, and these different types of capitalism integrated to contribute to the development of the modern Shanghai banking industry The Golden Age of Shanghai Modern Banking Along with the development of modem Chinese industries, Shanghai banking expanded to full-scale commercial and investment banking functions By accumulating various capital from industrial profits, international trade, wealth of retired Chinese officials, and overseas Chinese, many modern bank managers began to found their own private banks These new bankers usually received their financial training from both domestic and foreign schools They combined modern banking knowledge and Chinese traditional values to create a unique modern Chinese banking style The number of modern Chinese banks swelled quickly from 16 in 1911 to 158 in 1925 28 The leading Chinese private banks in this period were the "three southern banks" and "four northern banks." The “Three Southern Banks” The conventional term "three southern banks" indicated that the original capital of these banks came from the southern Yangtze regions such as Zhejiang and Shanghai The "three southern banks" were the National Commercial Bank, the Zhejiang Industrial Bank, and the Shanghai Commercial and Savings Bank With a solid banking base in Shanghai, these three banks cooperated to form the "three southern banks" group Although the three banks belonged to the same group, their business styles were totally different because of individual management practices The National Commercial Bank was a fully functional commercial bank that used conservative management strategies The Zhejiang Industrial Bank had a small staff group that was highly efficient in absorbing deposits and handling foreign exchange The Shanghai Commercial and Savings Bank started with a relatively small capital base but built a wide network of small savings around Shanghai The managers of these banks were close friends and knew each other very well Sometimes they made jokes about each other's business styles For instance, Chen Guangfu referred to the Zhejiang Industrial Bank as a small "Shaoxin pagoda" because its foreign exchange business was built in the shape of a pagoda Li Ming dubbed the Shanghai Bank a "shopping warehouse" because of its wide business territory 29 Nevertheless, they were friends and worked toward the common goal of building the business and institutions of modern Shanghai banking The National Commercial Bank (1907) The National Commercial Bank was founded by the Zhejiang Provincial Railway Company on May 27, 1907, in Hangzhou, with the goal of "vigorously developing industry." It had million Chinese silver dollars of paid-in capital, 43 percent from the Zhejiang Railway Company, 14.3 percent from local small or middle businessmen, and 20.4 percent from residents of the city 30 Because the Zhejiang Railway Company was a private company, the unofficial capital component occupied a three-fourths majority of voting power of the bank From the beginning, the bank was different from government-sponsored banks whose initial capital was, at least partially, contributed by the government Thus, the policy of "merchants' management under government supervision" was less effectively imposed on the bank Later, when the Zhejiang Railway was nationalized, the bank further subscribed all its shares from the mercantile community and individuals, and became a completely private banking company with limited liability In August 1908, the National Commercial Bank opened its Shanghai branch Based on its aim of putting "the priority on sound plans and growth rooted in industry," the bank set up savings, operations, and accounting departments.31 One month later, the Bank was granted the right to issue its own banknotes Since the bank emphasized the fundamental goal of sound plans, it placed a 100 percent cash reserve against its outstanding notes While this banking policy might be viewed as ridiculous today, it saved the bank during several financial crises at the end of the Qing dynasty When Ye Kuichu (1874-1949) was elected as president of the National Commercial Bank, he began a series of reforms that included moving the bank headquarters to Shanghai in 1915 The bank was reorganized to include offices for administration, auditing, and general affairs, as well as departments for savings and trust business In 1917, the savings department was granted independent capital and accounts, while the shareholders had unlimited liability for the savings The trust business was separated from the main office to manage the development of real estate and mortgages.32 This separation secured personal savings against the high risks involved in the real estate business As a result of these reforms, the National Commercial Bank became one of the most successful Chinese private banks In ability to attract deposits it ranked first among Chinese commercial banks listed by the Banker's Weekly from 1918 to 1926.33 Its fixed-term savings and floating capital increased from 4,385,000 yuan in 1915 to 33,121,000 yuan in 1926.34 The bank's treasurer, Xu Jiqing, who had graduated from the Yamaguchi College of Commercial Studies in Japan, maintained a conservative policy of using 100 percent cash reserves against the issuing of notes This conservative policy solidified the banking foundation The independence of the savings department with unlimited ownership liability combined the characteristics of Shanghai native banks and modern banks to create a new kind of financial institution Based on its primary goal of developing industry, the National Commercial Bank made many loans to private Chinese industries at relatively lower interest rates For example, the bank had long-term business dealings with the Dasheng Cotton Mill since its establishment, having made an initial loan of 250,000 yuan to the mill to launch its business Every year the bank subsequently granted a seasonal loan to the mill for its collection of raw cotton during the autumn harvest Furthermore, the bank granted many loans to the Rong brothers' flour mills, Nie Yuntai's Hengfeng Cotton Mill, Liu Hongsheng's Match Manufactory, and other private enterprises In the eyes of these Chinese entrepreneurs, the National Commercial Bank was a true Chinese industrial bank,35 Taking advantage of large commercial investment opportunities, the bank also engaged in real estate and made huge profits during the bank booming period The bank purchased large pieces of land and subsidized real estate development companies that designed, built, and sold office buildings and residential housing in Shanghai, At the same time, the bank granted large numbers of mortgage loans to buyers through its trust department All of these efforts showed that the bank was a full investment bank that supported Chinese industry and was ready to seize opportunities to develop real estate The National Commercial Bank declined after 1928, when the Nationalist government took power President Ye Kuichu distrusted Chiang Kai-shek, and was reluctant to grant loans to Chiang's Northern Expeditionary force in 1927, which became a major obstacle to the bank's future development The bank eventually stopped issuing notes after the national currency reform in 1935 In addition to the political reason, the bank president's overemphasis of traditional banking roles also limited the development of the bank One person was in charge of all decision making, which reduced the efficiency of the whole system and diminished the role of its general manager The Zhejiang Industrial Bank (1915) The Zhejiang Industrial Bank was instituted on the foundation of a former Zhejiang Bank founded in 1909 by the Zhejiang provincial government and local merchants as a semi-official bank with authorized capital of million silver dollars After the Revolution of 1911, the name of the bank was changed to the Zhejiang Bank of the Republic of China Because the bank dealt with local revenues and taxation, it was later renamed the Zhejiang Province Industrial Bank in 1915 Conflicting opinions about how the bank was to operate and some bankers' objections to interference from officials finally caused the bank to split in two While the Zhejiang Provincial Bank retained official shares and established its head office in Hangzhou, the Zhejiang Industrial Bank held private shares and established its head office in Shanghai.36 Li Ming (1887-1966), a 1910 graduate of the Yamaguchi College of Commercial Studies, favored liberal enterprise and resisted control by local authorities He actively upheld the independence of the Zhejiang Industrial Bank from the Zhejiang Provincial Industrial Bank Through his endeavors, the Zhejiang Industrial Bank was formed with initial capital of 1.8 million yuan in Shanghai on April 23, 1923, and it developed into a highly efficient bank with relatively small bank facilities Photo 4.4 Li Ming, the general manager of the Zhejiang Industrial Bank (Shanghai Municipal Archives) Besides acting as president beginning in 1927, Li Ming was also manager of the Sino-Japanese Industrial Company, director of the Beer Company of Jardine, Matheson & Co., and director of the American Shanghai Telephone Company He had wide business connections with foreign companies, which provided opportunities for the bank in foreign exchange dealings To develop the bank's multilateral business connections, he also invited some well known foreign businessmen to become directors of the Zhejiang Industrial Bank by investing in the bank.37 The business network between the bank and foreign companies benefited both sides by encouraging deposits and making business transactions convenient For example, the American-owned Shanghai Electric Light and Electric Power Company opened an account with the bank and deposited all its monthly receipts into the bank account This business relation enhanced the bank's capital mobility The Zhejing Industrial Bank was characterized by its smooth and skillful conducting of foreign exchange business Li Ming frequently invited foreign financial experts to lecture the banking staff about international trade and balance of payments issues In 1928, the bank conducted a total of more than million yuan in import and export transactions The Zhejiang Industrial Bank was listed second only to the Shanghai Commercial and Savings Bank among the Chinese private commercial banks specializing in foreign exchange Belonging to the same new generation of Chinese bankers, Li Ming had close personal friendships with Chen Guangfu and Zhang Gongquan When Cheng Guangfu opened the Shanghai Commercial and Savings Bank, he had only 80,000 yuan in initial capital, and half of this amount had come from sources that Li recommended When the Bank of China's Shanghai office decided to disobey the Beiyang government's order to suspend the remittance of banknotes, Li Ming and Chen Guangfu protected Zhang Gongquan's honor as a banker by accusing the government of wrongfully issuing the order The three friends acted like the three musketeers, creating new stories that would become legends in the history of modern Shanghai banking The Shanghai Commercial and Savings Bank (1915) The Shanghai Commercial and Savings Bank was founded by a group of Shanghai bankers under the leadership of Chen Guangfu with authorized capital of 100,000 yuan, or paid-in capital of 80,000 yuan in June 1915 Compared to other private banks, the initial capital of the bank was very small, so it became known as the "little Shanghai Bank." It nevertheless had a distinctive banking style and the ultimate aim of "serving all society." The bank offered a one-dollar savings plan that encouraged Shanghai citizens to open savings account with a one-dollar deposit By accumulating various savings resources, the bank subsequently developed into the number one private bank in Shanghai Chen Guangfu (1880-1976), a native of Dantu in Jiangsu, graduated from the Wharton School of Finance at the University of Pennsylvania in 1909 Thereafter, he worked as an intern in an American bank for a year After he returned to China, he worked first in the Nanyang Quanyehui, and then as general manager of the Jiangsu Provincial Bank A year later, he resigned because he had refused to disclose the names of the bank's customers to a local warlord Meanwhile, he became a private financial consultant to the Bank of China, as well as a close friend of Zhang Gongquan In 1915 he worked with Zhuang Dezhi, president of the Chinese Red Cross, to establish the Shanghai Commercial and Savings Bank.38 Chen was appointed general manager of the bank Although the starting capital for the bank was only 80,000 yuan, Chen Guangfu received a long-term interbank deposit of 50,000 yuan from Zhang Gongquan from the Bank of China as reserve capital.39 The Shanghai Commercial and Savings Bank cooperated closely with the Bank of China at its beginning Photo 4.5 Chen Guangfu, president of the Shanghai Commercial and Savings Bank (Shanghai Municipal Archives) As Chinese industries developed after Would War I, the Shanghai Bank absorbed surplus capital from domestic industries, thus expanding its business In 1919, the Rong brothers invested 200,000 yuan and Zhang Jian of the Dasheng Cotton Group invested 150,000 yuan in the bank Together with other investments, the amount of Shanghai Bank capital was 1,000,000 yuan, twelve times higher than it had been four years earlier Although the total industrial capital accounted for 49.7 percent, the general manager, Chen, still retained the controlling power in the bank.40 By adopting American banking management skills, Chen Guangfu emphasized efficiency and new strategies for promoting business He believed that if a bank lacked innovative spirit, it would not be able to compete in China's modernizing society In practice, he tended to go in an opposite direction from the conventional wisdom in Shanghai banking While others often sought short-term returns, he emphasized long-term returns; while others were often unable to deal with small accounts, he made them one of the bank's major operations He created the one-dollar savings box, travel agent offices, warehouse mortgages, railway transportation remittance, and foreign exchange business.41 These pragmatic banking practices helped to increase the Shanghai Bank's growth Chen Guangfu also paid special attention to recruiting financial experts and training staff members, realizing the value of human capital Having studied foreign exchange with Zhang Gongquan under Edward Kann, a noted expert in international banking and finance, he decided to promote banking education Chen approved an annual bank budget of 12,000 tael in silver to invite Gustav Barwald, a former manager of the Deutsch-Asiatische Bank branch in Tianjin, as the bank consultant and lecturer on the theory and practice of foreign exchange to staff members He also set up an educational fund to support sending senior staff members to the United States to continue their studies and to practice advanced banking skills To fulfill its goal, the Shanghai Commercial and Savings Bank had an overdraft account of million U.S dollars for research and development The return on the investment in foreign education was significant, and enabled the bank to establish a world business network through its overseas representative offices managed by senior staff In 1928, the Shanghai Bank handled over million yuan in foreign exchange, and became the number one private bank handling foreign exchange in China.42 During the process of promoting its foreign exchange business, the Shanghai Commercial and Savings Bank was boycotted by the Chartered Bank of India, Australia, and China, which refused to accept the Shanghai Bank's foreign exchange contracts To meet the British bank's challenge, Chen wrote a protest letter to the Shanghai Foreign Bankers Association, announcing that the Shanghai Bank would refuse to accept the Chartered Bank's contracts as well Chen's efforts won the support of both the Shanghai Bankers Association and the Shanghai Foreign Bankers Association Through the mediation of a third party, the Chartered Bank and the Shanghai Bank agreed to cooperate in their foreign exchange business in Shanghai.43 After ten years of hard work, Chen Guangfu had formed a highly efficient banking operation system at the Shanghai Bank The bank deposits increased from 570,000 yuan in 1915 to 32,440,000 yuan in 1926 Over the same period, loans granted by the bank increased from 510,000 yuan to 19,190,000 yuan The bank's profit was 3,550,000 yuan, with a capital and profit ratio of more than 20 percent As an indicator of the bank's growth, its accumulated capital increased from 100,000 yuan in 1915 to 2,500,000 yuan in 1921,44 The Shanghai Commercial and Savings Bank was no longer a "little Shanghai Bank," but the foremost private bank in foreign exchange and fifth-ranked commercial bank in China Chen Guangfu, a patriot/nationalist in his competition with foreign banks, felt much pain over China's loss of its sovereign right to control the maritime customs service On November 6, 1925, he drafted a proposal to the Special Committee on Tariff Autonomy urging the restoration of tariff autonomy to the Chinese government In this proposal, Chen suggested that the Chinese government should issue domestic bonds to pay off foreign debts He also criticized the Hongkong and Shanghai Banking Corporation for never having registered with the Chinese government and never having published its business report and balance sheets, which violated Chinese sovereign rights.45 When Chiang Kai-shek launched the Northern Expedition, Chen Guangfu became a financial supporter of the National government He was appointed director of the Jiangsu and Shanghai Financial Committee, and began to issue the "2.5 percent surtax treasury bonds," using the Shanghai customs surtax as security With the final victory of the Nationalist government in 1928, the Shanghai Commercial and Savings Bank and Chen Guangfu entered a new phase of development The organization of the Bank had been developed into a modem banking institution by 1934 The chart in Illustration 4.1 shows that the organization of modern Shanghai banks had reached international banking standards It had achieved the native banks' simple three-level system of operations by adding the function of the board of directors and legal supervisor above the president and general manager levels, and also created various business divisions to handle daily banking operations Branches, administrations, committees, and legal consultants maximized the banking function of the Shanghai Commercial and Savings Bank, and elevated this bank to the position of number one private bank in China in 1936 The “Four Northern Banks” Geographically, the "four northern banks,"—which included the Yien Yieh Commercial Bank, the Kincheng Banking Corporation, the Continental Bank, and the China & South Sea Bank—refer to the banks found north of the Yangtze River, in contrast to the "three southern banks" located south of the Yangtze River However, the China & South Sea Bank was an overseas Chinese bank, and its branches spread throughout most cities in south China Illustration 4.1 Organization Chart of the Shanghai Commercial and Savings Bank (Archives of the Shanghai Commercial and Savings Bank, pp 684-85) The "four northern banks," therefore, extended beyond the geographical boundary, connecting those banks with the northern government and the Bank of Communications Compared to the "three southern banks" and the other twenty-four private banks in China, the "four northern banks" had the strongest capital components According to 1927 statistics, the total paid-in capital for the four banks was 26 million yuan, while for the "three southern banks," it was 6.8 million yuan, and the remaining twenty-four private banks in China had total capital of 25.6 million yuan.46 The stronger capital resources of the "four northern banks" were derived from former Qing officials, warlords, and overseas Chinese Like the "three southern banks," the "four northern banks" also had an excellent team of managers Wu Dingchang of the Yien Yieh Commercial Bank, Zhou Zuomin of the Kincheng Banking Corporation, and Tan Lisun of the Continental Bank all received their banking and financial education in Japan Before they became general managers of their banks, Wu had been the superintendent to the Bank of China, Tan had been a branch manager in the Bank of China, Zhou had been the manager of the Bank of Communications Hu Bijiang had been a manager in the Bank of Communications before he became the general manager of the China & South Sea Bank As classmates, colleagues, and even relatives, these managers shared common interests and language Eventually, these common interests led them to unite the four banks to form a financial syndicate in 1922 Although the "four northern banks" had many common characteristics, their business styles varied The Yien Yieh Commercial Bank emphasized purchasing government bonds and foreign bonds, the Continental Bank highlighted real estate, and the Kincheng Bank and the China & South Sea Bank stressed the financing of industrial loans The Kincheng Bank in particular imitated the Japanese zaibatsu system by establishing a financial syndicate composed of several mills, transportation, and trade centers.47 The Yien Yien Commercial Bank (1915) When Yuan Shikai became president of the Republic of China, the major source of government revenues was the tax collected on salt In October 1914, Zhang Zhenfang, a cousin of Yuan Shikai, was appointed general manager to prepare for the establishment of the Yien Yieh Commercial Bank On March 26, 1915, the new bank was opened with the aim of "assisting salt administration for the benefit of government taxes and general people's livelihood."48 The bank was designated to specialize in the salt industry with official funds under government supervision However, the government did not keep its promise to provide the necessary funds to the bank because the salt revenue was used mainly as security for the Reorganization Loan, and the uninterrupted civil wars utilized the rest of the salt revenue Instead of investing promised capital, the government withdrew its initial deposit of 100,000 yuan from the new bank Thus, the Yien Yieh Commercial Bank was transformed from a national specialized bank to a private commercial bank With an authorized capital of million silver dollars and a paid-in capital of 1.25 million yuan, the Yien Yieh Commercial Bank opened for business The capital component of this bank came mainly from warlords, rich merchants, and native bankers in Tianjin and Beijing Wu Dingchang (1884— 1950), a native of Wuxing in Zhejing and former superintendent to the Bank of China, was elected general manager of the bank after Zhang Zhenfang was arrested for his participation in the restoration of the former Qing dynasty in 1917 Because warlords held the majority of the bank's shares, Wu's administration was limited to certain regions in selling and buying government and foreign bonds Despite Wu Dingchang's limited role in the Yien Yieh Commercial Bank, he organized the first Chinese banking syndicate On business trips to Europe and the United States in 1921, he found that Western financial syndicates had controlling power over the industrial syndicates because of joint ownership of capital As soon as he returned to China, he called a business meeting of the Yien Yieh Commercial Bank, the Kincheng Banking Corporation, and the China & South Sea Bank to form a joint business office on November 16, 1921 A few months later, the Continental Bank was admitted to the joint business offices, thus, establishing a new "joint business office of the four banks" on July 11, 1922, with Wu elected as general manager The joint banking syndicate impressed the Shanghai business world soon after it established the office In September 1922, the joint banking syndicate granted a million yuan mortgage loan to the Bank of Communications, and, the following November, another 500,000 yuan loan to the Yuyuan Cotton Mill Such a large loan was beyond the capacity of any single bank to grant The lending of one million yuan to the Bank of Communications became a powerful advertisement for the joint banking group In 1922, the total capital of the four banks reached 22.46 million yuan, amounting 17.79 percent of the capital of all the Chinese national banks.49 The Kincheng Banking Corporation (1917) The Kincheng Banking Corporation was founded in May 1917, its distinguished Chinese name meaning the "golden city" and implying wealth and security Zhou Zuomin (1884-1955), a native of Huaian in Jiangsu, who studied business and finance in Japan for two years, was the founder of the bank When he worked as branch manager of the Bank of Communications in Wuhu, Zhou Zuomin built a close personal relationship with Anhui General Commander Ni Sichong and his treasurer, Wang Zhilong When Zhou resigned from the Bank of Communications, he decided to open a new bank He raised most of the initial capital from Ni and Wang personally, and founded the Kincheng Banking Corporation on May 15, 1917, in Tianjin Photo 4.6 Zhou Zuomin, the general manager of the Kincheng Banking Corporation (Shanghai Municipal Archives) The bank started its business with authorized capital of million yuan and paid-in capital of 500,000 yuan Initially, the warlords and rich officials contributed 90 percent of the total capital The capital structure gradually changed as many merchants and individuals invested in the bank By the end of 1927, the total paid-in capital of the bank had increased to million yuan, and the percentage of ownership held by warlords and officials dropped to 50.5 percent.50 The bank's development can be divided into three periods: the initial stage in Tianjin (1917-27); the developmental period in Shanghai (1927-37); and the wartime banking period (1937-49) In the initial stage, Zhou Zuomin formulated bank policy creatively but cautiously The bank set up a savings department to absorb floating capital and small deposits from various channels It invited famous economists to conduct market surveys and analyses for the bank The daily business of granting loans was based on marketing information and credit reports on the clients However, in addition to the careful examination of each individual loan case, the bank spent huge amounts in overhead in promoting its business by hosting receptions and dinners for bank clients, thus even sending senior staff and managers out to play mahjong with rich customers Promoting banking through the financing of Chinese industrial projects, the Kincheng Bank granted loans to cotton and flour mills, match manufacturers, coal mines, and chemical industries In 1927, the bank received total deposits of 34.98 million yuan, which was seven times higher than in 1917, and its loans to various Chinese industries totaled 27.38 million yuan,51 almost 78 percent of its deposits Because Zhou Zuomin had studied in Japan for two years, he admired the banking system of the Mitsui and Mitsubishi zaibatsu He tried to pattern the Kincheng Bank on the Japanese model by joining banking capital with industrial syndicates Besides heavy investment in light industries, the bank also handled remittances from transportation, especially railways After the collapse of the Beiyang government and the establishment of the Nationalist regime in 1928, the Chinese capital moved to Nanjing, and the headquarters of the Kincheng Bank moved to Shanghai Zhou made connections with Chiang Kai-shek through his friends Zhang Qun and Qian Xinzhi By joining the Shanghai bankers who gave financial support to Chiang Kai-shek, Zhou was appointed a member of the Financial Committee of the Nationalist government In this period of prosperity, the Kincheng Bank had direct investments in nationwide warehouses, setting up five departments specializing in cotton, coal, food, transportation, and development The cotton department of the bank not only granted loans to cotton merchants but also engaged in buying raw cotton, processing it into cotton yarn, and then selling the yarn to Shanghai cotton mills.52 The Kincheng Banking Corporation also founded the Pacific Insurance Company to handle the business of shipping, automobile, and fire insurance The bank participated in the "joint business office of the four banks" in 1922 Furthermore, it suggested forming a "joint reserve fund of the four banks" and contributed initial capital to this organization The bank reformed the traditional personnel system based on personal recommendations, and opened a nationwide examination to recruit new staff from university graduates After recruiting them, the bank held job training programs for new staff In order to promote foreign exchange business, Zhou appointed staff members who spoke foreign languages to branches in the different foreign concessions For example, he appointed Yang Kincheng, a Japanese speaker, to be branch manager in Dalian He appointed Wu Yunzhai, an English speaker, to be branch manager in Shanghai 53 These managers worked well in such positions and contributed to the development of the bank, especially during World War II After the outbreak of the Sino-Japanese War in 1937, the bank closed its northern branches To compensate for further losses, the bank developed a southern branch in Chongqing and headquarters in Shanghai Zhuo Zuomin's Japanese education and close relationships with high officials in the Nationalist government, allowed him to play a subtle political role in this period The bank, however, reached its business peak during wartime in Shanghai The Continental Bank (1919) In August 1917, Feng Guozhang became acting president of the Republic of China Seeing the rise of Kincheng Banking Corporation, Feng attempted to establish his own bank He invited Tan Lisun (1880-1933), a graduate of Tokyo Commercial College and former Nanjing branch director of the Bank of China, to form a new bank Feng Guozhang invested 200,000 yuan, and his followers Zhang Diaozheng, Chen Guangyuan, Li Chun, Qi Yaolin, and others also contributed capital to the bank With authorized capital of million yuan and paid-in capital of 500,000 yuan, the new bank was established in Tianjin on April 1, 1919, and a Beijing branch was instituted a half-month later Since the Continental Bank was strongly funded by private funds from government officials, it had doubled its authorized capital by the end of 1919 Zhang Xun, a retired military commander loyal to the Qing, also invested his wealth in the bank Although these military officials held a large number of shares, the general manager, Tan Lisun, was able to make all banking policies and business decisions He quickly established a banking regulatory system for the bank and opened the Shanghai branch in 1921 When the three northern banks founded the joint business office, Tan represented the Continental Bank in its application for admission The Continental Bank specialized in savings, warehouses, trusts, and real estate business The bank set up savings service stations in universities, hospitals, and commercial eras It created the first savings branch at Qinghua University, and then set up branches in Yanjing University, Furen University, and Beijing University This bank established many warehouses to handle the transport business between Tianjin, Shanghai, and Hankuo It also engaged in foreign trade and trust businesses by opening the Continental Trade Company, and it granted loans to northwest China's wool industry and northeast China's oil manufacturers Although its involvement in real estate had generated tremendous profits, the building of the "Continental Mall" saddled the bank with huge debt In 1931, the bank borrowed huge mortgage loans to purchase a large piece of land on Nanjing Road, a main street in the International Settlements in Shanghai, to build a luxury "Continental Mall" for re tail.54 Before the mall was completed, the Japanese attacked Shanghai in January 1932 The unfinished mall served as a temporary hospital and as housing for refugees The war destroyed the plan of building a luxury retail department mall The mall remained largely vacant, and was finally auctioned off Although Tan Lisun died of encephalitis at the age of fifty-three, his banking policies were adopted by his successors, and the bank continued to develop after Tan's death By the end of 1936, the bank's total deposits had reached 122 million yuan, which ranked it third on the list of leading private banks.55 The China & South Sea Bank (1921) When Huang Yizhu, a native of Fujian, went to Indonesia as a young man looking for opportunities, he never dreamed he would later open a bank in his motherland In Indonesia, Huang worked hard and eventually opened a small coffee shop He also engaged in the import and export of sugar worldwide, accumulating great wealth After he had accumulated about 20 million yuan, Huang returned to China, looking for future prospects On the train from Beijing to Shanghai, Huang Yizhu met Hu Bijiang (1881 -1938), a former branch manager of the Bank of Communications, who was also someone Huang's friend had recommended The men took pleasure in the unexpected meeting Hu proposed that Huang establish a bank specializing in overseas Chinese business and foreign remittances, an idea that Huang Yizhu accepted Under Hu Bijiang's careful planning, the China & South Sea Bank was founded in June 1921 with paid-in capital of million yuan Huang Yizhu invested 3.5 million yuan, and Hu raised the rest of the capital from other sources Because it was an overseas Chinese investment bank, the Beiyang government granted the bank special rights to issue its banknotes overseas The following year, the China & South Sea Bank joined the Yien Yieh Commercial Bank, the Kincheng Bank, and the Continental Bank to form the "joint business office." The three banks transferred interbank funds to support the China & South Sea Bank when it was granted the special right of issuing banknotes To guarantee the safety of the notes in circulation, the four banks instituted a Four Banks Reserve Fund with a 60 percent cash reserve and 40 percent in additional reserves in securities or bonds Although the Four Banks Reserve Fund guaranteed all notes issued, each bank had its own logo on the notes, acknowledging its specific responsibility.56 In 1923, the four banks organized the Joint Savings Society of the Four Banks in Shanghai to absorb floating capital in the market This association carried out a different policy from other savings banks, sharing the profits from savings with all of its customers Under the slogan "savers are shareholders, savings are for the society," the association sent annual dividends to customers This innovative policy attracted many customers, some of whom even withdrew their savings from foreign banks to deposit them with the Joint Savings Society To promote its business further, the Joint Savings Society raised million yuan to build a twentyfour story International Hotel, the tallest hotel in Shanghai at that time, as a symbol of the financial strength of the Joint Savings Society, The Joint Savings Society established its headquarters in the hotel building to promote business After the hotel's grand opening in 1934, the level of deposits in the Joint Savings Society reached a new record According to the official banking report for 1936, national savings totaled 504,503,000 yuan, of which the Joint Savings Society accounted for 78,751,000 yuan, or 15.61 percent.57 Other Chinese National Banks In addition to the rapid growth of private banks such as the "three southern banks" and "four northern banks," other Chinese banks also developed rapidly From 1912 to 1927, 186 private banks registered with the government.58 Although 135 banks went out of business within ten years due to competition among the national banks, foreign banks, and native banks, the 51 survivors enjoyed the free entrepreneurial environment of the golden age of Chinese banking Commercial and savings banks with headquarters in Shanghai and paid-in capital of more than million yuan in silver dollars were the Xinhua Trust and Savings Bank (1914), the Zhongfu Bank (1916), the Donglai Bank (1918), the Dazhong Bank (1919), the Guohua Bank (1929), and the Zhonghui Bank (1929) Specialized industrial and agricultural banks included the Chinese Industrial Bank (1919), the Farmers Commercial Bank (1921), the Chinese Development Bank (1929), and the Bank of East Asia (1918) in Hong Kong, all set offices up in Shanghai because of its stature as a center of world finance It is worth mentioning that the first Chinese women's bank, the Shanghai Women Commercial and Savings Bank, was founded in 1910 Although this women's bank had very limited capital and a small business scope, it reflected Shanghai women's desire for financial independence Most of the managers of these banks had been educated both in China and abroad For example, the manager of the Zhongfu Bank, Sun Yuanfang, received his early education in China before going to America for further studies He graduated from Wesleyan Academy, and then from the Massachusetts Institute of Technology Finally, he received a degree in finance from Brown University In 1916, he was appointed manager of the Shanghai branch of the Zhongfu Bank His educational background enabled him to handle international financial transactions smoothly The modern banks implemented institutional operations by setting up a personnel system, so they depended less on personal and family ties than the old-style native banks did During the 1920s, Zhang Gongquan began hiring foreign-educated Chinese bankers to enlarge the bank's capacity to handle foreign exchange.59 Other banks also did nationwide recruiting of university graduates who had majored in economics and finance These highly educated young Chinese professionals injected new energy into Chinese banking and finance, created a new elite class, and prepared human capital resources for the rise of Chinese state banks in the 1930s New Organizations of Shanghai Banking In the midst of the golden age of Shanghai banking, many new organizations were launched Professional associations emerged in response to the need to resist the political and economic interventions of the warlords Preparation for the establishment of the Shanghai Bankers Association began immediately after the Bank of China's refusal to comply with the Beiyang government's order to cease issuing banknotes in 1916 On May 29, 1917, a leading financial publication for bankers and merchants, the Banker's Weekly, began publishing in Shanghai In 1918, the Shanghai Bankers Association formally announced its inauguration The Chinese National Bankers Association was subsequently established in 1920 The Shanghai Native Bankers Guild was reorganized into the Shanghai Native Bankers Association It actively participated in various Shanghai financial and political affairs with the awakening of nationalist consciousness With the southern native banking financial market declining in the old city, the northern native banking financial market in the International Settlements developed concurrently with the pace of growth in modern Shanghai banking To gain a public voice, the Shanghai Native Bankers Association started a professional publication, the Native Bankers' Monthly, in 1921 The Shanghai Stock and Commodity Exchange was established in 1920 in response to the development of Shanghai industry, foreign trade, and financial services This organization managed futures markets for many goods, including cotton, silk, and flour in Shanghai, and provided trading opportunities in various commodities both domestically and internationally During the credit crisis of 1921, the well-organized Shanghai Bankers Association and Shanghai Native Bankers Association cautioned their members against engaging in speculation and overdrawing their credit Compared with the "rubber stock storm" of 1910 during the credit crisis, most of the modern banks and native banks survived the 1921 credit crisis with little damage Both native and modem bankers' associations effectively prevented their members from becoming involved in and worsening the financial crisis In 1919, the May Fourth Movement rallied patriotic sentiment throughout Chinese cities Chinese nationalism centered on demands to restore national sovereignty, recover extraterritoriality, and establish administrative integrity In response to the student movement, Shanghai bankers went on strike on May 7, demanding that the Chinese government recover sovereignty over the Shandong Peninsula Furthermore, during the May Thirtieth Incident in 1925, Shanghai bankers protested against the Japanese killing of a Chinese worker and the subsequent killing of many demonstrators in the International Settlement by British police Shanghai bankers disagreed with some of the radical demands students raised, and the growing workers' movement harmed the merchants' and bankers' interests, but basic patriotic feeling and the pressure of unequal competition with foreign banks cased the bankers to stand together with the mass movement In competing with the predominant financial power of the foreign banks, Shanghai bankers looked forward to having support from a strong nationalist government in realizing their dream of national capitalism Shanghai banking was on the eve of transition The Shanghai Bankers Association Organizing a professional association for Shanghai bankers was initially the idea of Zhou Tingbi and Shen Manyun, the manager and associate manager, respectively, of the first Chinese private bank, the Xincheng Bank But this idea was not carried out because the bank went bankrupt after the Revolution of 1911 Zhang Gongquan of the Bank of China later became acquainted with Li Ming of the Zhejiang Industrial Bank and Chen Guangfu of the Shanghai Commercial and Savings Bank, and they began to invite the managers and associate managers of major banks for weekly luncheons in the convention hall of the newly established Shanghai Commercial and Savings Bank According to Zhang Gongquan's biography, in July 1915, the managers and associate managers of the Bank of China, the Bank of Communications, the National Commercial Bank, the Zhejiang Industrial Bank, the Shanghai Commercial and Savings Bank, the Xinhua Savings Bank, and the Yien Yieh Commercial Bank gathered for lunch to exchange financial information and discuss both current domestic events and international affairs Although the Commercial Bank of China and the Ningbo Commercial and Savings Bank did not participate in the luncheon discussions, they were influenced by policies arrived at in these meetings and adopted those policies at key moments when the banks faced common problems.60 The impact of these luncheon discussions was demonstrated the following spring when the Shanghai branch of the Bank of China successfully resisted the government order against note issuance with the support of the managers of the National Commercial Bank, the Shanghai Commercial and Savings Bank, and Zhejiang Industrial Bank The regular luncheon discussions among Shanghai bankers helped make the idea of a banker's association a reality The Shanghai Bankers Association held its inaugural meeting in 1918 with the goal of improving the exchange of financial information and banking management This association actively engaged in various political movements and economic affairs In response to the 1919 May Fourth Movement, the Shanghai Bankers Association called on Chinese banks to go on strike When the French Banque Industrielle de Chine was liquidated in 1921, the Shanghai Bankers Association organized a Union of Chinese Creditors to clear the bank After July 1, when the Banque Industrielle de Chine ceased business, the president and vice president of the Shanghai Bankers Association, Sheng Zuoshu and Qian Xinzhi, and the general manager of the Shanghai branch of the Bank of China, Song Hanzhang, went to the consul general of France in Shanghai to discuss a solution to Chinese creditor demands Then they went to the Banque Industrielle de Chine to freeze its assets The British news agency Reuters reported on July 4, 1921, that "Reuter is officially informed that the outstanding notes of the Banque Industrielle de Chine will be paid at par owing to an understanding which has been reached with the Chinese Bankers' Association." 61 As a result, the Chinese Bankers Associations took responsibility for remitting the French banknotes, using the bank's frozen assets, with the Ministry of Finance as guarantor for remitting When a civil war between Jiangsu and Zhejiang provinces broke out in 1924, interprovincial trade stagnated, many native banks went bankrupt, and the price of government bonds declined sharply The civil war caused banking and finance chaos to sweep the Shanghai markets The Shanghai Bankers Association sent telegrams to warlords on both sides urging them to cease hostilities and restore peace to the people of Jiangsu and Zhejiang provinces.62 On June 1, 1925, two days after the May Thirtieth Incident, the Shanghai Bankers Association and the Shanghai Native Bankers Association strongly condemned the bloody suppression of Chinese students conducted by the authorities of the International Settlement On June 19, representatives from various Shanghai associations held a meeting called by the Shanghai General Chamber of Commerce The meeting concluded a twenty-six item agenda with the aim of "developing domestic industrial products, relieving pressure from foreign products, and enhancing national prosperity." These strategies for carrying out the aims took both an active and a passive path Members of the Shanghai General Chamber of Commerce were encouraged to actively promote domestic industry and industrial production, while passively boycotting the goods of foreign countries that harmed Chinese interests.63 The Banker’s Weekly (1917) To enlarge the role of the Shanghai Bankers Association and to promote the study of banking and finance, Zhang Gongquan suggested publishing a professional weekly, the Banker's Weekly, for bankers, merchants, and intellectuals The first issue was published on May 29,1917 The contents of t he Banker's Weekly included a weekly report on Chinese economic, banking, and financial developments, introductory articles on foreign banking organization and management, and theoretical and political discussions of important issues in international finance, the domestic economy, and banking reform In 1923, the Banker's Weekly began publishing monthly economic statistics in different fields, which was welcomed by various business circles in Shanghai Its circulation had increased from 700 to 20,000 just ten years later It also published several important books, including The Theory of the Shanghai Financial Market (Shanghai Jinrong Shichangrun), The Recent History of Shanghai Finance (Zuijin Shanghai Jinrongshi), The Monetary Problems of Present-day China (Zhongguo Jinri zi Huobi Wenti), The Study of Clearing Houses (Piaojui Jiaoyishuo Yanjiu), and the Banking Yearbook (Yinhang Nianjian) 64 These books are major resources for the study of then current banking and finance and the history of modern Shanghai banking Among the members of the editorial board of this publication were the well-known Zhang Gongquan, Song Hangzhang, Xun Jiqing, Chen Guangfu, Li Ming, Qian Xinzhi, and others These men were prominent not only in business circles but also in politics Some of them became finance officials in the Nationalist government after Chiang Kai-shek came to power Although the Banker's Weekly adopted a sympathetic voice toward official policies in the early Nationalist period, it basically represented the interests of modern Chinese financial capitalists, and sometimes criticized the government's political and monetary policies This publication endured for more than thirty years, with a total 1,635 issues having been published It became profoundly influential in Shanghai banking circles, as well as in the international business world It ceased publication in March 1950 after the merger movement of private Shanghai banks began The Native Bankers’ Monthly (1921) As a sister publication to the Banker's Weekly, the Native Bankers' Monthly was published by the Shanghai Native Bankers Guild The publication was partially motivated by increasing competition among foreign banks, Chinese modern banks, and native banks Some members of the board of directors of the Shanghai Native Bankers Guild felt native bankers needed their own voice in society With the support of Qin Runqing, a vice president of the guild, the first issue of the Native Bankers' Monthly was published in February 1921 According to a study by Zhang Jifeng and Zhu Zhenghua, the main emphases of the Native Bankers' Monthly can be divided into four periods From 1921 to 1926, the publication emphasized improving the traditional management of the native bank for its continued development, and introduced new concepts and methods of Western banking From 1927 to 1931, the scope of editorials of this publication broadened to discuss not only native banks but also social, economic, and political issues Articles representative of this period were "The Promotion of Chinese-made Goods and the Development of National Industry" (1928), "Currency Reform Should Begin with Consolidation" (1931), "An Opinion on the Abolition of Silver Tael and Adoption of Silver Dollars" (1932), and "Reasons for the Bankruptcy of the Chinese Agricultural Economy and Methods for Rescuing It" (1932) From 1932 to 1937, the publication focused on the predicament of the Chinese economy, and on the processes of government decision making For example, some of its articles had a strong impact on Chinese society, such as "The Management of Inflation" (1935), "The Discussion of General Rules on Trade Management and Foreign Exchange" (1936), and "The Shift in United States Far East Policy" (1937) These articles expressed native bankers' views on international relations They also reiterated objections to the state monopoly power in the banking and financial markets After the outbreak of the Sino-Japanese War, the Native Bankers' Monthly stopped publication From 1947 to 1949, it resumed publication, expressing the complaints of the working class who had been crushed by galloping inflation, and attacked the Nationalist government for its financial policies and for the issuance of "golden notes." Important articles were "Gold Reserves and Inflation" (1948), "The Pressure of High Interests on Industry" (1948), and "Thoughts on Government Financial Control" (1949).6S Such articles from all four periods show that the goals of the Shanghai Native Bankers Association had grown to include, along with business organization, public policy objectives as well The Native Bankers' Monthly stopped publication after 1949 Illustration 4.2 A cover of the Native Bankers' Monthly (Library of Congress) The Shanghai Stock and Commodities Exchange (1920) In response to the development of modern financial markets in Shanghai, the Shanghai Stock and Commodities Exchange was formally established in 1920 The founders of this organization included Yu Qiaqing, the former comprador of the Nederlandsche Handel-Maatschappij and president of the Ningbo Commercial and Savings Bank, Wen Lanting, president of the Cotton Yarn Association, and Zhu Baosan, president of the Shanghai General Chamber of Commerce.66 The Shanghai Stock and Commodities Exchange was a shareholder company that issued 100,000 shares of common stock when it opened At the first shareholders' meeting, Yu Qiaqing was elected president The Shanghai Stock and Commodities Exchange issued detailed regulations covering stock exchange, brokers, reserve funds, exchange receipts, commissions, business transactions, and legal duties if disputes arose As indicated in its name, in addition to the stock exchange, six categories of commodities were listed on the company exchange: cotton, cotton yarn, textile, gold and silver, food and oil, and leather Exchange of these goods was handled either as merchandise or on a futures market Business transactions took place five business days after the contract, and completion was required within seven days Without the permission of the company, the contract could not be transferred to a second buyer or bought back by the original seller.67 In the Shanghai Stock and Commodities Exchange market, the Zhejiang and Jiangsu provincial townships, played an important role Yu Qiaqing was prominent as the representative of the Ningbo businessmen and had a profound influence within the company Among the 241 staff members employed by the company in October 1920, 148, or 61.4 percent of the total, were natives of Zhejiang, and 68, or 28.2 percent, were natives of Jiangsu The remaining 25 members, or 10.4 percent, came from Guangdong, Jiangxi, Anhui, Sichuan, Hubei, Guangxi, and Tianjin.68 The Shanghai Stock and Commodities Exchange also employed several potentially powerful figures as stockbrokers at the beginning of 1920s According to materials released by the Shanghai Municipal Archives in 1992, Chiang Kai-shek, Chen Guofu, and Dai Jitao were all stockbrokers of the Shanghai Stock and Commodities Exchange after 1920 Chiang Kai-shek invested 4,000 yuan in silver dollars in Hengtai Hao, a stock exchange and cotton yarn broker's office, and became a partner in the company on December 15, 1920.69 Six months later, Chiang invested another 3,000 yuan in silver dollars in Liyuan Hao, a specialized stock exchange office.70 During his career with the stock exchange, Chiang became friends with Chen Guofu and Dai Jitao The latter, in particular, helped Chiang Kai-shek by signing his name for business during Chiang's absence.71 A stockbroker's career in Shanghai was not as easy as Chiang expected, and he left Shanghai for Guangzhuo to join Dr Sun Yat-sen's followers Shanghai nevertheless became his second hometown His mixed love and hate relationship with Shanghai would impel him to return someday Photo 4.7 Outside of the Shanghai Gold Stock Exchange, 1930s (Shanghai History Museum) The Rise of Chinese Finance Capitalism The fast growth of modern Shanghai banking and the emergence of stock exchange markets became symbols of the inequity of finance capitalism in the newly developing Chinese bourgeois society Seeking maximum profits from lending capital and the stock exchange, the Shanghai bourgeoisie incorporated the behavior of finance capitalism into daily business life Without external intervention, free capital flowed according to the golden rule of market demand This financial freedom, however, not only spurred satisfaction among the Chinese capitalists' financial interests but also encouraged them to seek personal liberty, achieve individual goals, pursue national interests, and look for new opportunities on the political stage After Zhang Gongquan moved to Beijing as vice governor of the Bank of China in 1920, he organized the Chinese National Bankers Association there, spreading the spirit of free enterprise and encouraging Chinese bankers to participate in political affairs nationwide Zhang was not only a banker but also a member of the Progressive Party He often participated in party discussions of political philosophy, constitutional systems, and the political future of China As a banker, Zhang actively engaged in the Chinese nationalist movement by cooperating with Shanghai bankers On January 15,1922, Shanghai Shen Bao reported that the Chinese Bankers Association had announced it would raise 30 million Mexican silver dollars to buy back the rights of the Shandong– Jinan Railway from Japan The leaders of the Shanghai Bankers Association, Sheng Zuoshu, Chen Guangfu, and Song Hanzhang organized a special committee to discuss ways of raising the funds With the encouragement of the Chinese bankers, the Chinese Foreign Ministry discussed the purchase proposal with the Japanese government However, Japan rejected the proposal as the purchase conflicted with its own interests in China A few months later, the Chinese National Bankers Association petitioned the Ministry of Finance to pay off the International Banking Consortium loans In a letter dated May 11, 1922 to Inspector General of Maritime Customs Sir Aglen, the Shanghai Bankers Association and Shanghai Native Bankers Guild stated: "Received on 5th instant a telegram from the Ministry of Finance approving the petition sent by the National Bankers Conference and promising to pay out, on due dates and without any alteration, this sinking funds for the consolidated loans We therefore earnestly request that this Government promise be carried into effect and in accordance with the regulations of the loans."72 The Chinese bankers' attempt to pay off foreign loans showed their political and financial power in preparing to handle Chinese foreign debts and restore Chinese tariff autonomy On November 6, 1925, Chen Guangfu of the Shanghai Commercial and Savings Banks drafted a long proposal to the Special Committee on Tariff Autonomy It included a proposal for paying off foreign loans and recalling the rights by which the Hongkong and Shanghai Banking Corporation had been granted the authority to handle foreign exchange rates He thought that the Chinese government should issue domestic bonds to buy back from foreigners the rights to handle maritime customs and the salt taxes The Chinese Bankers Association and Shanghai Native Bankers Guild wanted to help the government to issue bonds and manage domestic debts.73 When the Russo-Asiatic Bank went bankrupt after engaging in speculation in the Paris market in 1926, the Shanghai Bankers Association sent several telegrams to the State Council, Ministry of Finance, and Ministry of Foreign Affairs on September 27,1926 Chen Guangfu represented the Shanghai bankers in calling in the Beijing government to restore China's sovereign rights to maritime customs and salt taxes from the Russo-Asiatic Bank immediately 74 This proposal was immediately supported by Beijing bankers Zhang Gongquan sent a reply telegram to the members of the Shanghai Bankers Association Zhang prudently advised that the clearing of the Russo-Asiatic Bank should follow the rule of international law 75 The Shanghai bankers' view also received strong support from the Chinese government Xiong Xiling, former prime minister and minister of finance, wrote a letter to Song Hanzhang that pointed out "the Russo-Asiatic Bank was a joint venture bank Since Russia had abolished its extraterritorial rights, China should send its officials to clear the bank."76 On September 30, Shanghai established a public foundation to prepare for the takeover of the administration of the maritime customs revenues and salt taxes The rise of Chinese finance capitalism was apparent in both the political and economic arenas Politically, the growth of financial capitalists strengthened demands for national sovereignty and administrative integrity Shanghai capitalists offered to help the government handle the maritime customs revenue and salt taxes Although this aspiration could not be realized under the weak Beiyang government, it did pave the way for Chinese tariff autonomy in the 1930s Economically, the success of Shanghai banking and the stock and commodities exchange indicated that the Shanghai capitalists were gaining the maturity necessary to control both the financial and commodities markets Compared to Hu Guangyong's unsuccessful attempts to compete with foreign merchants in the silk market, which had finally destroyed him in 1883, the Shanghai Stock and Commodities Exchange had the power to control the market by setting up several divisions of associations for specific goods In addition, the diversity of financial institutions and interest groups exemplified the democratic nature of Shanghai society Many financial publications served the public interest by criticizing and challenging the Beiyang government In short, the newly born financial capitalist class was a shining star on the Chinese political stage This elite group hoped for a strong national government to free China from a semi-colonial destiny It supported capitalist ideas of free enterprise, promoted national industries, and fostered a wealthy society However, the warlord Beiyang government could not meet those criteria Incessant civil war and the complex factional struggles of the military regime disgusted the new Chinese bourgeoisie With the victory of the Northern Expedition of the Nationalist movement in early 1927, Shanghai capitalists had new hopes for a strong national government to support them in realizing their political ideals and economic ambitions Over the next ten years, Shanghai banking reached a new phase 5 New Foreign Financial Powers, 1915–1930 With changes in the world political reality after World War I, foreign powers altered their existing banking and finance structures in China The Deutsch-Asiatische Bank was excluded from the International Banking Consortium when Germany was defeated; the Russo-Asiatic Bank was discriminated against following the Bolshevik victory in Russia; British and French banks were retrenched because of war financial debts that were due for repayment While the old members of the consortium struggled with their domestic problems, Japanese and American banking groups entered Chinese banking as new powers Before World War I, Japanese loans amounted to 12.4 percent and the U.S loans amounted to 0.7 percent of total foreign loans to China From 1915 to 1918, Japanese loans to China increased to 78.6 percent and U.S loans increased to 6.4 percent.1 In 1917, Japan assumed real power to represent the International Banking Consortium by extending 30 million Japanese yen for the Chinese Reorganization Loan The American banking group entered China's market after the U.S Congress passed the Federal Reserve Act in 1913, which approved the establishment of American banks in foreign countries Seeking a balance of financial power in China, the United States, Great Britain, France, and Japan reorganized the old International Banking Consortium into the "New International Banking Consortium" in May 1918 In this new organization, thirty-six American banks and financial institutions participated in the American group; seven British banks composed the British group; nine French banks constituted the French group; and nineteen Japanese banks and financial institutions joined together to form the Japanese group.2 The number of Japanese and American banks was much greater than the number of European banks Furthermore, because Japanese and American politics and banking policies directly impacted China's market, the new foreign financial power changed the old foreign banking and financial structure in China The Japanese Banking Group Despite the fact that Japan had been a capital-importing country, while investing its share in China's Reorganization Loan, which had been borrowed from England, France, and Germany, Japan became a capital-exporting country after World War I Although Japan had a trade deficit of 1.224 billion yen in 1913, it covered the trade deficit and had a trade surplus of 1.37 billion yen in 1918, which was created by exporting war materials to the Allies during the war Japan's cotton textile production had increased by fifteen times compared to prewar levels, iron production by seven times, and gold reserves by about five times in the postwar period Banking deposits increased by about three times to 5.6 billion yen as with the export business boomed Japan actively engaged in trade with China The total volume of Japanese trade with China in 1913 was 311.5 million in Japanese yen, of which imports from China were 93.4 million yen and exports to China 218.1 million yen The trade surplus was 124.7 million yen In 1926, Japanese trade with China reached 972.2 million yen, of which imports from China were 397.8 million yen and exports to China were 574.4 million yen The trade surplus was 176.6 million in Japanese yen.4 Japan also had large investments in China A typical Japanese investment in Shanghai was the cotton mill In 1914, the total number of cotton spindles in China was 865,788, of which Japan owned 105,952, or 12.2 percent In 1931, the total number of cotton spindles in China increased to 4,497,902, of which Japan owned 1,821,280 or 40.5 percent.5 The productivity of Japanese manufacturing in the textile industry is demonstrated in the Nankai Statistical Service report showing that Japanese mills in China employed 30.6 percent of the workers in the cotton industry of China, turned out 35 percent of the yarn and thread, and wove 55.2 percent of the cloth.6 Japanese banks played an increasingly important role in the rapid pace of investment in China According to Charles Remer's Foreign Investments in China, which was published in 1933, Japanese banks had twenty-seven main offices and branches in China in 1916 and fifty-five in 1925 The capital of these banks was reported to be 5.8 million yen in 1916, and 77.5 million yen in 1925; deposits totaled 10.9 million yen in 1916 and 73.5 million yen in 1925; and loans were 12.5 million yen in 1916 and 148.7 million yen in 1925 Net profits in China reported by these banks to their headquarters were 600,000 yen in 1916, 5.4 million yen in 1921 and 1.2 million yen in 1925.7 Japanese banking investments in China could be divided into two groups One was the "special banking group," which primarily carried out Japanese foreign policy rather than doing banking business This group was composed of the Yokohama Specie Bank, the Bank of Taiwan, and the Bank of Chosen They joined large financial operations that had both political and financial support from the Japanese government For example, a series of "Nishihara Loans" was created by the chief manager of the Bank of Chosen with the support of Japan's Terauchi Administration The other group was the "industrial banking group" or zaibatsu (financial cliques) system A typical banking group included the Sumitomo Bank, Mitsubishi Bank, and Mitsui Bank Since these banks had established ties within a certain type of industry, most of their business emphasized service to those industrial interests Based primarily on the copper industry of the Sumitomo Company, the Sumitomo Bank engaged in the multi-metallic monetary exchange business as soon as it was formed The Mitsubishi Bank was originally a financial department of the Mitsubishi zaibatsu, and had long provided financial service to Japanese shipping and trade before it was separated from the main company as an independent commercial bank.8 The Mitsui Bank was the first private bank founded in Japan to serve its company's international trade and finance In short, these three banks became Japan's leading private banks from the time of their establishment, a role that continues today.9 The Bank of Taiwan (1911) Following the Treaty of Shimonoseki that ceded Taiwan to Japan, the Bank of Taiwan was established as a Japanese colonial bank in 1899 with initial capital of million Japanese yen The political and financial aims of the bank were to unify the Taiwanese currency, to provide financial support for exporting Taiwan's raw materials to Japan, and to expand business in world trade through the bank branches in Southeast Asian countries.10 The Bank of Taiwan issued silver dollar notes immediately after its establishment by special permission as a Japanese chartered bank in Taiwan Then, in 1940, to be consistent with the Japanese gold standard system, the bank began to issue gold dollar notes instead of silver dollar notes After the Japanese government revised the "Taiwan Bank Law" in 1906, it issued paper notes instead of gold dollar notes Photo 5.1 The Bank of Taiwan, 1930s (Shanghai History Museum) Although the Bank of Taiwan had been chartered as a Japanese regional bank for major international trade transactions in south China and Southeast Asian countries, it opened a Shanghai branch in 1911 to expand its business in central China During the Sino-Japanese War, the Bank of Taiwan had approximately 10 percent of its banknotes in circulation on the mainland of China In August 1945, the amount of notes issued was 140 million Japanese yen When the Chinese nationalist government took over the Bank of Taiwan after the end of Sino-Japanese War, the remittance ratio was 1: in fabi, a Chinese legal currency.11 The Bank of Chosen (1911) The Bank of Chosen had originally been a Korean Bank prior to Japan's occupation of Korea In 1909, the bank was registered as a Japanese chartered bank with special permission from the Japanese government, and in 1911, it was named "the Bank of Chosen" under the ownership of the Japanese government The bank established its headquarters in Seoul with initial capital of 10 million yen After seven years, authorized capital was increased to 40 million yen at the end of 1918.12 The Bank of Chosen was the official bank in Korea with unlimited responsibility for issuing notes It opened sixteen branches in China, with primary business interests in northern China The bank issued its banknotes based on Japan's gold yen The banknote was known as the "old man bill," because an old man's picture was printed on its right side It was estimated that more than 30 million yen were in circulation by the middle of the 1920s.13 In 1916, Kamezo Nishihara, a member of the board of directors of the Bank of Chosen and the personal representative of Japanese Premier Minister Terauchi, went to China to investigate Chinese politics and finance Under his direction, the Bank of Chosen played a very important role in participating in the currency reform program in Manchuria The Chosen banknotes were designated as the legal Japanese currency in circulation in Lushu, Dalian, and in areas along the line of the Southern Manchuria Railway To strengthen Japanese economic investment in Manchuria, the Japanese government transferred the business of issuing Japanese gold notes and treasury notes from the Yokohama Specie Bank to the Bank of Chosen 14 According to statistics in the Chinese Banks Yearbook in 1936, government deposits in the bank were 80,955,000 yen, and the bank issued notes worth 211,252,195 yen.15 When the "New Four International Banking Consortium" was reorganized in 1920, the Bank of Chosen, instead of the Yokohama Specie Bank, was admitted to the consortium as the representative of the Japanese government Because of the Bank of Chosen's relationship with the Japanese military government, it vanished at the end of World War II The Sumitomo Bank (1916) On the foundation of the Basshi copper mine in Ehime, the Sumitomo Company developed its zaibatsu system with trading, mining, warehousing, steel manufacturing, and banking in the late nineteenth century The Sumitomo Bank was founded in 1895 with initial capital of million yen Setting up its headquarters in Osaka, the most important commercial center in Japan at the end of nineteenth century, the Sumitomo Bank received deposits from its associated companies and granted loans to landlords The bank also engaged in the multi-metallic monetary exchange of gold, silver, and copper Since the Sumitomo Company was both a copper producer and the official copper supplier to the government, the bank gained a great advantage from handling the multi-metallic exchange as a member of the zaibatsu The Sumitomo Bank hired a former director of the Bank of Japan, Kawakami Kin'ichi, as the general director of the bank Foreign exchange became one of the main business activities of the bank after the Russo-Japanese War The bank headquarters established a special department to study the foreign exchange and international banking businesses.16 Furthermore, World War I had provided significant trading opportunities for Japan's economic growth Exports increased, the shipping business blossomed, and foreign currencies accumulated in banks To capture this extraordinary opportunity, the Sumitomo Company and the Sumitomo Bank sent a delegation to China to investigate the market This business trip resulted in the decision to open branches in Shanghai in 1916 Although the bank's capital was only million yen in 1895, it had increased to 15 million yen in 1916, due to the bank's entering the foreign exchange business and establishing branches overseas.17 By 1936, the total capital of this bank had reached 70 million yen, making it one of the biggest banks in Japan.18 The Mitsubishi Bank (1916) The Mitsubishi Bank, originally a banking division of the Mitsubishi Company, was founded in 1895 with capital of million yen, or one-fifth the total capital of the Mitsubishi Company, Ltd 19 The Mitsubishi Company diversified its operations into coal mining, metal mining, warehousing, real estate, shipbuilding, and banking The Mitsubishi Bank was separated from the parent company as an independent commercial bank in 1919 While the Mitsubishi Bank was still a division of the Mitsubishi Company in 1917, it had already opened a Shanghai office to handle shipping and international trade transactions The bank took advantage of the Japanese economic boom after 1914 to export war materials to the Allies The net profit of the Mitsubishi Bank increased from 735,000 yen in 1915 to 2,953,000 yen in 1919.20 The Mitsubishi Bank not only operated the Mitsubishi zaibatsu business in Shanghai but also engaged in foreign exchange deals The bank's foreign exchange purchases increased from 621,735,000 yen in 1927 to 1,511,390,000 yen in 1929, and its foreign exchange sales increased from 551,917 yen to 1,510,202,000 yen.21 After the Japanese government removed the ban on gold exports, however, foreign exchange purchases decreased to 511,052,000 yen in 1930 and sales also decreased to 531,467,000 yen Listed only after the Yokohama Specie Bank, the Mitsubishi Bank Shanghai branch was the second largest Japanese bank in Shanghai until the end of war In the postwar period, the Mitsubishi Bank retained commercial contacts in Shanghai The Mitsui Bank (1917) As a prominent family name, Mitsui has dominated in Japan since the seventeenth century The Mitsui family business founder Hachirobei Takatoshi Mitsui (1622-1694) created the Mitsui dry goods and monetary-exchange business in the Tokugawa period Following the Mitsui House Constitution in 1722,22 the Mitsui Family members worked hard and cooperated with each other to become one of the largest merchant family organizations throughout Japan When the Japanese Emperor Meiji announced the formation of a new government in 1868, the Mitsui family was one of the wealthiest families supporting the new government As a result, the Mitsui family became the official exchange broker and financial agent for the government In 1872 the family dry goods business was separated under the name of "Mitsukoshi," while the Mitsui name remained in banking and finance The Mitsui family had once tried to form a joint-venture bank with the Ono family with government encouragement, but the attempt failed Then, the Mitsui family submitted an application to the Japanese government to establish the Mitsui Bank Receiving a conditional special permit from the government, the Mitsui Bank became Japan's first private bank in May 1876 At the same time, Mitsui's new trading company, the Mitsui Bussan (products and trading company) was also founded to diversify the financial risks of the bank because "Mitsui leaders had been forced to accept unlimited responsibility as a condition for establishing the Mitsui Bank, and they saw the trading business as an alternative to maintain the prosperity of the Mitsui family if the Mitsui Bank failed."23 A Mitsui zaibatsu system was thereby established Because the Mitsui Bank and Mitsui Bussan worked together, the bank developed its foreign exchange business through connections with Mitsui Bussan overseas trade The bank began to use foreign exchange to underwrite foreign bonds in 1916, and took the first step toward overseas investments In 1917, the Mitsui Bank opened its first overseas branch in Shanghai The same year, the bank's foreign exchange transactions reached 147 million yen.24 The principal foreign exchange transactions were the purchase of export bills for cotton yarn and fabrics sold to China, and the settlement of import bills for Chinese goods that were imported to Japan The Shanghai branch was highly profitable, and many bank personnel gained valuable firsthand experience in foreign exchange markets.25 With the outbreak of World War I, the Mitsui zaibatsu grew tremendously The capital of Mitsui Gomez, the Mitsui holding company increased to 200 million yen Mitsui Bussan became an economic giant, holding about 20 percent of the total value of Japan's imports and exports.26 The Mitsui Bank, therefore, further enhanced its financial power through loans for manufacturing and handling trade transactions The foreign exchange business developed quickly in the late summer of 1915, because of the dramatically increasing export volumes in overseas markets The bank's authorized capital also increased from 20 million Japanese yen in 1909 to 100 million yen in 1919.27 The “Nishihara Loans” (1917-1919) In sharp contrast to the Okuma cabinet's tough attitude toward China, which was exemplified by the twenty-one demands it placed on Yuan Shikai's government in 1915, the Terauchi cabinet emphasized economic cooperation In 1916, Terauchi sent Kamezo Nishihara to China as his representative in negotiations with Prime Minister Duan Qirui on a set of economic loans that were conditional on the establishment of a unified Chinese cabinet that was pro-Japan As a member of the "International Banking Consortium," politically, Japan could not unilaterally grant loans to China without considering the demands of other financial powers To avoid direct violation of the consortium agreement, the Terauchi cabinet formed a special banking group to handle overseas investments This special group included the Industrial Bank of Japan, the Bank of Taiwan, and the Bank of Chosen For the political considerations just noted, the Yokohama Specie Bank was excluded During his first trip to China in the summer of 1916, Nishihara wrote a letter to the president of the Bank of Chosen, Katsuta Kazue, to express his views on two different Japanese political approaches to the Chinese political situation: "one was a kind of foolish generosity; the other was tough and demanding."28 He thought both were unrealistic After returning from China, Nishihara drafted a proposal to the Japanese government on economic cooperation between Japan and China This proposal recommended investment in Chinese industry to guarantee Japanese economic interests in Manchuria, the loaning of money for railway construction, and currency reform in Manchuria.29 Nishihara's proposal was adopted by Terauchi, and he sent Nishihara back to Beijing to negotiate the conditions for the loan Preparation for Nishihara's negotiations included new restrictions on the activities of the Yokohama Specie Bank, new rights for the Bank of Chosen, and reorganization of the Industrial Bank of Japan The Terauchi cabinet had also approved the creation of a new Exchange Bank of China to serve Sino-Japanese enterprises in China The resulting "Nishihara loans" included eight items totaling 145 million Japanese yen These included two loans to the Bank of Communications for its reorganization in the amount of 25 million yen; a telegraph cable loan of 20 million yen; the Jiehui Railway loan of 10 million yen; the gold mining loan of 30 million yen, the Manchurian-Mongolian Railway loan of 20 million yen, the Shandong Railway loan of 20 million yen; and the loan of 20 million yen for Chinese participation in World War I.30 All these loans were granted by Japan between 1917 and 1918 The loans were negotiated secretly between the Duan government representative, Cao Rulin, and Nishihara Because of his pro-Japanese attitude, Cao Rulin accepted most of Nishihara's proposals without consulting the Chinese Ministries of Communications and Finance When Chinese newspapers subsequently published the contents of the negotiations, Chinese nationalistic outrage surged The condition of a pro-Japanese government imposed on the loans was regarded as a great national disgrace The results of the "Nishihara Loans" were mixed At the Pans Peace Conference, Japan demanded German concessions in Shandong, which aroused an impassioned anti-Japanese movement, beginning on May 4, 1919, in Beijing Most of the "Nishihara Loans" were never repaid by various warlord regimes of the 1920s For this reason, Japan's military took over Northern Chinese Customs Revenue immediately after occupying Shenyang (Mukden) in 1931 Because of the invasion, the prevailing Nationalist government stopped repaying the loans As Japan's militarist expansion advanced in Manchuria in the 1930s, Japanese troops gained tangible military advantages from the railway and telegraph network the Nishihara loans had financed, which provided a military communication structure for the Guandong Army occupation On February 4, 1922, the Washington Conference resulted in a Ninepower Treaty to respect China's sovereignty, independence, and territorial and administrative integrity; to maintain the "open door"; and to afford China the opportunity to develop a stable government.31 Although Japan signed the treaty at the Washington Conference and agreed to withdraw Japanese troops from Shandong and to restore to China all former German interests in Qingdao and the railways to Tianjin, it later withdrew from the joint Nine-power Treaty In contrast to Japan, the United States paid million dollars to China on May 21, 1924, in accordance with the American decision in 1908 to remit much of the money due under the terms of the Boxer indemnity This remission was used to create the China Foundation for Promotion of Education and Culture on September 17, 1924 With growing interests in China, American banking groups began to appear on the Shanghai banking stage The American Banking Group Despite the fact that the United States was the third largest exporting country in the world before 1913, its world financial capability was relatively weak because its trade finance relied primarily on German and British support for exporting large quantities of agricultural products and raw materials With the coming of World War I, America increased its volume of exports and built a financial structure In 1890, American manufactured goods amounted to only 14.8 percent of total world exports; by 1900, American exports had reached 35.4 percent; and by 1915 they had passed the 50 percent mark.32 Common American manufacturers who engaged in foreign trade wanted their own financial institutions to handle export transaction When the United States government recognized the problem that the average exporter could not afford to finance items produced by companies such as Standard Oil, United States Steel, International Harvester, the Remington Typewriter Company, and the Singer Sewing Machine Company, 33 it approved legislation to aid international trade and overseas banking When Woodrow Wilson was elected president, American businessmen and bankers worried about his antibanking attitude Wilson's decision to withdraw the United States from the International Consortium seemingly confirmed this fear However, the pro-trade position of the Wilson Administration revised the banking policy In 1913 the Federal Reserve Act approved the establishment of American banks in foreign countries and allowed them to accept bills of exchange arising from international transactions In Section 25 of the act, the Federal Reserve System authorized: any reserve (member) bank, with consent of the Board of Governors of the Federal Reserve System to establish banking accounts, appoint correspondents, and set up agencies in such foreign countries as it may deem best, for the purpose of purchasing, selling, and collecting bills of exchange, and further authorizes the reserve (member) bank to buy or sell, through such correspondents or agencies, bills of exchange arising out of actual commercial transactions, and to open and maintain banking accounts for such correspondents or agencies.34 In American banking history, the Federal Reserve Act of 1913 marked a milestone in the legislation to secure overseas trade and finance Although this act was important and significant, American banks did not rush into the international banking arena In January 1917, Secretary of the Treasury William McAdoo wrote President Wilson a memorandum to point out that the essential problem of American banks was a lack of foresight in financing industrial projects and control shares in the open markets: We are weak in those neutral nations of the world where the best open markets exist, because our bankers and businessmen are not taking advantage of their present opportunity to invest in the securities of the great railroad systems and other enterprises which would make them our certain customers for the future Our bankers have shown an extraordinary lack of foresight in the financing they have done for the belligerent powers Instead of buying collaterally secured bonds and stocks of railroads and other enterprises in these neutral countries, they should have bought these bonds and stocks outright and thus have secured control of those utilities which would put us in an impregnable position for the future development of these neutral countries and have given to our people control of the business These facilities will provide and enable us to develop the resources of these countries and secure a firm control upon our share of their markets.35 To enhance the Federal Reserve Act, the Congress approved the Edge Act, which was proposed by Senator Walter E Edge of New Jersey, and provided for federal chartered corporations to engage in banking and international financial operations in 1919 Edge Act corporations could make equity investments overseas that expanded the powers allowed to American banks, enabling them to compete more effectively against the stronger European banking houses To attain American goals and make progress in world financial markets, the secretary of the Treasury appointed Frank A Vanderlip, president of the National City Bank of New York, as a member of the International High Commission.36 Based on the Federal Reserve Act and the Edge Act, the National City Bank of New York acquired majority shares of the International Banking Corporation, the first American foreign bank in Shanghai, in 1915 The American Express Company opened its branch in Shanghai in 1919 The Chase Bank of America also established branches there in 1920 The Thrift & Investment, Finance & Trust Corporation was founded in 1927 And the Underwriter Savings Bank for the Far East was established in 1930 The American banking group took shape with vigorous goals and played important roles in the modern Shanghai banking stage The most recognized American banks in Shanghai were the National City Bank of New York, American-Oriental Banking Corporation, American Express Company, the Equitable Eastern Banking Corporation, which later merged with the Chase Bank, and the Underwriters Savings Bank for the Far East In addition to the growth of the American banking group, nonbanking institutions were also growing in Shanghai The American Asiatic Underwriters opened an office in Shanghai by offering fire and marine insurance beginning in 1919 The National City Bank of New York (1915) The temporary closing of the London financial market after the eruption of World War I made New York the center of international finance To pay for war supplies imported from the United States, European money flowed into New York markets, and America gradually replaced Britain as the largest financial power in the world Although the National City Bank of New York had started its international business at the end of the nineteenth century, it did not pay much attention to the Asian markets until the coming of World War I By acquiring majority shares of the International Banking Corporation in 1915, the National City Bank of New York became one of the largest international banks in Shanghai Considering the difference between the domestic and foreign banking environments, the process of transforming the International Banking Corporation into the National City Bank (NCB) of New York was done carefully and gradually "New forms were introduced and systems modified to conform with NCB procedures, but the actual integration over the years was gradual, being more in form than in substance."37 The Shanghai branch of the International Banking Corporation continued to function as a self-entity with the same Chinese name "Huaqi Yinhang" in Shanghai 38 The several branches of the National City Bank of New York in China began to circulate its notes in both local currencies of silver tael and dollars With foreign exchange as the major business of overseas branches, the National City Bank held special training courses on the subject of foreign exchange arbitrage Businesses in Shanghai included mainly local and foreign currency deposits, trade financing, and lending against securities and against cargo secured by goods warrants The discounting of native orders (local promissory notes) and cashing checks were regular activities Exports were financed prior to shipment by packing and "red clause" credits Import credits were opened usually on margins with trust receipt lines available on the arrival of shipments Overdrafts, clean and secured, were actively used for substantial amounts.39 Illustration 5.1 Banknote of the International Banking Corporation (Finance Studies Institute of the People's Bank of China) The Shanghai branch became the largest profit center for the National City Bank in China During the Great Depression in the early 1930s, the National City Bank of New York was able to continuously pay its domestic shareholders dividends, because the Shanghai branch earned tremendous profits for the headquarters by purchasing silver bars in China and selling them in both the London and New York financial markets Advocated by Frank A Vanderlip, the American International Corporation was formed as a worldwide investment trust The new trust enthusiastically financed foreign ventures and sold its own stock to the American public by investing in foreign securities "It would be a complete trust— vertical and horizontal, composed of construction, raw material, manufacturing, shipping, and financing firms."40 In 1916, the American International Corporation granted the Chinese government 100 million dollars for remolding the Grand Canal, constructing railways, and developing agricultural resources on the Island of Hainan.41 This loan was regarded as the greatest success of the American International Corporation Mayer Robert Stanley commented on the issue that "the accomplishments in China were quite significant This was the first entrance of American capital into China since the Hukwang Railroad Loan of 1908, and the United States replaced Europe as the primary financier of China."42 The success of the National City Bank of New York in China rested on financial support from the Rockefeller family William Rockefeller, the largest single stockholder before 1918, owned 52,000 shares He was personally allied with the Stillman family of the Standard Oil Company by the dynastic marriage of his two sons to Stillman's daughters Standard Oil money was always on reserve if the bank needed it The bank, in turn, was available to help Standard Oil in its worldwide search for oil.43 The National City Bank of New York and Standard Oil became two significant American enterprises in China To better conduct Chinese business, the National City Bank employed several Chinese compradors to secure local business for the bank, Candido E Osorio's 1940 memoir shows how compradors were viewed in those days He describes three compradors working in the Shanghai branch: Yuan Hengzhi (Yuen Yuen Kee) was "a very honest and respectable member of the Chinese community Though he had no education in English, he got along with his pidgin English Among the Chinese he was held in high esteem and his credit was A1 He could obtain, at any time, whatever amount he needed in the way of a loan."44 Wang Juncheng (Wong Ching Chung) was better educated and could speak slightly better English Though not so popular or so active he was well known as a very honest man and liked by the Chinese As with Yuan Hengzhi, the Chinese Bankers were all very willing to work with the bank."45 Wu Peichu (Wo Pei Choo) is described as being "well educated and writes and speaks English to perfection; he is a good financier and possesses a strong intellect Though quite modem in his ideas and familiar with foreign etiquette he is unlike the modern Chinese of the new generation He is the type of 'my word is as good as a bond.'"46 These Chinese compradors contributed their professional skills to expanding the business of the National City Bank in China Based on their excellent performance, the bank gave its comprador the official title of Chinese Manager The American-Oriental Banking Corporation (1917) Incorporated under the laws of Connecticut in 1917, the American-Oriental Banking Corporation started its business in Shanghai with paid-in capital of million Chinese silver dollars This bank had the majority of shares held by the American Raven Trust Co., and the remaining shares were held by Chinese merchants and other investors Of the paid-in capital, the Chinese contributed 1,250,000 yuan, and American Raven Trust Co controlled 550,000 in U.S dollars (the exchange ratio was about to Chinese yuan at that time).47 Compared with the National City Bank's performance, the American-Oriental Bank spent less on administration because of its location.48 Although it had branches in Shanghai, Sichuan, and Fujian, these branches had independent banking accountants to handle their own business The American-Oriental Banking Corporation in Shanghai had a close affiliation with the American-Oriental Bank of Sichuan, which was set up in 1921 with authorized capital of million gold dollars or million Mexican dollars The Sichuan branch had an American manager and a Chinese assistant manager Since it was the only American bank and the only foreign exchange bank located West of Hanzhou, it took large deposits and foreign exchange both from the hinterland and from Far Western China At the same time, the Sichuan branch had a loose relationship with the rest of the foreign banks located in the coastal area, and the American manager had diminished power to control business Finally, the American partners sold all their shares to Chinese merchants and local officials in 1932 Thus, the American-Oriental Bank of Sichuan became a Chinese capital bank The American-Oriental Banking Corporation in Shanghai also had a close affiliation with the American-Oriental Bank of Fujian, established in 1922 with capital of million dollars The proportion of stock held by the Raven Trust Co of Shanghai was 52 percent and the balance was held by Chinese merchants.49 In contrast to the bank in Sichuan, the Fujian bank was always managed and controlled by Americans until it was closed The American-Oriental Banking Corporation issued banknotes, which circulated mainly in Shanghai and Tianjin According to the bank's statement, as of January 1, 1922, the balance of outstanding banknotes was 318,230 dollars with special cash reserves deposited in Shanghai banks against notes in circulation.50 The American-Oriental Banking Corporation was closed in 1935 due to the failure of its foreign exchange activities The bank's collapse in China had a significant impact on the 1935 Shanghai financial market, because the bankruptcy weighted the silver crisis that was influenced by the U.S "Silver Purchase Act." Under the pressure of domestic economic depression and an international silver crisis, the Chinese government was forced to abolish the silver standard The American Express Company (1917) The American Express Company was founded in 1850 to fulfill the demand for express service during the Gold Rush in the United States This company combined its travel and financial services and expanded these services globally at the beginning of the twentieth century General Manager R A Foulks opened an office in Hong Kong on May 1, 1916 In the second year, offices were established successively in Shanghai and Beijing, and then in Tianjin The American Express Company's Chinese name is "Meiguo Yuntong Yinhang." Although the company had four offices in China, only the Hong Kong and Shanghai offices were engaged in the banking business The Beijing and Tianjin offices were mainly involved in the travel business The head office for the American Express Company in China was in Shanghai Based on the world tourist business, the Shanghai office engaged in purchasing and selling foreign exchange, and issuing travelers checks Its banking business in Shanghai was very limited because the company's primary interests revolved around tourism and express financial service This company issued no banknotes in China Compared to other foreign commercial banks, the American Express Company was considered only as an important American financial institution in China The Equitable Eastern Banking Corporation/The Chase Bank Under the laws of the state of New York governing foreign banking corporations, the Equitable Trust Company created a subsidiary bank, the Equitable Eastern Banking Corporation, in December 1920 With capital of million U.S dollars, the Equitable Eastern Banking Corporation opened its first foreign branch in Shanghai on January 2, 1921 This branch, formerly a representative office of the Equitable Trust Company, it was the second most important American banking institution in China in terms of capital investment In 1931, the Equitable Eastern Banking Corporation merged with the Chase National Bank of the City of New York, and the name of the Shanghai branch was changed to the Chase Bank with the Chinese name "Datong Yinhang." While Equitable operated foreign branches, "the major thrust of its business involved relations with foreign correspondent banks In this the Equitable had been a leader, and the concept had been carried forward into Chase The principle activity of Chase's officers was to visit these correspondents, attract deposits, and develop reciprocal trade business with them."51 An emphasis on foreign activities was a priority of the Chase Bank The Shanghai branch operated with a high degree of autonomy and independence After the eruption of the Pacific War, the Chase Bank Shanghai branch was forced to close by the Japanese military forces The bank reopened its branch shortly after the war ended over, and the Shanghai branch was in operation again by late 1945 However, its operation in Shanghai was "handicapped by stringent government regulations and by widespread economic dislocation accompanying the inflation then gripping China."52 The Chase Bank stopped its business in Shanghai after the communists took power, and left only a few employees to deal with the small amount of uncompleted business for another five years The Underwriters Savings Bank for the Far East (1930) The Underwriters Savings Bank for the Far East was a by-product of American Asiatic Underwriters, a leading insurance company created by an American businessman Cornelius Vander Starr (C.V Starr) in Shanghai in 1919 The American Asiatic Underwriters offered fire and marine coverage in Shanghai, which lacked sufficient insurance companies Furthermore, Starr set up the Asia Life Insurance Company to market life insurance to local Chinese people By focusing on hiring, training, and promoting local people to management, the company quickly established a life insurance market network According to statistical data of 1937, 75 percent of China's total insurance income, which was about 38.8 million fabi, was controlled by the company 53 With the American Asiatic Underwriters and Asia Life Insurance Company dominating about 30 percent of China's insurance business, they made enormous profits in China In 1926, Starr returned to the United States and registered the American International Underwriters in New York to issue insurance on American risks outside the United States In 1927, Starr purchased the famous building at 17 the Bund to construct a "resource" center for the multifunctional American banking and insurance company The Underwriters Savings Bank for the Far East operated its business on the first floor of the building It was a pure savings bank with paid-in capital of 500,000 yuan in silver dollars The American Asiatic Underwriters and Asia Life Insurance Company were all located in the same building After the outbreak of the Sino-Japanese War, Starr moved his company headquarters to New York in 1939 This company changed its name to the American International Assurance Co when it moved to Hong Kong in 1948 Joint-Venture Banks The joint-venture banking institution was a familiar banking form in China beginning in the later part of the nineteenth century Among the notable banks were the Sino-British joint bank named the "Bank of China, Japan, and the Straits," established in London in 1890, and closed in 1902; the Sino-British joint "Banking Corporation of China," formed in Hong Kong in 1891, and closed in 1911; the SinoRussian joint "Russo-Chinese Bank," founded in St Petersburg in 1895, and closed in 1926 The original capital of the first two joint-venture banks came from private funds, and the third bank, as we already know, was a political joint-venture bank for which the funds came from both governments All of these Sino-foreign joint-venture banks, however, struggled to find ways to survive and actually existed for only a short period Photo 5.2 The American Asiatic Underwriters and the Asia Life Insurance Company were in this building in the 1930s (Shanghai History Museum) In the early twentieth century, another wave of establishing Sino-foreign joint-venture banks emerged in China Among these were the Commercial Guarantee Bank of China, Banque Industrielle de Chine, the Exchange Bank of China, the Chinese-American Bank of Commerce, the Chinese-Italian Banking Corporation, the Sino-Scandinavian Bank, and the Banque Franco-Chinoise pour le Commerce et l'Industrie The motivations of these joint-venture banks were various: some were established by Chinese government and foreign merchants to settle foreign debts; and others were established by multinational private investors to promote trade and commerce The Commercial Guarantee Bank of China In 1911, the Chinese government and German merchants established the Commercial Guarantee Bank of China with million tael in silver Its primary goal was the guarantee of foreign debts Japan had a seat on the Board of Directors through its claim to creditor's rights in Tianjin investment This guarantee bank was reorganized into a commercial bank to expand its business scope in 1920 Furthermore, it became a Chinese bank after foreign capital withdrew from it in 1929.54 The Banque Industrielle de Chine The Banque Industrielle de Chine was a Sino-French joint-venture bank rooted in a diplomatic agreement signed by French merchants and the Chinese Beiyang government in 1912 The bank's headquarters were set up in Paris The French partner owned two-thirds of the shares with paid-in capital of 30 million franc, while the Chinese government owned one-third of the shares with paid-in capital of 15 million francs However, the joint venture was in name only because the Chinese capital was borrowed from the bank In gratitude for the help, the Chinese government offered the bank an opportunity to borrow 600 million franc to build a railway from Guanzhou to Chongqing.55 The bank enjoyed special permission to issue its notes in China In 1921, the Paris headquarters went bankrupt, forcing its Chinese branches to suspend business After the Chinese government bailed out the bank, it restored business in 1925 But it was no longer a joint-venture bank that could issue its banknotes in China.56 The Exchange Bank of China The Exchange Bank of China was a Sino-Japanese joint-venture bank established in 1918 with capital of 10 million Japanese yen The direct reason that this bank was formed was to make sure that the Nishihara loans were being carried out properly The Japanese capital was contributed by the Chosen Bank and the Taiwan Bank The Chinese capital was contributed by the Bank of China, the Bank of Communications, and private investors The Anhui warlord Duan Qirui became the largest private investor with million yen deposited in the bank.57 Some important figures in the Beiyang government, such as Cao Rulin, Lu Zhongyu, and Zhang Zhongxiang, were chosen to be presidents of the bank, successively A Chinese banker was appointed as the general manager, and a Japanese banker was appointed as the executive manager in charge of the daily business Although the bank was an exchange bank in name, it also engaged in a wider banking scope that included issuing banknotes After the Japanese Guandong military killed the Chinese military general Zhang Zuolin in north China, a wide anti-Japanese movement arose in China The Exchange Bank of China had a severe bank run in December 1928 Later, it was forced to close by Zhang Xueliang, the son of Zhang Zuolin Photo 5.3 Asia Banking Corporation, 1920s (Shanghai History Museum) The Asia Banking Corporation The Asia Banking Corporation took over the form of a United States-Canada joint bank, the Park Union Foreign Banking Corporation, to register in China in 1918 This bank triggered a backlash in the speculation of foreign exchange in its second year of business It could maintain the operation for only a few years, later merging with the National City Bank of New York in 1924 The Chinese-American Bank of Commerce The Chinese-American Bank of Commerce was founded in April 1919 with 50 percent each in joint capital from both the Chinese and American merchants Registered in Beijing with the special permission of the Beiyang government, this bank obtained the right to issue its notes in China The bank headquarters were originally set up in Beijing, however, they moved to Shanghai later in an attempt to gain more freedom to commercial banking business while avoiding direct political intervention from the Beiyang government.58 Of the eleven members of the Board of Directors, the Chinese partners had six seats Although the chairman appointed was Chinese, the position of executive director was held successively by two Americans, J.S Thomas and C.L Williams, However, this bank was not as prosperous as it should have been It lacked a clear business direction and was upset by internal quarrels The American investors lost confidence in its performance and sold off their stocks This bank was forced to close its doors in 1929 The Chinese-Italian Banking Corporation The Chinese-Italian Banking Corporation was established in 1921 After three years, the Chinese partner withdrew, and the bank merged with another Italian bank, Credito Italino, to become a solely Italian-owned foreign bank in 1924 The bank's main functions were to maintain the account of the Boxer indemnity for Italy, and to promote bilateral trade between the two countries This bank also conducted general banking business transactions, and maintained special facilities for Italian lire exchange, as well as savings accounts for tael, dollars, sterling, francs, and gold The Sino-Scandinavian Bank The Sino-Scandinavian Bank was a joint-venture bank established by Chinese, Norwegian, and Danish merchants in 1921 with paid-in capital of 2.5 million yuan in silver dollars The business was limited to the Tianjin and Qinhuangdao areas Affected by a severe bank run in Beijing in 1928, this bank closed its business shortly thereafter The Banque Franco-Chinoise pour le Commerce et l’Industrie The Banque Franco-Chinoise pour le Commerce et l'Industrie was initially a Sino-French industrial bank, Sociộtộ Franỗaise de Gộrance de la Banque Industrielle de Chine, founded in 1922 with capital of 10 million francs, and reorganized in 1925 The capital increased 20 million francs, and by 1930, capital has increased to 50 million francs, of which official Chinese capital totaled 10 million francs.59 This bank generated banking and exchange business all over the world Causes of the Failure of Joint-Venture Banks These joint-venture banks all existed for a short period in modern Chinese banking history Why had these joint-venture banks been formed? And why did they fall so quickly? The motivation for forming a joint Sino-foreign bank was obviously for a foreign partner to get into China's market quickly and participate in a wider business region with the Chinese partner's help and through its relationships with various bureaucratic levels; a Chinese partner could get foreign capital immediately to form a bank and could share these special benefits offering them to foreign investors and avoiding direct political intervention from the government However, these joint-venture banks fell in a short time What were the causes of the failures? First, there were many political and financial problems combined with international conflicts both before and after a specific bank was established in China There was not equal treatment in dealings with the joint-venture bank business The foreign policy of the investor's country contributed political risks that included threats of war, which directly impacted its overseas joint-venture bank Second, Chinese domestic political instabilities contributed high investment risks to these joint-venture banks In most banks established in the Beiyang government regimes, local warlords became the largest private investors in the bank Political anarchy led to volatility in the banking and finance Moreover, the absence of a consistent banking policy and a lack of responsibility also increased the market risks Third, cultural differences in banking operations could not satisfy all interest groups in the joint-venture bank In addition, official or semi-official corruption also contributed to the failure of these joint-venture banks At the beginning of the twentieth century, several European trading and shipping companies also established banks in China These included the P & O Banking Corporation, 60 Nederlandsch Indische Handesbank,61 E.D Sassoon Banking Company, 62 and others that established their banking facilities in Shanghai The business scope of these newly established European banks was much narrower than that of the old and well-established European banks Although British banking roles in China declined after World War I, these traditional British banks still had significant banking influence in Shanghai In particular, the Chartered Bank of India, Australia, and China and the Mercantile Bank of China continuously expanded their business, the Hongkong and Shanghai Banking Corporation still held its leading position among foreign banks in Shanghai until the outbreak of the Pacific War The finance capitalist influence of foreign banks in Shanghai did not decline with the diminishing role of the European banks, instead, it expanded with the rise of Japanese and American financial powers The Japanese "Nishihara loans" attempted to enhance Japanese investments in Manchuria and further influence China's currency reform The Japanese zaibatsu systern inspired some Chinese modern bankers to plan a similar banking and industrial system in Shanghai With U.S government support, the American banking group of thirty-six banking and financial institutions emerged as a new financial power The American monetary policy of the "Silver Purchase Act" directly impacted China's economic and financial market in the 1930s The foreign finance capitalist influence integrated with elements of Chinese native finance capitalism and modern capitalist thought to dominate Chinese banking and finance 6 Shanghai Banking and the Nationalist Government, 1928-1937 In the mid-1920s, the Chinese bourgeoisie had already taken shape with numerous industrial entrepreneurs increasing banking facilities and establishing a relatively strong private capital structure The young bourgeoisie had clear goals with regard to developing national industries and strengthening national banking and finance With the simultaneous emergence of widespread nationalism and anti-imperialism as well as opposition to civil war, Shanghai bankers played vigorous roles in various political movements They called for issuing domestic bonds to repay all foreign loans, building modern banking facilities, and imitating the Japanese zaibatsu system to construct the Chinese industrial structure They had dreamed of establishing a national capitalist society with democratic politics and a prosperous economy They hoped to have a strong nationalist government to support the realization of this dream and to end the constant civil war among warlords that had continued for more than a decade Dr Sun Yat-sen represented Chinese bourgeoisie idealism Based on his Three Principles of "Nationalism, Democracy, and People's Livelihood," he gradually led the Nationalist Party, or Kuomintang, to political victory in the southern part of China In his view of "People's Livelihood," Dr Sun believed that China would inevitably carry out industrialization or capitalism, because it was the only way to overcome poverty and to make the country prosperous and strong At the same time, however, he worried that the progress of capitalism had also created social inequalities enabling only the rich minority to enjoy the fruits of social achievements while the poor majority became the victims of social progress.1 To prevent the evils of capitalism and to check the dangers inherent in capitalism, Sun argued that the government should regulate private capitalism and develop national capitalism.2 Neither a purely Western concept of capitalism nor socialism in its real meaning, the concept of national capitalism was not clearly elaborated To a certain degree, the concept combined the meaning of "capitalism" with a "nationalist" character or "nationalist capitalism" that fostered in China's unique political and economic circumstances Hence, a national capitalism framework with governmental regulations was drawn by Sun Yat-sen When the Republican Revolution of 1911 occurred, Sun Yat-sen tried at once to get support from Western powers as well as from Japan However, the Western preference for Yuan Shikai and Japan's ambitions on Chinese territory destroyed Sun's hope Left with no choice, Sun Yat-sen decided to "unite with Russia and the Communist Party" against federalism and imperialism, and established the First United Front between the Nationalist Party and the Communist Party Sun pointed out that the foreign economic invasion was reflected in Chinese finance by what foreign banks took away from Chinese interests China should have its own central bank and state banks to unify the currency and issue government bonds Sun Yat-sen had a strong interest in the establishment of the first Chinese Central Bank in Guangzhou in 1924, and appointed his brother-in-law and a Harvard graduate, T.V Soong (Soong Tes-ven, Song Ziwen, 1894—1971) as the governor of the Central Bank To establish national capitalism and create a state banking system became the major economic and financial objectives of the Nationalist Party Political uncertainty during the time before Chinese capitalism was deeply rooted in China and the ambiguity of Dr Sun's thought led to later numerous interpretations of national capitalism The idea of national capitalism evolved under the Kuomintang as state capitalism characterized by bureaucratic monopoly Later, the idea was transformed as national capitalism by the Communists when they took power in China The Creation of Chinese State Banks A demonstration by Chinese students outraged over the killing of a Chinese worker, Gu Zhenghong, by his Japanese boss on May 15 was crushed by the British-dominated Shanghai municipal police in the International Settlement on May 30, 1925, intensifying the tempestuous anti-imperialist movement in China The impact of the anti-imperialist movement in Shanghai banking was demonstrated by the many Chinese who transferred their savings from foreign to Chinese banks Growing Chinese patriotic sentiment ran parallel to the decline of foreign banks In 1926, the Banque Industrielle de Chine and the Russo-Asiatic Bank successively went bankrupt, destroying the myth of foreign banks' force majeure Many former Qing officials and rich merchants transferred their wealth to Chinese banks for the sake of security According to the statistics of the "three southern banks" and "four northern banks," the total deposits of the seven banks increased from 140 million yuan in silver dollars in 1924 to 240 million yuan in 1926.3 In contrast to the growth of Chinese national banks, foreign banks declined and money tightened in their overseas business operations with the impact of their domestic recovery of the post-World War I economy In a shift from their usual role as lenders, foreign banks began to borrow interbank loans from Chinese banks According to the National Commercial Bank's report on February 9, 1918, this bank granted a two-week short-term loan of 50,000 silver tael to the Banque Beige pour l'Etranger at 7.5 percent interest; a one-month short-term loan of 100,000 tael to the Hongkong and Shanghai Banking Corporation at percent interest; and a floating loan of 50,000 tael to the Nederlandsche Handel-Maatschappij at percent interest.4 The decline of foreign banks in Shanghai provided tremendous opportunities for the growth of Chinese national banks Chinese banks accounted for 40.5 percent of China's banking capital in 1925, foreign banks for 36.7 percent, and native banks for 22.5 percent.5 Of total deposits that year, Chinese banks held 42 percent, foreign banks 25 percent, and native banks 33 percent.6 Modern Chinese banks finally gained the leading position over native banks and foreign banks after two decades of competition The Shanghai bankers played critically important roles in mass political movements and financially supported the Northern Expedition launched by Chiang Kai-shek With the victory of the Northern Expedition, the Nationalist Party began its efforts to establish a relatively strong government and create a central banking group in China Shanghai Bankers and Chiang Kai-shek After Chiang Kai-shek quit his job in the Shanghai Stock and Commodities Exchange, he went to Guangzhou and joined the Nationalist Party Having received military education in both China and Japan, Chiang was promoted quickly and soon became a close follower of Sun Yat-sen Following Sun's death in 1925, Chiang Kai-shek became generalissimo of the Kuomintang military force and launched the Northern Expedition in June 1926.7 Under the call of anti-imperialism, anti-feudalism, and support of the mass social movement, the Northern Expeditionary force won several crucial battles in southern provinces and arrived in Shanghai on March 22, 1927 During the Northern Expeditionary force attack on Nanchang in November 1926, Chiang Kai-shek secretly sent his close friend Huang Fu, and the business manager of the army, Xu Fu, to Shanghai to meet with bankers Qian Xinzhi and Chen Guangfu On January 25, 1927 Chiang wrote a letter inviting Qian and Chen to Wuhan to discuss the financial support of the revolutionary army In response to Chiang's invitation, Qian Xinzhi came to Wuhan to meet with him Chen Guangfu did not come, but he had made a secret agreement with Qian to assist in financing the Northern Expeditionary forces with 500,000 yuan in silver dollars Although the amount of money was relatively small, it solved the most pressing problem of the Northern Expedition, and impressed Chiang deeply preceding the final victory of the Northern Expedition According to Chinese scholar Zhu Zhenghua, Chiang Kai-shek chose Qian and Chen because he knew that Qian was a major player in the "four northern banks" and had a Japanese financial education, while Chen was the main policymaker in the "three southern banks" and had an American education These backgrounds interested Chiang and he thought they might serve a useful purpose in the future In addition, Qian and Chen were close friends in Shanghai, where they had countless ties with the Soong family, a major investor in the Shanghai Savings and Commercial Banks Chen also had known H.H Kung, (Kung Hsiang-his, 1881-1967), Soong Ailing's husband and the future minister of finance since he was in the United States.8 For this combination of reasons, Chiang planned to use Chinese bankers to raise funds for his army On March 26, 1927, Chiang Kai-shek arrived in Shanghai Immediately, he sent Bai Chongxi, the frontline commander-in-chief, to the Shanghai General Chamber of Commerce and the Shanghai Bankers Association to borrow money from Shanghai bankers and merchants Chiang personally worked through his old friend, Yu Qiaqing, who worked at the Ningbo Commercial and Savings Bank, to call for financial support to the army He also wrote a letter to the Shanghai Native Bankers Association asking for "finance of military and administrative expenditures" and promising to make the return of these monies "a high priority for taking both 'gong jia' (public) and banker interests into account and for helping each other."9 On April the Shanghai Bankers Association lent Chiang million yuan in silver dollars, and the Shanghai Native Bankers Association lent Chiang million yuan Chiang used this money to move his forces to Nanjing and arrange a "clearing party" campaign immediately after he left Shanghai On April 12, 1927, the Shanghai local Green Gang members, headed by Du Yuesheng began to suppress members of the Chinese Communist Party, ending the First United Front between the Nationalist Party and the Communist Party with the "April 12 massacre" in Shanghai In return for the support of the Shanghai bankers, the Nationalist Government appointed Qian Xinzhi as the minister of finance, and Chen Guangfu as the director of the Jiangsu and Shanghai Finance Committee as soon as the new government was inaugurated on April 18, 1927 Under the authority of the Nationalist Government, on May 1,1927, the Jiangsu and Shanghai Finance Committee issued 30 million yuan in treasury bonds called "Jiang-Hai Guan 2.5 percent surtax treasury bonds," which used the Shanghai customs surtax as security This bond was issued without a discount rate but at 0.7 percent monthly interest, or 8.4 percent annual interest Five months later, the minister of finance of the Nationalist government approved a second insured bond based on the revenue received by the Shanghai customs authority The amount of the second issue was 40 million yuan in silver dollars at a percent discount rate and a 9.6 percent interest rate.10 Illustration 6.1 Letter from Chiang Kai-Shek to the Shanghai Native Bankers Association Dated March 30, 1927, the letter concerned raising funds for military expenditures (Shanghai Municipal Archives) Issuing domestic bonds to finance government expenditures became vitally important to the new government From April to June 1, 1928, the government issued three loans amounting to 26 million yuan secured against the taxes on rolled tobacco and stamps On June 30, another 40 million yuan bond was issued using the taxes on kerosene and gasoline as security.11 As of Illustration 6.2 Reply letter from the Shanghai Native Bankers Association, dated April 3,1927, stating that the Shanghai bankers had raised million silver dollars for Chiang and had used the additional customs tax as security (Shanghai Municipal Archives) June 1928, over fourteen months, the Nationalist government had issued six domestic bonds with a nominal worth of 136 million yuan in Shanghai.12 Because the issuing of government bonds had financed Chiang Kai-shek's success in national unification, Chiang offered Chen Guangfu a position as deputy minister of finance Chen graciously declined this appointment, because of potential conflict of interest with his role as a banker However, he retained his positions on boards of directors of the Bank of China and of the Bank of Communications, and became the director of the newly organized Central Bank of China.13 Facing constant requests to finance the military expenditures, Shanghai bankers began to decline the requests Ye Kuizhu at the National Commercial Bank refused to lend a designated 400,000 yuan to Chiang Kai-shek, which caused Chiang to attempt to arrest Ye, and later resulted in misfortune for the bank.14 Zhang Gongquan at the Bank of China suggested that Chiang should limit his military expenditures, which planted the seed for Chiang to repel Zhang from the Bank of China in 1935 Although some Chinese banks were also reluctant to lend further funds to Chiang, the desire for an end of civil war and the hope for a unified China placed continuous pressure on them to support the Nationalist army The 1928 National Economic and Financial Conferences Beginning in 1928, the Nationalist government took several steps toward national economic and financial construction First, it reorganized the entire fiscal system by refunding the public debt Second, it obtained tariff autonomy and declared the unification of currency by abolishing the silver tael and adopting the silver dollar Finally, it created a "four banks and two bureaus" central banking system, which was a government-controlled banking institution In June and July of 1928, the National Economic Conference and the National Financial Conference were held separately by the Ministry of Finance in Shanghai The two conferences passed several resolutions regarding the Chinese economic and financial situation At the National Economic Conference, a proposal to establish a powerful central bank was adopted by the Committee on Banking and the Committee on Currency The main points included in the proposal were: (1) To establish a powerful central bank, on the basis of a limited liability corporation, with the sole right of note issuance, to act as a Government Treasury, and under the supervision of a Board of Supervisors to be appointed by the Government; (2) To establish provincial banks, one in each province, which should be forbidden to issue bank notes and whose functions should be subject to the regulations of the Central Government; (3) To promulgate regulations governing the organization and operation of ordinary commercial banks, foreign exchange banks, savings banks and agricultural and industrial banks, in order to promote commercial and industrial development and to protect the interest of the people.15 In July the National Financial Conference outlined a more specific plan for establishing a national banking system, with the following objectives: (1) To organize a national bank to act as the Government Treasury, with the sole right of issuing notes, and to stabilize foreign exchange; (2) To organize an exchange bank as a central clearing house for both internal and foreign exchange; (3) To establish agricultural and industrial banks to facilitate the country's development of industry and agriculture.16 To unify national currency, a proposal was raised at both conferences favoring abolition of the silver tael and its replacement with the monetary unit of silver dollars before ultimately working toward the gold standard.17 On the plan to construct a sound monetary system, the Nationalist government invited Professor E.W Kemmerer of Princeton University to bring the Commission of Financial Experts to China for one year Alter a nine-month investigation in China, Kemmerer submitted a report to the Ministry of Finance in November 1929, suggesting the establishment of the gold standard The planned gold unit was called the sun (in memory of Sun Yat-sen), a unit of measure but no actual gold to be placed in circulation The sun was designated as equal to 0.40 U.S dollars, the approximate value of the silver dollar in 1929 Parity was chosen in the belief that it would facilitate future transformation from the silver standard monetary base to the gold base Although the Kemmerer project received serious public debate, it was not carried out because world silver values slumped drastically after 1929 At both conferences, the participants discussed the revision, consolidation, and liquidation of domestic and foreign debts To be financially able to handle these debts, the Nationalist government declared tariff autonomy as the first step toward national economic and financial planning The 1928 National Economic and Financial Conferences represented the first time in Chinese history that planning the economic system under the central control of the Nationalist government was addressed Although implementation of the main decisions of the conferences was hindered by the civil war and world economic depression, the economic planning methods and the establishment of a state banking system remained central to Chinese leaders Tariff Autonomy One of the most important goals of the Chinese national revolution was the abolition of all unequal treaties and the regaining of national tariff autonomy On the third day after its establishment, the Nationalist government passed a resolution on tariff autonomy on April 20, 1927 Although abolishing the lijin tax and adopting "tariff autonomy" were originally set for September 1, 1927, they had to be postponed due to domestic obstacles in accomplishing national unification and external diplomatic difficulties with foreign powers Following the victory of the "Northern Expedition," the Nationalist government crossed the Great Wall in the middle of 1928 and signed a new tariff treaty with the United States on July 25 The new tariff treaty broke diplomatic barriers with other foreign countries, and brought China's tariff autonomy into realization On February 1, 1929, the Chinese government implemented new tariff rates for the first effective day Under the new regulations, the import tariff was increased from the original percent to 7.5 percent on general goods, and rates on some luxuries varied to a maximum 27.5 percent Japan was reluctant to sign the new tariff treaty with China until May 1930 The new SinoJapanese Tariff Treaty committed the Chinese to reserve million Japanese yen per year from custom revenues for repaying "Nishihara Loans," and maintained low rates on textiles and other major imports from Japan for three years.18 Based on the new tariff treaty, the Chinese government adjusted its tariff rates on Japanese imports after three years Despite an increase in nominal tariff revenue following national tariff autonomy, the Nationalist government did not receive as much as it expected, because some revenue had already been used as security on some domestic loans The Nationalist government military expenditures continued to be extremely high in order to suppress the Communist armies To fill the gap between national revenue and government budget deficits, the government imposed extra taxes on consumer goods, such as tobacco, gas, and oil The people's general livelihood did not benefit from national tariff autonomy, because the Nationalist government held continuous anti-Communist campaigns, which created huge government budget deficits The Creation of the Central Bank of China (1928) After it had established its capital in Nanjing, the Nationalist government pressured Chinese bankers to create a central bank On August 3, 1928, Chiang Kai-shek met Chen Guangfu in Nanjing to discuss the proposal to form a central bank Chen suggested two possible ways to this, either by merging the Bank of China and the Bank of Communications into a central bank or by creating a new central bank Chen's key points were that the central bank should be able to allow private shares; the minister of finance should not hold the post of president of the bank concurrently; and the director in charge of issuing banknotes should not be appointed by the government.19 These suggestions ran counter to Chiang's vision of central financial authority, and thus were not accepted As the financial minister and governor of the Central Bank in Guangdong, T V Soong tried to reorganize the Bank of China into a formal central bank of China He consulted with Zhang Gongquan, the general manager of the Bank of China in this attempt Zhang regarded the Bank of China as profoundly influential in international banking circles, and believed the records of the bank shareholders association and its self-regulation rules were outstanding If the government took over control as the central bank, it would weaken the image of the bank.20 So, Zhang softly turned down Soong's plan In fact, the Bank of China had strong historical anti-warlord sentiments that would make it very difficult for the new government to take over the bank immediately Moreover, the new government did not have the official financial power to compete with the large numbers of private shares in the bank Therefore, the National government decided to create a new central bank of China Before the new Central Bank of China was established in 1928, two other former central banks had been founded at Guangzhou and Wuhan in the early years Under Dr Sun Yat-sen's direction, the first central bank was founded at Guangzhou in 1924, with T.V Soong appointed as its governor During the "Northern Expedition," the left wing of the Kuomintang established another central bank in Wuhan in January 1927 Both formal central banks were established for the purpose of issuing currency to fund military expenditures, thus making it impossible for them to perform normal central banking functions On October 6,1928, the Political Council and the Central Executive Committee of the Kuomintang passed "the Regulations of the Central Bank of China."21 According to the regulations, the Central Bank of China was designated as the government bank with authorized capital of 20 million yuan in silver dollars directly provided by the National Treasury Considering Shanghai a world financial center, the Central Bank of China established its headquarters there The bank had an authorized right to issue notes, mint and circulate coins, handle foreign exchange, and issue government bonds The new Central Bank of China acted as an agency of the Ministry of Finance and undertook the service of foreign and domestic loans The Central Executive Committee of the Kuomintang, instead of the Ministry of Finance's leadership, exercised direct control over the Central Bank of China Moreover, the Central Committee appointed Minister of Finance T.V Soong as governor of the Central Bank of China In the following few years, T.V Soong developed views that differed from those of the Central Executive Committee, especially Chiang's, on the finance of military expenditures Soong resigned from his position as governor in December 1931 H.H Kung, another brother-in-law of Chiang Kai-shek, had been appointed as the minister of finance At first, the Central Bank did not play the leading banking role of issuing national notes Instead, it shared the right to issue notes with the Bank of China, the Bank of Communications, and several commercial banks, including the National Commercial Bank and the Ningbo Savings and Commercial Bank In 1933, the Nationalist government approved the proposal of "abolishment of silver tael and adoption of silver dollars," which gave the Central Bank of China the right to mint the standard silver dollar The Central Bank of China had increased its capital to 100 million yuan by issuing government bonds in the fall of 1934 A new Central Banking Law was promulgated on May 23, 1935 Under this law, the bank was defined as the government bank established by the National government of the Republic of China" (Art 1); the head office was set in Nanjing—the capital of the Republic of China (Art 3); and the members of the board of directors were all appointed by the National government for terms of three years and eligible for reappointment (Art 8) There were six departments, including banking, issuing, treasury, auditing, secretariat, and economic research, while the business of each department was distributed among divisions and sections.22 To administer the bank directly, the Central Committee of the Nationalist government moved the bank's headquarters to Nanjing However, the Central Bank of China did not really become "the bankers' bank" to issue unified currency It still performed general banking roles, which included discounting bonds, treasury notes, and coupons; rediscounting domestic bankers' acceptances, trading bills of exchange and promissory notes; and buying, selling, discounting, and rediscounting drafts and bills of exchange payable abroad which arose from export and import trade From a practical standpoint, government ownership provided special rights and prestige to the bank to conduct business The Reorganization of the Bank of China and the Bank of Communications (1928) While the Northern Expedition was just starting its mission in Southern China in 1926, Feng Gengguang, then governor of the Bank of China in Beijing, received a report from Bei Zuyi, the manager of the Hong Kong branch, regarding the complete organization of the Kuomintang military indicating that it could win control of the Chinese government Feng discussed the Southern political situation with Wang Kemin, finance minister of the Beijing government who had an ambiguous role in the Nationalist Revolution, and with Zhang Gongquan, vice governor of the Bank of China After the meeting, Feng Gengguang traveled to his native province Guangdong to observe the political situation there Then, Zhang Gongquan departed for Shanghai, on the pretext of visiting his ill mother, to set up a vice governor's office there that would monitor the military movement As soon as Zhang arrived in Shanghai, he contacted the representative of the Northern Expeditionary force He directed Bei Zuyi in Hong Kong to provide million yuan in silver dollars to finance the Guangzhou Revolutionary Army, and ordered the Southern branches of the Bank of China to finance the forces if neces-sary 23 In return, T V Soong ordered the Northern Expeditionary forces to treat the branches of the Bank of China as their own financial institution After the Nationalist government established its capital in Nanjing, the Bank of China moved its headquarters from Beijing to Shanghai Prior to Chiang Kai-shek's arrival in Shanghai, relations between the Nationalist government and Bank of China were quite smooth and cooperative From March to June 1927, however, three conflicts shattered the relationship First, when Chiang Kai-shek asked the Bank of China's Shanghai branch to lend him million yuan in March, Song Hanzhang, the manager of the branch, required a security deposit The Shanghai banker's request infuriated Chiang Chiang increased his demand from million to million yuan in silver dollars to demonstrate his power over the Bank of China Second, when the Jiangsu and Shanghai Financial Committee asked the Bank of China to advance million yuan for military expenditures in April, Song Hanzhang again refused Then, Chiang punished the Bank of China by ordering it to purchase 10 million yuan in future government bonds Furthermore, at the financial conference held on June 15, Zhang Gongquan suggested to Chiang that the total national expenditures should be limited to 16 million yuan per month, which meant no more money for the civil war 24 The suggestion greatly angered Chiang to say the least The conflicts of the Shanghai bankers with the Nationalist government, especially with Chiang Kai-shek personally, set the stage for a Nationalist government takeover of banking down the road Although Minister T.V Soong had initially planned to reestablish the Bank of China as the Central Bank of China, his plans were not ready by the time the Kuomintang had established its capital in Nanjing The Bank of China had a longstanding tradition of opposing government authority It formed an independent shareholders association in which every member had power to vote for the president and the general manager through the board of trustees This tradition was established through the painful experience of frequent political changes of the Beiyang government Prior to the Nanjing regime, the Beiyang government imposed bank regulations in 1913 According to the bank regulations, the central government would appoint the governor and vice governor of the Bank of China Within five years, however, the government appointed and dismissed eleven persons as governor and vice governor because of frequent changes of the minister of finance The government appointments caused great instability in bank personnel and distrust by the shareholders.25 When Liang Qichao became minister of finance in 1918, he revised the bank regulations Instead of being a government appointee, the governor of the Bank of China was elected by the shareholders and ratified by the Ministry of Finance Keeping a relative distance from the central political power, the Bank of China had better public awareness and business performance than the Bank of Communications On October 26, 1928, the government announced a new regulation for the Bank of China, under which it was chartered as a special bank for international exchange instead of functioning in its former role as the central bank of China By issuing treasury bonds, the Nationalist government added 4.95 million yuan in silver dollars in official capital to the Bank of China Thus, the Nationalist government had invested million yuan, which was 20 percent of the total capital of the Bank of China.26 Although the government was not able to control the majority of shares, it increased government investments and influence In the new election, Li Ming had been elected as the chairman of the Board of Directors of the Bank of China, and Zhang Gongquan became general manager of the bank With exploration of the reorganization, Zhang Gongquan tried to rebuild the Bank of China as a famous international foreign exchange bank by using the Yokohama Specie Bank as a model He recruited overseas Chinese students who had majored in banking and finance into the bank, and established overseas branches to promote international trade and foreign exchange business In the following several years, the Bank of China continued to perform better than the Central Bank of China, even though the Central Bank received preferences from the central government By the end of 1934, total deposits of the Bank of China had reached 547 million yuan, while the Central Bank of China had 273 million yuan in deposits In the meantime, the loans, discounts, and overdrafts of the Bank of China had reached 535 million yuan, while those of the Central Bank totaled 167 million yuan.27 The American "Silver Purchase Act of 1934" pushed up world silver prices, and silver was drained rapidly from China through a variety of channels The Shanghai financial panic provided the Nationalist government a second chance to reorganize the Bank of China On March 22, 1935, Chiang Kai-shek sent a telegram to H.H Kung to accuse that the Bank of China and the Bank of Communications had not followed his orders "For the sake of the government and the society, we have to make the three banks (the Central Bank of China, the Bank of China, and the Bank of Communications) follow the order of the central government absolutely and completely cooperate with the government."28 By issuing 100 million yuan in financial bonds to the public, the Nationalist government subscribed new capital of 15 million yuan to the Bank of China, 10 million yuan to the Bank of Communications, and 30 million yuan to the Central Bank of China The remaining amount was to be used as the capital flow of the Central Bank of China In issuing the bonds, the government gained control of a total of 50 percent of the capital of the Bank of China, and 60 percent of the capital of the Bank of Communications When the Ministry of Finance suddenly announced the reorganization of the Bank of China and the Bank of Communications, Shanghai bankers were both terrified and irate How could the government use unsold public bonds to increase the official capital of the bank? They reasoned that if the government wanted to increase the official capital, it should contact the board of directors before taking any action.29 People asked questions, but no one could obtain any answers The beginnings of state finance capitalism took root in the Shanghai private banking sectors By increasing the government shares, the Ministry of Finance gained majority control of the voting power in the bank As a result, T.V Soong was appointed chairman of the board The goal of control of the Bank of China had finally been completely attained by the government authorities who had the power to designate a chairman of the board from the standing committee instead of the chairman being elected by the directors themselves Twelve directors out of a total twenty-one were appointed by the Ministry of Finance The former general manager of the Bank of China, Zhang Gongquan, was placed in the nominal position of a vice president of the Central Bank of China The transfer of Zhang Gongquan to the Central Bank as vice president cut off his personal relations with the Bank of China, where he had worked for two decades Because Zhang Gongquan had profound influence in the Bank of China, he did not like Chiang Kai-shek's views Chiang Kai-shek could not tolerate Zhang's attitudes toward him, and, thus, removing him from the Bank of China was important Furthermore, removing Zhang also made it easy for T.V Soong to establish new leadership in the Bank of China Although Finance Minister Kung wanted Zhang Gongquan to be vice president of the Central Bank of China and asked Zhang to form a new Central Trust, Chiang Kai-shek nevertheless reappointed Zhang as minister of railways a few months later, and totally expelled Zhang from the bank circle The Japanese regarded the removal of Zhang Gongquan from the Bank of China as the Chinese government's adoption of a foreign policy that was close to America and hostile to Japan, because Zhang was a Japanese-educated banker who had relatively close ties with other Japanese bankers With the departure of Zhang and the reorganization of the Bank of China, Chiang, Soong, and Kung began attempting to establish modern China's financial monopoly The reorganization of the Bank of Communications was slightly different Having had close relations with the former Beiyang government, it was more inclined to carry out all administrative orders relative to government loans and money advanced for budget deficits In January 1917, Cao Rulin became the general manager of the Bank of Communications The same year, Cao was the representative of the Duan Qirui government in negotiating the "Nishihara Loans" with Kamezo Nishihara, the representative of the Japanese Terauchi cabinet Two of these loans had been granted to reorganize the Bank of Communications Although the first loan of million Japanese yen had been used to redeem some of the banknotes in the Zhejiang, Jiangsu, and Shanghai branches, the bank still had major problems because of constant government overdrafts In less than one year, however, the Bank of Communications had failed to redeem its notes for the second time because the Ministry of Finance had withdrawn million yen from the bank to pay the salaries of the government employees.30 Cao Rulin resigned as general manager as a result of the second bank crisis At the June 1922 shareholders meeting, the Bank of Communications elected Zhang Qin, a former minister of the Agricultural, Industrial and Business Bureau, as governor and Qian Yongmin, former manager of the Shanghai branch, as general manager The Bank of Communications restored normal business functions, and by 1924 deposits were reported to have increased by 34.8 percent compared to 1922 and reached 72,540,000 yuan The bank had converted its 1922 deficit of 900,000 yuan to a profit of 550,000 yuan.31 These circumstances did not last very long, and the regional war that broke out between the warlords Wu Peifu and Feng Yuxiang provided Liang Shiye, the former governor of the Bank of Communications, the chance to restore his power at the bank in 1925 Although Liang tried to contact the Nationalist Army when the Northern Expedition started in 1926, he was not welcomed In April 1927, Liang appeared on the most-wanted list and fled from the mainland of China In November 1928, the Ministry of Finance of the Nationalist government issued "The Regulations of the Bank of Communications." These laws named the bank as special national industrial bank In the middle of 1935, the Nationalist government issued 100 million yuan in financial bonds to strengthen the capital of the Central Bank of China, the Bank of China, and the Bank of Communications The total capital of the Bank of Communications was increased to 20 million yuan, of which the government owned 60 percent By recapitalization of the bank of China and the Bank of Communications, the Nationalist government controlled both banks The Postal Remittances & Savings Bank (1931) While Xu Shichang was president of the Republic of China in 1918, he ordered the institution of a post office savings bank On November 24, the Ministry of Communications followed the order, promulgating "the Regulations of the Post Office Savings Bank." On July 1,1919, the Post Office Savings Banks formally began its business with eleven branches around the country The Post Office Savings Bank adopted a two-chief respondent system A secretary, the director in general of posts, was in charge of postal remittances, and a chief of the Audit Bureau, the minister of finance, was in charge of the savings bank funds.32 The Post Office Savings Bank had limited business scope, but the Chinese Customs Service revenues were still under foreign control, and foreign postal offices dominated the major cities and trade ports When China regained national sovereign rights, many foreign postal offices were withdrawn from major cities during the Nanjing regime The Nationalist government decided to enhance its role in postal remittances and savings Approved at a Kuomintang Central Executive Committee meeting, the new Postal Remittances & Savings Bank was founded in Shanghai on March 15, 1930 The new bank was initially based in the finance department of the postal bureau As its name indicated, the business goals of the bank were postal remittances and savings The bank had the authority to issue savings passbooks, check books, fixed savings deposits, and remittance deposits It also issued various kinds of savings postage The maximum individual interest-bearing account was fixed at 3,000 yuan, and the minimum deposit was yuan, although postage deposits worth less than yuan were accepted In addition, the Postal Remittances & Savings Bank expanded its business to life insurance, offering coverage for terms of five, ten, fifteen, twenty, and twenty-five years The insurance premium for term life insurance started at a minimum of 50 yuan to a maximum of 500 yuan without a health examination Moreover, the children's savings plan was also created to cultivate the Chinese traditional virtue of savings and to encourage childhood savings.33 According to the 1936 Chinese Banks Yearbook, the total assets and liabilities of the Postal Remittances & Savings Bank amounted to 85.2 million yuan in fabi, of which savings deposits comprised 53.4 million yuan By the end of 1936, the bank had about 680 branches with remittance and savings facilities, and about 9,800 small business representatives.34 Because postal remittances and savings were services people needed in their daily lives, the bank became the most popular savings institution in both rural and urban areas The Farmers Bank of China (1935) Although the 1928 National Financial Conference designed a national farmers bank to be set up to promote Chinese agricultural growth, this plan was carried out during the anti-Communist campaigns Due to the extended and continuous civil wars, Nationalist government military expenditures drained all possible resources The Ministry of Finance could not carry the increasingly heavy military burden and balance the budget Thus, many quarrels arose between military and civilian groups The typical argument was reflected in the personal relationship between Finance Minister T.V Soong and Generalissimo Chiang Kai-shek In the report of the minister of finance for fiscal year 1929-30, Soong stated "with the return of peace and order, the people require of the Government more than the mere suppression of militarism and communism." Then he asked, "Shall we go on making military activity our major means for unity in China, or shall we approximate a balance of the budget and seek China's reconstruction by a systematic, if unspectacular combination of politico-military-economic treatments?"35 Chiang was very upset by the challenges from his brother-in-law, and also dissatisfied with control over the military budget being in the Ministry of Finance and the Central Bank of China He attempted to find a new way to finance himself In January 1933, Chiang Kai-shek issued an executive order appointing Guo Waifeng as the director who would establish the Farmers Bank of Henan, Hubei, Anhui, and Jiangxi 36 The Four Provinces Farmers Bank formally opened in April 1933 with million yuan in paid-in capital, of which the generalissimo's office deposited 2.25 million yuan.37 Because the capital of the Four Provinces Farmers Bank was tied to Chiang's office, from the very beginning, Chiang had authority to control all directions of the bank The bank did not obtain approval from the Ministry of Finance, which created distrust between the Fanners Bank and other banks Equal footing with the other three government banks enabled the Four Provinces Farmers Bank to issue and circulate banknotes of 10 cents, 20 cents, and 50 cents Furthermore, to meet the rapidly increasing military expenditures of the civil war, Chiang Kai-shek requested the premier of the Executive Yuan, Wang Jingwei, to enlarge the operating business regions of the fanners bank from four provinces to include the entire nation.38 The Farmers Bank of China was so named on April 1, 1935, based on the structure of the former Four Provinces Farmers Bank The Farmers Bank of China funded local landlords who returned to their village that had once been occupied by Communist forces and supported the establishment of local pawnshops and farmer cooperatives, all of which supported Chiang's military expenditures From April 1933 to January 1937, the bank provided various funds worth 108 million yuan or 68 percent of its total note issue These loans included 64 million yuan provided to the Nationalist army.39 Chiang Kai-shek sent his private seeetary, Chen Bulei, to manage the personnel system of the Fanners Bank of China Chen Bulei's coworker was Chen Guofu, the brother of Chen Lifu, a colleague of Chiang's in the Shanghai Stock and Commodities Exchange They were in charge of appointing personnel and providing special funds to the Nationalist Army and special agencies under the direct order of the generalissimo Because the chiefs of the Farmers Bank both reported to Chen, the bank was also linked to the special agency of the "CC faction,"40 thus being nicknamed the "CC Bank" in China Despite the fact that the Farmers Bank headquarters had moved to Shanghai in 1935, the Shanghai Bankers Association did not accept the Farmers Bank of China as a member because of its ties to Chiang and the CC faction The Central Trust of China (1935) When Zhang Gongquan accepted the appointment as vice governor of the Central Bank, he came to be in charge of the Central Trust of China With initial capital of 10 million yuan in silver dollars, the Central Trust of China was founded on October 1, 1935 The Central Bank kept its administrative power over the trust, but allowed the Central Trust to keep an independent accounting system Because the Central Trust was directly subordinate to the Central Bank, the Finance Minister H.H Kung became co-president of the Central Trust of China The business operations of the Central Trust included savings, purchases, storage, trust funds, and insurance In 1936, the Central Trust of China took over all public trust funds and established an affiliated Central Savings Society, which threatened the existence of private savings societies and foreign savings society such as the International Saving Society To stimulate savings, the Central Savings Society drew lots to reward its savings depositors Moreover, the Central Trust acted as the government purchaser in agricultural production to stabilize market prices It exercised particular control over the purchase of tung oil, which contributed to an American loan to maintain temporary wartime financial stability Although the Central Trust of China was established in Shanghai, it had been moved to Chongqing shortly after the outbreak of the full-scale Sino-Japanese War The Central Trust of China had set up a military transportation department and bought large quantities of military equipment from the United States in exchange for goods during wartime Due to its role in the war effort, it became an untouchable bureau in China The reorganization of the Bank of China and the Bank of Communications had been completed by mid-1935 From then on, the Nationalist government controlled 50 percent of the shares of the Bank of China, and 60 percent of the shares of the Bank of Communications By increasing the proportion of official capital in the banks, the government obtained the decisive voting power within the organization of these banks The traditional "guanshang heban" banking model still remained, but it had been transformed into a new form with the government exercising the most influence The bank personnel system had also become a subdivision of the government bureaucratic system With the creation and reorganization of the central banking group as "Four Banks and Two Bureaus," the Nationalist government asserted its authority over banking through the central banking group A major step in achieving the idea of regulating private capitalism and developing national capitalism, or gradually developing monopoly capitalism, had been realized Native banks had been in decay since the unification of the national silver dollar In fact, modern private commercial banks had diminished financial power and lending capabilities with the further loss of the right to issue banknotes Moreover, the foreign banks had contracted their business regions through various government laws and regulations This, combined with establishing the central banking group, created a strong state-controlled banking system and ended laissez-faire banking in Shanghai The Currency Reform As mentioned in chapter one, the Chinese monetary system had traditionally relied on both silver and copper as the monetary base in various units of tael and coins The multiple functions that silver served, as a standard, a unit of stored value, and a medium of exchange, meant price fluctuations in silver would greatly impact all aspects of the national economy Furthermore, international trade and the security of the existing monetary base were also at risk The multi-metallic monetary system, despite its complexity and frailty, had existed in China for more than a thousand years Owning silver meant having wealth When Shanghai was opened as an international port, foreign trade followed the traditional Chinese usage of the silver standard in the settlement of transactions The improvement this offered was the introduction of the standard shape of "Shanghai conventional silver" by merging various silver forms In short, China was a large silver-holding and silver-importing country and maintained a vital interest in measuring its value All China's foreign trade and foreign exchange rates were dependent on the daily exchange rates of silver, so any price changes in the world silver market would reverberate immediately and be reflected in China's economy and finance After 1929, world silver prices had fallen sharply along with commodity prices in the worldwide economic depression Several countries using the silver standard successively abolished it When these countries sold their silver reserves on the world market, it sped the decline in silver value According to statistics compiled by Edward Kann, foreign exchange rates in China fell from 0.44 U.S dollars per ounce in silver in 1929 to 0.22 dollars per ounce in 1931 The lowest point had reached 0.20 dollars in 1932.41 Plummeting prices of silver caused major disruptions in import and export wholesale prices in Shanghai The index of import goods showed that it had increased sharply from a standard of 100 in 1929 to 155.3 in 1932.42 As a result, credit became much easier to obtain Real estate projects and new construction mushroomed in Shanghai However, the tide of easy money gradually disappeared with the "Shenyang Incident" in the fall of 1931 On September 18, 1931, the Japanese Guandong Army seized Shenyang (Mukden) The invasion not only trampled on China's sovereignty but also threatened existing British interests in China because the British maintained the Maritime Customs Revenue.43 At the same time, the failure of the Credit-Austalt in Austria pulled down the large banks of Germany, while the British still maintained the gold standard as their monetary base.44 Because the British currency depreciation was associated with the price of silver, Britain went off the gold standard on September 21, three days after the "Shenyang Incident." The British abolition of the gold standard was followed by similar actions of Japan and other countries, thus impacting world silver prices The situation shifted dramatically after the United States went off the gold standard in 1933, and the world silver price began to rise in terms of sterling, yen, and U.S dollars To stabilize world silver prices, delegates from India, China, and Spain, as holders of large reserves of silver, and Australia, Canada, the United States, Mexico, and Peru, as principal producers of silver, held a conference in London in July 1933 At the International Monetary and Economic Conference, the representatives of these countries signed an agreement on silver Under the agreement, India, China, and Spain would limit their sale of silver while Australia, Canada, the United States, Mexico, and Peru agreed not to sell any silver, and also to arrange either aggregate purchases or withdrawal from the market, which covered 35 million fine ounces of silver from mine production in each calendar year for a period of four years.45 However, a clause in Article that stated "the silver purchased or withdrawn in accordance with Article above shall be used for currency purposes (either for coinage or for currency reserve)" opened up a Pandora's box in the international financial market After the Silver Agreement was successively ratified by governments of the above countries in May 1934, the United States passed "the Silver Purchase Act of 1934." The Silver Purchase Act drove world silver prices sharply upward A critical Chinese currency reform in 1935 directly related to the act as well as to international relations The Abolition of the Tael and the Adoption of the Silver Dollar (1933) Although the unification of national currency had been discussed since as early as the Beiyang era, the subject was resumed in the spring of 1932 When the decline in world silver prices provided plentiful inexpensive silver on the Shanghai market, it offered a good opportunity for the Ministry of Finance to consider unification of the national currency in the form of "feiliang gaiyuan," namely, abolishing the silver tael standard and officially adopting silver dollars as the national monetary base In the middle of July, the Ministry of Finance sent the director of the Monetary Division, Xu Kan, to Shanghai to meet with some representatives from different business and financial circles They formed a currency unification study group that included the members of the Chinese Bankers Association, the General Chamber of Commerce, and economists from Chinese universities The Native Bankers Association did not send representatives to attend the government-organized study group because the abolition of the silver tael would directly hurt their financial interests Carrying out the currency reform would essentially remove the financial basis for native banks whose main business involved dealing with daily silver interest and conducting exchange transactions between tael and dollars These native bankers expressed strong opposition in the Native Bankers' Monthly magazine The main points included: (1) the coexistence of silver tael and silver dollars had been implemented without conflict throughout Chinese economic history, and (2) the relationship between the silver tael and silver dollar could be mutually supportive For example, if silver dollars were in short supply, the rise in silver tael would attract deposits of silver dollars enabling the value of tael and dollars to adjust each other They feared that the abolition of silver tael was implemented, then all financial institutions would lose the instrument for adjusting the value of silver dollars in the money market The arguments of the native bankers were, however, challenged by modern bankers Modern bankers regarded the existing interest rate between silver tael and silver dollars as unnecessary If had done anything, it had actually contributed to the complexity of foreign exchange transactions, in that the determination of daily foreign exchange rates had to be processed by a predetermined daily silver interest rate Therefore, the first step toward a unified currency was the abolition of the silver tael as a monetary standard On March 2, 1933, the Ministry of Finance issued a decree on "the abolition of tael and adoption of silver dollars." By this decree, the "Shanghai Conventional Currency" system was replaced by a standard exchange formula of 0.715 "Shanghai currency" to silver dollar effective as of March 10, 1933.46 The Central Mint was responsible for minting the standard silver dollars in the designated weight of 26.6871 gram with a content of 88 percent silver and 12 percent copper On the front of the new silver dollar was Dr Sun Yat-sen's half-length portrait in memoriam, and the back of the dollar depicted a sailing boat designating a bright national future The Central Bank of China, the Bank of China, and the Bank of Communications responded by issuing the new silver dollars and collecting silver tael By following the order of the decree, the Shanghai Native Bankers Association reluctantly exchanged their reserves of silver tael into silver dollars from the three government banks Because the unification of national currency ended the multi-metallic exchange business, the Native Bankers Association closed the daily silver interest exchange market The Shanghai native banks irreversibly declined as a result Prior to 1933, the interbank balances between modern and native banks were settled through the Native Banks Clearing Association A modern bank had to place its deposits with a native bank, which handled a clearing balance After the abolition of silver tael, the native banks' role in clearing became less important The general situation had been revised with the opening of a new clearinghouse of the Shanghai Bankers Association in 1933 This new clearinghouse finally took over the role of the Native Bankers Association by handling the balances between modern and native banks in Shanghai By extending the government banking role, the Central Bank, Bank of China, and Bank of Communications accounted for 70 percent of China's total issue of notes at the end of 1933 As sole holders of the official silver tael and silver dollar exchange business, the three government banks held more than 80 percent of the silver of Shanghai Chinese banks, which was 88 percent of the silver in all Shanghai banks in February 1935.47 The state banks now had decisive power on the silver market The Silver Purchase Act (1934) While world silver and commodities prices declined steadily during the Great Depression, United States Senators from silver-producing states gradually grew worried about world silver prices As early as 1930, Senator Key Pittman of Nevada, Chairman of the Senate Committee on Foreign Relations, drafted a plan to the current president of the Chinese Legislative Yuan, Hu Hanmin, to lend China several hundred million ounces of silver for its currency reform This plan was drafted by the subcommittee of the International Silver Commission of the United States, but the Chinese Nationalist government rejected it, stating the reason that "we must settle our own financial problem and not wish to contract foreign loans."48 Senator Pittman persisted despite China's decision and tried "doing something for silver." According to Arthur Young's description, "the senators from seven states that produce silver, acting as a bloc, have repeatedly been able to gain support for silver measures in exchange for support of projects dear to the hearts of others in Congress or the administration."49 One of the main measures indicated that if the United States could raise the value of silver, it would increase the purchasing power of China and other "silver-using countries," and would encourage American exports The influence of Senator Pittman contributed to a Congress that was "predominantly silver- and inflation-minded" after 1932.50 At the beginning of 1933, a drastic banking crisis erupted in the United States Anxious depositors hurried to their banks throughout the country to withdraw cash and gold, creating runs that forced many banks to close President Franklin D Roosevelt declared a "bank holiday" on March 6, 1933 He closed all banks in the United States until the Department of the Treasury completed an examination of all of the bank's books and business performance On March 9, Congress passed the Banking Act of 1933, allowing banks with sufficient capital to reopen and ordering the reorganization of the others.51 After President Roosevelt declared the "bank holiday," an international silver conference was held in London The Memorandum of Silver Agreement was signed in July 1933, and the United States ratified this agreement in December Shortly after ratification, however, the increasing trend in silver prices was reflected in the international market because the United States had decided to use silver as part of its monetary reserves On February 20, 1934, the Shanghai Bankers Associations telegraphed an appeal to Franklin D Roosevelt to address their positions on the silver issue The text of the telegraph is cited below: Chinese Bankers Associations appeal to your presidency for recollection of the fact that devaluation of United States currency with consequent effect on price level has averted monetary crisis in your country Converse applies here that any drastic enhancement of silver values, unless accompanied by generous extension of credits to China, will result in flight of silver from these shores and bring about credit stringency and collapse of internal commodity level This great country already suffering from a recent series of calamities is in danger of sinking further into economic depression We desirous of further commercial ties with your great people appeal to you to ensure silver price stability and not drastic enhancement of silver price Purchasing power of this country is dependent upon maintenance of exports and is endangered by rumoured silver measures, and we trust your presidency will avert policies likely to bring calamity upon the millions of our people.52 On March 5, 1934, the Shanghai Chinese General Chamber of Commerce and the Shanghai Foreign General Chamber of Commerce also sent a telegram to President Roosevelt to "endorse views telegraphed by the Chinese Bankers Association deprecating artificial measures to raise the price of silver."53 Furthermore, the Chinese government ratified the London Silver Agreement on March 21 with the reservation that: In ratifyng this Agreement, the National Government of China declares that as silver is the basic monetary standard of China, the National Government will consider itself at liberty to take whatever action it may deem appropriate, if, in its opinion, changes in the relative values of gold and silver adversely affect the economic condition of the Chinese people, contrary to the spirit of stabilizing the price of silver as embodied in this Agreement.54 In response to the Chinese bankers' appeals and the Chinese government reservation, the U.S Treasury Secretary Henry Morgenthau obtained Roosevelt's consent to send Professor James Harvey Rogers of Yale University to China to investigate the silver market there Rogers reached Shanghai on April 10 After visiting several provinces, Rogers reported to Morgenthau "any considerable rise in silver price will aggravate greatly already depressed conditions in agriculture."55 The rise in silver price, Rogers believed, would produce a corresponding slump in the prices of most farm products for both imports or exports Thus, further depression in agriculture was apparently very serious politically as well as economically.56 The attitude of the administration was reflected in a telegram of April 21, 1934, from Morgenthau to Rogers, who was then in Shanghai: "For your personal information, administration is opposing Congressional proposals for remonetization of silver at higher than present market prices [about 0.45 U.S dollars per ounce] on ground that world stocks of disposable silver whose purchase such proposals would involve are incalculable in amount and that adoption of such proposals would interfere with President's monetary program."57 Although the administration had opposed the proposal to raise silver prices, Congress still passed the Silver Purchase Act on June 19, 1934 The key points of the act included an increase in the domestic silver purchasing price to 0.645 dollars per ounce; the establishment of an American monetary reserve that was 75 percent in gold and 25 percent in silver; the granting to the secretary of the treasury of the power to purchase silver abroad; and the nationalization of silver In August, as the United States began to purchase silver from abroad, the world price of silver rose sharply Silver began to flow out of China calamitously Faced with the serious challenge to its monetary fate, the Chinese minister of finance, H.H Kung, sent a message to Washington in December 1934 Kung indicated that rising silver prices were draining away silver, but China could not raise exchange rates to parity because that would cause extreme deflation Moreover, the adoption of a gold standard would be difficult for China without a sizable foreign credit.58 Could the U.S government grant credit to China? The Department of State and the Department of Treasury held different views The main consideration of the Department of State about the U.S extension of credit to China was concern about the likelihood of U.S involvement in China's affairs and difficulties with Japan that claimed primacy in economic relations with China.59 However, the Department of Treasury offered a price ceiling of 0.55 U.S dollars per ounce for the purchase of silver on December 18, 1934 This offer failed to be implemented as the information leaked to prosilver-act senators, who immediately made the Department of Treasury cancel the price ceiling As a result of this Congressional cancellation, world silver prices reached a peak of 0.81 U.S dollars per ounce in April 1935.60 Arthur Young argues that the key consideration for raising the value of silver was ostensibly to help China, which was of special interest in Congress However, sheer ignorance of China's relatively good economic performance with cheap silver damaged China Of course, the silverites wanted higher silver prices for their own reasons.61 The Silver Purchase Act directly caused silver to flow out of China and finally forced the Chinese government into currency reform The Shanghai Financial Panic of 1935 Prior to the appreciation in silver value, China enjoyed cheap world silver prices and relative economic prosperity from 1931 to 1933 In Shanghai, the increasing supply of silver made credit relatively easy to obtain Many firms, banks, trust companies, real estate companies, and individuals borrowed by using their properties as collateral However, this situation was reversed when the world silver price was pushed up by the "Silver Purchase Act" of 1934 With the silver standard as its monetary base, Chinese goods became too dear in relation to world silver prices As exports fell off, the country had to export silver to overcome the adverse balance of trade A serious deflationary crisis was evident in falling prices from delinquent debts, tight financial credits, and the collapse of the real estate market in Shanghai The sharp climb in the silver price caused many banks to freeze the credit of investors in real estate loans that could not be liquidated When these banks began to recall such loans, it forced many firms into bankruptcy According to silver import and export statistics compiled by Economic Studies magazine, the silver trade balance was at a surplus of 38,893,115 yuan in silver dollars in 1932 and a deficit of 14,154,259 yuan in 1933 However, as a result of the U.S Silver Purchase Act, silver trade reached a huge deficit of 259,941,414 yuan in 1934.62 Although the Chinese government began to impose a variety of export duties on silver on October 15, 1934, the increasing disparity between the London silver price and the Shanghai exchange rate for the Chinese dollar still made the export of silver profitable While the domestic foreign exchange rate was fixed by the Central Bank of China at about 0.40 dollars per ounce, silver moved up sharply abroad to a high of 0.81 U.S dollars on April 27, 1935, and was maintained above 70 dollars until mid-year Excluding the heavy export duty and transportation fee, the silver dollar was worth about 25 percent more abroad than its was in China At the same time, armed silver smuggling in North China was arranged under Japanese military protection Japanese-supported financial institutions set up numerous branches along the Great Wall to buy the smuggled silver According to a report from Yu Xuezhong, the president of Hebei Province, Japanese merchants arranged to smuggle silver, estimated to be worth 150,000 yuan in silver dollars per day, or about million yuan per month, out through land and seaways 63 The Japanese put a small part of the smuggled silver into the Central Bank of Manzhouguo as reserves, and transported the major portion into Japan and Korea After melting those silver dollars into pure silver, Japan sold them on the London market at a high profit In the month of September 1935 alone, Japan sold 20,793,000 yen worth of silver on the London market, while total annual output in Japan was worth only about 8,000,000 yen and the country had no stocks on hand.64 It was clear that most of the silver Japan was able to sell was smuggled from China A memorandum sent by the Chinese Minister of Finance to the United States indicated that "the Shanghai silver stock declined from 544 million dollars at the end of June 1934 to 312 million dollars" in January 1935,65 and the New Year settlement was only about 50 percent of normal as banks feared pressure would precipitate numerous bankruptcies causing general collapse Silver stocks in the foreign banks in Shanghai also declined from 275,660,000 yuan in 1933 to 54,672,000 yuan in 1934.66 In the chaotic economic situation in Shanghai, money remained tight, the economy was stagnant, bankruptcies were frequent, and many native banks and modern banks closed their doors Business reorganizations and failures in Shanghai rose sharply The monthly average of reorganizations in 1933 was 5.08, by 1934 it was 107.50, and for the first six months of 1935, 155.17 The monthly average number of failures was 17.83,30.50, and 41.67 for 1933, 1934, and 1935, respectively The number of new buildings constructed in the International Settlement fell from 8,699 in 1931 to 4,571 in 1934, while the assessed value of these buildings fell from ¥64,466,532 to ¥27,600,350 The general index of wholesale prices in Shanghai (1926 = 100) declined from 126.7 in 1931 to 97.1 in 1934 The foreign trade of Shanghai amounted to Ch.$1,428,510,650 in 1931; in 1934 it was Ch.$868,385,264.67 On May 24, 1935, the American-Oriental Banking Corporation, the American Oriental Finance Corporation, and the Asia Realty Company closed in Shanghai and requested that the United States Court for China appoint liquidators The news created a great sensation and caused a run in Shanghai The Chinese National Industrial Bank also suffered a banking run An anti-American sentiment growing out of the American silver program was voiced, most strongly by Ma Yinchu, a Chinese economist and member of the Legislative Yuan, who called for a boycott of American goods In contradiction to the goodwill articulated by U.S senators from silver-producing states, American sales to China did not increase, but fell from 3,971,000 dollars in 1934 to 2,462,000 dollars in 1935 The Tobacco Association of the United States, noting the decline in tobacco trade with China as contrary to the expectation of its exporter members, branded the act as not only "against our interests, but destructive of goodwill in China toward the United States."68 American bankers and businessmen attempted to stop declining business in China In July 1935, W Cameron Forbes asked U.S Undersecretary of State William Phillips to tell the president that he had discussed with the Export and Import Bank the possibility of governmental assistance in purchasing Russell & Co., the highly reputable American trading firm in Shanghai in which the Forbes family held the principal interest Forbes asked the Export and Import Bank for assistance in forming an American bank in Shanghai starting with capital of 10 million dollars to finance Chinese enterprises Forbes had already obtained approximately million dollars to create such a bank and construct a railway to Sichuan.69 After reviewing the proposal for the resurrection of Russell & Co., however, the Department of State made no decision on the proposal The potential impact of the contemplated bank linked with railway construction on existing British, French, German, and American rights in China, as well as Japanese views and aspirations, were certainly all considered in the decision Shanghai continued to have tight money and markets in turmoil The 1935 Currency Reform China had lost substantial silver reserves through the legal and illegal export of silver from June 1934 to January 1935 China's financial markets teetered on the brink of collapse The question was how to save the national monetary base and calm the financial panic On February 2, the Chinese government formed a Monetary Advisory Committee in Shanghai with Minister of Finance H.H Kung as chairman and twenty other Chinese bankers as committee members Various currency reform plans were discussed at the committee meeting On February 5, Kung sent a memorandum to Washington seeking U.S support of a currency reform linking China's currency to the American dollar In that memo, Kung indicated that China "had decided it has no choice but to seek feasible means to abandon the exclusive silver basis maintained by it alone and adopt a new currency system by using both silver and gold with a view to linking its currency to that of the United States and to freeing its exchange from uncertainty attached to the silver basis under present conditions."70 At the end of this memo, China outlined a plan for the currency reform On the same day, Kung sent another memo with an offer that the Chinese government could supply the silver necessary to meet U.S government demand, instead of America purchasing silver in London or on other open markets at prices that exceeded the value in China and that necessarily invited smuggling.71 In response to the two memorandums sent on the same day by the Chinese Minister, the Departments of State and Treasury discussed their differing views in conversations of February 14 Treasury Secretary Morgenthau regarded it as "a purely monetary matter" that should be handled "aggressively" by the Department of Treasury However, the Department of State did not regard it as that simple "In addition to monetary considerations, there are inherent in the problem very definite political factors which should not be overlooked Japan would oppose by various means any attempts by the United States, or by any other country, to affect, individually and without Japanese participation, substantial loans to China or a rehabilitation of that country." 72 As the Treasury and State Departments were "at opposite poles" on the procedure, no action was adopted by the United States In March 1935, Great Britain suggested a joint international conference among the Four Power Consortium regarding China's monetary situation, but this suggestion was rejected by France, America, and Japan In mid-1935, the British government sent Sir Frederick Leith-Ross, chief economic adviser to the British government, to China via Canada and Japan Stopping in Tokyo, Leith-Ross offered a plan that asked Japan to "cooperate" in the Chinese currency reform under the condition that it recognized the independence of "Manzhouguo," and to give up intervention in Chinese political affairs beyond the Great Wall 73 Japan, however, refused to cooperate with the Leith-Ross plan Leith-Ross arrived in Shanghai on September 21, 1935 He was accompanied by E Hall Patch of the British Treasury and C Rogers of the Bank of England To cooperate with the Leith-Ross investigation, the Chinese Ministry of Finance sent him background information on Chinese financial law, banking information, mint organization, custom reports, salt revenue, and the 1935 budget plan 74 Chinese officials discussed with Leith-Ross all possible methods to implement currency reform in order to obtain his consensus and support At the same time, China also expected the United States and Japan to send financial experts to assist the currency reform On September 24, Chinese Finance Minister Kung told American Ambassador Nelson Johnson that he hoped the United States would send a representative to join Leith-Ross in a cooperative effort.75 But political conditions in America prevented this request The Department of State feared Japan could disrupt the American action Treasury Secretary Morgenthau thought that it was not the appropriate time to send an expert to China to hear criticism of American silver policy The political reality was that Franklin D Roosevelt did not want to act against the will of the silver bloc in Congress before his New Deal economic plans were finally realized American idealism made the United States unwilling to help China financially alone and at the same time reluctant to intervene in Chinese internal affairs unless other countries would assist in the same manner Photo 6.1 T.V Soong and Mrs Soong welcome Frederick Leith-Ross and Mrs Leith-Ross to Shanghai on September 21,1935 (Shanghai Library) Japan was definitely unhappy with the Leith-Ross mission and had asked the Western powers to leave China and Japan alone Japan sent a message to H.H Kung stating that if China would reject the Western proposal, Japan would provide large loans for China's currency reform Facing Japan's ambitions of obtaining Chinese territory and its growing militarism, China could not trust her enemy The seriousness of the Shanghai financial crisis and the threat of a complete economic collapse caused the Chinese Ministry of Finance to decide not to wait any longer to carry out the currency reform On October 28, Kung informed Leith-Ross that China had no choice but to undertake a drastic reform of its currency To minimize the consequences of the currency reform's impact on the Shanghai market, the Currency Reform Decree was announced on Sunday, November 3, and made effective on Monday, November The main contents of the decree were as follows: To conserve the currency reserves of the country and effect a stable monetary and banking reform, and to prevent a financial catastrophe, the Government, following the precedents of many countries in recent years, has decreed, as follows: As of November 4, 1935, the banknotes issued by the Central Bank of China, The Bank of China, and the Bank of Communications shall be full legal tender Payment of taxes and discharge of all public and private obligations shall be affected by legal tender notes No use of silver dollars or bullion for currency purposes shall be permitted; and, in order to prevent smuggling of silver, any contravention of this provision shall be punishable by confiscation of the whole amount of silver seized Any individual found in illegal possession of silver with intention to smuggle it shall be punishable in accordance with the law governing acts of treason against the State Banknotes of issuing banks, other than the Central Bank of China, the Bank of China, and the Bank of Communications, whose issue had been previously authorized by the Ministry of Finance, shall remain in circulation, but the total outstanding banknotes of each bank shall not exceed the amount in circulation on November 3, 1935 The outstanding banknotes of these banks shall be gradually retired and exchanged for Central Bank of China banknotes within a period to be determined by the Ministry of Finance All reserves held against the outstanding banknotes, together with unissued or retired notes of these banks, shall be handed over at once to the Currency Reserve Board Notes previously authorized and in process of printing shall also be handed over to the said Board upon taking delivery by the banks A Currency Reserve Board shall be formed to control the issue and retirement of legal tender banknotes, and to keep custody of reserves against outstanding banknotes Regulations governing the said Board shall be separately enacted and promulgated As of November 4, 1935, banks, firms, and all private and public institutions and individuals holding standard dollars, or silver bullion, shall hand over the same to Currency Reserve Board or banks designated by the Board in exchange for legal tender notes, at face value in the case of standard silver dollars, and in accordance with the net silver content in the case of other silver dollars or silver bullion All contractual obligations expressed in terms of silver shall be discharged by the payment of legal tender notes in the nominal amount due For the purpose of keeping the exchange value of the Chinese dollar stable at its present level the Central Bank of China, the Bank of China, and the Bank of Communications shall buy and sell foreign exchange in unlimited quantities The measures set forth above are designed for economic rehabilitation The Central Bank of China will be reorganized to function as a bankers' bank The general banking system will be strengthened, giving increased liquidity to the commercial banks under sound conditions, so that they may have resources available to finance the legitimate requirements of trade and industry Measures have been prepared to create a special institution to deal with mortgage business; and steps will be taken to amend the present legal code affecting real estate mortgages so as to make real estate more acceptable as security for loans Plans of financial readjustment have been made whereby the National Budget will be balanced Also with the centralization of note issue, the provision of adequate reserves against the legal tender currency, and a system of rigorous supervision, confidence in the currency will be strengthened, It is hoped that the nation will wholeheartedly support the Government in measures to promote the national prosperity The Government will take drastic measures to deal with speculation and attempts to bring about unwarranted increase in prices, and with any action intended to hamper the execution of the measures set forth in this decree.76 The new currency system was based on minimum reserves of 25 percent in silver and 35 percent in foreign currency and government bonds The Chinese legal tender note or fabi, was not linked with any single foreign currency base Instead, it was cross foreign exchange rates in an inconvertible, managed currency system Foreign exchange rates were adjusted daily according to the London-New York buying and selling rates To support the Chinese Currency Reform, the Hongkong & Shanghai Banking Corporation sold its silver holdings to the Central Bank of China immediately after the decree took effect The leading action of the Hong Kong Bank influenced the decision of other foreign banks to sell their silver to the Chinese government in Shanghai, except Japanese banks, which resisted the currency reform decree until the spring of 1937 The 1935 currency reform was a milestone in that it signified the Nationalist government's takeover of monetary control of Chinese banking by managing silver nationalization This reform occurred as an accident that involved various conflicting interests with foreign powers and world finance However, the accident gave the Nationalist government a chance to change the domestic monetary base By accumulating hard money reserves from private banks, the Central Bank of China decided to end the right of private banks to issue their own notes within two years Before the full-scale outbreak of the Sino-Japanese War in July 1937, the Chinese Nationalist government had established a relatively strong central banking system The experience of handling an inconvertible managed foreign exchange system regulated the Chinese monetary system for over a half-century.77 Responses of Foreign Banks After the Chinese currency reform, foreign banks comment on the new monetary system and what its consequences might be An American historian, H.B Elliston, quoted a Roman historian, Alison, who attributed Rome's fall "to its loss of silver to the Orient."78 Would China repeat the fate of Rome and collapse due to the abolition of the silver standard? Much speculation was aired among international financial experts The British were in doubt, the Americans did not know, and the Japanese were involved actively Although Great Britain played an active role in supporting the currency reform, it could not predict what the result would be Meanwhile, America took a "wait-and-see" attitude until the Chinese currency reform decree was announced The divergent opinions of the U.S Congress, the Department of State, and the Department of Treasury on silver policies toward China immobilized the U.S government and prevented it from taking action Japan reacted with anger and displeasure to the Chinese currency reform Some Japanese scholars even argued that the outraged Japanese military government saw the Chinese currency reform as a major move against their interests in China, and this became a critical factor in the outbreak of the Sino-Japanese War in the summer of 1937 79 All these assessments are important to the comprehensive examination of the impact of international relations on China's currency reform The British Response British political attitudes toward China obviously changed with the Japanese attack on Shanghai where British interests were centered Before the attack, the British had been experiencing a dilemma in the Far East Although British prestige had declined with the rise of Chinese nationalism, it still maintained large stakes in Shanghai The British were reluctant to end the Japanese alliance and appreciated Japanese economic interests in Manzhouguo However, the Japanese attacks on Shanghai had placed the British on the horns of the dilemma While Japan continued to maintain that it had no intention of making war on China, its army attacked Shanghai on January 28, 1932 In response to the Japanese attack, the British government sent a sharp protest to the Japanese government, and requested that the United States likewise, which it did Furthermore, the British and American Consuls in Shanghai cooperated in establishing a neutral zone in the International Settlement between the Japanese occupied Northeast Shanghai and the remaining Chinese areas Beyond the political confrontation with Japan, Britain feared that China's economic difficulties might make it incapable of withstanding Japanese pressure Because the Nationalist government's financial stability and economic strength depended on silver, the silver question was vital to China's economic future A weak Chinese economy would have a negative impact on British interests in China Although Britain suggested a joint loan for Chinese currency reform to the Four Power Consortium, this suggestion was rejected by the Japanese, French, and American governments for a variety of reasons Britain had to carefully weigh its China policy with these issues The Leith-Ross mission was a significant indication of Sino-British relations during the Chinese currency reform As mentioned above, on September 21, 1935, Sir Frederick Leith-Ross arrived in Shanghai via Canada and Japan He had not received a formal invitation to go through the United States to meet with President Roosevelt and Secretary Morgenthau because the U.S government was displeased with the British mission He was also treated coldly by the Japanese government, even when he attempted to seek Japanese cooperation in the Chinese currency reform in exchange for recognition of the independence of "Manzhouguo."80 However, Leith-Ross was welcomed by the Chinese government, and received cooperation from various government agencies What was the actual role Sir Frederick played in the Chinese currency reform? It was a mystery to the public At that time, in Japan it was generally supposed that Sir Frederick was engaged in a scheme to float a 50 million pound loan secured by the Chinese government's railway revenues.81 In his statement issued to the press on leaving China, Leith-Ross announced publicly: I did not bring any cut and dry scheme with me to "put over" the Chinese Government There were several possible alternatives, and the decision between them, depending as it did largely on Chinese psychology, could only be taken by the Chinese Government [which] decided to adopt an inconvertible managed currency on the basis of their own resources I had no responsibility for this bold step, but I have of course closely followed the situation.82 Although Leith-Ross declared that he was merely a financial adviser who was to follow the Chinese currency reform situation closely, his role was vital to the reform, as demonstrated by the king's order that the British ambassador issued under his authority on the first effective day of the Chinese currency reform By this order, the British government prohibited British subjects from making payments of any debts or other obligations in silver The Hongkong and Shanghai Banking Corporation cooperated by turning its silver holdings against the Central Bank notes over to the Chinese government banks on the advice of Sir Frederick The American Response Despite the sharp increase in world silver prices, the Chinese government could not raise its domestic silver price because of the purchasing power in domestic markets Chinese political leaders had planned silver nationalization and government control of silver sales On September 24, 1934, Minister Shi Zhaoji of the Chinese Embassy of the Washington, known as Sao-ke Alfred Sze in the West, wrote a letter to Secretary of State Cordell Hull In the last paragraph, he wrote: The National Government feels obliged actively to seek means of avoiding further hardships of silver fluctuations It considers that China should not alone maintain the silver standard and is considering the gradual introduction of a gold basis currency which will necessitate the acquiring of gold Since the American Government desires an increased proportion of silver in its monetary reserve, the National Government desires also to ascertain in principle whether the American Government is willing to exchange with the Chinese Government gold for silver.83 Different cultural backgrounds contributed to different ways of doing business, which blocked the American deal of direct silver purchases Secretary Hull believed that "it was not exactly a normal procedure for governments to take up the question of specific exchanges of given amounts of money, such as an exchange of gold and silver," and if the government did so, "it might disrupt the normal flow of international finance and commerce."84 Although American government involvement in direct silver purchases seemed impossible in preliminary discussions, three major events changed American views on the decision First, the Chinese government suddenly announced the currency reform decree on November Second, the British suggested that the Chinese government case a silver dollar of 0.500 fineness, which implied the possibility of linking the Chinese dollar to the British pound sterling Third, some Japanese banks in China began to purchase large quantities of U.S dollars to take advantage of the Chinese government policy on banks that "shall buy and sell foreign exchange in unlimited quantities" eight days after the Chinese currency reform The run on U.S dollars by Japanese banks seriously threatened the existing Chinese foreign exchange reserves To maintain and strengthen the foreign exchange and to back up Chinese currency reform, H.H Kung sent an urgent message to Washington seeking American purchases of silver directly from China These three events pushed Secretary Morgenthau to decide on a direct silver purchase A final agreement to purchase 50 million ounces of silver was made by Secretary Morgenthau on behalf of Franklin D Roosevelt on November 13 and was signed two days later The U.S Treasury agreed "to purchase 50 million ounces of silver 0.999 fine at 65⅝ cents per ounce." In response to the American decision, the Chinese government granted freedom from any export tax or duty on silver shipped from Shanghai.85 Furthermore, to enhance the reciprocity of the bilateral agreement, the president of the Shanghai Commercial and Savings Bank, Chen Guangfu (K.P Chen), visited the United States to negotiate the exchange of a set amount of silver from China for a set amount of gold from the United States Chen came at the invitation of the treasury secretary According to a memorandum of the chief of the Division of Far Eastern Affairs, "Mr Morgenthau had at first asked that T.V Soong come; that Soong had countered by suggesting that C.T Wang be sent; that Mr Morgenthau had said that he wanted not a diplomat or politician but a financial expert; that the Chinese had then offered K.P Chen Mr Chen had been given an official passport but not an official title."86 Chen Guangfu traveled from Shanghai through Honolulu and San Francisco, and arrived in Washington in early April 1936 After several meetings, Secretary Morgenthau had a very positive impression of Chen Guangfu Secretary Morgenthau later recalled that Chen was "everything that a storybook Chinese business man should be and most of them aren't."87 The negotiation proceeded smoothly and an agreement was reached for the United States to purchase 75 million ounces of silver at a price of 45 cents per ounce The harmonious personal relations between Morgenthau and Chen lasted for a long time In particular, during the war between China and Japan, Chen came to the United States seeking loans using China's tung oil export as collateral Chen had gained an outstanding personal reputation in international banking circles American banks in Shanghai always approached Chen first when problems arose Although the United States initially stayed out of the Chinese currency-reform process, it was later engaged in important direct silver purchases that supported China's currency reform Between the British support effort and the Japanese resistance against currency reform in China, the United States emerged as the winner in this "currency war" among international powers Arthur N Young, a financial adviser to China from 1929 to 1947, commented on the issue: "The State Department did not appreciate the extent to which China's difficulties were caused by the American silver policy or the importance of success of the monetary reform forced by that policy." 88 However, Young further pointed out that "it is ironic and indeed frightening that an American policy promoted by special interests, and apparently when adopted of rather minor importance to the United States, changed world history in a way that could not have been foreseen."89 Later, a Nobel Prize winner, economist, and adviser to later U.S presidents, Milton Friedman, also commented on this issue: "No doubt government expenditures would have soared even if the United States had not driven up the price of silver, and China would sooner or later have left the silver standard and gone on a paper standard But the U.S action assured that the paper standard and inflation came sooner, not later."90 In short, world financial markets affected each other in an opening economic society, and one government's foreign policy might cause the change of another government's monetary base, as has been demonstrated in the history of modern Shanghai banking The Japanese Response Prior to the 1930s, Japanese concern over the Chinese debt on the "Nishihara loans" was the key problem between Sino-Japanese financial relations Although some of the "Nishihara loans" were designated for railways and communications, most of the loans went for administrative costs, military expenditures, and payments on former Chinese government loans The newly established Nationalist government believed that the "Nishihara loans" had supported the pro-Japanese Beiyang government and that the new government had no responsibility to repay them After its armies seized Shenyang in 1931, the Japanese took over the control of the Chinese Maritime Customs Revenue in the northeast areas The Japanese military occupation had caused about a 15 percent loss in salt revenue collections that should have partially contributed to payment of China's customs-secured debts.91 Thus, as Young aptly notes, the war "made it impossible for China to be expected to anything about the Nishihara loans."92 Following the Shenyang Incident in September 1931, Japan's military and export industries became very active as the Japanese government initiated policy changes, including the suspension of gold exports, reduction of interest rates, and enlargement of government expenditures However, the failure of the government's gold embargo policy as well as general disappointment in the existing political parties, caused a Japanese domestic movement toward extreme nationalism in the early 1930s In February 1932, Junnosuke Inoue, the former minister of finance, was assassinated On May 15, Prime Minister Inukai was assassinated by a young military officer These events demonstrated the increasing growth of military power in Japan After the Japanese established "Manzhouguo" in Northeast China, a puppet regime linked its currency at parity with the Japanese yen China's financial crisis of 1935 had provided significant opportunities for Japan to strengthen its financial power by smuggling millions of yen worth of silver out of China At the same time, Japan refused to accept any proposals for joint international financial aid to China and even pressured the Nanjing government by offering a huge loan for China's currency reform Japan's real motive was to link the Chinese yuan to the Japanese yen, and ultimately to subordinate the Chinese currency to Japanese currency The Leith-Ross mission to China created hostility in Japan When Sir Frederick Leith-Ross stopped in Tokyo on his trip to China, he offered a proposal to Japan to persuade the Nanjing government to recognize Manzhouguo in exchange for cooperation with Japan on Chinese currency reform Japan declined immediately because it regarded Manzhouguo as an independent country, which did not need the recognition of the Nanjing government In an editorial comment made in Asahi Shimbun, a leading Japanese newspaper "Japan holds the view that Japan should not cooperate in China on an equal footing with Great Britain and the United States Japan should consider cooperation only when she is recognized as being in a position of leadership,"93 and went on to strengthen the Japanese view On November 3, 1935, the Chinese currency reform allowed Japan to voice bitter resentment in connection with the British role Before the currency reform, Japanese Ambassador Ariyoshi Akira had postponed his intended visit to North China "because of the fact that Sir Frederick Leith-Ross was in Shanghai and he wanted to be nearby He stated that it was his opinion that Leith-Ross had an idea of linking Chinese currency with sterling."94 When the currency reform decree was transmitted to Japan, the Japanese war minister announced that "should China suddenly take such a course without consulting Japan can only be interpreted as a complete lack of interest on the part of China in improving her relations with Japan The army will take no action at once, but, when the time comes, it will not hesitate."95 On February 26, 1936, army officers attempted a coup in Tokyo, making the military influence in Japanese politics virtually omnipotent Following the Japanese government's orders, the Japanese banking group in China refused to hand over their silver stocks to the Chinese government The president of the Yokohama Specie Bank sent a secret telegram to his bank's branches in Shanghai with the instruction "you must refuse to hand over."96 Furthermore, Japanese banks knew that China had limited foreign currency reserves, and decided to raid the banks over the issue "On November 12 and during mid-December they purchased the foreign currency of Chinese banks and put pressure on China's new policy of dealing in 'foreign exchange in unlimited quantities.'"97 The Yokohama Specie Bank purchased massive amounts of foreign exchange, while British banks announced they would go off the silver standard At the same time, the police in the Japanese occupied area of Shanghai actively participated in smuggling silver out to the International Settlement and the Chinese area The new Chinese currency system was pushed to the brink of collapse Chinese Ambassador Shi Zhaoji went to see U.S Treasury Secretary Morgenthau on November 13, to ask for emergency aid and request that the United States purchase 100 million ounces of Chinese silver so that China could increase its foreign exchange reserves and resist the disruptive Japanese purchases By afternoon, the Department of Treasury had reached an agreement with the Chinese ambassador on the immediate purchase of 50 million ounces of silver for 32 million U.S dollars.98 In mid-December 1935, the United States stopped purchasing silver on the London market The price of silver finally declined from 0.65 to 0.45 dollars, the world price maintained before the American Silver Purchase Act of 1934 On January 11, 1936, American Consul General Davis wrote a report to the secretary of state to describe the silver nationalization in Shanghai, "All foreign banks in Shanghai except Japanese have now made arrangements to surrender silver to Central Bank Understand slightly under 26,000,000 silver dollars surrendered while Japanese banks still hold about 14,000,000."99 After unsuccessful attempts to disrupt Chinese foreign exchange reserves, the Japanese failed to earn any profit by selling silver on the London market at the reduced silver prices worldwide With no means to continue holding their silver stocks, the Japanese banks finally handed their silver over to the Chinese government in the spring of 1937 Consequences of the Currency Reform When the Spanish Carolus dollar was introduced to China in the mid-eighteenth century, the Chinese monetary system was fatefully linked to the world price of silver The most important consequence of the Chinese 1935 Currency Reform broke the link, and abolished the silver standard as the monetary base After the currency reform, the National government centralized its executive power over all state and private banks The central banking group of China took control over all business transactions from silver to foreign exchange, according to the exchange rates between the London and New York financial markets Although the new currency system could not totally protect the domestic market from future fluctuations in world silver prices, it at least cut off the direct impact of the world silver price on the Chinese domestic markets After the currency reform, public confidence in the Chinese currency gradually grew stronger Because exchange rates between the legal tender and the foreign exchange had been set relatively low, the devalued Chinese currency stimulated China's exports while limiting imports Although the depreciation of currency gradually diminished with rising commodity prices, the increased prices motivated farmers to produce more; increased the financial capability of general merchants to repay debts from selling their goods at relatively higher prices; and helped bankers to prevent passive capital From a financial perspective, China's economy grew quite well, stimulating new foreign investment while creating new employment opportunities.100 The circulation of the Chinese fabi ended the constricted money situation, lowered interest rates, and restored the Shanghai financial markets to normal Compared to the previous years, the national domestic product increased 9.3 percent (2.2 trillion yuan) in 1936 Agricultural production also increased 6.1 percent, and industrial production increased 21.3 percent Total imports and exports increased 10.2 percent, an increase of 2.5 percent in imports and 22.6 percent in exports The quantities of rice, flour, wheat, cotton, sugar, and wood imports decreased while imports of production machinery, such as textile equipment and paper machines increased 101 Imports of industrial machinery had provided future productive capacity for the Chinese economy In contrast to the business regions of the strong Chinese state banks expanding continuously, the operating regions of the native banks and general commercial banks shrank The number of Shanghai native banks had declined from eighty in 1935 to forty-six in 1937 because of the nationalization of silver and the government restriction on the issue of native notes To meet the challenge of financial competition, the surviving native banks generally increased their paid-in capital from an average of 320,000 yuan to 410,000 yuan.102 Before 1935, insuring banknotes was of vital importance to general commercial banks as a way of creating money and enlarging their credit circulation When the currency reform took back these rights from private commercial banks, the number and size of private commercial banks also declined In November 1935, notes issued by seven commercial Shanghai banks amounted to 182.2 million yuan, but they were limited to 70 million yuan in the following month, and were retired or taken out of circulation at the end of June 1937.103 Compared to the seven leading private banks (the "three southern banks" and the "four northern banks"), the capital of the four government banks increased significantly On December 31, 1935, the paid-in capital of the four government banks had increased to 167.2 million yuan through the issue of government bonds, while the capital of seven of the leading private banks remained at 36.8 million yuan The four government banks held total assets of 3.1 billion yuan, while the seven private banks held 968.5 million yuan.104 The rapid growth of centralized banking power began to hurt private banking interests Shanghai bankers shifted their attitudes from support of the Nationalist government to resistance of the government, and some had yielded to the Nationalist government Zhang Gongquan of the Bank of China had supported the Northern Expedition for the unification of China, but resisted constant government demands for financing military expenditures He was opposed to a civil war Yu Xiaqin of the Ningbo Commercial and Savings Bank had strongly supported Chiang Kai-shek when he arrived in Shanghai, but he later changed his position When the Ningbo Commercial and Savings Bank encountered difficulties in the 1934-35 silver crises, the government added million yuan in official capital to take over the bank The Commercial Bank of China was taken over by the Nationalist government, which added million yuan in official capital when the bank was in financial crisis Fu Xiaoyan of the Commercial Bank of China refused to comply with the Nationalist government His conflict with the latter led to his later betrayal of the government when he became of Shanghai under the Japanese occupation From the start of the Chinese currency reform in November 1935 until the outbreak of the SinoJapanese War in July 1937, the study of Chinese economic trends was a major task of the Japanese government In the view of Kubo Touru, a Japanese scholar, the Chinese currency reform conflicted with the interests of the Japanese military government and became one of the major reasons for the outbreak of full-scale war between China and Japan.105 An old Chinese proverb that says, "good fortune lies within bad, bad fortune lurks within good," describes the whole process of Chinese currency reform When the U.S Congress passed the 1934 Silver Purchase Act, causing drastic silver panics in China, it forced the Chinese government to reform its currency and abolish its silver standard However, the Chinese currency reform led to an economic boom and increased financial strength Again, the fear of a strong China as its neighbor strengthened Japanese resolve toward full-scale war with China 7 Wartime Banking and Finance, 1937–1945 The need for wartime banking and financial controls created important opportunities for the Nationalist government to consolidate state power and to monopolize banking and finance When Japanese troops encircled Shanghai, the Chinese central banking group and many private commercial bank branches were forced to relocate to the hinterland The relocation weakened many banking functions in Shanghai, which gave Chiang Kai-shek and his brothers-in-law the chance to gain complete control of the banking system Money and power became tightly combined in special wartime circumstances A highly monopolistic and bureaucratic banking system was created This bureaucratic system generated many serious political problems that included corruption in wartime and postwar China During the wartime emergency, the Bank of China, the Bank of Communications, the Farmers Bank, and the Central Bank of China were reorganized into a General Administration of the Four Consolidated Banks This consolidation provided a unique opportunity for the Central Bank to gain the solo right to issue banknotes and control foreign currency reserves While the tradition of emphasizing foreign reserves in China had its genesis in the 1935 currency reform, wartime financial control had further deepened sensitivity to the managed foreign currency reserve operation Because the stability of currency depended on sufficient foreign currency reserves and stable exchange rates, controlling foreign currency and maintaining stable exchange rates thus became major tasks of wartime finance Just as the military was waging a frontline battle, a currency war was being fought to defend Chinese currency from the threat posed by Japanese military notes and Japanese-supported Chinese Federal Reserve Bank notes in the occupation areas The currency war reflected complex issues involving both opportunism and patriotism Wartime banking and finance in Shanghai can be roughly divided into two periods, namely, the "isolated island" and the "occupation" period The "isolated island" covered the period from November 1937, when Japanese forces encircled Shanghai, to December 1941 and the Pacific War broke out The "occupation" period began with the war in the Pacific and continued to the end of World War II in 1945 The Isolated Island of Banking and Finance Japanese forces attacked Shanghai on August 13, 1937 Three months later, Japanese forces captured the Chinese-controlled area of Shanghai, and isolated the International Settlement and French Concession from their occupation areas The Japanese military encirclement of these foreign concession areas of Shanghai created what has been described as an "isolated island." As the Japanese bombing had damaged the headquarters of the Central Bank of China on Huangpu Bund in the International Settlement, the Central Bank decided to move its headquarters to Hangzhou, while maintaining an office in Shanghai Every stage of the war forced banks in Shanghai to make extremely cautious adjustments All native banks in the South Market had been moved to the North Market in the International Settlement before the Japanese captured the Chinese sector of Shanghai; modern commercial banks set up their branches in the hinterlands in order to diversify the war risk; some foreign banks also relocated from the International Settlement to the French Concession to seek safer conditions for their banking operations Large quantities of refugees flocked to the "isolated island." The population in the International Settlement and the French Concession had quickly increased from million in the prewar period to 4.5 million at the end of 1938 Funds flowed into Shanghai in large quantities but fluctuated according to the wartime news An excess supply of money stimulated the rise of new native banks and many small banks and financial institutions Living in the "isolated island" area was very expensive, and living space was small and crowded Heavy demand stimulated new housing growth that caused the real estate market to mushroom According to one statistic, the annual turnover of the Shanghai real estate business, which averaged 12 million yuan in fabi to 14 million yuan in prewar years, rose abruptly to 55 million yuan in 1939, and significantly exceeded the 100 million yuan mark in 1940.1 The rise in land values and rents continued throughout the wartime period Clever builders absorbed small amounts of capital from many refugees through a guaranteed rate of return, and used the consolidated capital to build townhouses Speculators purchased entire old lanes and remodeled them for high profits Others bought many small pieces of land from farmers in the suburbs of Shanghai and sold them to a builder for a profit "If you have a piece of land, then you have gold," was an old saying that reflected Shanghai residents' longing for a piece of land Although many Chinese manufacturing plants had been relocated to the hinterland at the beginning of the war, the remaining industries were still able to provide sufficient goods to meet the market demand because refugees provided cheap labor and new entrants provided capital From January 1938 to February 1939 the newly registered and reopened plants in the concession areas numbered 4,534, and wholesale and retail stores increased substantially as well.2 The war stimulated massive demand for materials from various sources In the temporary prosperity of this "isolated island," however, the excess inflow of capital and the shortage of raw materials began to accelerate inflation in wartime Shanghai With the absence of Chinese government banks, private banks made progress by absorbing deposits from many sources The Shanghai Commercial and Savings Bank increased its deposits from 129.21 million yuan in 1937 to 178.2 million yuan at the end of 1939; the China & South Sea Bank increased its deposits from 94,78 million yuan to 101.29 million yuan; the National Commercial Bank increased its deposits from 81.6 million yuan to 129.68 million yuan; and the Zhejiang Industrial Bank increased its deposits from 50.1 million yuan to 64.4 million yuan during the same period.3 These increased deposits reflected increased industrial profits, as well as the influx of capital from Japaneseoccupied areas The number of remaining private banks in Shanghai also grew continuously until the beginning of the Pacific War Wartime Banking Organization and Financial Control Although the Nationalist government had created a central banking group before the war, the government reorganized this group into one banking entity to meet wartime emergencies The Central Bank of China, the Bank of China, the Bank of Communications, and the Farmers Bank of China were consolidated into a General Administration of the Four Consolidated Banks after they moved to the hinterland The most important figures of the Kuomintang, H.H Kung, Qian Yongmin, and Chiang Kai-shek all became directors of the General Administration of the Four Consolidated Banks, making it possible for them to determine bank policy and allocate bank funds Four subcommittees and groups were established: the Wartime Finance Committee, the Wartime Economic Committee, the Agricultural Finance Designation, and the Secretary Group The Wartime Finance Committee was in charge of all financial affairs setting up six specialized departments to handle note issue, discount, remittance, savings, and then buying and selling of gold and silver The Wartime Economic Committee was in charge of planning and managing the industrial factories withdrawn from Japaneseoccupied areas and building new railways and roads in the southwest region The Agricultural Finance Designation provided agricultural credits and handled rural affairs And the Secretary Group of the Four Consolidated Banks was in charge of daily administration In addition to the General Administration of the Four Consolidated Banks, the Central Trust Bureau run by H.H Kung had strong executive power to oversee imports and exports, as well as to handle directly the purchase of military equipment from the United States The commissions from military procurement deals generated tremendous levels of corruption in the Central Trust Bureau Wartime banking reorganization strengthened central financial and monetary control To reduce the risk of a run on the currency (fabi) after the intensive war in Shanghai, the Ministry of Finance issued seven regulations on May 1, 1938.4 The regulations limited withdrawals from current bank accounts to percent per week, not to exceed 150 yuan in fabi per week (later amended to exempt accounts below 300 yuan) Fixed deposits were frozen until maturity or were limited not to exceed 1,000 yuan by guarantee of the native banks Currency could be withdrawn by special arrangement with the respective banks to meet payrolls or expenses related to military operations Cashiers' orders could be used for interbank settlement or within the huihua (interbank clearing) system only The Shanghai Bankers Association sent an enforcement order of the seven regulations to all the members and requested them "strictly to observe these regulations in all their deal—ings."6 These restraints protected the national banks during the first period of the war and maintained economic stability in Shanghai until the outbreak of the Pacific War Foreign Exchange Management Since the Chinese currency system had been linked to the managed foreign currency reserves in 1935, foreign exchange operations had a great impact on the stability of Chinese currency At the beginning of the war, the central banking group was still following the policy of maintaining currency stability by providing unlimited foreign exchange at a fixed exchange rate The Ministry of Finance signed a "Gentlemen's Agreement" with foreign banks in Shanghai to provide foreign currency to these banks at a fixed parity of shilling 2.5 penny British pound or 0.29 U.S dollar to Chinese yuan One condition of the "Gentlemen's Agreement" was that foreign exchange operations should be limited to "legitimate purposes." The foreign banks were required to buy foreign currency only from the Chinese government bank and to sell it only to their normal customers, which prevented the foreign banks from directly selling foreign currency and buying Chinese currency from other sources Although there was some public pressure on the exchange rate, the government order limiting withdrawals reduced the demand To limit speculative buying and capital flight, the Central Bank and the Bank of China had special cooperative arrangements with the Hongkong and Shanghai Banking Corporation to maintain foreign exchange rate stability As the result of these currency controls, financial markets became very tight in Shanghai In the first period of fighting through 1941, the Chinese government sent Shanghai banker Chen Guangfu, the president of the Shanghai Commercial and Savings Bank, to Washington to ask the United States to buy more silver from China With personal sympathy and understanding of the whole process of Chinese currency reform, American Secretary of the Treasury Henry Morgenthau agreed, on December 2,1938, to buy 50 million ounces of Chinese silver at 45 cents an ounce According to Arthur Young's summary, "the Treasury's prewar purchases of silver from the Chinese Government, including the purchase concluded July 8,1937, were 188 million ounces, and the purchases thereafter during the war were 362 million ounces, valued respectively at US $157 million."7 By selling silver, the Chinese Central Trust was able to purchase airplanes, guns, and transportation equipment from the United States The American purchase of silver temporarily supported the Chinese foreign currency reserve in the first period However, the foreign currency reserves were drastically reduced after the war intensified Although China held sizable funds abroad to buy war supplies and to meet other essential needs, it had received only foreign credits and no cash to support the foreign exchange On March 11, 1938, two days after the Japanese-sponsored Federated Reserve Bank was established in North China, the Chinese government decided to undertake comprehensive controls of foreign exchange (waihui tongzhi) For the first time in Chinese history, China practiced the management of foreign exchange control On March 13, the Chinese Ministry of Finance issued three regulations on foreign exchange and six detailed regulations to manage the purchase of foreign exchange The main points included that all buying and selling of foreign exchange had to go through the Central Bank of China, and that foreign exchange transactions could be allowed to take place only at the headquarters of the bank or its special liaison office in Hong Kong.8 In the beginning, the government was unable to implement the policy of foreign exchange control effectively because of the complex judicial system in Shanghai The funds from foreign trade could still be obtained from foreign exchange markets at swap exchange rates Many foreign banks could hold or exchange foreign currency through interbank loans To restrict speculative buying and capital flight, the Chinese government created an inspection committee to deal with all requests for foreign exchange In practice, the government asked the merchants to balance import and export payments simply through "goods exchange," To limit requests for importing foreign exchange, the Central Bank required the importing company to put cash on deposit instead of providing credit to the importer At the same time, the government encouraged merchants' export activities by offering the exporter maritime and wartime insurance from the Central Trust Bureau without requiring prepayment of the insurance premium.9 The foreign exchange control policy provided invaluable experience for China's later dealings in foreign trade and balance of payments In using state power, the Chinese government established the practice of emphasizing foreign reserves as the base of monetary policy, a policy that continue to this day The Exchange Stabilization Operation The Japanese invasion had seriously hurt British interests in China Britain worried about the shrinking Chinese customs revenue because the largest portion of the revenue was designed as security for the payment of several international loans To respond to these factors, China froze the payment of the customs-secured Japanese portion of the Boxer indemnity, which was due in monthly installments of about 33,000 pounds, and placed the money in a special account in the Hongkong and Shanghai Banking Corporation On March 10, 1939, a Sino-British Exchange Stabilization Fund was set up for the purpose of supporting the Chinese currency and maintaining the Shanghai foreign exchange market A total of 10 million pounds (about 47 million U.S dollars) was collected as a stabilization fund, according to the Sino-British Agreement Half of the total fund was supplied by the Hongkong and Shanghai Banking Corporation and the Chartered Bank of India, Australia, and China and the other half by the Bank of China and the Bank of Communications The Sino-British stabilization operation continued for ten months up through January 1940 When the fund began operations, Chinese currency was overvalued in Shanghai As the exchange rate was 20 percent higher in the hinterland, Chinese currency flowed into Shanghai to buy foreign exchange for imports and personal needs, and there was also capital flight overseas The Exchange Stabilization Fund was quickly exhausted Another important reason for the drain was Chinese government military expenditure for supplies Although the Bank of China and the Bank of Communications injected an additional 800,000 pounds in June and July of 1939, the constant demand for foreign exchange finally exhausted the fund, and it was out of the exchange market by July 18, 1939.10 This situation changed after Hitler's march into Poland on September 1, 1939 Because Shanghai was the only international city to accept Jewish refugees from Europe without entrance visas, a large number of them came to Shanghai, bringing enormous foreign exchange holdings Thus, the exchange rate fluctuated drastically according to fighting on both European and domestic battlefields British sterling fell rapidly in terms of the U.S dollar after Hitler had occupied most of Europe The exchange rate rose by 20 percent as a result of speculation in Shanghai Funds were brought back by the fund from overseas Chinese as well as from foreigners By the end of 1939, the Sino-British Exchange Stabilization Fund had restored its holdings to about 4.2 million pounds A new danger arose for the Sino-British Fund with the establishment of the Japanese-supported Wang Jingwei regime, which set up a Central Reserve Bank in Shanghai and began to issue notes The Japanese banks collected foreign currency deposits at higher rates and held them for the duration of the war The general public wanted foreign currency as the financial life insurance The Sino-British Fund was again drained On May 2, 1940, the first Sino-British Fund withdrew its foreign exchange support After a long period of debate, the American government finally agreed to joint efforts to stabilize Chinese foreign exchange operations Based on consensus between the Department of State and China's Ministry of Finance, the Sino-American Stabilization Fund agreement was signed in Washington in April 1941 Its first action was to support the second Sino-British Fund (or Fund B), which was designed for "the purpose of checking undue fluctuations in the Chinese dollar in relation to sterling." In support of Fund B, the Stabilization Board of China was established in the summer of 1941 This board was composed of five members: Chen Guangfu of the Shanghai Bank; Xi Demao of the Central Bank; Bei Zhuyi of the Bank of China; A Manuel Fox of the U.S Department of Treasury; and Edmund Hall-Patch of the British Treasury The secretary-general was Ji Chaoding, a secretary to Minister H.H Kung Chen Guanfu was nominated as chairman by U.S Treasury Secretary Morgenthau On July 16, 1941, Japanese and Chinese assets in the United States and Britain were frozen The economic and financial sanctions clearly indicated that both Britain and the United States opposed Japan's aggression in Asia At the same time, both governments also froze the assets of overseas Chinese in the United States and Britain These international sanctions actually prevented capital flight from China and reduced foreign exchange speculation in Shanghai Foreign exchange rates between the British pound and Chinese fabi depreciated sharply, but U.S dollars appreciated against fabi The sanctions gave the Chinese nationalist government the chance to control both state and private funds in international markets Photo 7.1 T.V Soong and Secretary Henry Morgenthau sign the 500 million in U.S dollars loan agreement, January 1942 (U.S Office of War Information) Immediately after the Japanese attack on Pearl Harbor in December 1941, Japanese forces in Shanghai occupied the International Settlement and extended control over the French Concession The Japanese occupation blocked Shanghai's international financial contacts with Britain and the United States Ultimately, the Shanghai Foreign exchange market was closed in July 1942 Currency War As the Sino-Japanese war erupted in China, so did a currency war Japanese military notes circulated in occupied areas, and the Japanese-supported Chinese Federal Reserve Bank had been established in 1938 To undermine the Chinese economy, Japanese banks and Japanese-supported banks had clear goals: to recover Japanese yen, which were being used extensively to finance Japan's military outlays in North China; to finance puppet regimes and their armies and civilian organs; to finance Japanese firms and produce goods for export; and to discredit and displace the fabi.11 The Yokohama Specie Bank, the Taiwan Bank, and the Sumitomo Bank were purchasing foreign exchange and fabi for hoarding In contrast to the normal banking practice of selling long-term and buying short-term foreign promissory notes, the Japanese sold short-term and bought long-term notes, despite the risks, because they needed fabi to purchase military raw materials in the hinterland.12 To counter the Japanese financial policies, the Chinese government adopted a traditional method of money transaction known as the huihua system in Shanghai Huihua was an internal clearing instrument used by native banks for interbank settlements The Nationalist government expanded this practice from interbank settlements to general business transactions, which enabled the government to make currency transfers illegally for both fabi and foreign exchange Depositors with commercial accounts in the local banks were allowed to draw huihua from these counts to meet business requirements over and above withdrawals permitted in cash This method developed a currency that was acceptable within Shanghai but still remained under the control of the Chinese authorities.13 The huihua money could be used to pay custom duties daily up to 1,000 customs gold units for imports and up to 1,000 fabi for exports.14 Using the huihua instrument, therefore, the government efficiently controlled the general withdrawals of fabi and maintained relative stability in the money market until the end of 1939 On February 7, 1938, a "Federal Reserve Banking Law" was issued, and adopted by the Japanese puppet government in Beijing The Federal Reserve Bank was organized by the Japanese in four days, and formally opened on March 7, 1938 The bank had 50 million yuan of paid-in capital, which was linked to the value of the Japanese yen The main functions of the bank included: (1) a monopoly on note issue in North China; (2) loans to military industries; (3) control of foreign exchange and purchase of gold and silver as reserves to support its international military trade; (4) representing the Japanese treasury in dealing with military expenditure By the end of 1938, the Federal Reserve Bank (FRB) had issued 162 million yuan in banknotes.15 The puppet authority tried to drive fabi out of circulation with a decree that they could circulate only in North China for one year In August, they proclaimed a discount rate between FRB notes and fabi to 10 percent, and raised the discount to 40 percent on February 20, 1939 In fact, instead of a 40 percent discount against fabi in spring 1939, FRB notes were worth only 74 percent of the face value of fabi This situation continued until the summer when the Sino-British stabilization fund broke down By mid-1939 the circulation of FRB notes had grown to 264 million yuan In July 1939, for the first time, fabi fell below the value of the Japanese-supported Federal Reserve Bank notes Illustration 7.1 Japanese military note (Finance Studies Institute of the People's Bank of China) Although FRB notes made headway as a circulating medium in Japanese-controlled areas, fabi remained in special demand for payment of goods bought from the interior, and for foreign exchange Fabi remained freely convertible into foreign currencies until China, with American and British participation, initiated exchange control in Shanghai in August 1941 The Hua Hsing Bank (1939) In May 1939, the Japanese supported the Liang Hongzhi regime in setting up the Hua Hsing Bank in Shanghai with paid-in capital of 50 million yuan in equal shares from the puppet regime and six Japanese banks The Hua Hsing Bank issued banknotes linked to fabi and attempted to ensure convertibility into foreign exchange After the Hua Hsing Bank was established, the Chinese government immediately instructed its embassies in Washington, London, and Paris to urge that their host governments not deal with this new bank Because the Japanese intention was to control the whole financial system centered in Shanghai, the Hua Hsing Bank threatened not only Chinese banking and commercial interests but also the interests of other foreign banks On May 20, the U.S State Department instructed Consul General Gauss in Shanghai to advise the American banks, indicating the American position: It is our impression that the establishment of the new bank is an initial step in a Japanese program for the establishment in Central China of financial and economic control similar to that which the Japanese have attempted to set up in North China; that it does not seem to the Department that advantage would accrue to American or other foreign banks through assisting the new bank in launching of its notes issuing; and that, while the Department recognizes that American banks have responsibilities of their own and have to protect their own interests, the Department would welcome the maintenance by foreign banks in China of a united front against the new Japanese financial measures and hopes that American banks in central China will see their way clear to refraining from action which might assist the Japanese in establishing the new bank and launching the new currency.16 At the same time, the Chinese government instructed all Chinese banking institutions and commercial firms and retail stores to refuse to accept and circulate the Hua Hsing Bank notes The Shanghai citizens discounted the notes as soon as they got them After the Sino-British Stabilization Fund withdrew its support of the Chinese currency fabi on July 18, 1939, the Hua Hsing Bank unlinked its notes with fabi On August 31, the puppet regime issued a notification that customs dues should be paid in Hua Hsing Bank notes However, the Hua Hsing Bank was never able to handle the customs collection After the Central Reserve Bank of China was established in January 1941, the Hua Hsing Bank redeemed its entire circulation of banknotes on February 19, 1941, in exchange for notes issued by the Central Reserve Bank of China The Central Reserve Bank of China (1941) After Wang Jingwei established the puppet government in Nanjing in March 1940, a discussion on setting a Central Reserve Bank of China was placed on its agenda On December 17, Zhou Fohai, the financial minister of the Wang Jingwei regime, and the financial minister of the Japanese Embassy signed a secret memorandum regarding a proposal to establish the Central Reserve Bank.17 Two days later, the puppet government approved the proposal The Central Reserve Bank of China was formally opened with 100 million yuan in paid-in capital in Nanjing on January 6, 1941, and its Shanghai branch opened on January 20 Zhou Fohai was appointed chairman of the Central Reserve Bank of China At first, the new bank adopted a cautious approach toward Shanghai financial markets and did not seek to control trade or foreign exchange The Central Reserve Bank (CRB) note was equal to fabi at par For example, customs duties were to be paid in the new notes, but fabi could also be accepted In terms of its organization, more than ten departments were established, including general business, issuing, treasury, foreign exchange, audit, investigation, finance, and secretary The CRB also had an "Expert Department" of Japanese financial consultants who were appointed and sent by the Japanese government.18 When the Pacific War erupted eleven months after the establishment of the Central Reserve Bank, the CRB actively engaged in dissolving and reorganizing Chinese government banks in Shanghai The Central Reserve Bank took over control of the Central Bank, the Farmers Bank and the Central Trust Bureaus and placed them under Japanese supervision The Central Reserve Bank reorganized the Bank of China and the Bank of Communication, and cut off their relations with the Nationalist government The Central Reserve Bank issued its notes, chubei quan, to replace fabi; bought and sold gold and silver to support its currency; supplied funds to the Japanese military; reorganized the Chinese "Central Saving Society" to promote savings plans; issued "Peace Bonds" to absorb fabi; made loans to military industries for wartime supplies; and controlled foreign exchange.19 The parity between CRB notes and fabi was one to one However, as the Chinese believed fabi was the legal tender note, they were unwilling to use the CRB notes On May 16, 1941, the Wang Jing-wei government issued an executive order to prosecute those who were not willing to accept new notes One year later, the parity between CRB notes and fabi changed to one to two On May 27, Zhou Fohai announced that CRB notes would be the only legal tender notes in circulation in Jiangsu, Zhejiang, Anhui, Nanjing, and Shanghai The final date for "the abolition of fabi" was set for June 25, 1942, and, by the end of that day, the CRB notes came into almost exclusive use in the International Settlement and the French Concession The psychological effect of people's faith in currency during the war was crucial to the success or failure of a currency The fabi held its value in the first war period as people hoped for the success of national defense; it gradually lost its ground, however, with the intensified Sino-Japanese War and the eruption of the Pacific War The failure of the national currency destroyed China's monetary base Wartime inflation increased with the depreciation of fabi The Pacific Wartime Finance and Inflation During the long resistance against Japanese aggression, the Chinese government suffered huge budget deficits and military expenditures The Ministry of Finance met these needs by issuing National Liberty Bonds and by printing additional fabi, without concern for the potential inflationary consequences At the beginning of war, many Chinese people showed their patriotic sentiments by purchasing government bonds and donating them to the military With the Nationalist army continually being defeated and with growing inflation, they lost confidence in government bonds Moreover, the excessive issuance of government bonds before the war had psychologically undermined public confidence in government securities The capacity of private banks to absorb bonds and savings was exploited to the limit With few alternatives, the Ministry of Finance had to rely on printing more fabi and on incidental sales of foreign exchange and gold to finance government deficits Inflation increased rapidly From a base of 100 in June 1936, the consumer price index went up to 304 in 1939, 558 in 1940, and 1,071 in 1941 Wholesale prices in Shanghai were up to 308 in 1939, 653 in 1940, and 1,598 in 1941.20 At the same time, Chinese customs revenue declined sharply as the Japanese seized coastal areas, ports, and other territory Soon after the outbreak of the Pacific War, Japanese aggressors seized American, British, and Dutch banks in Shanghai, and turned them over to the Japanese banks for liquidation, The Yokohama Specie Bank took over the role of the Hongkong and Shanghai Banking Corporation in handling the customs and salt administrations After that, the Chinese government lost all its customs and salt revenue in coastal areas until the end of the war In addition to the loss of customs revenue, the properties of Chinese national banks had been taken over by the Japanese occupation The Shanghai office of the Central Bank of China and the Farmers Bank were turned over to the Yokohama Specie Bank for liquidation The Bank of China and the Bank of Communications were turned over to the Central Reserve Bank for reorganization Local commercial banks were ordered to follow the new banking regulations imposed by the Wang Jingwei regime While British and American banks were forced to close during the Pacific War, the French Banque de l'lndochine was allowed to continue its business The bank operated in a conservative manner for loans, except when it engaged in foreign exchange business The Deutsch-Asiatische Bank, which had been closed after World War I, restored its business in Shanghai But its activities were limited because of the bank's preoccupation in Europe Although Japanese banks were dominant in Shanghai, Chinese people deposited their savings in native banks rather than Japanese banks Thus, Shanghai native banks enjoyed a certain revival The Revival of Native Banks Native banks revived in Shanghai as an alternative to financial institutions in the absence of Chinese government banks and the British and American banks closed during the Pacific War The direct reason leading to the revival of native banks was that the Wang government ordered all old-style Shanghai native bank to change their form of organization and to follow a corporation law in August 1942 This became the largest organization change since the emergence of native banks in Shanghai over 200 years earlier According to the new corporation law, many native banks changed from traditional unlimited ownership or partnerships to corporations having limited liability in 1943 The business form of a corporation had limited liability, which could reduce the risk of owners and thus encourage investors to form new financial firms Some merchants in trade, light industries, and retail stores had opportunities to operate new native banks Those who had withdrawn from the native banking business in the prewar period also returned As they did not follow the traditional approval procedure, the newly established native banks increased rapidly The registered number of native banks rose from 54 in 1942 to 193 in 1943, and to 216 in 1944.21 The revived native banks riot only handled remittance and trade settlement with native banks and firms in the hinterland, but also operated the complex currency systems between fabi and CRB notes However, the newly established native banks were plagued by both speculation and uncertainty They changed their exchange rates very quickly and drastically, and earned huge profits by making shortterm loans to businesses and merchants at higher interest rates However, wartime hyperinflation washed out their profits Forced by anti-inflation and the uncertainty of wartime banking and finance, some native banks created a dual accounting system to handle daily transactions The dual accounting system set up two accounts, one for public auditing and the other for internal recording The native bankers made profits through various daily interest rates in the dual accounting system Then, they made loans to many small firms and industrial enterprises The dividends were sent to investors without being recorded Besides the dual accounting system, some native banks also put a certain percentage of profits into a reserve account to protect business losses from wartime hyperinflation These native banks could use the reserve fund to buy gold and foreign exchange or even goods for higher profits The complex accounting system became a "public secret" during the Japanese occupation Since there was no standard law to prohibit the dual accounting system, it remained in place after the Nationalist government returned to Shanghai Compared to traditional native bank performance, many wartime native banks had lost the public's confidence The dual accounting system created a negative image of native bank owner as speculators and profiteers Although the dual accounting system of native banks had served as a weapon against galloping inflation in the late 1940s, this dishonest and seemingly unethical conduct provided the excuse for later governments to dissolve the native bank Wartime Inflation After the start of the Sino-Japanese War, the Japanese military government diverted all financial resources to military industries domestically and overseas Japan had a five-year plan for developing key industries, including the steel, liquid fuels, mining, light metals, armaments, manufacturing, electric power, and chemicals However, the priority given to the military undercut the effectiveness of economic policy on agricultural products such as cotton and rice Demand by Japanese troops drove up the market price for rice in Shanghai markets, which rose from 845 yuan per shi (2.7497 bu) at the end of 1942 to 50,000 yuan per shi at the end of 1944.22 To allocate the limited supply of key products, with Japanese support the Shanghai government implemented a ration system to distribute rice, coal, and electricity The living standard of Shanghai citizens declined drastically At the same time, the ration system engendered speculative activities and pushed prices up Thus, the Shanghai commodity and stock market trading volume zoomed up, with gold prices being the most affected The Central Reserve Bank attempted to prevent this damaging inflation and to encourage savings However, it created money simply by increasing the price of gold when it was necessary for its balance of payments The bank issued a certificate of gold for 780,000 yuan per ounce on May 7, 1945, raised the gold price to 1,250,000 yuan per ounce on June 4, and to 2,040,000 yuan per ounce on June 20.23 According to the statistics computed by Arthur Young, growth price between the CRB note and fabi increased from 0.93: in 1943 to 3.3: in 1944, and 32.3: in August 1945 24 Initially, the value of the Central Reserve Bank note had been relatively stable However, with the excessive issuance of CRB notes demanded by the military, the prices in Shanghai reached the point of spiraling inflation in the first eight months in 1945 The CRB notes collapsed with the defeat of Japan The drain of Japanese financial resources and strict control of goods in occupied areas caused financial chaos in the Shanghai markets The increasing need of fabi to buy foreign exchange and military materiel caused the CRB note to collapse Although the official exchange rate between the CRB note and fabi and was set at 1: in June 1942, the situation was reversed at the end of 1943 Gradually, fabi began to appreciate The conversion rate between CRB notes and fabi was 2: in late 1944, and 10: in May 1945.25 The original small denominations did not satisfy the demand as inflation progressed In the beginning of 1945, the Central Reserve Bank issued the notes in denominations of 1,000 yuan, 5,000 yuan, and even 10,000 yuan and issued them without register numbers Thus, the credit of the CRB was completely destroyed Shortly after the end of war, the Central Bank of China converted the CRB notes to fabi at an official conversion rate of 200 to Obviously, the ratio of 200 to greatly overvalued the fabi Since August 1945, the wholesale price index of Shanghai and the hinterland had generally stood at 8,640,000 and 245,503, respectively, and, thus, the conversion rate of Central Reserve notes should have been 35: according to research carried out by Chang Gongquan.26 The arbitrary setting of the conversion rate had greatly disappointed the people of Shanghai Holders of CRB notes suffered greatly from the artificial rate; and holders of fabi had an enormous advantage in purchasing power Such unfair treatment caused great dissatisfaction among Shanghai citizens toward the Nationalist government after it returned to Shanghai The experiences of wartime banking and financial control provided the Nationalist government with opportunities to monopolize Chinese banking and financial institutions Many of the emergent financial and monetary policies implemented during wartime were carried over into postwar banking reconstruction The controls on foreign exchange rates and foreign reserves had been extended throughout the civil war Even after the establishment of the new People's Republic of China, the method of management of foreign exchange has continued to the present 8 Collapse of the Nationalist Monetary System, 1945–1949 After the Sino-Japanese War ended with Japan's unconditional surrender in August 1945, the Nationalist government returned to Nanjing from its wartime capital of Chongqing Many high ranking officials flew between Nanjing and Shanghai weekly to enjoy the latter's extravagance and pleasures after the long bloody war Shanghai's financial markets flourished because of the enormous inflow of funds from the hinterland, the demand for loans to reconstruct national industries, and trade in luxury consumer items Nightclubs, dancing girls, luxurious hotels, and crowded department stores emerged with the postwar economic recovery and financial prosperity The appearance of peace and prosperity, however, did not last long because peace talks between the Nationalist Party and the Communist Party broke down The prospect of a new civil war clouded the sky During the short period of postwar reconstruction, Chiang Kai-shek enhanced his rule over a bureaucratic banking system that was completed during wartime The Nationalist government created many state industries by confiscating enemy industries Immediately after these confiscations, state industrial capital rose to two-thirds of total Chinese industrial capital The share of state banks' deposits in all bank deposits rose from the prewar level of 56.5 percent in 1936 to 91.7 percent in 1946.1 State finance capitalism was finally complete when the Nationalist government took the control of 91 percent of national deposits and major banking assets Although the number of state enterprises grew substantially, the production efficiency was low Because industries had restored only 25 percent of the prewar level in Shanghai, the economy throughout the country was still very weak State industries had to depend on state banks to finance their operations However, the military industries had priority in obtaining funds from state banks for the civil war Civilian industries, trade, and communications had limited opportunities to get loans from state banks Postwar banking reconstruction did not resolve the serious imbalances in the distribution of financial resources in China, but instead widened the gap between the rural and urban areas With Shanghai absorbing more than 50 percent of national deposits, the central banking system group, the "four banks and two bureaus," controlled more than 90 percent of national deposits.2 The central government began to manipulate Shanghai banking and financial markets, which were formerly guided by market forces rather than by government regulations With the renewed civil war, enormous military expenditures put the Nationalist government budget seriously out of balance The government met military needs simply by printing paper money Hyperinflation and the failure of the gold yuan currency introduced in 1948 destroyed the people's confidence in the government The collapse of the monetary system and defeat on the battlefield finally forced the Nationalist government out of Mainland China Postwar Banking Rehabilitation The first act the Nationalist government performed after returning to Shanghai was to confiscate all Japanese banks and Japanese-supported banks The Central Bank of China took over the Central Reserve Bank and the Bank of Chosen; the Bank of China acquired the Yokohama Specie Bank and the Deutsch-Asiatische Bank; the Farmers Bank took over the Bank of Taiwan; and the Central Trust Bureaus acquired the Sumitomo Bank and Mitsubishi Bank In confiscating those banking facilities and capital, the Nationalist government strengthened state banking and financial power At the same time, the government curtailed all the activities of private commercial banks and native banks by means of postwar clearance On October 1, 1945, the Ministry of Finance announced "the Measures for Clearances of Shanghai Commercial Banks and Native Banks." The Ministry of Finance set up a special agency to carry out the measures The clearance impinged on every private bank and financial institute in Shanghai and determined which bank should continue and which should not By these measures, banks that were established after the Sino-Japanese War had to liquidate business unconditionally; banks that had been established before the war had to apply for a new business license from the Ministry of Finance These measures were disastrous for all Shanghai private banks The poorly defined qualifications for a new business license opened the backdoor to official corruption To obtain a business license, many bankers and native bank managers used their connections or "friends" inside the government Gold bullion, cars, and even houses were used as gifts Official corruption grew quickly as the pace of business accelerated Corruption gradually spread through all Nationalist-occupied areas The extreme measures for obtaining clearance to operate a bank truly hurt the native banks As a result, 181 of a total 229 native banks were forced to close because they had been established during the war; only 48 survived by the end of 1945 Many native banks persistently appealed to higher officials through various channels, however, and some eventually regained their business licenses The number of native banks began to increase from their low point of 48 in 1945, reaching 72 in 1946 The 1946 Banking Laws At the beginning of 1946, the Ministry of Finance promulgated a series of new banking laws to regulate domestic and foreign banks Under these laws, new private banks were no longer allowed to be established, only government banks were allowed to open All banks were required to register and to apply for a business license Foreign banks were limited to certain business areas relating to foreign exchange transactions Even within the "four government banks and two bureaus," the development of these banks and bureaus was uneven The Central Bank of China became "the bank's bank." In addition to serving as the national treasury and handling all government administrative funds, the Central Bank determined national discount and rediscount rates It also served as the sole authority permitted to issue paper money To compete with private banks, the government banks constantly dropped their interest rates Unfair competition created hardships for many commercial banks and small native banks When private banks got into financial trouble, state banks extended short-term emergency loans to them When these private banks were unable to repay the loans on time, the state banks purchased large shares of the banks and acquired control of power Under these circumstances, the group of state banks successively gained control of the Commercial Bank of China, the Ningbo Commercial and Savings Bank, the China Industrial Bank, and the Xinghua Commercial and Savings Bank These four formerly private banks gradually became subordinate to the government—four semi-official banks— which were called the "four little banks." The process by which the Nationalist government took over private banks and monopolized the banking sector had begun in 1935 and was completed in 1948 With the rapid expansion of state finance capitalism, private financial activities declined sharply For example, the Bank of China was incorporated as a private shareholding bank in 1912, then it was reorganized into a fifty-fifty joint private and official bank in 1935 For greater control over the Bank of China, the Nationalist government poured 20 million fabi into the bank in 1943 and also appointed a president of the bank The capital input changed the ownership ratio between the government and private shareholders from 1: to 2: In effect, the Shareholders Association of the Bank of China yielded control to the government For another example, the Shanghai Commercial and Savings Bank was listed as the number one private bank in The 1936 Bank Yearbook, because it absorbed percent of total national deposits before the war While the bank was still able to keep its position as number one private bank in 1946, it was able to absorb only 0.8 percent of total national deposits after the war Chen Guangfu, the president of the Shanghai Commercial and Savings Bank, criticized the government for monopolizing the banking system and for bringing all private banks under the official "united controlled banking system."3 The wartime circumstances in China provided effective means for the Nationalist government to monopolize the banking sector, creating what the Communists called "bureaucratic monopoly financial capitalism." The postwar banking laws imposed many restrictions on foreign banks Although China's Minister of Finance had permitted American banks to reopen old branches on a "liquidation" basis without prejudice as to subsequent registrations and other legal requirements,4 the Ministry of Finance issued new regulations on January 10 to instruct all foreign banks not to open deposit accounts or transact overseas remittances in foreign currencies for their clients.5 Because extraterritoriality had ended, the reopened foreign banks lost their special status in Shanghai Prior to this regulation, the Chase Bank was making both inward and outward remittances, as well as paying and receiving U.S currency against telegraphic transfers to New York To comply with the new regulations, the Chase Bank ceased accepting U.S currency for outward remittances but continued meeting inward remittances.6 Under the new banking laws, all foreign banks had to adhere to the same regulations On February 25, 1946, the Ministry of Finance announced "Temporary Regulations with regard to Foreign Exchange Transactions." Authority for foreign exchange transactions was centralized in the Central Bank of China, which was directed to exercise, among other activities, the following major specific functions: (1) to appoint banks that may engage in foreign exchange transactions; (2) to license some special banks including native banks to deal in foreign currency; to license travel agencies to issue and cash foreign currency, travelers' letters of credit and checks; and to license persons to act as foreign exchange brokers; and (3) to intervene in financial markets when the bank deems it necessary to check fluctuations of rates After the effective day of March 4, the appointed banks may sell foreign exchange to the public only to pay the cost of importing goods whose importation is permitted; for legitimate personal requirements in accordance with the regulations; and for other legitimate purposes authorized by the Central Bank of China, The appointed banks may buy foreign exchange arising from the following transactions: exports or re-exports from China; remittances from abroad to China; and foreign exchange sold for expenditures in China Additional regulations provided that no bank was allowed to open new foreign currency accounts Import and export of foreign currency notes were prohibited without a license from the Ministry of Finance Persons traveling were allowed to bring to and take from China an amount not exceeding 200 U.S dollars or the equivalent.7 Among these appointed banks, the Bank of China occupied a special position in foreign exchange operations, insofar as it replaced the Hongkong and Shanghai Bank, which had dominant the past eighty years The Bank of China was authorized to set daily foreign exchange rates according to changes in domestic and international financial markets as the standard in Shanghai In the postwar banking reconstruction, the Central Bank of China gained monopoly power over banking and financial markets under the direct control of Chiang Kai-shek The Central Bank simply printed out a huge quantity of fabi based on the demands of the civil war expenditures Chiang had frequent changes of minister of finance and governor of the Central Bank as scapegoats of inflation and the weakened economy Official corruption, beginning during the war and growing exponentially in the postwar period, jeopardized the rehabilitation of banking and finance in Shanghai Gold Scandals During World War II, U.S president Franklin D Roosevelt had proposed in 1942 a 500 million dollar loan to China, of which 200 million dollars were committed in gold for stabilizing the Chinese currency and combating inflation The Chinese Nationalist government was eager to use the sale of gold as a monetary tool to absorb excess funds and reduce the cash in circulation Negotiations on the delivery of the gold became one of the major financial issues in Sino-American relations Because of the difficulties of shipping gold during the war and the limited effect of sales while prices continued to rise in China, the transfer of the gold had been delayed until mid-1945 Chinese public response to purchases of gold and U.S dollar certificates and bonds was slow at the beginning The official exchange rate of dollar to 20 yuan declined to dollar to 17 yuan However, subsequently, inflation pushed the rate to dollar to 30 yuan At this moment, Lu Xian, the director of the Treasury Department of the Central Bank, used his position to purchase large quantities of American bonds Chinese Vice Premier and Minister of Finance H.H Kung then stopped the public sales of American bonds The remaining 50 million dollars in American bonds was purchased by the Central Bank of China at the official price Instead of keeping these bonds in the Treasury Department of the Central Bank, Lu Xian sold U.S bonds to Kung personally at the official price of 3,504,260 dollars, and Lu also purchased another set of bonds for 7,995,740 dollars.8 When the black market price of a bond share rose to 273 yuan in January 1944, these bureaucrats made millions of dollars in profits through insider trading On May 19, 1945, another large Chongqing gold scandal involving multimillions of dollars was exposed in many Chinese newspapers despite tight Chinese censorship The scandal stemmed from a premature leak of the Chinese government decision in March to raise the official price of gold, thus permitting Chongqing speculators to make fantastic profits in a few hours When the official price of gold was raised from 20,000 yuan to 35,000 yuan per ounce on March 30, the open market price was approximately 50,000 yuan According to the Commercial Daily News of June 3, even though the open market gold price closed at 101,500 yuan per ounce on June 2, the official price for gold was still maintained at 35,000 yuan The double track gold price system provided speculators with huge profits The public criticism of bureaucratic corruption forced H.H Kung to resign from his positions in the Ministry of Finance and the Executive Yuan The gold scandal confirmed the impression in the United States that "the $200 million of U.S dollar certification and bonds and the gold sold in China have gone into relatively few hands with resultant large individual profits and have failed to be of real assistance to the Chinese economy." There was public criticism that the buying of gold had utilized a large quantity of foreign exchanges that should have been used for postwar construction The Department of State sent a suggestion to China stating that "China should investigate and cancel sales to speculators and illicit purchasers and insure that only bona fide purchasers will receive such gold as is available."10 The new premier of the Executive Yuan, T.V Soong, could not save the failed gold policy Instead, he made things worse by imposing a so-called contribution on gold purchases On July 30, the Supreme National Defense Council adopted Soong's proposal that beginning on July 31, a 40 percent "contribution" would be imposed on all unmet gold commitments The contributors were given the option of paying at the current official price, which was fixed at 170,000 yuan per ounce as of July 31.11 This measure was criticized in financial circles and the news media as discriminatory because it left all gold purchasers who had received their gold prior to July 31 without the tax imposition It was a breach of faith and therefore a blow to public confidence.12 Under pressure of public criticism, the Central Bank changed the "contribution" for gold purchases into a 40 percent tax After its imposition, the black market spot price for gold fluctuated violently between 200,000 yuan and 300,000 yuan per ounce The money market became tight due to the demand for cash to meet the tax on the delivery of gold The tight money market was suddenly relieved when the Japanese surrendered on August 15, 1945 The open market price of gold fell to 88,000 yuan per ounce then recovered to 102,000 yuan on V-J Day.13 The outbreak of the civil war shortly thereafter generated large military expenditures that consumed 75 percent of the total national budget From March to November 1946, the Central Bank sold 1,350,000 grams of gold.14 This caused a heavy drain on the Central Bank's foreign exchange and gold reserves As demand increased, so did the gold price, which climbed again in late 1946 At the end of 1946, the Central Bank of China adopted a ration system for selling gold at the fixed official price on one hand, and it entrusted some gold shops with selling gold at the market price, on the other hand The governor of the Central Bank and a few top managers controlled the sales of gold at the market price This small group sent daily confidential business reports to Premier T.V Soong The Chinese people had lost their confidence in the government and its currency because of the constant military failures of the civil war and the recurring gold scandals People rushed to purchase gold as a hedge against inflation The run on gold reflected a deep depreciation of fabi On December 23, 1946, the Central Bank and some gold shops sold 179,200 ounces of gold within one day The price of gold soared drastically The market price of gold climbed from 160,000 yuan per ounce in April 1946 to 350,000 yuan per ounce on January 6, 1947 On January 9, the Central Bank announced that it would no longer sell gold In response to the Central Bank's decision, the Shanghai gold price suddenly rose to 960,000 yuan per ounce oil January 10 As affected by the gold price, Shanghai rice prices rose from 100,000 yuan to 160,000 yuan per picul, and prices of other daily necessities also rose drastically The sale of gold was supposed to be an important deflationary measure aimed toward restraining the rise of prices However, the inflationary pressure of money flowing into Shanghai led to the following decline in the Central Bank's holdings: March 4, 1946, 5,800,000 yuan per ounce; January 31, 1947, 2,400,000 yuan per ounce A total 3,400,000 ounces of gold were sold within eleven months Of these sales, approximately one-half were made in the last three months.15 With the loss of gold reserves and under strong public pressure, T.V Soong stepped down from his position as premier, and Bei Zhuyi resigned as governor of the Central Bank of China The 1947 Economic Emergency Measures Attempting to combat inflation and financial crises, the Nationalist government announced the Emergency Measures on February 16,1947 The Nanjing government promulgated economic emergency measures to balance the national budget, enforce tax collection, and impose price ceilings on daily necessities, such as rice, flour, cotton, cloth, fuel, salt, sugar, and edible oil Wages and salaries were frozen at the January 1947 living index levels The government also strengthened financial regulations against speculators in order to stabilize the currency The main objectives of the regulations were to control foreign exchange and forbid the selling and purchasing of gold and foreign exchange The government set a new official exchange rate between the U.S dollar and fabi at dollar to 12,000 yuan The fixed official exchange rate did not reduce the pace of inflation Instead, it caused a sharp deterioration of international trade and the balance of payments Because the financial regulation had been designed to limit imports and encourage exports, importers were hardly able to obtain import permits, and exporters had to settle their trade bills at the fixed official exchange rate Smuggling became rampant in order to circumvent the limitation of import permits and to meet the market demand for imported consumer goods Exporters were also smuggling commodities through Guangzhou and Hong Kong because the black market foreign exchange rate was much higher than the fixed official rate in Shanghai It has been estimated that in 1947, illegal imports from Hong Kong were worth about 65.2 million U.S dollars, and illegal exports to Hong Kong were about 21.5 million U.S dollars.16 Many Shanghai capitalists set up branches of their banks and firms in Hong Kong to avoid the restrictions imposed by the Emergency Measures Hong Kong had gradually become the second trade and financial center after Shanghai Although government agencies made efforts to control prices and maintain the foreign exchange rate, the Enhanced Financial Regulations were sustained for only one month At the beginning of April 1947, black market trading of gold and U.S dollar revived The price of gold soared from 610,000 yuan per ounce in February 1947 to 8,500,000 yuan in December The failure to strengthen regulations caused a more rapid growth of the black market in all commodities As a result, the government had "to raise ceilings in line with unofficial prices in the middle of April and to unfreeze wages in May The monthly increase in Shanghai wholesale prices was 54 percent in May, compared with 19 percent in the month before the emergency order." 18 Again, in June and July, Shanghai wholesale prices increased by 260 percent and 45 percent, respectively The market rates for foreign exchange rose by 98 percent and 181 percent.19 Inflation wiped out any positive results that were achieved in the economic recovery The 1947 economic and financial measures ended in failure because the Nationalist government was incapable of enforcing them or of balancing the budget As long as the civil war continued and military expenditures drained limited resources, it was impossible to use economic tools to stop hyperinflation and reach a desirable economic equilibrium Hyperinflation With the rapid escalation of the civil war, China's inflation reached catastrophic proportions The Nationalist government military expenditures reached 75 percent of total national income China's hyperinflation was reflected in the increase of currency in circulation from about 30 trillion fabi at the beginning of 1948 to about 700 trillion in the middle of August 1948 In the same period, the official exchange rate of fabi depreciated from 77,636 yuan to U.S dollar to million yuan to U.S dollar.20 The main cause of inflation was still the massive budgetary deficit caused by military expenditures and financed by placing paper money in circulation The people's confidence in the Nationalist government declined with the financial chaos As the confidence in currency waned, prices rose faster than the government could print new money People's living standards dropped drastically along with galloping inflation Government bank employees also suffered from inflation and new banking regulations In the fall of 1947, the Ministry of Finance released a letter from Chiang Kai-shek to all staff in the four government banks and two bureaus regarding the termination of staff benefits On September 26, 1947, about 6,000 banking employees declared a lunch hunger strike in protest.21 This strike had a destructive impact on the government's public standing, because the conventional wisdom said that work at a bank was a "golden bowl." If the "golden bowl" could not hold rice, then, whose bowl could? The media in Shanghai publicized the news around the world and fear of hyperinflation spread throughout Shanghai At the end of the Sino-Japanese War, the Nationalist government raised the conversion rate between fabi and the Central Reserve Bank notes to 1: 200 in Shanghai This conversion rate shifted the distribution of income in favor of merchants and bankers from the hinterland Shanghai citizens, salaried workers, and the general public did not expect a loss of real income after the war They eventually obtained wage increases through strikes and forceful bargaining However, their wage and salary incomes merely contributed to further inflation Moreover, because faith in government bonds and securities had been lost, the Nationalist government was forced to print money to finance increasing military expenditures The excessive issuance of currency further contributed to hyperinflation In addition to issuing notes, the influx of money from the hinterland caused by the civil war also accelerated inflation Furthermore, as Shanghai prices rose each day, speculation in property, goods, and stock and futures markets pushed the prices for industrial raw materials and other commodities higher Merchants and retail businessmen began to hoard consumer goods in order to conserve the value of these current assets, and the general public hoarded foods and durable goods in fear of rising inflation The economic situation was deteriorating further Although H.H Kung and T.V Soong were fired or had stepped down because of the gold scandal, the price of gold continued to rise In February 1947, the market gold price was set at 610,000 yuan per ounce It rose to 10,430,000 yuan per ounce in January 1948, and again to 539,600,000 yuan per ounce in August 1948.22 Within twenty months, the gold price had risen about 885 times As hyperinflation spiraled upward, the Chinese people lost all confidence in the Nationalist government The influential Shanghai newspaper, Da Gong Bao, carried an editorial on August 5, 1948, which indicated that what is "especially serious is that everyone believes nothing can be done about [the economic crisis] So they live from day to day, without thought of the future, as though awaiting the onset of collapse."23 The collapse of national monetary policy, however, was not far away The issuance of gold yuan notes heralded the last curtain call of the Nationalist government on the mainland of China The 1948 Economic Emergency and the Issuance of Gold Yuan In an attempt to control galloping inflation and to find new financial resources for the civil war, Chiang Kai-shek appointed Yu Hongjun (O.K Yu), a former Shanghai mayor and minister of finance, as the governor of the Central Bank of China, and Wang Yunwu as the new minister of finance Chiang ordered Yu and Wang to organize two research groups to study the possibilities of currency conversion Based on the 1935 currency reform experience, Chiang thought a new currency conversion might be able to end inflation As a result, two opposing plans were drafted for currency conversion The research group of the Central Bank drafted plan A that recommended keeping fabi as the national currency because at least it was known and accepted by the general public To support fabi, the research group argued, the government should extend the function of a gold customs unit note, guangjin juan, as a supplemental means of payment for tariff and commercial bills.24 By contrast, the research group of the Ministry of Finance led by Wang Yunwu drafted plan B, which recommended withdrawing fabi from circulation and converting fabi into gold yuan Plan B recommended that the Central Bank use gold as a reserve for the new currency and anticipated that the currency would be issued in a fixed ration to the gold reserve When the two plans were sent to Chiang Kai-shek, Chiang made a fatal decision to turn down plan A and adopt plan B, On the evening of August 19, 1948, Chinese radio announced a presidential mandate of the "Financial and Economic Emergency Measures," which proclaimed that a currency conversion reform would be earned out on August 20 The currency conversion from fabi to gold yuan was to be based on a managed gold standard The unit value of the gold yuan was defined as 0.2217 centigrams of pure gold The conversion rate between gold yuan and fabi was 1: million By law, the maximum issuing amount of new currency was limited to 200 million gold yuan The prices of all commodities were frozen at the equation to the gold yuan levels of August 19 In addition to the Financial and Economic Emergency Measures, the government required people to register their foreign properties and to surrender to the government, by September 30, 1948, all private holdings of gold and silver bullion, and all foreign currencies at rates of gold yuan to U.S dollar, gold yuan to ounce silver, gold yuan to silver dollar.25 A two-day bank holiday was declared on August 20 and 21,1948 On the bank holiday, all prominent bankers were called to Nanjing for a conference The premier of the Executive Yuan, Weng Wenhao, briefly explained the background of the currency conversion and asked the support of the Shanghai bankers The plan required all commercial banks and persons to surrender all gold, silver, and foreign currency to the Central Bank for gold yuan Chiang Kai-shek met with the bankers and complained that the Shanghai bankers loved only money but not the country He urged them to cooperate with the government by surrendering their hard currency to the government To enforce the Financial and Economic Emergency Measures, Chiang Kai-shek appointed Yu Hongjun as economic supervisor and his son Chiang Ching-kuo as deputy chief of the Economic Supervisory Office in Shanghai Chiang Ching-kuo set up special targets for the Zhejiang Industry Bank and the Kincheng Banking Corporation Although the bank presidents Li Ming and Zhou Zuomin reported their bank holdings of gold, silver, and foreign currency, young Chiang did not trust them Chiang Ching-kuo put Zhou under house arrest This offensive action against Zhou enraged the Shanghai bankers As a result, Li Ming flew to New York and Zhou Zuomin escaped from Shanghai with the help of former American general Chennault The Shanghai bankers condemned Chiang Kaishek, charging that he had "removed the bridge after crossing the river" because Chiang had betrayed those who had supported him in the 1920s At the beginning of currency conversion, Chiang Kai-shek was in Nanjing, and communicated with Yu Hongjun every night on the quantity of gold, silver, and foreign currency that had been collected According to statistics of the Central Bank of China, at the end of October, the bank had collected 165 million ounces of gold, 900 million ounces of silver bullion, and 2.3 billion silver dollars, and several million U.S dollars and other foreign currency Thus, the total value was about 200 million U.S dollars At the same time, Chiang Ching-kuo set off economic storms by employing an economic police corps Adopting a strategy of "killing a chicken to frighten the monkey" (shaji jinghou), which refers to punishing someone as warning to others, Chiang Ching-kuo arrested and executed speculators "During the 70 days of the Emergency Measures, several hundred people in Shanghai were arrested and one civilian was executed for economic crimes Most of those arrested were charged with overpricing, scalping, or hoard-ing."26 By the end of September, Shanghai residents had turned in about two-thirds of their hard currency to the government However, most of these items were turned in by the middle classes, not by the plutocrats27 who held most of the country's assets "Killing a chicken" was not enough to change the public impression of the government, Chiang Ching-kuo took a further step by "hunting big tigers." On September 3, the economic police arrested Du Weiping, the son of Du Yuesheng Du Weiping was charged with black market stock transactions after the Shanghai Stock Market had been shut down Rong Hongyuan, the head of the Rong family, was charged with illegal foreign exchange remittances Zhan Peilin, chairman of the Paper Guild, was charged with hoarding paper and refusing to sell it at the official price.28 Chiang Ching-kuo labeled these actions as a "social revolutionary movement." He delivered a speech on September 13: "Many people have criticized me and said my methods are not democratic, but we know what is meant by democracy Democracy means to use the force of the majority to suppress the minority in interests of the majority." He continued, "Some have said my act of confiscating hoarded goods is equivalent to robbing If this robbery is committed to protect law-abiding merchants and to safeguard the property and livelihood of good citizens, then I would be willing to be such a robber." 29 This "robber" theory terrified Shanghai capitalists However, many low- and middle-class people supported Chiang Ching-kuo's action, and dreamed about the return of normal economic and financial orders They followed the ration quotas to purchase the necessities of daily life and handed their silver and gold over to the government Among these "big tigers," however, some escaped punishment One was Kung Lingkan, the son of H.H Kung and the nephew of Chiang Kai-shek and Soong Meiling According to the account in the Shanghai news, Kung Lingkan "was general manager of the Yangtze Development Corporation, a search of whose premises on September 29 uncovered a huge store of goods suspected of being hoarded Kung claimed that the goods had been legally registered with the government, and therefore had not been hoarded Not until later in December did the Control Yuan return a bill of indictment against Kung By that time, however, young Kung had flown to the United States." 30 The general public believed that Kung was protected by his cousin Chiang Ching-kuo, or at least by the family network.31 In September 1948, Chiang Ching-kuo's terror tactics brought a certain level of economic equilibrium to Shanghai Commodity prices remained at ceiling levels within the regulations, and black markets in gold and foreign exchange temporarily passed out of existence While the government triumphantly broadcasted the success of reform, hyperinflation resumed after a temporary lull Refugees from the civil war again flowed into Shanghai People used all their funds to buy commodities such as cigarettes, silk, wool and cotton goods, knitting wool, shoes, and canned goods, which they believed would hold their value But, at the official fixed prices, wholesale traders in Shanghai suspended operation As a result, commodity shortages intensified Retailers had either sold all their goods or were illegally hoarding goods for larger profits Restaurants refused to business either because the markets lacked food supplies or because the prices of raw materials of foods were higher than what restaurants were supposed to charge for meals Moreover, commercial banks were reluctant to make loans because the real value of the loans had dwindled to almost nothing Although the temporary state of economic equilibrium had given some hope to the government, the Shanghai people lived under constantly looming inflationary pressures Although the Nationalist government made a commitment at the beginning of the currency conversion not to issue more than 200 million gold yuan, it ... finance area, which may be abstracted or analyzed as native finance pre -capitalism, integrated finance capitalism, and state finance capitalism Native Finance Pre -Capitalism China's finance capitalism. .. an analysis of the pattern of the rise and decline of China's finance capitalism Here I choose the concept of "finance capitalism" by emphasizing the capitalism developed in China's banking and. .. Native Banks Money and Native Banks Shanxi Banks The Ningbo and Shaoxing Financial Groups Shanghai Native Bankers Guild Native Banks and Merchants The Organization of Native Banks Native Banks’ Capital