Brief History of Finance in China 9781844641499, 9781844641482

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ISTORY IN CHINA SERIES ECONOMIC HISTORY IN CHINA SERIES ECONOMIC HISTORY IN C

A Brief History of Finance in China Chen Zhengping

A Brief History of Finance in China Author: Chen Zhengping Translator: Qian Suqin Polisher: Alastair Robert Wilson

Acknowledgements

We sincerely appreciate the hard work of the translator Qian Suqin, as well as the final polisher Alastair Robert Wilson. Without their diligent work this English version would not exist. We also sincerely appreciate the Social Sciences Academic Press. They have done much work in arranging the preparation of the English version.

May, 2014

Chapter 1 Finance in China before the Opium War .................................................................. 1 Chapter 2 Finance during the Early Semi-colonial and Semi-Feudal Period of China (1840-1894) 6 2.1 The intrusion of foreign financial forces into China ............................................................ 6 2.2 The evolution of money shops .......................................................................................... 10 2.3 The boom of exchange shops ............................................................................................ 13 2.4 Financial crisis and the downfall of “red-top official merchants” (红顶商人) .................. 16 2.5 Chaotic currencies ............................................................................................................. 19 Chapter 3 Finance during the early semi-colonial and semi-feudal period of China (1895-1927) ........................................................................................................................................... 25 3.1 The expansion of foreign financial forces in China............................................................ 26 3.2 The rise of modern banking industry in China .................................................................. 30 3.3 The decline of exchange shops and the continuous development of money shop .......... 35 3.4 Repeated financial unrest ................................................................................................. 37 Chapter 4 Finance during the Ten Years before the Anti-Japanese War (1927-1937) ................ 42 4.1 The development of the Four Banks and Two Bureaus and bureaucratic capital financial capital ...................................................................................................................................... 42 4.2 The abolishment of silver liang system and the adoption of silver dollar system............. 46 4.3 Silver wave and legal tender reform ................................................................................. 47 4.4 Changes in the non-governmental money industry .......................................................... 51 4.5 Shanghai: Oriental New York ............................................................................................. 53 4.6 Finance in revolutionary bases.......................................................................................... 56 4.7 Finance in Northeastern China after the Mukden Incident .............................................. 58 Chapter 5 Finance During the Anti-Japanese War Period (1937-1945) .................................... 61 5.1 Finance in Japanese-occupied zones................................................................................. 61 5.1.1 Finance in Japanese-occupied zones of northeastern China ................................. 61 5.1.2 Finance in Japanese-occupied zones inside Shanhaiguan Pass.............................. 62 5.1.3 Finance in Shanghai during the Isolated Islands period and after the outbreak of the Pacific War of 1941 ................................................................................................... 64 5.2 Joint Office of the Four Banks and the KMT government’s financial control of the Great Rear Area ................................................................................................................................. 66 5.3 Over-issue of legal tender ................................................................................................. 70 5.4 Gold and foreign exchange market in KMT-controlled zones ........................................... 71 5.5 Finance in anti-Japanese Bases ......................................................................................... 74 5.6 Currency War: the battle to control currency during the anti-Japanese War period ....... 80 Chapter 6 Finance during the Chinese War of Liberation (1945-1949) ..................................... 85 6.1 The monopoly of the Four Banks, Two Bureaus and One Treasury over finance ............. 85 6.2 The hyperinflation in KMT-controlled areas...................................................................... 87 6.3 The collapse of gold coin certificates and silver dollar certificates ................................... 90 6.4 Non-governmental financial industry’s gradual decline.................................................... 96 6.5 The retreat of foreign banks from China ........................................................................... 99 6.6 The nationwide victory of the new democratic financial system .................................... 101 References ......................................................................................................................... 106

Chapter 1 Finance in China before the Opium War1 Finance and financial activities play a central role in the development of a commodity economy. A detailed financial history, therefore, is an important component of the modern and contemporary economic history of China. China‘s economy had always been dominated and continued to be dominated and run by the natural economy ethos in the Ming and Qing dynasties. Nevertheless, by this time commodity production and exchange became increasingly developed and the seeds of the market economy began to sprout. After reuniting China, the ruler of the Qing Empire instituted measures such as tax reduction and water-conservancy projects which gradually recovered and developed the war-beaten productivity, strengthened economic ties between regions and expanded the domestic market. In turn, and as a result of these measures, the commodity economy enjoyed remarkable development during this period of time. In tandem with the fast growing commodity economy, township markets and village fairs sprang up like mushrooms and added vitality to the prosperous urban market. In the most commercially-developed regions south of the Yangtze River, township markets and village fairs were seen everywhere. Hankou (汉口) in Hubei Province had already become a commercial town with a population of 200,000 or so before the First Opium War. The narrow local market system had been smashed and a new domestic market characterized with a circulation network was formed with cities at its center, towns as its strongholds, fairs as its outlets and markets at all levels closely connected to each other. Meanwhile, a great number of merchants‘ associations (or Shang Bang) emerged in the domestic market. This kind of merchants‘ association appeared for the first time in mid-Ming Dynasty. It was a guild of fellow merchants established in a foreign area on the basis of friendship and aimed to provide mutual assistance. Among the numerous merchants‘ associations, those in northern Chinese provinces like Shanxi (山西), Shaanxi (陕西) and Shandong (山东) and southern Chinese provinces like Zhejiang (浙江), Guangdong (广 东)and Fujian (福建) were the most dynamic and well-known ones. In the course of the long-distance trade of salt, tea, cloth and wood, the capital of some influential merchants grew substantially from 500,000-1000,000 liang in the late Ming Dynasty to 10 million liang in the mid-Qing Dynasty. It followed that because of the development of commerce, increasing merchant capital, the growth of currency volume and the widespread use of currency, financial organizations of various kinds came into existence. Around mid-Qing Dynasty, then, the number of financial institutions increased and the four major kinds of financial institutions were pawn shops (dang pu 当铺) specializing in secured loans, money shops (qianzhuang 钱庄) engaging in currency exchange as a major business line and depositing-lending as a sideline, debt bureaus (zhangju 账局) dealing in depositing-lending, and bill firms dealing in remittance. Pawn broking is a very old business in China and boasted a history of over one thousand years by the mid-Qing Dynasty. It was evolved from what was called ‗temple treasury‘ (or siku 寺库)in the Northern and Southern dynasties, a kind of institution managed by temples that made secured 1

In this book, the Opium War specifically refers to the First Opium War of 1840. 1

loans. As a kind of consumer loan with clothes or movable property as the security, the practice existed and was developed to meet the urgent need for subsistence of small producers, city dwellers and landlords. During the Tang Dynasty pawn shops were run by nobles, but after the Song Dynasty, usury capital also entered into pawn broking. In the course of its development and expansion throughout history, pawn shops were given various names like zhiku, zhisi, jieku, jiepu, changshengku, dianku, dianpu, dangpu, zhipu and yinzipu. During Emperor Qianlong‘s reign, Beijing alone had around 700 pawn shops of different sizes. Pawn broking in Shanxi‘s was more prosperous and the province had over 4,000 pawn shops. Some researchers have estimated that the whole country had approximately 20,000 pawn shops in mid-Qing Dynasty and most merchants engaging in the pawn broking business were from Anhui and Shanxi provinces. As a barometer of local finance in the feudal Chinese society, the growth of pawn broking mirrored the development of the commodity economy in the society of the day. In the Ming and Qing dynasties, because of the simultaneous use of white silver and copper coins, credit institutions in the initial forms of stalls known as qianzhuo (钱桌) or qiantan (钱 摊)which engaged in remittance and exchange caught on and became popular. At the same time, some commercial organizations like rice shops, raw cloth shops and grocery stores took up the exchange of silver coins and copper coins as a sideline. Later, stores specializing in currency exchange emerged including money shops in the Yangtze River Basin and money stores (qianpu 钱铺), silver firms (yinhao 银号) or exchange shops (duidian 兑店) in Beijing (北京), Tianjin (天 津), Shenyang (沈阳), Jinan (济南) and Guangzhou (广州). Thanks to the development of the commodity economy, money shops, money stores and silver firms grew rapidly during the mid-Qing Dynasty. Beijing had 389 money stores before 1830 (the 10th year of Emperor Daoguang‘s reign) and Shanghai as a major commercial port at the mouth of the Yangtze River had 124 money shops before 1797 (the second year of Emperor Jiaqing‘s reign). At that time, Shanghai had already established a banking guild to safeguard the interests of traders in this industry. As their business expanded, gradually money shops not only engaged in currency exchange but also managed deposits and lending. Some big money shops also acted as agents of county treasuries and dao treasuries2 (道库). In addition, most big money shops in Shanghai had financial connections with the shipping industry in the North Sea3 and South Sea4 regions. Before sailing, owners of ships often borrowed a large sum of money from money shops to buy local products in Shanghai (上海), and they would then transport these products southward to Fujian (福建) or northward to Shandong (山东) and the northeastern China. This showed that before the Opium War, money shops in Shanghai had extended their loan business from commerce to the transportation sector. Silver firms‘ functions were similar to money shops‘, but, apart from ordinary business like currency exchange, depositing and lending, they also engaged in smelting fine silver. During the late period of Emperor Qianlong‘s rule, money bills (qianpiao 钱票), a kind of credit instrument issued by financial institutions like money shops and silver firms, came into circulation 2 Dao treasury refers to warehouses that stored money and grains and that had rights to accept and manage the money and grains submitted from various dao. 3 North Sea refers to coastal cities north of Jiangsu Province, like Shandong, Hebei and Liaoning. 4 South Sea refers to coastal cities south of Jiangsu Province. 2

within a certain area and functioned as a kind of currency. At that time, money bills were mainly used in northern Chinese provinces like Shanxi (山西), Zhili (直隶)5, Shaanxi (陕西), and Shandong (山东). This was because in the north, ―land transportation was more advanced than water transportation. So, when doing business, traders usually had to use horses or carriages to carry cash often amounting to 10,000 liang or above which caused much trouble. Thanks to money bills which were light-weight and easy to carry, much trouble was avoided. Like merchants, ordinary people also enjoyed the convenience brought by money bills‖ (The Advisory Office of the General Headquarters of People‘s Bank of China, 1964, p.131). With prosperous commerce and advanced transportation facilities, Beijing established close economic ties with other major commercial cities. In the course of commerce and trade, money bills drawn by money shops outside of Beijing circulated in the city. The emergence and development of money bills was the result of credit expansion, but the abuse of money bills and currency credit hyperinflation inevitably led to financial turmoil and disputes. The years 1825 and 1830 both saw the closure of numerous money shops that failed to redeem money bills. Money bills were widely used not only in northern Chinese provinces, but also in China‘s southeastern coastal areas. In Jiangsu (江苏), for instance, they had long been used along with fine silver and silver dollar in settling commercial payments. As early as in 1838, Governor Tao Shu (陶澍) said that ―all traders in the regions south of the Yangtze River used to exchange silver for foreign currency for bulky trade and for zhiqian6(制钱)for retail business. Later, for convenience‘s sake, they began to exchange silver for money bills. Money bills are all drawn by money shops and can be cashed once they are presented to the money shops. In this sense, they are no different from cash‖. Shanghai had a long history of using promissory notes, nearly one hundred years even before the Opium War. In 1841, many money shops in Shanghai drew and issued promissory notes with a face value of 1000 liang7(两). People could not only use them in commodity exchange and debt settlement, but also ―exchange them for silver at their maturity or accept and distribute money with them‖. The appearance and development of promissory notes manifested that the loan business of Shanghai‘s banking sector was extremely advanced for the day and had far surpassed that of other coastal cities and inland cities before the Opium War. After the Opium War, promissory notes, with their intrinsic dynamics, continued to play an even greater role in the development of Shanghai‘s port trade. A debt bureau (or debt store) is a kind of financial institutions providing depositing and lending service to urban industrialists and merchants. It came into existence during the reign of Emperor Yongzheng (雍正) and Emperor Qianlong (乾隆)of the Qing Dynasty in northern China, Beijing, Zhangjiakou (张家口) and Taiyuan (太原) in particular, and was considered by some scholars as the earliest bank in China. Most debt bureaus were run by Shanxi merchants and most were located in Beijing and Zhangjiakou. 5

The former name of today‘s Hebei Province. Zhiqian is a kind of coin minted by Ming and Qing governments according to the then current legal monetary system and was different from old currencies minted in previous dynasties and private currencies minted in Ming and Qing dynasties. 7 Liang is a unit of weight, equal to 50 grams. 3 6

During the mid-Qing Dynasty, Beijing‘s industry and commerce were very prosperous: ―Outside the Nine Gates8of Beijing (京城九门), you can find over tens of thousands of debt bureaus‖, so a popular saying went at that time. To expand business, Beijing‘s industrialists and merchants often capitalized on loans. To be specific, ―a large portion of capital in circulation was borrowed capital and only ten or twenty percent of the total belonged to industrialists and merchants themselves‖. This paved the way for Shanxi merchants‘ establishment of debt bureaus in Beijing. Apart from Beijing, Zhangjiakou, a major communication hub of land trade between China and Russia, also had many debt bureaus. Since a round trip from Zhangjiakou to the China-Russia border usually took half a year or so which involved a large sum of capital to cover advance expenditure, merchants often resorted to loans. In such circumstances, debt bureaus (a kind of financial institution which will be introduced in detail later) emerged. In the first half of the 19th century, debt bureaus enjoyed considerable progress. Merchants from provinces other than Shanxi joined in to establish debt bureaus in Beijing, Tianjin, and other cities. Debt bureaus became not only the major regulator of industrial and commercial capital in the late feudal Chinese society, but also the back-up to pawn shops, money stores and printing bureaus. They functioned as the center of usury. Exchange shops, also referred to as money shops or exchange stores appeared around the early 1820s. Since most exchange shops were run by Shanxi merchants, they were also called ‗Shanxi exchange shops‘ (山西票号). During the reigns of Emperor Qianlong and Emperor Jiaqing (嘉庆), the domestic commodity and monetary economy further developed along with port trade, thanks to which, economic ties between different cities became increasingly close. In the process, commodities in circulation increased and their circulation zones expanded continuously. As a result, problems of interregional cash acceptance and transportation and debt payments could no longer be solved in the traditional way, i.e. either by merchants carrying cash themselves or security companies transporting cash for them. To solve these problems, a number of well-established stores that had established branches in some cities gradually took up interregional currency exchange and remittance business as a sideline. Since it was difficult and unsafe to transport large quantities of cash, a Shanxi merchant named Lei Lvtai (雷履泰), manager of Rishengchang Dyestuff Store (日升昌颜料铺) took the lead in settling their accounts with bills of exchange. At the very start, he implemented this method only in a few regions such as Chongqing (重庆), Hankou (汉口), Tianjin and Beijing. Afterwards, lured by the huge profits this method promised, he changed Rishengchang Dyestuff Store into Rishengchang Exchange Shop (日升昌票号) outright which specialized in exchange business. As such, Rishengchang Exchange Shop became the first exchange shop in China and Lei Lvtai became the founding father of exchange shops. Soon, five cloth stores and silk stores in Lei Lvtai‘s county followed suit and transformed themselves into professional exchange shops specializing in exchange business. They were known as the ‗Five Exchange Shops of Pingyao‘ (平

8 Nine Gates refers to the nine city gates of Beijing in Ming and Qing dynasties, i.e. Desheng Gate (德胜门) and Anding Gate (安定门) in the north; Dongzhi Gate (东直门) and Chaoyang Gate (朝阳门) in the east; Chongwen Gate (崇文门), Zhengyang Gate (正阳门) and Xuanwu Gate (宣武门) in the south; Xizhi Gate (西直门) and Fucheng Gate (阜成门) in the west. 4

遥蔚字五联号)9at that time. Besides this, many stores in Taigu (太古) and Qixian (祁县) of Shanxi also abandoned their original business in favor of exchange business. Thereafter, exchange shops as a new kind of financial institutions gradually made headway. Before the Opium War, almost all exchange shops were run by Shanxi merchants and merchants from Pingyao, Taigu and Qixi of Shanxi were exceptionally powerful, to such an extent that they were nicknamed the ‗Top Three Groups‘ in Shanxi‘s exchange business at that time. With capital large or small, they established branches in several cities, providing mutual financial regulation. On this basis, they developed an advanced financial system centered on exchange and remittance and supplemented by depositing and lending. Exchange shops had more capital than ordinary money shops and their shareholders possessed capital several or even tens of times more than those of money shops. The positive role of the commercial activity of exchange shops in promoting commodity circulation was soon recognized by the public. Indeed, exchange shops were reputed as what allowed trade to become a ‗Global Traveler‘. Printing bureaus (yin ju 印局), another kind of credit institution specializing in usury also emerged during the Qing Dynasty. They were widespread in commercial cities at that time and engaged in offering yinziqian10at a monthly interest ranging from three cents to six cents which, surprisingly, was higher than normal usury interest rates. In sum, before the Opium War, with the growth of the commodity economy in the late feudal Chinese society, various categories of financial institutions were under development and began to develop faster during the mid-Qing Dynasty. Therefore, we have every reason to assume that without the intrusion of foreign capitalism, China‘s financial sector would have prospered in its own way and would have played an increasingly significant role in China‘s commodity economy.

9 Five Exhange Shops of Pingyao refers to Wei Taihou Cloth Store, Wei Fenghou Money shop, Wei Shengchang Silk Store, TianChengxiang Fine Cloth Store and Xin Taihou Cloth Store. 10 Yinziqian is a kind of usury in Qing dynasty which incurs excessive interest rates. Debtors are required to repay the principal with interest on a daily basis. 5

Chapter 2 Finance during the Early Semi-colonial and Semi-Feudal Period of China (1840-1894) The period from the outbreak of the First Opium War of 1840 to the First Japanese War of 1894 witnessed the degeneration of China from an independent sovereign state into a semi-colonial and semi-feudal country. During this period of time, foreign capitalists launched two opium wars against China and expanded their influence in China, gradually turning it into a semi-colonial country. Foreign financial forces intruded into China and reinforced their connections with Qing government by making loans to it to suppress the Taiping Rebellion(太平天国运动)11, the Dungan Revolt (西北回民起义)12and other uprisings. With the deepening of foreign capitalism‘s encroachment into China and the gradual disintegration of China‘s feudal economic system, foreign capital integrated with China‘s old financial institutions and began to dominate China‘s social economy. Due to the fluctuation in the world cotton market, the manipulation of foreign banks and foreign firms, as well as speculation by money merchants 13 , two grave financial storms occurred successively, one in 1866 and the other in 1883.

2.1 The intrusion of foreign financial forces into China When China was still a feudal society whose commodity economy developed slowly, western countries like Britain, France and America had already become capitalist powers and pursued expansionism. Their expansion in China started with an invasion into the time-honored Empire through opium traffic. Later in 1840, British aggressors waged the First Opium War (1840-1842)against China and forced the defeated Qing government to sign the Treaty of Nanking (南京条约)14together with a series of supplementary treaties. The conclusion of these unequal treaties destroyed China‘s sovereignty and territorial integrity. Privileges of Britain in China included a fixed tariff agreed upon between the two governments, concession establishment, free trade in the five treaty ports15 and most–favored-nation status, etc. In this way, British aggressors expanded their presence in the Chinese market. Equal privileges were also gained by America and France by means of military intimidation and political blackmail. With these treaties, foreign capitalist powers kept expanding their aggressive activities in China and gradually turned the latter 11 The Taiping Rebellion was a massive civil war in southern China from 1850 to 1864, against the ruling Manchu-led Qing Dynasty. It was a millenarian movement led by Hong Xiuquan, who announced that he had received visions in which he learned that he was the younger brother of Jesus. 12 The Dungan revolt by the Hui from the provinces of Shaanxi, Gansu, Ningxia and Xinjiang, broke out due to a pricing dispute over bamboo poles which a Han merchant was selling to a Hui. It lasted from 1862 to 1877. The failure of the revolt led to the flight of many Dungan people into Imperial Russia. 13 Money merchants refer to those merchants in money industry, an early form of banking industry in feudal Chinese society. 14 The Treaty of Nanking (or Nanjing) was signed on the 29th of August 1842 to mark the end of the First Opium War (1839–42) between the United Kingdom of Great Britain and Ireland and the Qing Dynasty of China. It was the first of unequal treaties against the Chinese because Britain had no obligations in return. 15 Five treaty ports refer to Canton (Shamen Island until 1943), Amoy (Xiamen until 1930), Foochowfoo (Fuzhou), Ningpo (Ningbo) and Shanghai (until 1943). 6

into a semi-colonial and semi-feudal country. Correspondingly, China‘s finance became less independent and less feudal. Before the 1830s, western merchants had already begun to export opium to China in bulk and profiteered from it at the cost of the Chinese people‘s well-being. Opium traders usually submitted a large portion of their proceeds to the agent of the Eastern India Company (EIC)16 in Guangzhou (广州) to get a bill of exchange drawn and issued by EIC, and had it redeemed in London or Calcutta17. Then, EIC would use these proceeds to purchase tea, raw silk and other Chinese commodities in Guangzhou. Apart from EIC, other foreign firms also engaged in borrowing and lending to businesses involved in trade with China. Among them, the most famous were Jardine Matheson Holdings Ltd.18and Dent & Co.19of Britain, and Russell & Company20 of America. In fact, it was these foreign firms that basically controlled the borrowing and lending business for foreign trade in China after the monopoly of EIC was abolished. After the Opium War of 1840, they set out to extend their reach from Guangzhou to other treaty ports in China. Phenomenally influential, they were the ‗commercial kings of China‘, acted as spearheads of foreign capital in modern China and were major banking businesses for a long time. In addition, they also made commercial loans in China and seized every opportunity to make profits from loans to the Chinese government. Soon after, more foreign banks began to engage in financial activity in China. In 1845, the Oriental Bank Corporation, which grew out of the Bank of Western India21,established branches in Hong Kong (香港) and Guangzhou and became the first foreign bank established in China. Not long after, it issued bank notes in Hong Kong which became the first batch of foreign bank notes circulating in the Chinese market and in 1850, it established branches in Shanghai. At this time, its capital depositswere600, 000 pounds but within no more than five years‘ time, the figure soared to 1.2 million. Therefore, people of the day considered ―its financial status in Far-East equal to that of the Bank of England in Britain‖. Thereafter, another four British-funded banks, the Commercial Bank of India, the Agra and United Service Bank, the Chartered Mercantile Bank of India, London & China, and the Chartered Bank of India, Australia & China also successively established branches in China in the 1850s. As foreign banks were just establishing themselves in China in the 1850s, their financial strength was much weaker than that of the big foreign firms. Take the Oriental Bank Corporation as an example. As foreign exchange was its major business, its total foreign exchange trade volume was no match for that of just one counter of some of the big foreign firms. In terms of 16 The East India Company (EIC) also referred to as British East India Company (BEIC) or John Company was originally chartered as the Governor and Company of Merchants of London trading into the East Indies. It was a British joint-stock company formed for pursuing trade with the East Indies but which ended up trading mainly with the Indian subcontinent, North-West Frontier Province and Balochistan. 17 Calcutta is the largest city of Indian and one of the most famous commercial cities in Asia. 18 Jardine Matheson Holdings Ltd. often referred to as Jardines, was a British conglomerate. It was one of the original HongKong trading houses that dated back to Imperial China and the Opium War of 1840. 19 Dent & Co., or Dent‘s, was one of the wealthiest British merchant firms that were active in China during the 19th century. The company was a direct rival to Jardine Matheson Holdings Ltd. Together with Russell & Co., the companies are recognized as the three original Canton companies active in early Colonial Hong Kong. 20 Russell &Company was the largest and most important American trading house in China from 1842 to its closing in 1891 established by Samuel Russell in Guangzhou. 21 The Bank of West India is a British chartered bank established in 1842 in Mumbai, India. In 1845, its head office was transferred to London, Britain and after merging with the Bank of Ceylon was renamed the Oriental Bank Corporation. 7

commercial loans, extensive business contacts had already been established between foreign firms and Chinese merchants whereas those between foreign banks and Chinese merchants were still to be established. As for government loans, before 1865, 13 out of the 16 loans were made by foreign firms, and 2 out of the mere 3 loans made by foreign banks were actually done in the name of foreign firms. Therefore, compared with foreign banks, foreign firms were in a much stronger position. In 1860, the Bank of France also established branches in China and rivaled the British, but since Britain had always been in a dominant position in foreign capitalism‘s economic invasion of China in the 19th century, British capital had an edge in the competition for business in the semi-colonized China. During this period of the 1860s, the Hong Kong & Shanghai Banking Co. Ltd (HSBC), the key player of British financial capital in modern China, also emerged. HSBC was founded in 1865 as Hui Feng Bank in Chinese and Hong Kong & Shanghai Banking Corporation Ltd in English. Its Chinese name suggests ‗rich remittance‘ and its English name implies that it is a China-based foreign bank. It was mainly supported by proprietors of foreign firms that had participated in the economic invasion of China and had conducted various commercial activities in China for a long time. In its strategic initiative paper, HSBC clearly stated that ―most banks in China at present are merely branches of banks headquartered in Britain or India. Business of these branches is limited to remittance between their homeland and China and cannot satisfy local trade demands. This is exactly why HSBC was established‖. In August 1864, the HSBC interim committee held its first meeting, designating itself as a bank not only engaging in remittance, but also serving China-based British capital, assisting the British authority in Hong Kong to carry out monetary reform and financing public facilities with a view to reinforcing British rule in Hong Kong. Only one month after the establishment of its head office in Hong Kong, it set up branches in Shanghai and embarked on vigorous financial activities on the Chinese mainland. Five years after the founding of HSBC, the Suez Canal came into operation which halved the distance between the West and the East, doubled the rate of trade turnover and reduced the amount of advanced capital by half. In 1871, after an undersea cable between London and Shanghai was built, telecommunication between Europe and China was formally established. After telecommunication ordering and telecommunication remittance were widely practiced, the turnover rate of merchant capital increased by dozens or even hundreds of times. Around this time, thanks to the establishment of East-West telecommunications, the Shanghai financial market was linked to the world financial center-London. Meanwhile, mortgage credit and discount notes were developed as two major avenues of business for banking capital. Even the well-known, conservative Oriental Bank Corporation which traditionally dealt in remittance only, took up discount note business and became a powerful actor in both the Shanghai and the London financial markets. At that time, advanced ordering was popular in Shanghai and London alike and once an order contract was concluded, foreign firms could immediately obtain the necessary amount of turnover capital from foreign banks to conduct the next round of trade. The change in the mode of both trade and financial turnover between China and the West in the 1870s paved the way for numerous small foreign firms to enter into China. Since the 1870s, because of the considerable growth in the number of small foreign firms, foreign firms in China 8

increased rapidly from less than 40 shortly after the Opium War to over 300. During the period from 1872 to 1892, some small foreign firms were closed or merged, but the total number of foreign firms across the country rose as still from 343 to 579. However, due to capital shortage, numerous small foreign firms had to rely more on bank capital. The remarkable increase of small foreign firms, then, not only broke down the monopoly of a few big foreign firms in China, but also expanded the influence of China-based foreign banks and assisted the latter to replace the former in terms of financial status. The growing influence of China-based foreign banks was manifested in the establishment of new banks and the increase in branches of the old banks. On the one hand, the newly-established banks competed with each other in China. New banks such as National Bank of India22, The Trust and Loan Co. of China, Japan & the Straits and National Bank of China23appeared in China in 1875, 1890 and 1891 respectively and they all attempted to ―expand their influence in China‖. On the other hand, the expansion of the financial influence of other capitalist countries had a major impact and posed new challenges to Britain‘s dominance in China. Amidst the fierce competition, the role of senior British banks such as the Oriental Bank Corporation and Agra and United Service Bank was weakened and they finally ended up in closure in the 1890s. In 1872, the Deutsche Bank Aktien Gesellsehaft backed up by state power established aggressive strongholds in China. This cleared the way for Deutsch-Asiatische Bank24 being founded in China in 1889. Meanwhile, the Bank of France also strengthened its status in China. It extended its reach from Shanghai to the inland and made a remarkable contribution to Sino-French direct trade by facilitating its financial turnover. By the 1890s, the Deutsch-Asiatische Bank had superseded the Deutsche Bank Aktien Gesellsehaft and, similarly, the Banque de I‘Indochine, the central bank of France‘s colony, Vietnam, had replaced the Bank of France and established its foothold in China. The Deutsch-Asiatische Bank and the Banque de I‘Indochine, then, soon became effective instruments of German and French capital in China. In addition, Japan, though still a fledging capitalist country, also fixed its eyes on the vast Chinese market. In 1893, just one year before the outbreak of the First Sino-Japanese War of 1894, Japan Yokohama Specie Bank, ―a liability bank in foreign trade‖ and ―a tool for implementing government policy‖, set up offices in Shanghai. At the same time, branches of the old China-based foreign banks also increased sharply during the last two decades of the 19th century. Take HSBC as an example. Before the 1870s, it had already established branches in major commercial cities like Shanghai, Fuzhou (福州), Ningpo (宁波), Hankou (汉口) and Shantou (汕头). After 1873, it further established branches and agencies in cities like Xiamen (厦门), Yantai (烟台), Jiu Jiang (九阳), Guangzhou, Beihai (北海), Tianjin, Macao (澳门),Dagou (打狗)25, Beijing, Niuzhuang (牛庄)26, Keelung (基隆)27, etc., 22 The National Bank of India was formed in 1863 and became one of the largest London overseas banks operating not only in the Indian sub-continent but in communities around the Indian Ocean. 23 The National Bank of China was a bank in Hong Kong. It was founded in 1891 by the Poon‘s family, a wealthy and influential Guangzhou family. It is the first banknote issuer to be financed by Chinese merchants. It began operations and issued banknotes of denominations of HK$5 and HK$10 and closed in 1911. 24 Deutsch-Asiatische Bank was a China-based bank found by German merchants and served for the trade between Germany and Asia. 25 Dagou, or Dagou City, was the old name of Kaohsiung, a Taiwan province. 26 Niuzhuang is a city located in the south of Liaoning Province. 27 Keelung is city located in the northeast of Taiwan Province. 9

forming a financial network starting from Niuzhuang, Beijing and Tianjian in the north toKaikou (海口)28 in the south and from Shanghai and Guangzhou along the coastline, inland to Hankou29 and Jiujiang (九江)30. China-based foreign banks actively made loans to the Qing government to make tremendous profits and tighten their relationship with Qing government. This kind of lending was called usury. In fact, usury had been practiced even before the 1870s, but at that time it was basically to solve problems of financial turnover because it only involved a small sum of money (usually less than tens of thousands of liang) and required faster repayment. After the 1870s, however, usury began to involve a larger amount of money often amounting to several million liang and HSBC gradually became the principal creditor of the Qing government. At that time, HSBC enjoyed at least three favorable conditions. First, it maintained close contacts with China-based foreign enterprises, British enterprises in particular. Therefore, it could fully meet the demands of foreign enterprises in their expansion. Second, it received support from the Hong Kong authority when applying for registration and more note-issue rights and was granted more time to submit the registered capital. Third, as its headquarters were established in Hong Kong, it could easily command its branches throughout the country and this promoted its effective and efficient use of capital. Thanks to these favorable conditions, HSBC made more profits and developed more rapidly than other China-based foreign bank and gradually occupied the dominant position in modern China‘s finance.

2.2 The evolution of money shops31 After foreign capitalist forces intruded into China, some Chinese coastal and riverside port cities were opened to foreign countries and a commodity economy in these port cities developed rapidly. Money shops that had long been active there also experienced new growth. This was because on the one hand, after foreign merchants arrived at port cities, they were encountered with the problem of currency exchange, and on the other hand, the development of Sino-foreign trade inevitably brought about the problem of international payment. To solve these problems, merchants had to resort to local money shops. Therefore, Guangzhou‘s money shops became an important aid of foreign merchants to keep cash, identify silver purity and negotiate funds; Fuzhou‘s money shops offered great assistance to foreign merchants in trade, to such an extent that foreign merchants in Fuzhou thought that ―in terms of the security and convenience brought by money shops to commercial activities and the profits produced by them, money shops are equal to the European banking system‖. A similar relationship could also be found between money shops and foreign merchants in Shanghai and elsewhere. As the connector of foreign firms and Chinese merchants, Shanghai‘s money shops assisted in identifying gold and silver purity, exchanging currency, negotiating funds and effecting payments. When Chinese merchants did not have enough cash to purchase goods and were refused purchase on credit by foreign firms who 28

Kaikou is seaport and city of Hainan Province. Hankou is a major city of Wuhan Province. Jiujiang is the second largest city of Jiangxi Province. 31 Money shop or qianzhuang in pin yin is kind of financial institutions that emerged for the first time in mid-Ming dynasty and were considered the earliest forms of banks. 10 29 30

knew little about their credit standing, they tended to have their credit standing guaranteed by a money shop and obtained a promissory note drawn by the money shop. Since foreign firms accepted promissory notes, notably forward promissory notes, the use of promissory notes brought convenience to buyers and sellers alike. Shanghai‘s money shops were classified into two categories according to their financial strength: remittance and offset money shops(or major money shops 大同行) and non-remittance and non-offset money shops (or minor money shops 小同行).Money shops in the former category had to join the Shanghai General Guild of Round Money 32Industry (内圆钱业总公所) and pay membership dues before they could start business. This was why remittance and offset money shops were also called ‗round money shops‘ (入圆钱庄). These money shops had the privileges of issuing silver notes and paper money, selling bills, dealing in deposits and loans, discounting, remittance, offsetting, drawing and issuing promissory notes and bills of exchange, etc. Non-remittance and non-offset money shops, however, were not permitted to join the General Guild of Round Money Industry because their capital was too small. In 1863, to safeguard the credibility of promissory notes, people in Shanghai‘s money industry decided to reject promissory notes drawn by non-remittance and non-offset money shops, thus excluding their promissory notes from circulation. Later in the 1890s, Shanghai‘s banking sector further introduced the Guild Bill System33, under which all remittance and offset money shops had to collect promissory notes every afternoon and send them to their issuers in exchange for guild bills. At four o‘clock, they had to gather at the General Association of Remittance and Offset (汇划总会) to effect mutual payments. In addition, the General Association of Remittance and Offset also managed the clearing business on behalf of non-membership money shops and banks. In this way, a bill exchange system between money shops took initial shape. In financial settlement, foreign merchants usually accepted promissory notes drawn by well-capitalized money shops only. Using promissory notes, foreign firms promoted sales of foreign goods. Consequently, money shops‘ business expanded and the relationship between foreign firms and money shops in Shanghai became increasingly close. As trade developed, the credit business of money shops grew constantly and more capital was needed. Hence, since money shops‘ capital was small, they had to borrow capital from foreign firms. In the late 1860s and the early 1870s, to further control the Shanghai financial market, foreign banks began to make loans to money shops at an interest lower than the market rate and the guarantee on the loans was promissory notes drawn by money shops. Such kinds of loans increased rapidly and amounted to over three million by 1873. They kept on the rise thereafter and became a major source of the working capital of Shanghai‘s money shops. Therefore, money shops had an increasingly great reliance on foreign banks, so great that as long as foreign banks tightened their loans, Shanghai‘s money shops would have a lower turnover and financial panics would occur. Because of the establishment of the inter-bank lending relationship between money shops and foreign banks, foreign firms could deposit promissory notes obtained through selling foreign goods in a foreign bank and entrusted it to accept payments. As for Chinese merchants of 32

Round money refers to the coins in the Old China which were round outside and square inside. Guild Bill System refers to the system of adopting bills issued by the guild. Bills issued were called ―public bills(公单)‖. 11 33

domestic products, they could deposit foreign merchants‘ checks to their issuing money shops and entrusted them to accept payments. The offset of debts between foreign banks and money shops reduced cash transport, which not only facilitated foreign banks‘ control of Shanghai financial market, but also promoted the development of Shanghai‘s foreign trade. Other cities like Zhenjiang, Ningpo, Hankou, and Chongqing were in a similar situation. For instance, compradors(买办)34 in Zhenjiang usually paid foreign merchants with loans provided by local money shops. The money shops of Shanghai, Zhenjiang and Suzhou maintained close financial contacts with each other, which substantially supported the turnover of the import and export trade. For instance, in Ningpo, any merchant having contact with money shops could keep accounts at a local money shop when a deal was concluded without going through procedures of foreign firms no matter how much money was involved. It was thanks to the active participation of money shops in Ningbo and other cities that foreign goods could easily entered western Zhejiang, eastern Jiangxi(江西) and Southern Anhui (安徽). Moreover, money shops in Fujian and Anhui also ably provided credit support to the export of tea. During the Taiping Rebellion, Hankou‘s commerce was destroyed and finance was consequently impaired. After the rebellion, with the recovery of commerce, the money shop industry developed rapidly and gradually became ―the leading industry of all industries‖. By drawing and issuing promissory notes to their correspondent merchants, money shops promoted the growth of trade. Meanwhile, with the development of trade in port cities, foreign capitalism expanded trade in port cities and inland by making loans to money shops while money shops used the massive capital of foreign firms or banks to extend their financial activities. The fact that foreign firms accepted promissory notes drawn by money shops and foreign banks asked money shops for loans with promissory notes drawn by money shops as security contributed to the compradorization of money shops. The cradle of Shanghai‘s money shops was originally South City (南市)35because it was a major linking area between land and sea and had been the trade and financial center of Shanghai in the past. But after North City (北市)36was transformed into a concession, its business gradually prospered and it had some money shops too. Incidents such as the Knife Association Revolt of 1853 (小刀会起义)37and the stationing of Taiping rebellion troops in Shanghai in 1860led to the transfer of Shanghai‘s money shops from South City to North City. As Shanghai‘s money shops were more and more controlled by Chinese agents of foreign banks, many money shops were transferred to North City so that they could contact foreign banks more easily, conduct speculation, absorb more deposits and put themselves under the protection of foreign forces in the concession. As a consequence, money shops in North City increased rapidly while business in South City declined. By 1876, the number of money shops established in the concession was higher than those in South City and accounted for over 60% of all money shops in Shanghai.

34

A comprador refers to a native agent of a foreign enterprise formerly in China and some other Asian countries. South City refers to the Huangpu region in the south of the East Yanan Road. North City refers to the commercial zone in the south of Shanghai prefecture in the old time. 37 Knife Association Revolt of 1853 broke out in the third year of the Taiping Heavenly Kingdom‘s reign. The Knife Association was a secret private organization. 12 35 36

2.3 The boom of exchange shops38 By the 1850s, China had already had more than 10 exchange shops. These exchange shops usually possessed plenty of capital and had their own method of management. They all adopted the branch-contact system39 and established branches in major commercial cities like Beijing, Tianjin, Taiyuan, Zhangjiakou, Xi‘an, Jinan, Suzhou (苏州), Hankou and Guangzhou. These branches supported each other and dealt in commercial remittance under the leadership of their head office. As for the internal distribution, exchange shops implemented the human capital share system. That is to say, operators of money shops (often referred to as ‗shopkeeper‘ or ‗manager‘) held certain shares of the money shops that were in proportion to their positions and performance. Some senior and medium clerks also held a certain number of shares and received dividends according to their shares just as investors of money shops (often called boss) did. Under this incentive system, the vital interests of shopkeepers, senior and medium clerks of head offices and branches were closely linked with the performance of money shops, which played an important role in motivating managers and clerks. Moreover, investors seldom attended to the business of money shops and all business affairs were in the charge of operators. In light of the social condition of the day, this arrangement was somewhat rare and led to the prosperity of money shops which gradually became a major regulative force of the national financial circulation system. By themid-19th century, some money shops extended their business from merely commercial remittance to include deposits and loans and gradually evolved into financial institutions that undertook lending and remittance in an all-round way. The Taiping Rebellion in the 1850s also had great impact on the development of the exchange shop industry. It not only interrupted the geographical distribution of exchange shops‘ strength, but also impaired the role of exchange shops in commerce and trade. As the rebellion went on, major commercial cities at the middle and lower reaches of the Yangtze River such as Hankou and Suzhou were destroyed and subsidiary exchange shops established there were moved to Shanghai one after another, which consolidated the strength of exchange shops in Shanghai. At that time, Shanghai had already become the national trade center. Its domestic and foreign trade volume increased constantly and its demand for financial development also kept rising. Meanwhile, Shanghai had also become the major venue where money shops financial activities took place. Therefore, Shanghai‘s money shops played an important role in the financial regulation of foreign trade. However, Shanghai‘s money shops‘ capital was small and even in the 1870s the capital of major money shops was no more than tens of thousands liang. Comparatively, the capital of exchange shops was much larger, usually amounting to hundreds of thousands liang. Therefore, some money shops and firms often asked exchange shops for loans. Besides this, since exchange shops adopted the branch-contact system and had branches in major commercial cities throughout the country, they could conduct direct remittance. Chinese merchants involved in foreign trade had to use the remittance network of exchange shops to receive goods and effect payments arising 38 Exchange shops or piaohao in pin were a kind of financial institution in the Old China which dealt in remittance and issued bills. 39 The branch-contact system referred to one under which branches of exchange shops were established in major commercial cities and kept close contacts with each other and with their head office. 13

from trade between inland and treaty ports. As a result, after the 1860s, as they dealt with the purchase and sale of foreign goods and native products, it was often necessary for money shops and exchange shops to regulate finance in collaboration. In the process, the role of exchange shops in foreign trade was substantially strengthened. ―A modern foreign financial expert once described how financial regulation was conducted when Shanghai‘s foreign goods were sold to Kaifeng, and how inland traders relied on the cooperation of money shops and exchange shops in capital regulation and financial settlement when purchasing foreign goods from treaty ports. After knowing that he had to pay some for the purchased goods on a certain day, the Kaifeng trader would immediately ask for a local promissory note drawn by his current money shop, give it to a local branch of Shanxi money shop, buy a bill of exchange from the branch and send the draft to his agent in Shanghai. After the agent received the draft, he would send it to a Shanxi money shops‘ branch in Shanghai in exchange for a promissory note that could only circulate in Kaifeng and sent it to his middleman. Hereto, the transaction between the Kaifeng trader and his agent was finished. After the agent received goods, he would transport them to Kaifeng in a traditional way. As for the broker in charge of contacting foreign traders and delivering goods and who could not receive payment for goods from the Kaifeng trader while goods were still in the hands of a foreign firm, he would ask his current money shop to draw a promissory note for him to pay the foreign firm, who in turn would give him goods upon receiving the note. Then the broker would get the promissory note from the Kaifeng trader and pay his current money shop. Up till now, the deal was completed on all sides‖ (S. R. Wagel, 1914, pp.123-124). This was also the case in Tianjin. The North China Daily News of April 1885 reported how exchange shops played an important role when compradors of Tianjin Sassoon &Co. Ltd40 traded in inland leather goods and sold them. Tianjin‘s foreign firms used to send people to northwest China several times to purchase leather goods, but suffered repeated setbacks. Later, thanks to the credit support from HengIyuHong Exchange Shop (恒益裕票号) which had financial connections with exchange shops in Zhangjiakou, compradors of Sassoon & Co. Ltd managed to purchase large quantities of leather goods from northwest China in Zhangjiakou. When it came to the important role of Tianjin‘s financial institutions in the development of local commerce during Emperor Guangxu‘s reign, people said that ―when conducting local business, Tianjin merchants took money shops as their warehouses and when conducting inter-port trade, they relied on the financial regulation of exchange shops. As a result, business foreign exchange shops and money shops was extraordinarily prosperous and their influence was exceptionally great‖. In other cities like Chongqing and Xiamen, exchange shops also played an increasingly significant role in foreign trade. The Taiping Rebellion tremendously changed the relationship between exchange shops and the Qing government. According to the old fiscal system formulated by the Qing government, jingxiang (京饷) 41 transported to Beijing from various regions nationwide and xiexiang (协

40 Tianjin Sassoon & Co. Ltd was a British-funded foreign form established in 1850, also referred to as New Sassoon &Co. Ltd. 41 Jing xiang refers to taxes in silver or grain delivered to the central government in Qing dynasty by provinces nationwide. 14

饷)42allocated to neighboring provinces had to be submitted in cash and transported by soldiers without merchants‘ interference. Even if domestic remittance was in full swing, merchants were not allowed to intervene, otherwise they would be punished. This system was strictly carried out in the early days of the Taiping Rebellion. However, when the fight between military forces of the Taiping Rebellion and those of the Qing government reached the decisive stage, things changed. Ferocious battles broke out incessantly around the Yangtze River and the nian army (捻军)43was combating Qing troops in the north. As a result, the Qing government could no longer transport cash as before and had to approve of the appeal the Ministry of Revenue in 1862 to abandon the original system and regulate solders‘ pay by virtue of the capital money shops and their remittance network. From then on, because of the remittance of jingxiang and xiexiang, the relationship between exchange shops and the Qing government gradually deepened. According to an estimate, during the 31 years between 1862 and 1893, jingxiang from various provinces nationwide remitted to Beijing through exchange shops totaled over 61.58 million liang and xiexiang remitted to Shaanxi, Gansu and Xinjiang through exchange shops totaled over 4.6 million liang. Other financial contacts between exchange shops and the Qing government also deepened. In the 1870s when the Self-Strengthening Movement 44 launched by the Qing government was in full swing, exchange shops also remitted funds from across the country and effected payments between modernized enterprises. When helping the Qing government to remit jingxiang and xiexiang, exchange shops dealt with an enormous amount of working capital every year, which made immeasurable contribution to their business development and performance improvement. In contrast with the growing influence of exchange shops, the financial situation of the Qing government went from bad to worse due to repeated wars, the costly Westernization Movement and a lavish court lifestyle. Over time, the government not only relied on exchange shops‘ to conduct remittance, but also asked for loans from them occasionally. During the period from the 1860s to the late 1870s when the Qing government sent Zuo Zongtang (左宗棠)45 to lead his troops westward to suppress the revolts in Shaanxi, Gansu and other western regions, soldiers‘ pay and provisions were often delayed. Under such circumstances, Zuo Zongtang asked exchange shops for loans many times. In 1874, Zeng Guoquan (曾国荃)46, General of Qing army in Shanxi borrowed over 200,000 liang from exchange shops in Pingyao, Qixian and Taigu to pay his soldiers. During the Sino-French War47in the 1880s, General of Qing Army, Bao Chao (鲍超), borrowed money from exchange shops in Sichuan and Yunnan for the same reason when leading a 42 Xiexiang refers to the silver or grain allocated by the central government from those provinces with a surplus of silver or grain to those with a deficit of silver or grain. 43 Nian army refers to the northern peasant uprising army in times of the Taiping Rebellion. 44 The Self-Strengthening Movement was nationwide industrial movement starting from the end of 1861. Its slogan was ―to suppress the West with western technologies‖ and it was divided into the early period and the late period. The movement ended up in failure in 1895. 45 ZuoZongtang (November 10, 1812 - September 5, 1885), known simply as General Tso in the West, was a Chinese statesman and military leader in the late Qing Dynasty. 46 Zeng Guoquan(1824-1890) was an eminent official, military general and devout Confucian scholar of the late Qing Dynasty in China. He raised the Xiang Army to fight effectively against the Taiping Rebellion and restored the stability of Qing Dynasty along with other prominent figures, including Zuo Zongtang and Li Hongzhang, setting the scene for the era later known as the ―Tongzhi Restoration‖. 47 The Sino-French War, also known as the Tonkin War and Tonquin War was a limited conflict fought between August 1884 and April 1885 to decide whether France should replace China in control of Tonkin (northern Vietnam). 15

troop from Sichuan (四川) to Yunnan (云南), and generals of armies in other places had similar experiences. Exchange shops not only made loans to armies in wartime but also lent money to local governments with financial difficulties. At that time, local governments often failed to collect sufficient revenue for various social and economic reasons, but they were required by the central government to submit revenue within strict deadlines. As this was the case, local governments had to rely on cash advances provided by exchange shops. Besides this, exchange shops also dealt with other financial affairs on behalf of the Qing government occasionally and thus gradually achieved a semi-official status. Financial contacts between exchange shops and the Qing government were conducted through the connections between officials in power and exchange shop merchants. The official system in the late Qing Dynasty, however, was corrupt. On the one hand, exchange shop merchants colluded with local officials on the basis of back scratching and officials exploited their privileges to deposit public funds in exchange shops at low interest or without interest. This enabled exchange shops to utilize large sums of capital at extremely low cost. On the other hand, officials also deposited unfair gains in exchange shops and the latter would pay them a decent interest and keep the deposits secret for them. Some exchange shops were so closely associated with local governments that they moved to wherever local officials were transferred. For instance, the manager of Taetok Exchange Shop (大德通票号)48once followed a bureaucrat named Zhao Erxun (赵尔巽)49 to Anhui, Shaanxi, Gansu, Shanxi, Hunan (湖南), Shenyang (沈阳), among other places, and was tantamount to Zhao‘s private treasury. In a nutshell, after the 1860s, the demand foreign exchange shops kept expanding, the relationship between exchange shops and the Qing government got increasingly close and, consequently, the exchange shop industry reached its peak.

2.4 Financial crisis and the downfall of “red-top official merchants” (红顶商人)50 Modern foreign capitalism not only deepened its aggression in China but also brought modern market speculation of a western style with consequent financial upheaval. Strong and powerful, foreign financial capital made waves in the Chinese financial market, instigated market speculation and triggered much financial turmoil wreaking havoc time and again on the development of commerce, finance and economy of the old China51. The first major financial crisis in modern Chinese history occurred in 1866. In 1861, America, the then major cotton producer was hit by civil war which caused a cotton famine. As a result, the cotton price in the world market doubled then redoubled. The capitalist world threw itself into 48 Taetok Exchange Shop grew out of Taetok Tea House established by the Qiao Family in Qixian, Pingyao‘s border. In April 1884, the Taetok Tea House was formally changed into Taetok Exchange Shop. 49 Zhao Erxun (1844-1927) was the brother of Zhao Erfeng. He was the governor of Hubei (1907–1908) and Sichuan (1908–1911) and viceroy (1911) and governor (1912) of Fengtian. 50 Red-top official merchants refer to people who were both officials and merchants in the late Qing dynasty. 51 Old China refers to the Chinese society before the establishment of People‘s Republic of China. 16

cotton speculation and China‘s cotton became foreign speculators‘ target with a number of foreign financiers coming to China to undertake remittance, speculation and other financial activities. In 1864 alone, three foreign banks, namely, Asiatic Banking Corporation, Bank of Hindustan, China and Japan, Ltd. and Bank of India were established in China. Foreign banks such as Commercial Bank of India and Standard Chartered Bank that had already established branches in Shanghai in the 1850s set up more branches in the Chinese mainland. Throughout 1864, the Shanghai financial market was saturated with fierce market competition and speculation, and prices of stocks issued by foreign banks kept rising. In addition, speculative activities of foreign banks and foreign firms in Hankou ran rampant. Incited by foreign banks and foreign firms, some Chinese firms indulged speculation too. After the American Civil War ended in 1865, cotton price in the world market plunged and a grave financial crisis occurred in Europe. The crisis soon spread to China and as a result, stocks issued by some foreign banks in the Shanghai market almost became worthless instantly, and foreign banks and Chinese firms closed their doors one after another. Thereafter, due to the manipulation of foreign banks and foreign firms and the impact of Chinese merchants‘ speculative activities, financial crises of different magnitudes successively occurred in 1871, 1872, 1873, 1878 and 1879.The crises all started in Shanghai and spread to other Chinese cities. These financial crises dealt heavy blows to China‘s finance industry while strengthened foreign banks‘ control over it. The greatest financial crisis before the Sino-Japanese War of 1894-1895 broke out in 1883. Some scholars used to attribute it to the bankruptcy of a rich merchant named Hu Gungyong (胡光 墉) in the autumn of that year. But recent studies showed that the crisis had started much earlier than his bankruptcy and the root cause was speculation, particularly speculation in stocks. Since the 1870s, under the influence of the progressing the Self-strengthening Movement and the

successful

modernized

enterprises

like

the

Chinese

Merchants

Steamship

NavigationCompany52and the Kaiping Coal Mine Company53, many provinces attempted to issue stocks in the Shanghai market and other markets, and established joint-stock companies in the early 1880s. Many merchants and money shops also joined in trading stocks and speculation prevailed in some coastal areas. By 1882, it was not strange to see thousands of people rushing to purchase stocks issued by a newly established stock company. At that time, there were more than 30 kinds of stocks in the market and most of them were issued by Chinese enterprises. Stock prices were driven up constantly. For example, the market price of stocks in denominations of 100-liang issued by the Chinese Merchants SteamshipNavigationCompany rose from 40-50 liang in 1876 to over 200 liang in 1882 and further to over 270 liang in October 1882. Prices of stocks issued by other enterprises were also on the rise during this same period. Nevertheless, it should be pointed out that the price rise was a result of the speculation mania in China‘s emerging stock market and was unlikely to last long given the instability of China‘s emerging enterprises. Amidst the stock mania, almost all money shop owners accepted stocks as security and made 52 ChineseMerchantsSteamshipNavigationCompany was the first modern official and mercantile enterprise established in the late Qing dynasty in Shanghai. 53 Kaiping Coal Mine Company was a large modern official and mercantile mine company established in the late Qing dynasty Luanzhou, today‘s Tangshan. 17

loans, but many money shops went broke in the summer of 1883. One of the causes of this was the devaluation of most stocks held by shopkeepers following the sharp fall in stock prices at the start of this year. Another cause was that some depositors, in fear of an impending war between China and France, withdrew money from money shops to avoid losses. In the autumn of that year, Hu Guangyong (a ‗red top official merchant‘) suffered great losses while speculating in stocks which intensified the financial crisis.Hu Guangyong (1823-1885), also called Hu Xueyan (胡雪岩), was a prominent rich merchant during the reigns of Emperor Tongzhi (同治)and Guangxu (光绪). He was an official and a merchant and was considered to ―have a good knowledge of western countries‖. His achievements included opening banks in Hangzhou and other places, exporting silk, and he established Hu Qing Yu Tang54. When Zuo Zongtang led his troops westwards, Hu Xueyan acted as an official of Shanghai Purchase and Transport Bureau and chaired the purchase and transport of foreign munitions. However, he manipulated the interest on loans provided by foreign merchants to his own advantage and made tremendous profits in the process. He opened the Tailai Money Shop in Hangzhou, the Tongquan Money Shop and the Tongyu Silver Firm in Ningbo, the Fukang Money Shop in Beijing and other money shops and silver firms in Zhenjiang, Fuzhou, Hunan and Hubei. Most provincial public funds and private savings of officials and dignitaries were kept in these money shops and silver firms. With these money shops and silver firms as his financial backup, Hu Xueyan attempted to break foreign merchants‘ manipulation of China‘s silk export industry. In the early 1880s, he bought large quantities of raw silk and ordered the branches of his money shops and firms to dole out silver to silkworm-raising village and towns of Zhejiang and Jiangsu and monopolized the purchase of local silkworm cocoons. In so doing, he hoarded large quantities of raw silk and drove up the Shanghai silk price which exceeded the London silk price at the time. In 1883, Italy‘s raw silk output soared. Foreign merchants joined to plot against Hu Guangyong and foreign firms in Shanghai stopped trading in fresh cocoons. In October that year, the bankruptcy wave in the money shop industry affected Hu‘s Tailai Money Shop which went bankrupt. After the news of its bankruptcy spread, depositors of the Shanghai Fukang Exchange Shop rushed to withdraw deposits, forcing the Fukang Exchange Shop to close its doors. In November, Hu could no longer hold on and sold out his raw silk at a loss. Soon, the Fukang Money Shop, another of his money shops, also went broke and other shops of his ended up being closed down by local fiefdoms.Hu Guangyong finally went bankrupt. Hu Guangyong‘s bankruptcy worsened the already panic-stricken Shanghai market. Depositors hastened to withdraw money from money shops, exchange shops withdrew their silver deposits in money shops, and foreign banks stopped making inter-bank loans. As a result, money shops ran out of money and closed their doors one after another. In Shanghai‘s North City and South City, hundreds of money shops and enterprises were closed and the Shanghai stock market fell into depression. A financial crisis started in Shanghai and soon spread to Jingshi (today‘s Beijing), Hankou, Tianjin, Ningbo and Hangzhou, jeopardizing local commerce, agriculture and handicrafts, and wreaking severe havoc on the social economy.

54 Hu Qing Yu Tang is a historically significant Chinese pharmaceutical company. It is as famous as Tong Ren Tang in Beijing. 18

2.5 Chaotic currencies The Qing dynasty adopted a currency system that allowed the simultaneous circulation of silver coin and copper coin though there was no legal relationship between the value of silver and copper. Silver coin was used for government income and expenses and bulky commercial transactions, but the Qing government did not manage silver in line with the currency management principle. For quite a long period of time, it did not have a standard minted silver coin that circulated widely and it still adopted the practice of measuring the value of silver by weight. In addition, it also took a laissez-faire attitude towards the casting of silver ingots and silver bullion and the content and unit weight of silver could be changed arbitrarily. By contrast, although copper coin was used for effecting small nongovernmental payments, the Qing government imposed strict rules on its casting and forbade any private casting of it, so copper coin could only be minted by government. During the Qing dynasty, copper coin minted by government was called zhiqian to distinguish it from that minted by governments of previous dynasties. The Qing government, then, had legal requirements on the minting of copper coin. Currencies in actual circulation came in great varieties. Silver coin had varieties such as solid silver coin and virtual silver coin. Solid silver coin was customarily minted into ingots and called baoyin (宝银). In terms of shape and size, solid silver coin fell into the following categories: Yuanbao (元宝): each weighed around 50 liang; because it looked like a horseshoe, it wasalso referred to as horse-shoe silver (马蹄银). Zhongding (中锭): each weighed about 10 liang; most looked like a hammer andsome look like a horseshoe. It was also referred to as xiaoyuanbao (小元宝). Xiaoding (小锭): its weight ranged from one or two liang to three or five liang and looked like a bun. Also referred to as xiangzi(an edge of silver or gold 镶子) or kezi (a small ingot of silver or gold 锞子) Di zhu/fuzhu (滴福 or 福珠): small silver pieces. It weighed less than one liang. The measuring standard and purity of silver coin had more complex rules. The master scale used for weighing silver coin was called ping (平) but had a variety of standards for different applications. The standard used by the Qing government to collect land tax and other taxes was called kuping (库平) and that was used to collect tribute rice was called caoping (漕平).The standard used by customs to collect import and export tax was called guanping (关平), that used in foreign trade was called guangping (广平), andthatwas used in general market transaction was called gongfaping (公砝平). Moreover, kuping, caoping and gongfaping also differed from region to region. Throughout the country, then, there were over one hundred pings and the purity of silver coin also varied from place to place. Because of the differences in weight and purity, it was very difficult to convert silver. This retarded the development of commodity economy and provided an excuse for officials to take advantage of the public and for money dealers to exploit clients. Due to the purity difference, silver furnaces or stoves (the Qing dynasty made a distinction between official and private stoves) specialized in minting bao yin, and specific assessor bureaus were responsible for identifying the 19

purity and weight of bao yin. Bao yin from other places would be minted into local bao yin by local silver furnaces and could not circulate without the approval of local assessor bureaus. After bao yin from other places were minted into local ones and permitted to circulate, they could be used in local market transaction without having to go through purity and weight identification. This facilitated regional market transactions to some extent. However, the localization of bao yin from other regions tremendously impeded the extensive development of commodity economy. Virtual silver refers to silver used as a value unit in the late Qing Dynasty which was accepted by both governments and citizens. Virtual silver fell into many categories and the most important were as follows: Fine silver was a kind of legal standard silver which was first used during Emperor Kangxi‘s reign. A premium of six liang was required for each 100 liang fine silver to reach the standard silver content. Because the silver content of bao yin was usually higher than that of fine silver, a premium for fine silver was required when converting it into bao yin. For example, one bao yin (50liang) in Shanghai was equal to 52.7 liang fine silver which necessitated a premium of 2.7 liang for fine silver. As for the bao yin in Wuhan and Tianjin, a premium of 2.4 liang and 2.8 liang for fine silver was required respectively. Shanghai standard silver (上海规元) as a kind of current virtual silver in Shanghai used only in bookkeeping. Since its silver content was 2% lower than that of fine silver, it was also called nine-eight standard silver. There was a story about its origin. During Emperor Daoguang‘s reign, a northeastern trader came to Shanghai to deal in beans. At the year-end, he was so anxious to get silver cash and return to his hometown that he converted his virtual silver at a discount of 2%.This practice of exchanging each 100liang virtual silver for 98 liang solid silver was adopted by more people and the virtual silver was thus called nine-eight bean standard silver (九八豆规元). Afterwards, with the prosperity of Shanghai‘s commerce and rising transaction demands, foreign banks and the business circle in Shanghai reached an agreement in 1858 to keep accounts in standard silver. Custom silver, also referred to as guanping silver (关平银) or hai guanliang (海关两), was a value unit of silver used by the customs of modern China to collect tax. Most foreign debts and indemnities to the Qing government in its middle and late periods were counted in custom silver. One hundred liang custom silver were equal to 111.4 liang Shanghai standard silver. Other important virtual silver included hang hua silver (行化银) of Tianjin and yang li silver (洋例银) of Hankou. Since silver content varied from region to region, even people in money industry found it difficult to memorize the silver content of different silvers or distinguish the silver content of them. Therefore, some songs and pithy rhymes were widespread in the then money industry. For instance, Shanxi exchange shop had a song that went like this: In Tianjin, people use hua bao silver In Beijing, people use song jiang silver. And fine silver could only be found in the City of Chao55(朝城). Though bean standard silver used in Shanghai is delicate, 55

The City of Chao was in Shandong Province.

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Standard fine silver could only be found in Xi‘an. Everyone engaged in money industry must bear this in mind. With the development of foreign trade in the Qing Dynasty, more foreign silver coins entered into China and there were tens of kinds of them altogether. Among them, Spanish silver coins, Mexican silver coins, Hang Kong silver coins and Japanese silver coins were the most important. Since China‘s bao yin were minted into different shapes and differed vastly in silver content and weight, they were not convenient for market transactions. Comparatively, foreign silver coins were minted according to standard weight and silver content and was more exquisite and user-friendly. For this reason, they won people‘s favor and although their silver content was low, their exchange price against China‘s silver coinage was constantly driven up. According to a calculation, each conversion of China‘s silver coinage into foreign silver coins would lead to a loss of over 11% on China‘s part. In the beginning, foreign merchants used silver coins to purchase Chinese tea, silk, porcelain, etc. Later, lured by the constantly rising silver price, they used enormous amounts of silver coins with low silver content to ‗purchase‘ China‘s silver, transported it to their home countries, made more silver coins from it and then transported the new silver coins back to China. In so doing, they reaped tremendous profits while the Qing government lost tens of millions in silver. This tremendous inflow of foreign silver to China not only fermented foreign capitalism‘s pillage of China‘s wealth, but also further complicated the already-complex currencies of the old China. At the same time, however, it helped advance China‘s currency reform. As early as in the days of Emperor Daoguang and Emperor Xianfeng, Lin Zexu (林则 徐)56suggested that the Qing government should mint silver coin itself. But this suggestion came in for strong opposition from the then conservative forces. Later, as the circulation zone of foreign silver coins expanded and greater damage was done to Chinese finance, the Qing government could no longer stand aloof. In 1887, it approved of Zhang Zhidong‘s (张之洞)57proposal and established a mint in Guangdong to mint silver coinage with machines. Silver coinage minted in Guangdong weighed seven qian58and two cents each and was roughly equal to the Mexican silver coin which was in wide circulation in the China of the day. Since it had a curled-up dragon pattern on its reverse side, it was also generally referred to as dragon silver coin (or long yang in pinyin 龙 洋). Since the Qing government ruled that all taxes, money and grain be collected in dragon silver coins and it also received the same status as Mexican silver coins in local transactions, it circulated smoothly. This marked the beginning of China‘s minting of modern silver coinage on a more formal basis. The Qing government established the BaoQuan Bureau (宝泉局)59 and the Bao Yuan Bureau

56 Lin Zexu (August30, 1785-November 22, 1850), style name Yuanfu, was a Chinese scholar and official of the Qing Dynasty. He is most recognized for his conduct and his constant position on the ―moral high ground‖ in his fight, as a ―shepherd‖ of his people, against the opium trade in Guangzhou. 57 Zhang Zhidong(September 4, 1837-October 5, 1909) was an eminent Chinese politician during the late Qing Dynasty who advocated controlled reform. Along with Zeng Guofan, Li Hongzhang and ZuoZongtang, he was one of the ―Four Famous Officials of the Late Qing‖. 58 Qian or Mace (unit) is one of the Chinese units of measurement, equal to 5g. 59 BaoQuan Bureau was one of the two mints established by the central Qing government to mint for it. The other one was Bao Yuan Bureau. 21

(宝源局)60in Jingshi, affiliated to the Ministry of Revenue (户部) and the Ministry of Works (工 部) respectively. It also built dozens of mints in various provinces to mint copper coinage. In the early Qing dynasty, a copper coin weighed one qian, but over time its weight changed several times. This was mainly because the inherent metal content and the value of a copper coin were inseparable and underweighting of coins might induce private minting while overweighting might encourage melting the coins for the silver content. Given this, it was necessary to figure out a moderate standard weight for copper coin which was fairly difficult since the price of copper in the market kept changing. In the early Qing Dynasty, zhiqian was heavy and each one-wen (文)61-denominated zhiqian weighed one qian and four cents at a time. Moreover, copper in the market was rare and expensive therefore many people melted zhiqian and recast them into utensils. Such practice persisted despite the Qing government‘s repeated stringent prohibitions. After Emperor Xianfeng (咸丰) came to the throne, the legal weight of the zhiqian was reduced from one wen to eight cents. The copper content was reduced and the content of other materials was increased, which stimulated private minting of zhiqian. In addition, mints nationwide did not mint the zhiqian according to the stipulation on weight and copper content fixed by the Qing government. Even the BaoQuan Bureau and the Bao Yuan Bureau in Jingshi (京师) openly reduced the copper content of zhiqian and made fraudulent profits. Therefore, it should come as no surprise that zhiqian minted by local bureaus in other provinces differed vastly and there was also illegal minting in various regions nationwide. Due to these factors, zhiqian quality varied from region to region. On the whole, a diachronic comparison of various zhiqian in the Qing dynasty would reveal to us the fact that zhiqian quality was on a downward trend. This gave rise to the constant price increases at that time and poor people, as major users of zhiqian, suffered greater losses than other people. Due to the tremendous military expenses and indemnities, the Qing government‘s financial strength declined after the Opium War. Worse still, while the expansion of war zones reduced its fiscal revenue sharply, the subsequent Taiping Rebellion cost the central government an enormous amount of military expenditure. Facing severe financial difficulties, the Qing government adopted an inflationary policy in the third year of Emperor Xianfeng‘s reign and minted copper coinage with large denominations. At first, it minted dang 十 qian62, dang 五十 qian63 and dang 百 qian64. Later, it minted dang 五百 qian65, dang 千 qian66 and dang 十 iron qian67. To mint large-denominated copper coinage, new mints were set up in provinces nationwide and more people joined in the illicit minting of zhiqian which led to a dramatic fall in the value of large-denominated copper coins. In response, merchants closed their doors and people refused 60

Bao Yuan Bureau was the other mint established by the central Qing government to mint coins for it. Wen was a quantifier used to measure copper pieces in the Old China. 62 Dang 十 qian is a kind of copper coin in the Old China. The ratio of its face value and actual value was 1:10. 63 Dang 五十 qian is a kind of copper coin in the Old China. The ratio of its face value and actual value was 1:50. 64 Dang 百 qian is a kind of copper coin in the Old China. The ratio of its face value and actual value was 1:100. 65 Dang 五百 qian is a kind of copper coin in the Old China. The ratio of its face value and actual value was 1:500. 66 Dang 千 qian is a kind of copper coin in the Old China. The ratio of its face value and actual value was 1:1000. 67 Dang 十 iron qian is a kind of iron coin in the Old China. The ratio of its face value and actual value was 1:10. 61

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large-denominated copper coins, and also large-denominated iron coinage. As a result, the large-denominated coin system of Qing dynasty collapsed within short time. Shortly after large-denominated coins were issued, the Qing government began to issue paper notes. In the third year of Emperor Xianfeng‘s reign, the government issued official notes (also called silver notes) whose face value ranged from one liang or three liang, to50liang and paper notes (or Da Qing Bao Chao 大清宝钞) whose face value ranged from 250wen, 500wen, 1,000wen to 100,000wen. The over-issue of paper notes aggravated price rises. In the first year of Emperor Tongzhi‘s reign, the central government ordered local governments to reject taxes in paper notes and accept only physical silver. Therefore, paper notes soon became as worthless as waste paper and the paper notes policy introduced during Emperor Xianfeng‘s reign floundered. After the Taiping Heavenly Kingdom 68 made Nanjing (then Tianjin, suggesting Heavenly Capital) its capital, it also minted copper coinage which was called ‗Holy Heavenly Copper Coin‘ (TianGuo Sheng Bao 天国圣宝). Made of good materials in a scientific and exquisite way, Holy Heavenly Copper Coin formed a striking contrast to the large-denominated copper coins minted in excess by the Qing government in Jingshi. During its later period, the Heavenly Kingdom also approved of A Draft on Capitalism Development put forward by Hong Rengan69(洪仁玕). In this draft which dealt with developing capitalism, Hong Rengan explicitly presented such proposals as setting up banks and issuing paper notes. A Draft on Capitalism Development was an invaluable chapter in the development of the financial history of modern China. As early as in the initial stage of the Qing Dynasty, silver notes issued by the money industry and pawnbrokers had been in circulation. Later, paper notes with greater liquidity came into existence. After Emperor Xianfeng came to the throne, private paper notes enjoyed wider circulation in the market and came in greater varieties. Some of them could be used as regular promissory notes and some were equal to sight notes (paper notes in the real sense). Most of them were issued by money shops, silver firms, exchange shops, pawnbrokers and silver furnaces across the country and some were even issued by stores. Since silver notes and paper notes had sound credibility among the people, they circulated smoothly. For this reason, when paper notes issued by Emperor Xianfeng‘s government were cleared up, paper notes held by common people were still in vogue throughout the country. During Emperor Daoguang‘s reign, foreign merchants dumped large quantities of opium on China. They usually sold an opium indent to Chinese people before their opium-loaded ships arrived in China and delivered opium to the indent holder after their ships pulled in. What was surprising was that because of the prevalence of the opium trade after the Opium War, such indents became so popular in some Chinese coastal areas as to become a circulation medium similar to Japanese rice coupons and acted as sort of paper note. During the Emperor Xianfeng period, paper notes in real sense that were issued by foreign 58 Taiping Heavenly Kingdom was an oppositional state in China from 1851 to 1864 established by Hong Xiuquan, the leader of the Taiping Rebellion (1850–1864). 69 Hong Rengan (1822-1864) was an important leader of the Taiping Rebellion. He was the cousin of the movement's founder and spiritual leader Hong Xiuquan. His position as the Prince Gan resembled the role of a Prime Minister. He is a noted figure in history because of the sweeping reforms attempted under his rule, and because of his popularity in the West. 23

merchants had already appeared in coastal areas. Later, the Standard Chartered Bank and HSBC established by British merchants, Deutsch-Asiatische Bank opened by German merchants and BanquedeI‘IndoChineopened by French merchants all issued paper notes to absorb Chinese capital and expand their financial influence. In consequence, more foreign paper notes circulated in China and by the 1880s, HBSC had issued 600,000-70,000paper notes in Xiamen alone. ―Foreign merchants exchanged foreign paper notes with small denominations for thousands ingold‖, so commented a bureaucrat taking part in the Self-Strengthening Movement. With the further expansion of China‘s foreign trade, foreign paper notes were widely used not only in Chinese coastal ports but also in Hankou and other inland cities. They were so widespread that by the 1890s they had already become an integral part of China‘s currency system. The extensive issue of foreign paper notes not only intensified foreign capital‘s pillage of the Chinese people‘s wealth but also aggravated the confusion in modern China‘s currencies.

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Chapter 3 Finance during the early semi-colonial and semi-feudal period of China (1895-1927) In the late 19th century and the early 20th century, foreign capitalist powers successively waged the First Sino-Japanese War of 1894-1895 (甲午中日战争) 70 and the Siege of the International Legations (八国联军侵华)71 in China. The rotten Qing government‘s failures in these two wars aggravated the national crisis being faced by China. Precisely during this period, foreign capitalist countries were moving from capitalism to imperialism. Financial capital became the real ruler of the capitalist world and conflicts among capitalist powers in establishing colonies and re-carving up the world were becoming increasingly fierce. Capital export during this period assumed greater significance and China-based foreign banks became the most important tool of foreign capitalism to export capital to China. Through making enormous loans to China, foreign financial capital tightened its fiscal and financial control over the Qing government. As a result, China‘s economy became semi-colonial and the degree of semi-colonialism kept deepening. To address the fiscal and financial crises, the Qing government set up central and regional governmental modern financial institutions and meanwhile the non-governmental modern financial sector also emerged and developed. Amidst the acute national conflicts and class contradictions, the Xinhai Revolution (辛亥革命)72 broke out which ended up in the downfall of the Qing government and the demise of the reign of feudal empires. In the next year (1912), the Republic of China (中华民国)73was founded, but the political power was soon usurped by Beiyang Warlords (北洋军阀)74headed by Yuan Shikai (袁世凯). In the early days of the Republic of China, foreign capitalism organized international bank consortiums to monopolize loans to China and further tightened its control of China‘s finance. After Yuan Shikai died in 1916 following his unsuccessful attempt at a restoration of the autocratic monarchy, China was troubled by warlord dogfights for more than ten years. In those turbulent years, financial turmoil occurred frequently. At the same time, China‘s modern banking sector continued it progress while some old financial institutions declined. In addition, China‘s monetary system experienced some changes.

70 The First Sino-Japanese War of 1894-1895 is commonly known in China as the War of Jiawu referring to the year (1894) as named under the traditional sexagenary system of year reckoning. In Japan, it is commonly known as the Japan–Qing War. In Korea, where much of the war took place, it is commonly known as the Qing-Japan War. 71 The Siege of the International Legations occurred during the Boxer Rebellion in the Chinese city of Beijing (Peking). The Qing government took the side of the Boxers. The foreigners and Chinese Christians in the Legation Quarter survived a 55-day siege by the Qing Army and the Boxers. The siege was broken by an international military force which marched from the coast of China, defeated the Qing army, and occupied Beijing. 72 The Xinhai Revolution, or the Hsin-hai Revolution, also known as the Revolution of 1911 or the Chinese Revolution, was a revolution that overthrew China‘s last imperial dynasty, the Qing Dynasty and established the Republic of China. The revolution was named Xinhai (Hsin-hai) because it occurred in 1911, the year of the Xinhai stem-branch in the sexagenary cycle of the Chinese calendar. 73 The Republic of China was founded in 1912 and it governed mainland China until 1949, when it lost the mainland during the Chinese Civil War and withdrew to Taiwan. 74 Beiyang Warlords was one of the major factions of warlords during the republican time. 25

3.1 The expansion of foreign financial forces in China After the First Sino-Japanese War of 1894-1895, the defeated Qing government was forced to pay to Japan a war indemnity of 200 million liang silver and an additional sum of30 million liang (1.12 million kg)silver for the Liaodong Peninsula75 and in the first year of the payment term, the Qing government had to pay 130 million liang. Since its year-round fiscal revenue was less than 90 million liang, the Qing government had to ask foreign banks for unprecedentedly enormous loans to pay the immense foreign debts and imperialists vied to make loans to China. To effect its payment to Japan, the Qing government asked for three major foreign loans: the Russian-French Loan76, the British-German Loan77 and the Renewed British-German Loan78. While making loans to China, Western powers put forward harsh lending conditions and demanded China‘s tariff and salt tax as guarantees. This meant that creditor countries could levy tax from treaty ports directly should the Qing government fail to repay the principal with interest. In this way, through the banks, imperialists manipulated China‘s finance and economy. In 1895, Russia and France co-founded the Russo-Chinese Bank 79 and forced the Qing government to set aside five million liang silver granted by Russian-French Loan to ‗buy a share‘ of the bank. Although the Qing government put capital equal to 70% of Russia and France‘s combined contribution into the bank, it did not have a single seat on the board of the bank, and the real power was in the hands of Russia. The Russo-Chinese Bank was headquartered in Petersburg, Russia, but it had numerous branches in Chinese cities like Shanghai, Hankou, Tianjin, Yantai, Haerbin(哈尔滨), Dalian (大连) and Beijing. It was unmatched by other China-based foreign banks either in terms of its number of branches or remarkable progress. It had extensive rights in China and engaged in not only ordinary financial regulation but also the storage, insurance and transaction of real estate. Apart from making financial loans and enterprise investment, by participating in railway construction, electricity cable erection and mining within the Chinese territory, it also collected taxes, managed the national treasury, purchased munitions and issued currency for the Chinese government. Moreover, even its regional agents were empowered to ask the Qing government to establish a local Russian consulate. Therefore, the Russo-Chinese Bank was more than merely a bank. In fact, foreign newspapers dubbed it as ―the China-based central government of Russia‖. After the establishment of the Russo-Chinese Bank, foreign capitalism further set up over 20 75 The Liao Dong Peninsula is apeninsula in the Liaoning province of northeastern China, historically known in the west as southern east-Manchuria. The peninsula was ceded to Japan by the Treaty of Maguan of 17 April 1895 but this was rescinded after the Triple of 23 April 1895 by Russia, France and Germany and China was required to pay 30 million liang silver coin to reassume the peninsula. 76 Russian-French Loan was the first foreign loan of the Qing government to cover its war indemnity to Japan after the First Sino-Japanese War of 1894-1895.The Qing government asked the Russian government then for this loan, but due to Russia‘s limited financial strength, this loan was provided to China by the financial consortium made up of 10 Russian and French banks. Therefore, it was called Russian-French Loan. 77 British-German Loan was the second foreign loan of the Qing government to cover its war indemnity to Japan after the First Sino-Japanese War of 1894-1895. It was a loan of 16 million pounds (100 million liang) provided by HSBC and the Deutsch Asiatische Bank fifty-fifty for a term of 36 years. 78 Renewed British-German Loan was the third foreign loan of the Qing government to cover its war indemnity to Japan after the First Sino-Japanese War of 1894-1895. It was a loan of 16 million pounds (or 100 million liang) at an annual interest of 4.5 li for a term of 45 years. 79 Russo-Chinese Bank was a foreign bank representing Russian interest in China during the period between Qing dynasty and Republic of China. 26

banks including the American-funded Citibank, the Belgium-funded Belgian Bank, the Japanese-funded Korean Bank and the Taiwan Bank with a combined total of over 100 bank branches. Meanwhile, old China-based foreign banks also continuously increased their branches. During this period, with foreign-funded banks developing on a large scale at a great speed, a nationwide foreign financial network took shape and China was in a situation where the six major powers, i.e., Britain, France, German, Japan, Russia and America were in direct competition with each other. In 1990 (or historically known as the boxer year), shortly after the Qing government paid off its debt to Japan, the Eight-Nations Allied Forces80(八国联军) invaded China and forced the defeated Chinese government to sign the infamous Boxer Protocol81(辛丑条约) in 1901 which ruled that China had to pay 450 million liang silver to the eight nations involved. This was historically known as the Boxer Indemnity which was too immense for the Qing government to pay off even with its total revenue for four years. As this was the situation, the Boxer Protocol ruled it to be amortized at an annual interest of 4 li (厘)82on December 31, 1940. After 39 years, the total amount was still almost one billion liang. In addition, imperialists also formed the Indemnity Committee of Banks whose members included HBSC, Deutsch-Asiatische Bank, Russo-Chinese Bank, BanquedeI‘IndoChine, Citibank, and Yokohama Specie Bank to accept and distribute the annual payments from China. Later, Dutch Bank and Belgian Bank also acceded to this committee. The Boxer Indemnity was an unprecedented burden not only in Chinese history but also in world history. Even so, insatiable imperialists were never satisfied. At first, the indemnity was paid by in silver, but because silver price in the world market fell in the 20th century, in1905, the imperialists pressed the Qing government to pay the rest in gold at the gold price of 1901 and demanded an additional eight million liang silver to cover the ‗pounds loss‘ 83 . The Qing government‘s funds had already been exhausted by the previous two major indemnities (the indemnity to Japan and the Boxer Indemnity) and could not pay this additional 800 liang silver. At its wit‘s end, it raised a loan from HSBC and this was known as the Pounds Loss Loan of 1905 (镑 亏借款). Due to the Boxer Indemnity, the Qing government had to pay a sum of over 40 million liang foreign debts and war indemnity annually, which ―accounted for nearly 50% of its total fiscal expenditure‖. As a result, once the annual payment was due, the financial market would inevitably undergo different degrees of fluctuations and HSBC as well as other foreign banks would use their monopoly on remittance between countries to lower the foreign exchange rate. In so doing, HSBC reaped a profit of about 15 million yuan during the annual repayment periods alone from 1900 to 80

The Eight-Nations Allied Forces referred to the international legation of eight nations, i.e. Britain, the United

States, Germany, France, Tsarist Russia, Japan, Italy and Austria, which sent troops to China in 1900 to suppress the anti-imperialist Boxer Movement. 81 Boxer Protocol, also known as the Treaty of 1901 or Xinchou Treaty (Xinchou was a year according to the Chinese lunar calendar), was signed between the Qing government and the Eight Nation Alliance on September 7, 1901. The full name of the protocol is Austria-Hungary, Belgium, France, Germany, Great Britain, Italy, Japan, The Netherlands, Russia, Spain, United States and China—Final Protocol for the Settlement of the Disturbances of 1900, reflecting its nature as a diplomatic protocol rather than a peace treaty at the time of signature. 82 Li or cash (mass), a Chinese weight unit for 1⁄10 candareen. 83 Pounds loss referred to the loss foreign countries suffered due to the appreciation of GBP when the Old China effected payments according to silver price. 27

1937. Among the numerous foreign banks in China, the British-funded HSBC was the strongest. As an old foreign bank deeply rooted in the Chinese land, HSBC‘s capital had multiplied. Its profits and financial strength had also increased remarkably. By the end of the 19th century, it had been regarded as a bank of ―international influence‖ and in the early 20th century, it ―had actually become the dictator of silver exchange rate in China‘s foreign exchange market‖. However, HSBC‘s hegemony was constantly challenged by the capital ventures of other countries. For instance, in the emerging Japanese financial community, Japanese banks challenged the established British bank capital. Just as the general manager of Sumitomo Mitsui Banking Corporation (SMBC 三井银行)84 said to his peers, ―Never feel inferior to HSBC. Raise your head and gain an equal footing with it‖. After the Sino-Japanese War of 1894-1895, Japan stepped up invading the northeastern China with Yokohama Specie Bank (横滨正金银行)85as its spearhead. During the first decade of the 20th century, Yokohama Specie Bank rapidly set up branches in Niuzhuang, Dalian, Liaoyang (辽阳), Lvshun (旅顺), Shenyang (沈阳), Tieling (铁岭), Andong (安东), Changchun (长春), Harbin (哈 尔滨), Kaiyuan (开原), Toudaogou (头道沟), Gongzhuling (公主岭)and a financial network covering Southern Manchuria and extending to Northern Manchuria was basically formed with Dalian Branch acting as the governing bank of Yokohama Specie Bank in northeastern China. The aggressive Japanese forces used this financial network as its Central Bank in northeastern China. In the first year after the Russo-Japanese War of 1904-1905, Japan‘s Ministry of Foreign Affairs and Ministry of Finance instructed the Yokohama Specie Bank to unify currencies in ―Manchuria‖ and implement a new monetary system based on the Japanese silver dollar. Soon, the Yokohama Specie Bank Dalian Branch issued silver standard bank notes denominated one yuan, five yuan, 10 yuan and 100 yuan. Afterwards, to unify Japan‘s domestic monetary system, it further issued gold notes. Moreover, it was authorized by the Japanese government to manage Japan‘s general gold treasury. Besides this, the Yokohama Specie Bank also made it its main business to lend to the Kwangtung Military Administration, a Japanese colonial administration in northeast China. In the early days of Kwangtung Military Administration, Yokohama Specie Bank provided enormous loans to it which far surpassed the aggregate fiscal revenue of the Administration. These loans played an important role in supporting Japan‘s colonial rule in northeastern China. At the same time, the Yokohama Specie Bank also set up many branches or offices including in Hong Kong, Tianjin, Beijing, Yantai, Hankou and Qingdao (青岛). Its office in Shanghai was promoted to be a branch and designated as the Central Branch of General Affairs, in charge of dealing in draft business of each branch and balancing remittance contacts between branches to fulfill the supreme goal ―of promoting Japan‘s trade with China‖. From 1897 to 1913, the total remittance volume of Yokohama Specie Bank rose from 32 million Japanese yen to 282 million Japanese yen, presenting an increase of 7.8 times. 84 Sumitomo Mitsui Banking Corporation is a Japanese bank based in Yurakucho, Chiyoda and Tokyo, Japan. It is a wholly owned subsidiary of Sumitomo Mitsui Financial Group. As of the year 2009, SMBC was the second largest bank in Japan in terms of assets. 85 Yokohama Specie Bank is a Japanese bank founded in Yokohama, Japan in the year 1880. It later became The Bank of Tokyo, Ltd. in 1947. The bank played a significant role in Japanese trade with China. 28

The Bank of Japan as the national bank of the country often made loans to Yokohama Specie Banked assisted the latter to ―boost Japan‘s trade with China‖. For instance, in 1897 when Japan had enormous amounts of overstocked cotton, the Bank of Japan provided capital to Yokohama Specie Bank in order that it could then make loans to Japan‘s domestic cotton factories which enabled the latter to transport overstocked cotton directly to China. In this way, the competitiveness of Japanese cotton in the Chinese market was strengthened and the sales volume of Japanese cotton doubled and redoubled and soon overtook that of British and Indian cotton. During this period of time, imperialists practiced the strategy of ―conquering China with railways and banks‖, so railway construction also became their major tool to expand invasion and contend for spheres of influence. Imperialists controlled China‘s railways in two major ways. The first was to make direct investment in railway construction. In this way, foreign investors fully controlled railway rights; German construction of railways in Shandong Province was a case in point. The second was to make loans to the Chinese government to construct railways itself, but the foreign investors fully controlled the management of railways and major technical positions. Since the second method was more prevalent, railway loans became a major part of China‘s foreign debt and a focus of conflicts and confrontations among imperialist powers during this period of time. In the process of imperialists‘ vying for railway rights and other interests, HSBC and other foreign banks had played an important role. In the early years of the Chinese republic, the governments of Britain, America, France and German and private investors thought they could ―exercise necessary control‖ over China by jointly monopolizing the making of loans to China. To prevent Russia and Japan from destroying their monopoly, they incorporated these two countries and formed a coalition of banks of the six countries on the additional condition that Japan and Russia could maintain their privileges in Manchuria and Mongolia. The coalition made various harsh loan conditions when making loans to Yuan Shikai, and demanded that they supervise China‘s finance comprehensively and intervene in China‘s salt administration. In addition, the coalition also exerted pressure on Yuan Shikai through their respective governments. Within the coalition, however, the six imperialists were seriously divided on the supervision of China‘s public finance and the use of loans. They were especially divided on the quota of foreign advisors allocated in Chinese financial institutions, the monetary system, banks, auditing and other departments such as the Treasury Bureau and the Court of Salt Tax Audit. In March 1913, America dropped out of the coalition because of strong dissatisfaction with Britain‘s precedence in making loans to China. Thus, the six-country bank coalition became a Five-NationsBank Consortium, composed of HBSC, Credit Agricole CIB, Deutsch-Asiatische Bank, Yokohama Specie Bank and Russo-Chinese Bank, representing the interests of Britain, France, German, Japan and Russia respectively. In April 1913, anxious to get massive money to consolidate his military strength and suppress the Second Revolution (二次革命)86, Yuan Shihkai ignored national objections and signed the Chinese Government Reorganization Loan Agreement (善后借款合同) 87 with the 86 The Second Revolution also referred to as the Kuichou Revolution or the Anti-Yuan Shih-kai Revolution, was a military battle initiated by Sun Yat-sen in 1913 against Yuan Shih-kai. 87 The Chinese Government Reorganization Loan Agreement was signed between Yuan Shih-kai and the Five-Nations Bank Consortium in 1913. It granted a loan of 25 million pounds to the Beiyang government at an annual interest of 5 li over a course of 47 years. 29

aforementioned Five-Nations Bank Consortium without getting the approval of Congress. .

The Chinese Government Reorganization Loan Agreement nominally granted a sum of £25 million to China, but in fact China only got £20.22 million from the loan if discounts, commission charges and remittance fees are taken into account. Worse still, when the payment was due, China would have to pay a total of £68.99 million including principal, interest and commission charges, nearly 3.5 times of the amount it borrowed. In this way, foreign financiers not only made a fat profit of over £48.77 million, but also obtained many privileges including the right to keep China‘s salt revenue, decide the use of loans, administer China‘s salt affairs and supervise China‘s finance within the life of loan, thus further controlling the lifeline of China‘s finance and economy.

3.2 The rise of modern banking industry in China Since the mid-19th century, many far-sighted personages including Hong Rengan, Rong Hong (容 闳)88, Zheng Guanying (郑观应)89 and Chen Chi (陈炽)90 proposed that China should establish banks itself, but 50 years after the establishment of foreign banks in China, China was still in want of its own modern banks. In 1896, Sheng Xuanhuai (盛宣怀)91 , a senior official in charge of railway construction proposed to the then emperor that running its own banks would enable China to ―mobilize the strength of Chinese merchants and terminate the coercion of foreign merchants‖, issue its own bank notes and manage state bonds. He also made a comparison between bank operation and railway construction and argued that while the latter produced slow and light profits the former produced instant and sizable profits. Emperor Guangxu (光绪) approved of his proposal after a deliberation with his secretaries. The reasons for his approval were three-fold. First, it catered to the needs of people in power to solve financial problems; second, with the mining industry and the transportation industry developing rapidly, mass movements aimed at resuming economic development were enthusiastically embraced and the public appeal for running domestic banks was strong; third, the Qing government was lured by the handsome profits of the foreign banking industry and irritated by overbearing foreign banks. After his proposal was approved, then, Sheng Xuanhuai began to attract investment and raise funds through issuing stocks. After a period of intense preparation, China Merchants Bank92, the first modern bank run by the Chinese people, was established in Shanghai in 1897. Nominally a commercial bank, China Merchants Bank was actually an official-commercial joint bank. Bureaucratic capital and capital of modern enterprises like China Merchants Group and Telegraph Administration accounted for half of its initial capital of 2.5 million liang, and most of its deposits also came from the government. Shortly after its establishment, the government 88 Rong Hong or Yung Wing (November 17, 1828-April 21, 1912) was the first Chinese student to graduate from a U.S. university (Yale College in 1854). 89 Zheng Guanying (1842-1921) was a renowned thinker, reformer and entrepreneur in modern Chinese history. 90 Chen Chi (?-1900) was a reformer in the late Qing dynasty. 91 Sheng Xuanhuai or Sheng Gongbao (November 4, 1844-April 27, 1916) was the Minister of Transportation of the Qing Empire. 92 China Merchants Bank, briefly known as Merchants Bank, was the first Chinese-run bank established by Sheng Xuanhuai in Shanghai on May 27, 1897. 30

allocated one million liang to it and continued to deposit money in it thereafter. Besides this, the government also authorized the bank to issue paper notes, silver dollar certificates and silver liang notes. In addition, Sheng Xuanhuai repeatedly presented memorials to Emperor Guangxu, striving for the right to manage the remittance of government funds. Thanks to his unremitting efforts, the remittance business of China Merchants Bank developed gradually. Apart from government funds, it also managed the depository and remittance of the government‘s foreign railway loans. On top of these, it maintained close business contacts with China Merchants Group, Telegraph Administration and other modern enterprises controlled by Sheng Xuanhuai. In short, the various connections between Sheng Xuanhuai and Qing government enabled China Merchants Bank to gain a foothold in the financial market in its early days. Nevertheless, for all the privileges and special treatment China Merchants Bank enjoyed, it grew slowly and this had something to do with its management system. The management of China Merchants Bank was characterized with blind worship of foreign methods and a lack of forward thinking. On the one hand, it unduly simulated HSBC and adopted its Foreign Supervisor Management System. Under this system, the management of China Merchants Bank including both its head office and branches in major ports were in the hands of the foreign supervisor and all its books and accounts had to be written in English. On the other hand, it was managed in a feudal way just like a yamen (衙门)93. Its board members were appointed by Sheng Xuanhuai rather than elected by the General Meeting of Stockholders. The posts of directors or managers of its numerous branches were mainly filled by retired government officials, alternate local government officials and despotic gentries who knew nothing about bank management and managed in a feudal style. Due to the chaotic management system and unqualified managers, China Merchants Bank was stuck in a state of backwardness, corruption and stagnation. From the start of the 20th century, new Chinese-funded banks were established constantly. It was estimated that by 1911, a total of 30 Chinese-funded banks had been established, of which 13 were official banks or official-merchant joint banks. After the Sino-Japanese War of 1894-1895, official silver firms(yin hao 银号)94 and official money bureaus (guan qianju 官钱局)95were established in various provinces throughout the country and quite a few of them were reorganized into local official and official-merchant joint banks in the twentieth century. Since most merchant banks established during this period were closed shortly after their establishment, there was a preponderance of official banks and official-merchant joint banks took preponderance. Of them, the Bank of Ministry of Revenue (户部银行),which was renamed Da Qing Bank (大清银行) from 1908, and the Bank of Communications were the most important. The Bank of Ministry was established in Beijing in August 1905. Soon, it established branches in Tianjin, Shanghai, Hankou, Jinan and Zhangjiakou. It was set up as a limited liability company with an initial capital of 400 million liang, half owned by the then Ministry of Revenue and half to be purchased by individuals (excluding foreigners). Nominally an official-merchant joint bank, its 93 A yamen is any local bureaucrat's, or mandarin's office and residence of the Chinese Empire. The term has been widely used in China for centuries, but appeared in English during the Qing dynasty. 94 Silver firm or yin hao in pin yin was a kind of credit institutions that emerged after the mid-Ming dynasty. It was an early form of banks in China which engaged in silver conversion and later took up depositing, lending and remittance. 95 Official money bureaus or official qianju was an institution responsible for minting coins in the Old China. 31

real power was in the hands of the government. Both its executive and vice executive were appointed by the Ministry of Revenue. However, the bank also appointed some renowned merchants as managers and assistant managers of its head office and branches nationwide and gradually expanded business with their help. According to its regulations and rules, its business included ―to accept funds, open bank accounts and make loans, trade in immature bills and keep important articles for people, etc.‖ Besides this, the Qing government also authorized it to mint coins, issue paper notes and manage the national treasury, thereby making it tantamount to the national bank of China. The business of the Bank of Ministry enjoyed remarkable progress and by the first half of 1911, its deposit volume reached 63.39 million liang, over 30 times more than that of China Merchants‘ Bank during the same period. The Bank of Communications was an official-commercial joint bank established by the Ministry of Postal, Shipping, Railway and Telecommunication Service (邮传部)96 in Beijing in 1908 with an initial capital of 2.5 million liang, 40% owned by it and the rest to be ―purchased by officials and civilians‖. Its manager and assistant manager were officials designated by the Ministry of Postal, Shipping, Railway and Telecommunication Service. According to its regulations and rules, its aim was ―to facilitate transportation‖ and revitalize steamships, railways, the postal service and telecommunications. However, its real business was limited to ―the regulation and allocation of government loans‖. It also established branches in cities like Shanghai, Tianjin, and Hankou and most of its deposits came from government organs. By the year 1910, its deposit volume reached 23.7 million liang, smaller than that of Da Qing Bank but much larger than that of China Merchants Bank. After the 1911 Revolution broke out, Da Qing Bank declared its closure. Soon, some shareholders of the original Da Qing Bank made a joint appeal to the Provisional Government of the Republic of China (中华民国临时政府)97, proposing to transform Da Qing Bank into the Bank of China and the central bank of the country. This proposal was approved by the interim government and in February 1912 the Bank of China opened. Later, it became the central bank of the Beiyang Government with an initial capital of 60 million yuan (half official and half commercial). It had one president and one vice-president, both appointed by the government on the advice of the Ministry of Finance. Since the finance chief of the bank changed frequently in the early republican years, its president and vice-president also changed constantly, to such an extent that it had nine presidents within four years. Its major business included managing the national treasury, remitting public funds, and issuing banknotes. The Bank of Communications also amended its statute in 1914 and changed its total share capital to10 million liang. It continued to manage the revenue and expenditure of ―four services‖, namely, steamships, railways, electricity and the postal service, but it also managed the national treasury, undertook domestic and foreign remittance, issued banknotes, etc. In this way, the Bank 96 The Ministry of Postal, Shipping, Railway and Telecommunication Service was a central organ established by the Qing government on November 6, 1906 in charge of the postal, shipping, railway and telecommunication service. 97 The Provisional Government of the Republic of China was established during the Xinhai Revolution by the revolutionaries in 1912. After the success of the Wuchang uprising, revolutionary provincial assembly representatives held a conference in Wuchang, China, which framed the organizational outline of the Provisional Government. 32

of China and the Bank of Communications became two fiscal and financial pivots of the Beiyang Government. After the founding of Republic of China, the Chinese financial industry enjoyed more favorable conditions for development. To begin with, the new government made great efforts to establish a new economic system in its early years which boosted the development of domestic commerce and finance to some extent. Furthermore, because of the outbreak of the First World War in 1914, the imperialists relaxed their economic aggression in China both during wartime and during the first years after the war. China‘s national commerce and industry thus enjoyed a temporary golden period of development. Finally, the influence of foreign banks that had for a long time controlled China‘s financial market was impaired due to weaker financial support from their mother countries. Financially straitened, they eased their exploitation of Chinese financial market and even borrowed money from Chinese-funded banks occasionally. In addition, the financially straitened Beiyang Government often borrowed money from Chinese-funded banks and issued government bonds through domestic financial institutions, which also propelled the growth of some Chinese-funded banks to some extent. During this period, Chinese funded banks, notably commercial banks, developed rapidly. From 1912 to 1927, a total of 302 new Chinese banks were established. Of them, 247 were commercial banks, accounting for over 80% of all the newly-established banks. The period between 1919 and 1923 marked the peak of the establishment of commercial banks and an average of 30 commercial banks were established annually. Some of these banks professed to be industrial banks such as China Agricultural Bank Corp sponsored by agricultural promotion association, Reclaim and Cultivate Bank sponsored by Reclaim and Cultivate Association, Hypothec Bank sponsored by Industrial Construction Association, Railway Bank sponsored by Railway Association and some provincial industrial banks, mining banks and fishing banks. This led to Chinese-funded banks beginning to make more loans to domestic commerce and industry from the 1920s. There was also news about the establishment of banks in remote areas. It was said that Tibet and Mongolia were to set up banks and the Chinese banking industry experienced unprecedented development during this period. However, about half of all the Chinese-funded banks closed around the same time because most of these banks were speculation-oriented and thus shortly-lived. Some well-managed companies, however, survived and their financial strength increased. In terms of capital paid-in, accumulation funds and deposits, the overall strength of major Chinese-funded banks rose by 2.5 times during the eight years from 1918 to 1926. By this time, Chinese banks were strong enough to contend with foreign banks and money shops (See Figure 3-1).

33

Figure 3-1: A comparison of the financial strength of foreign-funded banks, Sino-foreign joint banks, Chinese-funded bank and money shops (in 1925)

capital paid-in & accumulation funds

Percentage (%)

(millions yuan)

Financial

Percentage

strength

(%)

(millions yuan)

Foreign-funded

193.8

35.4

1141.2

32.1

48.2

8.8

162.7

4.6

205.5

37.5

1453.7

40.8

Money shops

100.0

18.3

800.0

22.5

Total

574.5

100

3557.6

100

banks Sino-Foreign joint banks Chinese-funded banks

Note: Financial strength refers to capital paid-in, accumulation funds, profit rollover, deposits and exchange certificates issued. Data Sources: Figure 7 from On China’s Banking Industry before 1927, by Tang Chuansi and Huang Hanmin (compiled into the Research Materials on the Economic History of Modern China, the fourth volume).

During this period, apart from the Bank of China and the Bank of Communications, the Three Southern Banks (南三行) and the Four Northern Banks (北四行) also developed quite well. The ‗Four Northern Banks‘ refers to four commercial banks, i.e. Salt Industry Bank98, Kin Cheng Banking Corporation99, Continental Bank100 and China-South Bank101. Since their stockholders were mostly warlords and bureaucrats of the Beiyang Government, they were supported by the Beiyang Government and developed rapidly. In 1922, the Four Northern Banks set up the Office of the Four Northern Banks and engaged in lending initially. Later, they set up a Joint Reserves Bank of the Four Northern Banks and began to issue banknotes. With abundant reserves, the Joint Reserves Bank of the Four Northern Banks enjoyed good reputation. In 1923, they further set up a Savings Association of the Four Northern Banks which absorbed enormous nongovernmental deposits. The ‗Three Southern Banks‘ refers to three commercial banks, i.e. Zhejiang Industrial Bank102, Zhejiang Investment Bank103 and Shanghai Commercial and Savings Bank104. Taking Shanghai as 98

Salt Industry Bank was established by Governor Zhang Zhenfang in Tianjin in 1915. Kin Cheng Banking Corporation was established by Wang Zhilong and Zhou Zuomin in 1917 in Tianjin. Continental Bank was established by Tan Lisun, Wang Guilin and Cao Xinku in 1919 in Tianjin. It was transferred to Shanghai in 1942. 101 China-South Bank was established by Huang Yizhu, an overseas Chinese merchant and Shi Liangcai, a Shanghai capitalist in 1921 in Shanghai. Although it was headquartered in Shanghai, its business focus was in Beijing(Peking) and Tianjin. 102 Zhejiang Industrial Bank was established by Zhejiang Railway Company in 1907 in Hangzhou. It set up branches in Shanghai in 1908. 103 Zhejiang Investment Bank evolved from the Bank of Zhejiang established in 1910. In 1923, the Bank of Zhejiang Shanghai Branch was transformed into Zhejiang Investment Bank. 104 Shanghai Commercial and Savings Bank was established on June 2, 1915 in Shanghai. 34 99

100

their base, the three banks supported each other in business and had some common executives and supervisors. Although there were no such organizations as joint offices among them, they cooperated with each other to achieve mutual benefits. Shanghai Commercial and Savings Bank (or Shanghai Bank in short) was the rising star of the Three Southern Banks. It was established in 1915 with an initial capital of less than 100,000 million yuan, much smaller than the other two southern banks and the Four Northern Banks. In fact, its capital was too small to match that of a big money shop. Therefore, it was also called ‗Mini Bank‘. However, thanks to the conscientious management, advanced personnel development and innovative operation of its manager Chen Guangfu105 who stuck to the principle of ―caring about details and pursuing long-term benefits rather than instant gains‖, Shanghai Commercial and Savings Bank initiated the practice of absorbing various small deposits including one-yuan deposit and developed fairly rapidly. By the year 1926, its capital increased to 2.5 million yuan, its volume of deposits amounted to 30 million yuan and its branches were set up throughout the country. It excelled over other Chinese-funded banks and was regarded as a miracle. Meanwhile, there emerged a group of prestigious modern bankers among the managers of Chinese-funded banks. Besides Chen Guangfu, Song Hanzhang106 and Zhang Jiaao107of the Bank of China, Qian Yongming108 of the Bank of Communications, Zhou Zuomin109of Kincheng Bank, Wu Dingchang110 of Salt Industry, Ye Kuichu 111of Zhejiang Industrial Bank, Li Ming 112 of Zhejiang Investment Bank, to name just a few, were new talents in the Chinese banking community and celebrities of the economic world, and made great contributions to the development of modern financial institutions in China.

3.3 The decline of exchange shops and the continuous development of money shop In the late Qing Dynasty, the relationship between exchange shops and the Qing government kept deepening. This also led to feudalism of the guideline for management of exchange shops. In the early 20th century, the exchange shops enjoyed great development. The reason for this was that the Qing government had to pay enormous foreign debts and the Boxer Indemnity annually and all provinces and customs had to submit enormous obligations in due time and this could only be done through the remittance of the exchange shops. With enormous working capital, 105

Chen Guangfu (1881-1976) was a Chinese Banker from Jiangsu Province. Song Hanzhang (1872-1968) was born in Jianning, Fujian and was of Hangzhou origin. He was the then manager of the China Merchants Bank. 107 Zhang Jiaao or Chang Kia-ngau (1889-1979), Known almost exclusively as Chang Kia-ngau in the West, was born in 1889 in Baoshan District, near Shanghai. 108 Qian Yongming (1885-1958) was the president of the Bank of Communications during the republican time. 109 Zhou Zuomin (1884-1955) was a Chinese banker who made great contribution to the reform of private financial industry. 110 Wu Dingchang (1884-1990) was the manager of the Salt Industry Bank. 111 Ye Kuichu was the then president of Zhejiang Industrial Bank. 112 Li Ming (1887-1966) was the then manager of Zhejiang Investment Bank. He was born in Shaoxing, Zhejiang and died in Hong Kong. 35 106

exchange shop industry also began to make loans to modern industrial and commercial enterprises. At the same time, China-based foreign banks not only monopolized the international remittance but also began to meddle in China‘s domestic remittance business. The rising modern Chinese banking industry, however, gradually rivaled the exchange shop industry. The aforementioned China Merchants‘ Bank, the Bank of Ministry of Revenue and the Bank of Communications had already gradually seized its remittance of government loans business. Under the new circumstances, some forward-thinking managers of exchange shops alerted exchange shop industry leaders by suggesting that they transform the management style of exchange shops. This suggestion, however, was strongly objected to by the conservative forces inside the exchange shop industry and failed to come into effect. The outdated exchange shop industry suffered grave losses due to repeated financial turbulence such as the Rubber Stock Unrest of 1910113in Shanghai and the Bankruptcy of Yuan Feng Run Silver Firm (源丰润银号) in 1910. It was also affected adversely by the victory of revolutionists in the Xinhai Revolution which overthrew the Qing government which had close links with exchange shops. In addition, the subsequent social unrest also dealt a heavy blow to the already scarred exchange shops. Consequently, the exchange shop industry declined sharply. A dozen prestigious exchange shops including Ri Sheng Chang Exchange Shop (日升昌票号), Tian ChengHeng Exchange Shop (天成亨票号) and Wei TaiHou Exchange Shop (蔚泰厚票号), to name just a few, made great efforts to reverse the worsening situation, but to no avail. They all successively closed in the following a few years after the Xinhai Revolution. Thereafter, a few exchange shops managed to hold on but they were in no position to save the industry from general decline. In the late Qing dynasty and the early republican years, China‘s money shop industry was jolted by a series of financial problems, such as the Tie Piao (贴票)114Unrest of 1897115, the Rubber Stock Unrest of 1910, and the Exchange House and Trust Company Unrest116 of 1921, but on the whole, the money shop industry during this period made some progress. Take Shanghai‘s money shop industry as an example. Between 1912 and 1926, the number of Shanghai‘s money shops rose from 28 to 87. The total capital volume of money shops rose by 11 fold and the average capital volume of each money shop rose by over three times. Additionally, money shops which traditionally had limited relations with industry began to forge relationships with national industrial enterprises. Shanghai‘s Fu Yuan Money Shop (福源钱庄)117, for instance, made 31 loans (amounting to 2.19 million yuan) to industry during the three years from 1925 to 1927.Most money shops during this period also began to insist on greater security before making loans which promoted both the consolidation of lender-borrower relationship and the effective use 113 Rubber Stock Unrest of 1910 referred to the severe financial crisis caused by rubber stocks that hit the Shanghai financial market seriously. Rubber stock referred to stock issued by enterprises of rubber plantation and production. 114 Tie piao was a kind of promissory notes drawn by money shops in the old China. It was an invention of Xie He Money Shop in Shanghai. 115 The Promissory Note Unrest of 1897 referred to the financial turmoil caused by promissory notes issued by Shanghai‘s money shops to absorb deposits by offering high interests. 116 Exchange House and Trust Companies Unrest referred to the financial turmoil caused by the establishment of exchange houses and trust companies in excess. 117 Fu Yuan Money Shop was one of the most influential money shops of Shanghai and enjoyed good reputation in financial industry of the day. Its manager Qin Runqing acted as chief, deputy-chief and president of the General Association of the Money Shop Industry. 36

of capital. Money shops in other places also changed. For example, in Jinan, money shops founded during the Qing Dynasty usually had smaller capital and their management style was relatively conservative. Comparatively, those established during the republican years which had accounted for 60% of all the money shops in Jinan were relatively larger and their capital often reached 59,000 yuan or even 300,000 yuan. Their management style was ―new‖ and ―their business was mostly limited to ordinary banking business such as lending and depositing. Few of them engaged in speculation.‖Inland, and in some small and medium-sized cities like Changsha, Wuhu, and Shaoxing, the influence of money shops was still very strong, to such extent that ―local financial institutions entirely centered on money shops‖.

3.4 Repeated financial unrest In the late Qing dynasty and early republican years, the financial influence of foreign imperialism in China had already spread to China‘s major commercial cities and controlled the currency markets in all commercial ports. China‘s old-style financial institutions such as money shops and exchange shops had basically become appendages of foreign banks. Therefore, as long as major foreign banks rejected promissory notes drawn by money shops, all commercial ports would experience currency and credit crises. For various reasons including social turbulence, financial speculation, financial fraud by foreign merchants and inadequate government policy, financial unrest occurred frequently, jolting and disrupting the economy time and again. Among them, the most influential and destructive financial problem was the Promissory Note Unrest of 1897, the Rubber Stock Unrest of 1910, the Jing Chao(Jing means Beijing and Chao means bank notes) Unrest of 1916118 in Beijing, Tianjin and Jinan, and the Exchange House and Trust Companies Unrest of 1921. In 1897, lured by the huge profits of opium traffic and due to the acute cash shortage in Shanghai market, opium traders borrowed money from money shops at exorbitant interests. Not having enough money to lend, money shops tried every means possible to absorb deposits at high interest rates. Shanghai‘s Xie He Money Shop (协和钱庄) initiated the practice of attracting deposits with tie piao (贴票). This was to say, when you deposited 90 yuan in cash at the money shop, you would be given a 100 yuan-denominated tie piao and you could exchange it for 100 yuan in cash in half a month‘s time. Since this practice worked quite well in attracting deposits, it was widely adopted. Some traders in speculation even set up money shops specializing in tie piao. At that time, the road along the Mansion in the Shanghai French Concession119 alone had more than 50 promissory notes money shops specializing in tie piao. Other places also had many money shops of this kind. Some people went so far as to just put notice board in a lane and engage in tie 118 The Jing Chao Unrest of 1916 referred to the financial turmoil caused by the suspension of conversion of bank notes in the Bank of China and the Bank of Communications which swept Beijing, Tianjin and Jinan. Jing Chao referred to the banks notes issued by the Bank of China and the Bank of Communications in Beijing and Tianjin. 119 Shanghai French Concession was one of the two concessions of Shanghai. The other one was Shanghai International Settlement. It was the first, largest and most affluent Concession established by France and the other three French concessions were Tianjin French Concession, Hankou French Concession and Guangzhou French Concession. 37

piao business. Money shops engaged in tie piao business or tie piao money shops were not run according to regular practice. Instead, they all offered an interest higher than the market level to lure people to purchase notes. At first, the volume of notes purchased was small, so they could easily be redeemed by the money shops. Over time, however, with tie piao transactions increasing and their interest getting higher, they could not be redeemed at their maturity. This resulted in people hastening to withdraw their deposits and the market became more chaotic. Money shops practicing in tie piao closed their doors one after another and almost none survived. The closure of these money shops not only brought tremendous economic losses to residents holding tie piao, but also left quite a number of money shops that had not engaged in tie piao in a difficult situation. The acute cash shortage in the marketplace also tremendously affected commerce and trade. Since this financial unrest was caused by the speculative activities of money shops (encouraged by the opium trade), it was referred to as the Tie Piao Unrest of 1910. After the Tie Piao Unrest of 1910, Shanghai‘s money shops gradually recovered. In 1908, a British trader called George McBain (麦边) established Lan Ge Zhi Colony Development Company (兰格志拓殖公司) in Shanghai which engaged in the rubber trade. Taking advantage of the price surge of rubber in the world market, British traders preached the high profitability of the rubber trade. Deceived by them, opportunists rushed to money shops to borrow money to buy rubber stocks. Money shops themselves were also lured by the profits in the rubber trade and invested large sums of money in rubber stocks. Foreign banks such as the HSBC, Chartered Bank of India, Australia and China, and Citibank, N. A. made an exception to make loans on the security of stocks, and cash the rubber stocks with 100 percent reserves. Rubber stock prices, meanwhile, were constantly driven up. In 1910, the market price of rubber stock rose to exceed its face value by over 20 times. Seizing this opportunity, George McBain and other foreign speculators sold stocks and absconded with large fortunes. Meanwhile, foreign banks stopped making loans on the security of stocks and pressed borrowers to effect repayment. As a consequence, the rubber stock price plunged and stocks became worthless almost instantly. Stockholders went broke one after another. In July 1910, Shanghai‘s Zheng Yuan Money Shop (正元钱庄) and Zhao Kang Money Shop (兆康钱庄) which had purchased or accepted enormous amounts of rubber stocks closed their doors and this produced a chain reaction, causing the closure of about half the money shops in Shanghai and tremendous unrest. Foreign banks, meanwhile, which still held promissory notes drawn and issued by closed money shops claimed compensation from the Qing government. The unrest continued until the Qing government finally borrowed money from the foreign banks to compensate their losses. All this financial unrest, then, was triggered by the speculation of foreign traders and caused tremendous losses to the Chinese people. Historically it was referred to as the Rubber Stock Unrest. In the early republican years, Yuan Shi-kai restored the autocratic monarchy system and depleted the national treasury. Liang Shiyi (梁士诒)120, Yuan Shikai‘ s trusted follower and executive officer of the Bank of Communications, over-issued paper notes through the Bank of China and the Bank of Communications to raise military funds and to cover fiscal expenditure. In 120

Liang Shiyi (May 5, 1869-April 9, 1933) was premier of China‘s Beiyang government from 1921 to 1922. 38

April 1916, Yuan Shikai was pressed to abolish the monarchy, but he continued to raise military funds. However, since the silver reserves of the Bank of China and the Bank of Communications had been appropriated by the Beiyang Government, their financial strength was impaired and their credibility was shaken. This led insiders to make hasty withdrawals. When news of this spread, it triggered a bank run on the Bank of China and the Bank of Communications in Beijing and Tianjin which soon spread to other places. On May 11, the State Council mandated the two banks to suspend redeeming banknotes and obligations immediately. This practically announced the bankruptcy of the Beiyang Government and gave rise to a wave of nationwide redemption suspension orders. Amidst this wave of suspension orders, people rushed to sell stocks and purchase commodities and some commercial banks with issue rights also experienced bank runs. However, Customs, the Salt Affairs Department and the Railway Department controlled by foreign imperialists ignored the suspension order of the Beiyang Government, the Five-Nation Bank Coalition declared itself to be free from the restriction of the order, and the foreign diplomatic body in Beijing threatened the Beiyang Government that it would take measures to ―safeguard their financial interest in China‖. Under the pressure of foreign forces, the Beiyang Government had to alter the Suspension Measure and permitted bank notes in such departments as Customs, Salt Affairs and Railways that were reissued by the Bank of China and the Bank of Communications to be redeemed as usual. During the suspension wave, Song Hanzhang (宋汉章)121 and Zhang Jiaao (张嘉傲), manager and deputy manager of the Bank of China Shanghai Branch respectively who had close relations with the Jiangsu and Zhejiang syndicates, took advantage of the protection of foreign concessions and blatantly defied the suspension order with a view to defending the reputation of the bank. Their defiance was fully supported by Shanghai Commercial and Savings Bank, Zhejiang Business Promotion Bank and Xhejiang Industrial Bank. Based on their own vital interests or on the behalf of the bank‘s stockholders, holders of banknotes issued by the bank or its depositors, the Three Southern Banks tried every means possible to support Song Hanzhang and Zhang Jiaao‘s defiance of the suspension order. They even lodged a pseudo lawsuit against Song Hanzhang and Zhang Jiaao on the grounds that once the lawsuit was established, the head office of the Bank of China in Beijing would not be able to dismiss them from their posts until the lawsuit had been settled. Moreover, stockholders of the Shanghai Branch also established a coalition and appointed foreign lawyers to manage the assets of the Bank of China and guarantee the normal operation of it. In addition, they still invited Song Hanzhang and Zhang Jiaao to chair the coalition. To maintain the market order in Shanghai Concession, the foreign consulate to Shanghai highly praised the move against suspension order. Feng Guozhang (冯国璋), the then governor of Jiangsu and warlord of Zhili Clique (直系军阀)122, also sent a telegraph expressing ―his satisfaction with the practice adopted by the Bank of China Shanghai Branch‖. Drawing on its own strength and support from interested parties, the Shanghai Branch 121 Song Hanzhang (1872—1968) was born in Jianning, Fujian Province. He used to work in Shanghai Telegraphic Bureau and was once the manager of Da Qing Bank. In 1912, he became manager of the Bank of China Shanghai Branch. 122 The Zhili Clique was one of several mutually hostile cliques or factions that split from the Beiyang clique during the Republic of China‘s warlord era. It was named for the general region of the clique‘s base of power, Zhili Province, now Hebei. 39

successfully stood the test of the wave of bank runs and substantially enhanced its credibility. Throughout, it continued its business and redeemed currency as usual. Its volume of deposits rose dramatically and banknotes issued by it circulated widely. This laid a solid foundation for its further development. The victory over the suspension order, then, was a triumph of the financial syndicates in Jiangsu and Zhejiang over the Beiyang Government. Thereafter, the Bank of China gradually got rid of the control of the Beiyang Government and instead fell into the hands of stockholders, particularly the syndicates in Jiangsu and Zhejiang. During the suspension unrest of 1916, cities like Beijing and Tianjin fully implemented the suspension order and banknotes issued by the Bank of China and the Bank of Communications in Beijing and Tianjin (jingchao) became inconvertible and depreciated sharply, which led to a price surge, silver escape and market chaos. The impact left by jingchao on society was profound and it was not until 1921, thanks to many years of effort, that jingchao was finally removed from the market. Because of this, the suspension wave of 1916 was also called the Jing Chao Wave. As a consequence of the depression in China‘s industry and commerce after the First World War, enormous amounts of hot money flew into finance and speculation in futures. For instance, Shanghai Securities Exchange House‘s profit within half a year after its establishment in July 1920 reached 500,000 yuan, representing an annual rate of return of nearly 100%. Other exchange houses established in 1921 also made huge profits. This led people to consider running exchange houses as a shortcut to make large fortunes. As a result, a wave of establishing exchange houses erupted in the summer of 1921 in Shanghai. Other cities like Hankou, Tianjin, Guangzhou, Nanjing, Suzhou, and Ningpo quickly followed suit. Although the then Beiyang Government had ruled that the establishment of exchange houses should be subject to the examination and approval of the Ministry of Agriculture and Commerce, many people established exchange houses in foreign concessions or asked the local warlord in Shanghai for the permission. In this way, they could avoid the complicated and time-consuming approval procedures. As a matter of fact, even the Ministry of Finance of the Beiyang Government openly violated the law of exchange houses and sent personnel to establish exchange houses in Shanghai. Consequently, the establishment of exchange houses went out of control. From May 1921, the number of newly-established exchange houses rose on a monthly basis. Within only a couple of months, Shanghai alone had over 130 exchange houses, surprisingly outnumbering America, the then No.1 economic power by several fold. During this period, Shanghai also established 12 trust enterprises. Under the stimulus of the speculation fever, stock prices of these enterprises and exchange houses kept rising. Some even rose to be five or six times higher than their face value. The warrants of some stocks that had not been issued yet could sell at a fairly high price. After their establishment, many exchange houses did not engaged in regular stock transactions. Instead, they were intent on speculation in stocks and drove up stock prices by exploiting the public‘s speculative mentality to make profits. Quite a few exchange houses even violated the ―Law of Exchange Houses‖ and traded their stocks in their own stock exchange houses. Some did not invest money into the exchange houses they set up; they just purchased a large sum of shares, drove up their prices and then sold them. In so doing, they not only made tremendous profits, but also turned themselves from virtual stockholder to actual stockholders. Trust enterprises collaborated with exchange houses, using stocks issued by 40

trust enterprises as speculative chips of exchange houses on the one hand and used stocks issued by exchange houses to guarantee loans to trust enterprises. In this way, within only a few months‘ time, the total capital raised by trust companies and exchange houses far surpassed that of all the well-established banks put together, forming a mega economic bubble. However, it didn‘t take long for the economic bubble to burst. In the winter of the same year, because speculation fever had siphoned off massive amounts of capital, the market was short of capital when creditors customarily demanded repayment of loans at the year-end. Noticing the high risks of lending money to trust companies and exchange houses, banks and money shops stopped making loans to them which accelerated the collapse of trust industry and exchange house industry. Unable to apply for loans, speculators soon met financial difficulties and the stock market instantly collapsed. People hastened to sell their stocks and stock prices plunged, triggering a bankruptcy wave in the trust industry and the exchange house industry. Since trust enterprises and exchange houses had complex liability and credit relations with each other, a chain reaction was produced and one closure often led to that of another. Finally, this bankruptcy wave evolved into a major financial turmoil, in the aftermath of which, only six out of the over 130 exchange houses and two trust companies in Shanghai survived. Meanwhile, many firms closed their doors and many merchants committed suicide amidst the chaos. Given the huge losses arising from this turmoil, the year 1921was considered by some people as the ‗most grievous year‘ in China‘s commercial history and the turmoil of 1921 was referred to as the Exchange House and Trust Companies Unrest in the Tenth Year of the Reign of the Republic of China.

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Chapter 4 Finance during the Ten Years before the Anti-Japanese War (1927-1937) During the short period from 1927 when Chiang Kai-shek (蒋介石) launched the April 12th Incident123 and founded the Nanjing KMT Government to 1937 when the Anti-Japanese War broke out, many significant changes took place in the financial history of China. In founding the national regime, Chiang Kai-shek and his followers received full support from the capitalists of the financial syndicate of Jiangsu and Zhejiang. However, after the KMT regime was established, they turned their back on the capitalists and oppressed them through political threats and reconstruction, impairing the status of merchant-owned financial capital and establishing the bureaucratic capital financial system of the Four Banks and Two Bureaus (四行两 局)124, which laid the foundation for the KMT‘s further monopoly of the national finance and economy. The KMT government also introduced the reform of ―replacing silver liang with silver dollar‖ and ―legal tender reform‖ and accomplished the unfulfilled currency reform task left by the previous governments, strengthened its control over finance and gradually turned the national capital financial industry into an appendage of bureaucratic financial capital. During this period, the non-governmental financial industry continued its modernization progress, the modern financial market improved, and Shanghai fully established itself as the center of the national finance. After setting up some industrial and agricultural banks in the revolutionary base areas, the CPC gradually formed its own financial system.

4.1 The development of the Four Banks and Two Bureaus and bureaucratic capital financial capital The Four Banks and Two Bureaus system refers to the bureaucratic financial system established by the KMT government between 1928 and 1935 to monopolize national finance and the economy. It was comprised of the Central Bank, the Bank of China, the Bank of Communications and the Bank of Farmers, the Post Services, Savings and Remittance Bureau and Central Trust of China. In October 1927, KMT government promulgated Regulations on the Central Bank and decided to set up the Central Bank as the national bank of the country. As Soong Tzu-wen (宋子文)125, the then financial minister said, ―the Central Bank was established to unify the national monetary system, unify the national treasury and regulate domestic finance‖. After one year‘s preparation, the Central Bank formally opened in November 1928 in Shanghai. Its president was Soong 123 The April 12th Incident of 1927 refers to the violent suppression of Chinese Communist Party organizations in Shanghai by the military forces of Chiang Kai-shek and conservative factions in the Kuomintang(Chinese Nationalist Party). 124 The Four Banks and Two Bureaus System was the KMT bureaucratic monopoly financial system which consisted of four banks, i.e. the Central Bank, the Bank of China, the Bank of Communications and the Bank of Farmers and two bureaus, i.e. the Central Trust of China and the Postal Service, Savings and Remittance Bureau. 125 Soong Tzu-wen (December 4, 1891-April 26, 1971) was a prominent businessman and politician in the early 20th century Republic. His father was Charlie Soongand his siblings were the Soong sisters. 42

Tzu-wen. The Bank had no cash capital and all its initial capital which was worth 20 million yuan was in financial bonds issued by the KMT government. The KMT government authorized the Central Bank to manage the national treasury, issue exchange certificates, mint and issue legal tender, deal in domestic and foreign government bonds, repayment business, and foreign exchange business, thus turning the Central Bank into the powerful center of the bureaucratic capital financial system. To reinforce the strength of the Central Bank, the KMT government increased its capital to 100 million yuan by issuing more financial bonds and bank advances, making it the largest bank in the country. The Central Bank could therefore be seen as the product of the KMT government‘s political power. During the eight years after its establishment, with the consolidation of the KMT‘s rule, the Central Bank used its privileges to increase its capital by about 25 times, deposit volume by about 48 times, paper note volume by about 28 times, and net profit by about 70 times and became the driving force of the Four Banks. Since the Bank of China and the Bank of Communications had been preeminent and their financial strength ranked the first among the Chinese-owned banks when the KMT government was founded, the KMT had to strengthen its control over them to corner the national finance. In October 1928, the KMT government reorganized the Bank of China and franchised it as a foreign exchange bank dealing in domestic and foreign exchange, managing banking affairs concerning the national treasury, and issuing exchange certificates. Moreover, the KMT government moved the bank‘s general administration office from Beijing to Shanghai and, in addition, also forcibly put five million yuan-worth of government stocks into the bank which would be allocated in reserves notes, and sent three officials to the bank to take roles as official directors. However, Zhang Jiaao was still its manager and the KMT government‘s influence had only just permeated into it, therefore, the real power in the Bank of China was still controlled by the syndicate of Zhejiang and Jiangsu. Also in1928, the KMT government similarly reorganized the Bank of Communications in a similar way, by forcibly putting in it government stocks and transferring its head office from Beijing to Shanghai. However, Chiang Kai-shek and his followers desired more than just reorganization. In a telegraph, Chiang Kai-shek pointed out that the root cause of the social economic difficulty was ―the disunity of the monetary system and the issuing of currency‖ and this was caused by the disobedience of the Bank of China and the Bank of Communications. Therefore, he demanded that the two banks should ―strictly follow the central government‘s order and fully cooperate with the central government‖. At that time, Chiang Kai-shek had difficulty in controlling these two banks because government stocks at that time only accounted for 20% of the Central Bank‘s total capital stocks and 10% of the Bank of Communications‘. Although the Central Bank had some privileges, the balance of its deposits and loans lagged far behind that of the Bank of China and the Bank of Communications put together. Given this, to achieve the dominant position in finance, Chiang Kai-shek had a secret discussion with Kung Hsiang-his (孔祥熙)126 and Soong Tzu-wen and decided to press the Legislature Court to pass the act on issuing 100 million government bonds in the name of ―rescuing finance‖. They increased the government shares of the Bank of China and the Bank of Communications to 50% and 55% respectively with government bonds, changed responsibility for the bank from the 126 Kung Hsianghsi (September 11, 1881–August 16, 1967), often known as Dr. H. H. Kung, was a wealthy Chinese banker and politicianin the early 20th century. He was highly influential in determining the economic policies of the KMT (The Chinese Nationalist Party) government in the 1930s and 1940s. 43

general-manager to the president and appointed Soong Tzu-wen the president and transferred Zhang Jiaao to the powerless post of vice-president. Zhang Jiaao refused this appointment and was later appointed as the Railway Minister. Meanwhile, Hu Bijiang (胡笔江), Soong Tzu-wen‘s trusted follower, became the president of the Bank of Communications and seized power over the two banks. Thereafter, the Bank of China and the Bank of Communications became the tool of the KMT government to monopolize the national finance and economy. The Farmers‘ Bank of China was one of the four bureaucratic banks of the KMT government. It not only dealt in regular banking business, but also raised military funds and purchased military provisions for the KMT government. Besides this, it also made agricultural loans to control rural economy and issued exchange certificates, agricultural bonds and land bonds. It grew out of the Farmers‘ Bank of Henan, Hubei, Anhui and Jiangxi and was established in 1933 by Chiang Kai-shek to help oppose the Red Army of the CPC and raise funds for the KMT army to ―encircle and suppress‖ the Red Army. After the Red Army adopted a major strategic shift and embarked on the Long March127, Chiang Kai-shek and his followers aimed to exercise ―encirclement, pursuit, obstruction and interception‖ tactics on the Red Army and expanded their military operations, thereby tremendously increasing the KMT‘s military expenses. It was these circumstances that led the KMT government to reorder the Farmers‘ Bank of Henan, Hubei, Anhui and Jiangxi into the Farmers‘ Bank of China and increased its total capital to 10 million yuan, held by the Ministry of Finance and municipal and provincial governments. In 1896, China established the first post office dealing in exchange business. Savings had been under way at post offices for a time when exchange business was developed on a national scale. By 1929, China had a total of 2,374 post offices and a total of 130 million yuan exchange bills had been issued by post offices. In March 1930, the KMT government passed a decree and established the Administration of Postal Service, Savings and Exchange. It was affiliated to the Ministry of Transport of the KMT government and took charge of the exchange and savings business of post offices. By 1935, administrations and offices of exchange and savings business had increased to 9,500 and the total deposit volume had also increased by several times. In March of the same year, the Administration of Postal Service, Savings and Exchange was restructured into the Postal Service, Savings and Exchange Bureau, affiliated to the General Post Office. The Postal Service, Savings and Exchange Bureau mainly managed current and time deposits, postal exchange bills and telegraphic remittances. It was an effective tool of the KMT government to absorb enormous deposits and remit capital. The Central Trust of China was established in October 1935. Its head office was in Shanghai and its branches or agents were nationwide. Its total capital volume was 10 million yuan, all from the Central Bank. Its first president was Kung Hsianghsi, the then president of the Central Bank. Why did the KMT government set up the central Trust of China? The reason was, as Kung Hsianghsi put it, that ―on the one hand, the government needed a commercial agent to handle many of its affairs; on the other hand, confined to its role as the national bank to manage the national treasury, the Central Bank could not deal with some matters efficiently due to complicated procedures and other practical reasons.‖ Therefore, the KMT government needed a 127 The Long March was a massive military retreat undertaken by the Red Armies of the Communist Party of China in 1934. 44

central trust to handle some affairs for it. The primary business of the Central Trust of China was to purchase munitions for the KMT troops, monopolize the purchase of exports, take charge of the insurance and storage of ‗public‘ properties and vital documents and contracts of government, raise and issue state-owned bonds and stocks issued by state-owned undertakings or public undertakings, and accept and use trust deposits of public institutions or organizations. With privileges and abundant capital, it became the largest trust institution in China upon its founding and stole away trust business from other trust companies and trust departments of banks. On this ground, people at that time referred to it as the ‗bully among trust companies‘. The Four Banks and Two Bureaus was a bureaucratic financial system formed by the KMT government by setting up new banks or bureaus and reorganizing old banks. Its establishment accelerated capital centralization and paved the way for the KMT government to further monopolize national finance and the economy. By 1936, China had a total of 164 banks and the real capital of the Central Bank, the Bank of China, the Bank of Communications and the Bank of Farmers accounted for 42% of the total real capital, their asset volume accounted for 59% of the total asset volume, their deposit volume accounted for 59% of the total, their banknotes volume accounted for 78% of the total, and their net profits accounted for 44% of the total. With political privileges and an absolute edge in terms of their financial strength, the Four Banks basically controlled national finance. China Merchants Bank, China‘s first modern bank, experienced a bank run amidst the Silver Unrest of 1935128 and suffered a shortage of cash reserves. It was therefore forced to accept government shares from the KMT government and was reorganized into an official-commercial joint bank. Together with Si Ming Commercial and Savings Bank, China Investment Bank, and China Domestic Commodities Bank, it was controlled by KMT‘s bureaucratic capital and appendages of the KMT bureaucratic financial system, and together they were generally referred to as the Four Mini Banks. During this period, apart from the KMT bureaucratic financial system centered on the Four Banks and Two Bureaus, local bureaucratic capital banks also developed. Controlled by local warlords, these banks not only engaged in ordinary banking business but also managed the gold treasuries of local governments. They often issued local banknotes to make up local fiscal deficits and a great number of them also undertook various industrial and commercial businesses. For instance, the Provincial Bank of Shanxi, financial pivot of warlord Yan Xishan(阎锡山)129, issued banknotes known as jinchao130(Shanxi bank notes)during his rule of Shanxi Province and the circulation zone of jinchao expanded or shrunk in line with the expansion or contraction of Yan Xishan‘s influence. In 1929, in alliance with Feng Yuxiang and Li Zongren, Yan Xishan waged a war against Chiang Kai-shek and jinchao spread to the Northern Chinese Provinces and some provinces and regions in Central and East China. After the war against Chiang Kai-shek, jinchao retreated to Shanxi Province and caused the first hyperinflation in Shanxi‘s modern history. During the period 128 The Silver Unrest of 1935 referred to the wave of run on banks in Shanghai, Beijing, Tianjin and other Chinese cities in early 1935. Since the wave was triggered by the drain of enormous silver, it was called the Silver Unrest. 129 Yan Xishan (October 8, 1883-July 22, 1960) was a Chinese warlord who served in the government of the Republic of China. 130 Shanxi bank notes were also called jinchao. Jin stands for Shanxi and chao means bank notes. 45

from 1932 to 1937, Yan Xishan vigorously restructured Shanxi Province‘s economy, reorganized the Provincial Bank of Shanxi, and rectified the monetary system. This promoted the urban and rural economic development of Shanxi Province to some extent and the development of the Provincial Bank of Shanxi also reached its peak. By the end of 1936, its capital volume rose to 20million yuan and its deposit volume reached 21.21 million yuan. Sichuan Province was among the earliest provinces of China to establish local bureaucratic capital banks. After Liu Xiang unified the province in 1933, he gradually reshuffled the Provincial Bank of Sichuan and endowed it with the privileges of issuing fractional coin notes, managing public treasuries, etc. It professed to aim at ―regulating the finance of the province as a whole, supporting economic development, developing industry and promoting rural revitalization‖. Its businesses often supported other provincial banks in China Provinces such as Hubei, Jiangxi and Shaanxi which had not established provincial banks during the era of the Beiyang Government successively founded local financial institutions during this decade. By 1935, China had 25 local banks and 331 branches in all provinces and municipalities excluding northeast China and the total bank capital reached 447.5 million yuan. In this way, local financial institutions became a significant part of the bureaucratic capital financial system.

4.2 The abolishment of silver liang system131 and the adoption of silver dollar system The messy currency in the early years of modern China caused tremendous trouble to market transactions, people‘s life and the social economy. Given this, far-sighted personages in China repeatedly proposed the abolishment of the silver liang system and replacing it with the silver dollar system. In 1910, the Qing government promulgated Regulation on Monetary System, stipulating silver dollar coinage as the base currency. In 1914, the Beiyang Government promulgated Regulation on Legal Tender, stipulating silver dollar coinage as the standard currency and set forth to mint new silver dollar (generally known as ‗Yuan Tou Coin‘ or ‗Yuan‘s Head Coin‘ as there was a picture of Yuan Shikai‘s head on one of its sides). However, this regulation was strongly opposed by the money shops that had been accustomed to profiteering from silver conversion. In addition, the enforcement of this regulation was also held back by the foreign bank consortium on the grounds that China‘s foreign debts had long been calculated in silver liang. Therefore, the attempt to replace the silver liang system with the silver dollar system failed to come into effect and China adopted both systems until the early 1930s. In order to unify the issue of currency, KMT government discussed the issue of replacing the silver liang system with the silver dollar system at the national financial and economic meeting of 1928. Heated arguments arose and opinions fell into two categories: people representing the interests of money shops insisted on their objection to the monetary reform on the plausible 131

The silver liang system referred to one under which people measured the value of silver coin by weight. 46

ground that the sources of silver dollars were insecure; by contrast, people representing the interests of new bankers, welcomed the monetary reform. Apart from these two financial forces (money shops and new bankers), foreign banks, the third financial force of the day, mostly advocated a deferred enforcement of the reform partly because they could control silver supply and demand since they possessed imported raw silver, and partly because once the silver dollar system was adopted, their right to assess the foreign exchange price would be affected. In the first half of 1932, a large sum of silver dollars, amounting to54.46 million yuan, surged into Shanghai and the proponents of silver dollar system considered it a suitable time to implement the monetary reform. In July 1932, on behalf of KMT government, Soong Tzu-wen clarified the principle of replacing the silver liang system with the silver dollar system. Afterwards, the KMT government convened a ―Seminar on Replacing the Silver Liang System with the Silver Dollar System‖ composed of bankers and business representatives. The seminar energetically publicized monetary reform and deliberated over relevant issues. Under the pressure of public opinion, the money shop industry of Shanghai had no choice but to approve of the reform in principle on the condition that the reform should proceed gradually. On March 1, 1933, the Ministry of Finance of the National Government promulgated the Decree of Replacing the Silver Liang System with the Silver Dollar System, declaring that from March 10, Shanghai would take the lead to abolish the silver liang system and adopt the silver dollar system. The ratio between the Shanghai standard silver note and silver coin was 7.15 qian: 1yuan. All market transactions would be completed in silver coins and all markets would adopt the silver dollar standard. At the same time, the central government would build mints to mint new silver coins with a half-length photo of Sun Yat-sen (孙中山) on one side and a ship pattern on its reverse side. The new coin was called Sun Tou (meaning Sun Yat-sen‘s Head 孙头) or Ship Dollar (船洋). It circulated nationwide once it was issued. On April 6, the Ministry of Finance ordered the national adoption of the silver dollar system and ruled that from April 6, all public and private obligations and market transactions must be completed in silver dollar coinage rather than silver liang. Bank associations and money shop industry associations in cities like Shanghai, Hankou, and Tianjin all followed the rule thereby making the monetary reform essentially successful. This monetary reform of abolishing the silver liang system and adopting the silver dollar system was of great significance as it contributed to the unification and modernization of China‘s monetary system and promoted the development of the commodity economy. It was also conducive to the growth of new and old forces in the financial industry. It hit old financial forces including money shop industry and furthered strengthened the valuable modern banking industry. However, it also reinforced KMT‘s control of the national currency.

4.3 Silver wave and legal tender reform In the major financial crisis of the 1930s that hit the capitalist world, major capitalist countries like America, Britain, Japan and France scrambled to shift their domestic crisis to other countries. They waged trade and currency wars against each other and divided the world into the USD bloc, GBP bloc, franc bloc, etc. Amidst the fierce competition, the American government promulgated 47

the Silver Purchase Act in December 1933. Soon thereafter in May 1934, it declared its intention to purchase 24.42 million ounces of silver every year over the course of four years in order to raise the silver price. The reasons why the American government adopted the policy of raising silver price were manifold. On the one hand, the silver bloc representing the interests of silver miners in the south of America kept pressing the government to lift the silver price; on the other hand, it desired to manipulate the world silver market and force countries that still adopted silver-standard, China in particular, to take refuge in the dollar bloc. Besides this, raising silver price could also stimulate the purchasing power of silver-standard countries, thus promoting the sales of surplus goods from America and shifting economic crisis in America to other countries. China bore the brunt of the rising silver price in the world market with large amounts of silver flooding the Chinese market, a net sum of 180 million liang in 1934 and another net sum of 186 million liang in 1935. The enormous outflow of silver, the standard monetary metal, led to a shortage of silver dollars and exorbitant interest rates in China. As a result, national industry and commerce whose circulation and production had always relied on bank loans suddenly met financial problems and had to suspend business or close their doors. In Shanghai alone, many cotton mills, silk mills and flour mills went out of business and over 500 stores shut down. As more and more industrial and commercial enterprises went out of business or closed their doors, some weak banks and money shops had more bad debts and were on the verge of bankruptcy. In 1935, Shanghai alone saw the closure of12 national capital-funded banks, a surprisingly high17.9% of all the national capital-funded banks in Shanghai. China had never seen so many banks closed in one single year. Admittedly, some banks such as China Merchants Bank and Si Ming Commercial and Savings Bank survived, but they were forced to accept government shares and were altered to official-commercial joint banks. As for money shops, the situation was even worse. This wave of bankruptcies was generally known as the Silver Unrest of 1935, aggravated China‘s economic crisis, and it was unprecedented in Chinese financial history in terms of its magnitude and effects. To check the immense outflow of silver, the KMT government took some measures and issued an order to increase the export tax on silver in October 1934. However, some foreign banks used consular jurisdiction and other privileges to transport enormous silver out of China secretly. In Shanghai, some even blatantly transported silver in warships and the KMT government could do nothing about it. Similarly in North China, Japanese merchants smuggled silver in a frantic manner. Repeatedly hit by the substantial rise and fall in the silver price in the world market, the silver-standard system of the Old China could no longer be sustained and a monetary system reform was a must. Previous advice by some western financial experts like Professor Jeremiah Jenks from Cornell University, USA, who came to China in 1903 and Doctor G. Vissering, the then monetary consultant of the Chinese government, repeatedly advised China to adopt the gold-standard or gold exchange standard monetary system. In 1929, at the invitation of the KMT government, Professor E. W. Kemmerer from Princeton University, U.S.A, arrived in China to study the issue of China‘s monetary reform. Later, he proposed the gradual implementation of the gold-standard monetary system in China in a draft bill. However, this draft bill became outdated 48

even prior to its enforcement since gold-standard countries including Britain, Japan and Sweden abandoned the gold standard system one after another due to the major financial crisis of 1929-1933. America also left the gold standard in April 1934. In such a circumstance, Professor E. W. Kemmerer further proposed to the Chinese government that it concentrate the silver of the nation and forbid the private possession of silver. In the fierce international currency wars, capitalist powers like Britain, America and Japan all considered China‘s currency reform as a good opportunity for them to seize the control of China‘s currency. They all endeavored to control China‘s monetary system so that they could export more commodities and capital to China and further manipulate China‘s politics and economy. To catch up with America and Japan whose economic influence in China was constantly on the rise and to safeguard its investment interest in China, in March 1935 Britain proposed to hold a meeting of public finance experts from China, Britain, America, Japan and France, but this came under resistance from America, Japan and France. Later, it sent Leeze Rose, chief advisor of Britain‘s Finance Ministry, to China where he advised the Chinese government to adopt paper notes as legal tender and proposed a scheme on including China‘s currency into the pound bloc. In response to the proposal, Japan‘s finance minister Takahashi declared that ―it objected to other capitalist powers‘ financial and technical assistance to China either in alliance or single-handedly and that it should be the only country that can lend financial and technical assistance to China‖. The Japanese authority insinuated to Kung Hsianghsi that it could provide the KMT government with enormous loans to address the crisis touched off by the silver drain on condition that China should meet a series of demanding requirements put forward by Japan so that it could better control China‘s finance. The KMT government accepted the act on adopting paper notes and promulgated ―Measures on Implementing Legal Tender Policy‖ on November 3, 1935, to the effect: 1) From November 4, 1935, to designate banknotes issued by the Central Bank, the Bank of China and the Bank of Communications as legal tender. To collect all grain tax and effect the payments of public or private obligations in legal tender to guard against silver evasion. Cash is not permitted to be used; otherwise, it will be confiscated. 2) Apart from bank notes issued by the Central Bank, the Bank of China and the Bank of Communications, other bank notes in circulation issued with the approval of the Ministry of Finance are permitted to be used as usual. But no more new bank notes of this kind are allowed; they should be recalled with the bank notes issued by the Central Bank within certain time limit set by the Ministry of Finance. 3) To establish a Management Committee of Issue Reserves to manage the storage, issue and recall of legal tender reserves. 4) All money shops, money firms and other public and private organs or individuals holding silver standard coins or other silver coins, raw silver, etc. should exchange their currencies for legal tender in the Management Committee of Issue Reserves or designated banks. 5) The payment of obligations concluded in silver coins should be effected in the same amount of legal tender at their original maturity; 6) To stabilize the exchange rate of legal tender against foreign currencies, the Central Bank, the 49

Bank of China and the Bank of Communications is permitted to trade foreign currencies without limit. In addition, the KMT government also promulgated a series of measures, including ―Measures on Converting Legal Tender‖ and ―Measures on Managing the Use of Silver in Silver Products‖ on November 15, ruling that all firms, public and private organizations and individuals should convert their silver coin or silver bullion into legal tender within three months so as to ensure the implementation of legal tender policy. One outcome of the enforcement of these policies was that the KMT government amassed a worth of over 300 million yuan silver instantly. The enforcement of legal tender policy met with resistance in some provinces like Shaanxi, Shanxi, Guangdong and Guangxi where the local governments wished to use their own banknotes as legal tender. But the resistance was soon eliminated and legal tender was in use throughout the country. Therefore, the monetary system was basically unified and the unaccomplished aim of the previous dynasties to transform the monetary system was fulfilled. This not only contributed to the development of the commodity economy but also strengthened the KMT government‘s control of domestic finance. Due to the implementation of legal tender policy, silver was no longer used as the basis to value legal tender. Legal tender policy did not specify gold content in legal tender, but it ruled that the value of legal tender should be presented in terms of GBP and the exchange rate of legal tender against GBP was 1yuan= 14.5 pence. In this way, legal tender was closely linked with GBP and China became a member of the sterling bloc. The KMT government transported enormous amounts of silver to London, and exchanged it for GBP and deposited GBP in Britain as reserves so as to preserve the stability of legal tender. Hardly had the KMT government published the legal tender policy when the British envoy to China issued an edict from the British King, demanding that British merchants and British residents in China should obey the legal tender policy, accept legal tender and stop using silver. British-funded banks including HSBC and the Chartered Bank also took the lead to promise to hand in their silver reserves to the Central Bank of KMT in exchange for legal tender. America‘s attitude towards the legal tender reform was unclear at first, but later it spoke highly of the legal tender reform though it was extremely envious of the closer financial relationship between China and Britain. In early December, the American government decided to suspend its purchase of silver in London. Since America was a major purchaser of silver, its suspension of silver purchase led to a sharp fall in the silver price, about 30% in 20 days and caused tremendous losses to the KMT government. If things went on like this, nobody would buy silver in the world market and China would no longer be able to purchase GBP as foreign exchange reserves, which would threaten the stability of legal tender. This possibility not only frustrated the Chinese government but also exerted certain pressure on the British government. In March 1936, the KMT government sent Chen Guangfu (陈光甫)132 to America as chief representative of China‘s monetary system delegation. After a negotiation with America and with the concession of Britain, China and America signed the Sino-American Silver Agreement that 132 Chen Guangfu (1880-1976) was a Shanghai-based Chinese banker, State Councillor, a great innovator and one of China‘s most successful entrepreneurs in the twentieth century. He was particularly influential in the financial and business world of Shanghai. 50

May. According to the Sino-American Silver Agreement, America would continue to purchase China‘s silver, but China had to deposit foreign exchange and gold obtained from silver sales at New York banks and peg its legal tender, which was originally pegged to GBP only, to USD at the rate of 1: 0.2975. In this way, legal tender was reduced to an appendage of both GBP and USD. Japan was irritated to see its smuggling activities in China hindered by the legal tender reform, but what irritated it most was the fact that the KMT government was increasingly closer to Britain and America. In response, China-based Japanese banks refused to hand in silver and did their utmost to prevent other foreign-funded banks from transferring their silver from North China southward to Shanghai. Using the excuse that people in North China objected to the nationalization of silver, the Japanese aggressors vigorously engaged in independent monetary system movements in North China in an attempt to separate the five northern Chinese provinces133from the rest of China. Moreover, the Japanese government strongly reproached the legal tender reform and sent diplomats to China, censuring the KMT government for negotiating with British merchants without its knowledge. The Japanese Army even labeled China‘s monetary reform as an open challenge to Japan and stepped up preparing an all-out war against China.

4.4 Changes in the non-governmental money industry In the process of establishing and consolidating its regime, the KMT government received strong support from nongovernmental financial bourgeoisie and in the early years of KMT rule, the non-governmental financial industry developed to some extent. From 1927 to 1931, the KMT government issued a total of over one billion yuan worth of government bonds in order to raise military funds to establish and strengthen its rule throughout the country. Interest rates of these government bonds usually ranged from six to eight li (厘)134 (or from 6% to 8%). Since these government bonds were purchased at a discount of 50% or 40%, the annual interest was about 1-2 cents. The high profitability of government bonds lured banks, money shops and rich merchants and stimulated the prosperity of financial industry. Meanwhile, apart from government bonds, the rise in the price of real estate in Shanghai and other port cities as well as related speculative activities also promoted the development of the financial industry. From 1928 to 1936, 128 new banks were established and only 23 went out of business. The ratio of the closed banks to the total newly-established banks was much smaller than that during the reign of the Beiyang Government. China‘s total bank capital increased by 1.25 times from 158 million yuan in 1925 to 356 million yuan in 1934. During the a few years prior to the Silver Wave, the volume of deposits and loans in major commercial banks grew substantially and quite a number of commercial banks increased their loans or investment to industry. After the Battle of Shanghai 135 in 1932, Shanghai fell into money shortage and financial 133 The five Northern Chinese provinces referred to Liaoning Province, Jilin Province, Heilongjiang Province, Rehe Province and Chahar Province. 134 Li (厘) is a traditional Chinese unit of interest used in the old times. One Li for the annual interest is 1%; one Li for the monthly interest is 0.1% and one Li for the daily interest is 0.01%. 135 The Battle of Shanghai was the first of the twenty-two major engagements fought between the National Revolutionary Armyof the Republic of Chinaand the Imperial Japanese Armyof the Empire of Japanduring the Second Sino-Japanese War. It was one of the largest and bloodiest battles of the entire war. 51

turbulence. To cope with financial panic and stabilize finance, the Shanghai Banking Association held discussions and decided to establish the Joint Reserves Committee of Shanghai‘s Banking Industry with the Three Southern Banks and Four Northern Banks, and with the support of China Bank and Bank of Communications. After the Joint Reserves Committee of Shanghai‘s Banking Industry was established in March, 1932, member banks submitted and deposited a certain amount of assets in it and it gave them some credit instruments like gongdan 136 , public treasury certificates137 and mortgage debenture so as to regulate funds among banks. The establishment of the Joint Reserves Committee of Shanghai‘s Banking Industry played a role in centralizing reserves and regulating surplus and deficit. It also enabled banks to offer mutual assistance and therefore, stabilized finance. In January 1933, Shanghai‘s banking industry further set up the Shang Clearing House138, which did not necessitate the transmittance and obligations written-off procedures one had to go through in a money shop. Therefore, it saved manual labor, shortened time and reduced the cost of clearing bills. The establishment of the Joint Reserves Committee and Shanghai Clearing House marked an important progress of China‘s national capital banking industry in its modernization drive. Nevertheless, during this period, national capital banking industry was subjected to constant exclusion and oppression from KMT government. For instance, since non-governmental banking industry bought and underwrote enormous government bonds issued by the KMT government, it set up a government bonds fund committee to safeguard its interests. Under the heavy burden of repaying principal with interest, the KMT government desired a grace period or a reduction in the interest of government bonds, which would inevitably damage the interests of creditors. In early 1932, the KMT government would have to negotiate with the government bonds fund committee if it wanted a grace period and it would not be able to receive the understanding of non-governmental banking industry unless it openly promised to preserve its credibility. By the end of 1935, the KMT government deferred its repayment and reduced the interest of government bonds for a second time in the name of issuing consols139. Although the national capital banking industry was against this move of the KMT government, the increasingly stronger national government brazenly broke its promise and issued consols. The national capital banking industry could do nothing but do what the government ordered it to do. With the deepening of the monopoly of bureaucratic capital, national capital banking industry gradually became nothing but an appendage of bureaucratic capital. This was particularly obvious in the 1940s.With the development of the banking industry, then, monetary capital further converged on Shanghai and other metropolises. This further boosted the development of savings institutions, trust companies, insurance companies and other financial institutions. After 1927, though, the money shop industry met repeated setbacks due to its old management style and inherent organizational system that was increasingly out of step with social economic demands. From 1927, foreign-funded banks no 136 Gongdan was a kind of certificates used by the Guild of Money Industry in Shanghai for money shops to write off obligations in the course of liquidation. 137 Public treasury certificates were vouchers issued by public treasuries of money shops. 138 Shanghai Clearing House was the first Clearing House of China set up by Zhu Boquan on January 10, 1933 in Shanghai. 139 Consols is a kind of special bonds without maturity date which offer regular and fixed interest to their holders. 52

longer accepted forward promissory notes once used by money shops to facilitate trade between Chinese and foreign traders. After the monetary system reform of 1933, the silver liang standard that money shops had always protected was replaced by the silver dollar standard. As a result, money shops could no longer profiteer from yang li (洋厘)140or yin chai (银拆)141 (yang li and yin chai were two instruments of Shanghai‘s money shops, used to manipulate finance) and their business was tremendously affected. After Shanghai Bank‘s Clearing House was established in 1933, the function of money shops to conduct national financial clearing was substantially impaired. The Silver Wave of 1935 made matters worse by triggering a great financial panic. Many money shops were closed and the remittance and transfer system of money shop industry was actually overthrown. As a matter of fact, money shops had become small banks with their business subordinate to that of domestic banks. Amidst the grave financial panic, bureaucratic capital banks organized a financial supervisory board in the name of financial relief, leaving the surviving money shops at the mercy of the supervision of bureaucratic monopoly financial capital.

4.5 Shanghai: Oriental New York The domestic financial market was dynamic during this period. Shanghai, in particular, had all kinds of markets, including a monetary market and a capital market; a foreign exchange market and a domestic exchange market; a gold market and a silver market, and Shanghai‘s business was at its peak. At that time, Shanghai was called ‗Oriental New York‘ and the ‗Wall Street in China‘. Located at the mouth of the Yangtze River, the ‗gold waterway‘ of China, Shanghai enjoyed a notable geographical advantage. The vast and affluent hinterland provided it with ample native products and also consumed large quantities of commodities from Shanghai. As a result, in the latter half of the 19th century, Shanghai became China‘s largest port city. Its foreign trade volume stood at over 50% of the total national foreign trade volume for a long time from the 1960s. Before that in1907, this figure was lower due to the development of other port cities, but it was still higher than that of other cities, about 40%-50% on average. As a consequence of foreign trade, Shanghai had become the most modernized city of China by the early 20th century. This could be seen in the following respects: it was the hub of modern industry and the largest center of domestic trade in China; it boasted the largest port and the best urban facilities in China; thanks to railways and roads, it was connected with inland cities by land and thanks to the four major lanes, namely, inland waterways, the Yangtze River, coastal routes and ocean routes, it was linked with the outside world and other Chinese cities by water. Moreover, the construction of Longhua Airport (龙华机场)142 and Hongqiao Airport (虹桥机场)143 in the 1920s ushered in a new era for Shanghai‘s transport system which boasted sea, air and road links. Partly because Shanghai was the major southern financial center in China during the Beiyang 140

Yang li referred to the ratio of silver dollar to Shanghai standard silver coin. Yin Chai was a daily interest rate on private loans or deposits. 142 Longhua Airport was established in Shanghai in 1922 and was then called Long Hua Flying Port. It was located in the southwest of Shanghai. 143 Hongqiao Airport was established in 1921 in Shanghai which used to be occupied by the Japanese aggressors during the anti-Japanese War. It was located in the west of Shanghai, 13km from the center of the city. 53 141

Government and partly because Shanghai‘s financial bourgeoisie had long-standing relationships with the KMT government led by Chiang Kai-shek after its founding in Nanjing, Shanghai‘s financial industry experienced unprecedented growth, unparalleled during this period of time. It was also during this period that Shanghai‘s financial status gradually overtook that of Beijing and became the largest financial hub in China. Head offices of the Bank of China and the Bank of Communications were transferred from Beijing to Shanghai and the headquarters of the Four Banks and Two Bureaus were all centralized in Shanghai. Meanwhile, with the southward shift of the political center, head offices of banks such as Kin Cheng Bank, Salt Industry Bank, Continental Bank and China Investment Bank were also moved southward to Shanghai. In addition, head offices of 81% of China‘s famous banks were also established in Shanghai. At that time, Shanghai was not only home to the head offices of China‘s major financial institutions, but also home to nearly half the country‘s financial capital. It was the hub of currency issuance and the trade of foreign exchange, gold and silver. As the center of the convergence and divergence of large sums of capital, it profoundly affected the economy in surrounding regions. The rise and fall in loan interest rates and in the market prices of gold, silver and foreign exchange were also based on the Shanghai financial market. Domestic exchange markets in other major trading ports in China took Shanghai‘s market prices as the benchmark and people throughout the country traded Shanghai‘s exchange as hard currency or strong foreign exchange. By this time, Shanghai had become the largest investment market in China. This could be evidenced by securities transactions. Before 1927, Beijing and Shanghai were the major financial centers of northern China and southern China respectively, and their securities turnover was roughly the same. But in 1933, the annual securities turnover of Beijing (the then Beiping) was only 0.5% of Shanghai‘s. In 1934, Shanghai‘s bond turnover was as much as 4.77 billion yuan. Before 1933, securities transactions were conducted in the Shanghai Stock Exchange of Chinese Merchants and the Stock Department of Shanghai Stock and Goods Exchange. On May 31, 1933, according to the provisions of Exchange Law promulgated by the KMT government, the Shanghai Stock and Goods Exchange suspended its business and was incorporated into Shanghai Stock Exchange of Chinese Merchants. At the same time, the Shanghai Stock Exchange of Chinese Merchants was reorganized. Its capital volume increased by 1.2 million yuan and its brokers increased from 55 to 80. From June 1, 1933, the Shanghai Stock Exchange of Chinese Merchants became the only venue for conducting stock transactions in Shanghai. It had an eight-roomed building in Hankou Road in downtown Shanghai. With a good trading ring and advanced trading facilities, it was a specialized stock transaction house. It was also the seat of the largest stock market in China with its capital coming from all parts of the country. Shanghai‘s capital market not only absorbed and pooled enormous funds, but also channeled funds to enterprises and industries with good economic performance. For instance, when the Yongli Chemical Industrial Company of Fan Xudong ( 范 旭 东 ), a patriotic industrialist, established a sulfuric acid factory, Kincheng Bank, Shanghai Commercial and Savings Bank, the National Commercial Bank and China and South Sea Bank organized a bank coalition to issue a total of 15 million yuan of corporate bonds for it, without which the development of this embattled nascent national industrial enterprise would have been impossible. 54

By the1930s, Shanghai‘s gold market was also becoming increasingly prosperous and its trade volume rose on an annual basis. Before 1933, Shanghai‘s gold transactions were conducted in the Shanghai Gold Exchange and the Shanghai Stock and Goods Exchange. In September 1934, the Shanghai Stock and Goods Exchange was ordered to incorporate its standard gold business into the Shanghai Gold Exchange and the latter became the only standard gold market in Shanghai. Standard gold stands for standard gold bullion. Each weighed 10 liang according to cao ping. Large gold bullion weighing 70 liang was mainly used for export. The Shanghai Gold Exchange ruled that gold for transaction in the Exchange fell into four categories-domestic ore gold, gold bullion and gold coins from all over the world, pink gold and standard gold. Since real transactions mainly involved standard gold and only a small amount of other types of gold, Shanghai‘s gold market was generally referred to as the standard gold market. In the 1920s and 1930s, the annual turnover of Shanghai‘s standard gold market stood at ―40 million or even 50 million bars‖. After the legal tender reform of 1935, Shanghai‘s standard gold trade volume fell, but its standard gold market remained as the ―No.1 in the Far East‖ all the way to the outbreak of the anti-Japanese war of 1937, and it was considered at that time to be ―large and well-organized. Its daily trade volume, though no match for that of London and New York, far exceeded that of France, India and Japan.‖ Before the legal tender reform of 1935, silver was the major currency circulating in the Chinese market. Since China was a major consumer of silver but not a major silver producer, it had to import silver from London, New York and other markets to meet domestic demand. Silver imported from London and New York was called Silver Strip. It took the shape of a rectangle brick and its weight ranged from 980 ounces to 1,190 ounces. In the Old China, Shanghai was the chief hub of silver import and export. After silver strips were imported to Shanghai from Britain and America, about 40% of them would be minted by Shanghai‘s silver furnaces into local currency, bao yin, and the rest would be transferred to other trade ports such as Tianjin and Hankou. By virtue of their direct relations with silver brokers of London and other silver markets, foreign-funded banks in Shanghai controlled the city‘s silver import and export. Once gold price rose and silver price fell in the world market, they would import enormous amount of silver and once silver price rallied in the world market, they would export the silver in enormous amounts. In this way, they made handsome profits. Since the volume of silver trade by foreign-funded banks was enormous, the pricing of silver in London often depended on the trade volume of HSBC, Charter‘s Bank and other banks in Shanghai. Therefore, either in terms of its trade volume or its close relations with London, Shanghai had already become an important branch of London silver market. In the Old China, the Shanghai foreign exchange market (FX market) was composed of foreign banks, domestic banks, remittance agents, import and export foreign firms, business firm, speculators, etc. Among them, foreign banks were the mainstay. Although some Chinese-funded banks had begun to deal in foreign exchange business, their trade volume accounted for a meager proportion of the total in the entire FX market. At that time, payments of foreign trade in Shanghai were all settled through Shanghai‘s foreign-funded banks. This laid a solid foundation for foreign-funded banks to monopolize China‘s foreign exchange market. Besides this, in the Old China, the abouchement of enormous foreign loans and remittance of 55

principal and interest, inflow and outflow of foreign investment funds and remittances of overseas Chinese were all or mostly completed through foreign-funded banks. This further strengthened their monopoly of the FX market of the old China. The foreign exchange volume of HSBC, in particular, often accounted for 60-70% of Shanghai‘s total foreign exchange volume. Every morning at 9:30, HSBC Shanghai Branch would list exchange rates and because of its financial strength, the exchange rates listed by it were taken as the actually effective exchange rates of both Shanghai and China of the day. This situation remained unchanged until the legal tender reform of 1935. Shanghai‘s foreign exchange market, standard gold market and silver bullion market combined to provide a mutual hedge and achieved considerable financial strength. They were so influential as to influence markets of other countries. Through its polygonal remittance relations with the London, New York and Tokyo markets, Shanghai became a major international arena of capital flow. It was not only the largest financial center in China, but also one of the most important financial cities in Far East.

4.6 Finance in revolutionary bases In 1927, Chiang Kai-shek and Wang Jingwei staged the April 12th Incident and July 15thIncident144respectively and cruelly suppressed and murdered CPC members and revolutionary masses. In such a state of emergency, the CPC initiated the Nanchang Revolt on August 1st of the same year and led workers and peasants to establish the central revolutionary base and other revolutionary

bases

like

Western

Hunan

and

Western

Hubei

Revolutionary

Base,

Haifeng-Lufeng-Luhe Revolutionary Base, Hubei-Henan-Anhui Revolutionary Base, Qiongya Revolutionary Base,

Fujian-Zhejiang-Jiangxi Revolutionary Base, Hunan and Jiangxi

Revolutionary Base, Hunan-Hubei-Jiangxi Revolutionary Base, Revolutionary Base in the Left River and Right River145 Region, Sichuan and Shanxi Revolutionary Base, Shanxi and Gansu Revolutionary Base and Hunan-Jiangxi-Sichuan-Guizhou Revolutionary Base. Thus, a revolutionary regime in opposition to KMT regime was formed. Facing constant military encirclements and an economic blockade from Chiang Kai-shek, in order to fortify revolutionary bases and develop local economies to support the revolutionary war, the CPC took some measures. On the one hand, it issued laws and decrees, outlawing feudal debt exploitation like usury and pawn broking. On the other hand, it began to set up industrial and agricultural banks from 1928 and issued currencies that could circulate in soviet areas, forming an autonomous monetary and financial system in revolutionary bases. On February 20, 1928, the soviet government in Haifeng County of Guangdong Province published a notice to establish the power allowing Haifeng Labour Bank to issue bank notes. It became the first financial institution established by the soviet regime during the Second Revolutionary Civil War (1924-1927). However, due to KMT army‘s attack on Haifeng County 144 The July 15th Incident of 1927 refers to the suppression of CPC organizations and members in Wuhan by the military forces of Wang Jingwei. 145 The Left River and Right River Revolutionary Base was located in Guangxi. Left River and Right Rover were tributaries of the Pearl River. 56

regions, the soviet regime soon retreated to mountainous areas and the bank was also transferred outside of Haifeng County. After 1929, Donggu Civilian Bank of Southern Jiangxi, Workers and Peasants Bank of Jiangxi, Pauper Bank of Northern Jiangxi‘s Special Zones, Soviet Bank of Fujian, Zhejiang and Jiangxi, Workers and Peasants Bank of Western Fujian, Peasants Bank of Western Hubei, Farmers‘ Bank of Western Hunan and Hubei, Soviet Bank of Hubei and Anhui Special Zones, soviet Bank of Hubei, Henan and Anhui, Workers and Peasants Bank of Hunan, Hubei and Jiangxi, Workers and Peasants Bank of Hunan and Hubei, Workers and Peasants Bank of Sichuan and Shaanxi and Soviet Bank of Shaanxi, Gansu and Shanxi were established one after another in revolutionary bases. They all issued paper notes and dealt in remittance, savings and loans, etc. After CPC frustrated the KMT‘s third ―encirclement‖, Western Fujian Revolutionary Base and Southern Hubei Revolutionary Base became one, and the Central Revolutionary Base was formally established. In November of the same year, the First National Soviet Congress was held in Ruijin (瑞金) of Jiangxi Province, at which the Provisional Central Government of the Chinese Soviet Republic was founded. Later, the government convened the First Executive Commission which decided to establish the national bank and designated Mao Zedong to take charge of the preparation work for its establishment. On February 1, 1932, the National Bank of the Chinese Soviet Republic formally opened in Beijing with capital of one million yuan. Mao Zedong (the first Chairman of the People‘s Republic of China) was appointed its first president. Apart from ordinary banking business, the National Bank of the Chinese Soviet Republic was endowed with the privilege of issuing paper notes by the Chinese Soviet government. From July 1932, it began to issue silver coin notes which fell into five kinds according to their denominations: five cent (分), one jiao (角)146, two jiao (角), five jiao (角) and one yuan (元). Meanwhile, it also issued fractional minted coins including two jiao-denominated silver coins and five cents- and one cent-denominated copper coins. In addition, it also managed gold treasuries for the Chinese Soviet Republic with its presidents at all levels acting as directors of gold treasuries accordingly. Besides this, the national bank also issued short-term government bonds twice (600,000yuan the first time, and 1.2 million yuan the second time) and installment economic construction government bonds worth three million yuan for the central revolutionary base and managed their payment. Finally, it also absorbed deposits and made loans to key fields so as to promote economic development in revolutionary bases. After the National Bank of Chinese Soviet Republic was established, it set up branches throughout the country. Meanwhile, banks in other revolutionary bases were made into provincial branches of the National Bank of Chinese Soviet Republic. Because of the encirclement and blockade of the KMT army as well as the decentralized rural economy, banks in revolutionary bases were not closely linked with each other and continued to run their business independently. However, after the establishment of the National Bank of Chinese Soviet Republic, principles for conducting financial operations of banks in revolutionary bases were basically unified. To meet its business development needs, the National Bank of Chinese Soviet Republic formulated eight provisional regulations on bookkeeping notice, savings, loans, remittance, etc., which became the first set of advanced regulations of banks in revolutionary bases. Moreover, the 146

Jiao is a unit of value in China. 1 jiao=10 cents=0.1 yuan. 57

National Bank of Chinese Soviet Republic also organized training courses to train leaders of banks and gold treasuries and accumulated experience in the organizational and institutional building of banks in revolutionary bases. In October 1934, the Red Army embarked on the world-famous Long March. The National Bank of Chinese Soviet Republic was incorporated into the military commission led by political commissar Mao Zedong as the fifth regiment and followed the Red Army in the Long March. Other banks in southern revolutionary bases were all closed in succession after local Red Armies were evacuated. During the Long March, the National Bank of the Chinese Soviet Republic was downsized many times, some of its personnel were transferred, and some died. In October 1935, the National Bank of the Chinese Soviet Republic arrived at Northern Shaanxi Revolutionary Base. In November, it was ordered to change its name into the National Bank Northwest Branch. The original Soviet Bank of Shaanxi, Gansu and Shanxi was closed and its personnel were moved to the National Bank Northwest Branch. In October 1937, the National Bank Northwestern Branch was ordered to form itself into the Frontier Bank of Shaanxi, Gansu and Ningxia.

4.7 Finance in Northeastern China after the Mukden Incident147 After launching the September 18th Incident of 1931 and occupying Northeastern China, Japanese imperialists further founded Manchukuo 148 as its tool to deceive and oppress people in Northeastern China. By this time, Northeastern China had become a colony of Japanese imperialists. At this time the Provincial Bank of the Three Northeastern Provinces149, the Frontier Bank150, the Bank of Jilin Yongheng and the Bank of Heilongjiang were referred to as the Four Banks. They were the financial mainstay of Northeast China and experienced expansion and development before the 9.18 Incident. After the Japanese imperialists occupied Northeast China, however, their property was forcibly taken over by the Japanese imperialists. The Japanese Kwantung Army instructed Southern Manchurian Railway Company, Yokohama Specie Bank and the Bank of Democratic People‘s Republic of Korea151 to hold a meeting on preparing to establish the Central Manchurian Bank and drafted the ―Development Outline of Central Manchurian Bank‖ and ―Scheme on reforming Manchurian Currency and Finance‖. Soon after, in June 1932, using the properties taken from the Four Banks, the Japanese imperialists established the Central Manchurian Bank as the hub of finance in Manchukuo. Its authorized capital was 30 million yuan in puppet currency and paid-in capital was 15 million yuan. Half of its board members were 147 The Mukden Incident, also known as the Manchurian Incident, was a staged event engineered by Japanese military personnel as a pretext for invading the northern part of China, known as Manchuria, in 1931. 148 Manchukuo, literally State of Manchuria was a puppet state located in what is now Northeast China and Inner Mongolia, which was governed under a form of constitutional monarchy. 149 Three eastern provinces of China refer to Heilongjiang Province, Jilin Province and Liaoning Province. 150 The Frontier Bank is a local commercial bank established during the period of the Northern Warlords. 151 Bank of Democratic People‘s Republic of Korea is established by Japan as Korean Bank in Seoul, Korea in 1909 and was changed into Bank of Democratic People‘s Republic of Korea in 1911. 58

Chinese and half Japanese, but the real power was in the hands of Japanese. Its head office was located in Changchun and the official silver firms in Northeast China were all made into its branches, amounting to 128. The major business areas of the Central Manchurian Bank were: 1) Issuing zhong yin quan (or Central Manchurian Bank Notes), recall old currencies, monopolize the issuance of currency in Northeast China and pursue the so called ‗unification of Japanese and Manchurian currencies‘. According to the rules of monetary law published in 1932, ―the right of making and issuing currency belongs to Manchurian government and the Central Manchurian Bank is authorized to make and issue currency on its behalf‖. The Central Manchurian Bank Notes issued by the Central Manchurian Bank were initially pegged to silver. Later, in November 1935, under the principle of ―unifying Japanese and Manchurian currencies‖, they were pegged to Japanese yen at the ratio of 1:1.Bythe end of 1935, the value of Central Manchurian Bank Notes issued was 198.9 million yuan and this rose to 280 million by the end of 1936. By June 1937, the Japanese puppet regime had converted and recalled all old currencies in Northeast China with Central Manchurian Bank Notes. During this process, the Japanese regime tried every means possible to undervalue old currencies in Northeast China and deprive local people of their wealth. For instance, the Japanese regime initially ruled that 360 diao152Jinlin Official Notes issued by the Jilin Yongheng Official Silver Firm could be exchanged for a one one-yuan denominated Central Manchurian Bank Note, but this soon changed the ratio to 500 to 1. Through this alone, Japan embezzled a total of over 800 million central Manchurian bank notes. 2) Accumulate savings, sell government bonds and monopolize loans. All the institutions of the Central Manchurian Bank had a ‗gold treasury‘ which dealt in savings. The Japanese puppet regime also ruled that private banks and money shops in Northeast China must transfer 30% of their deposits to the Central Manchurian Bank. This substantially reinforced the financial strength of the Central Manchurian Bank. In addition, it also underwrote government bonds in the form of Central Manchurian Bank Notes issued by the Japanese regime. Enormous funds accumulated by it were put into Japan‘s key industrial sectors to finance the Japanese imperialists ‗military industrial development in the northeast of China. 3) Monopolize gold, silver and foreign exchange in Northeast China. From November 1935, the Japanese puppet regime began to manage foreign exchange and concentrate gold and silver in Northeast China. The Central Manchurian Bank took charge of the management of foreign exchange and the Japanese dealt in foreign trade as a sideline and purchased military supplies with its foreign exchange, gold and silver so as to fund its aggressive wars. 4) Manage businesses of the national treasury of Manchukuo, deal in special wartime fiscal and financial businesses and cover the military expenditure of Japanese Kwangtung Army. From these business activities, we can see that the Central Manchurian Bank was a colonial bank and the important financial pivot of the Japanese imperialists to implement their aggressive policy in Northeast China. From 1933, the Japanese puppet regime set up a number of rural financial cooperatives in 152

Diao was a unit of money in the Old China, meaning a string of 1,000 cash. 59

northeastern Chinese provinces. These cooperatives provided usury to needy peasants in times of crop failure and pressed them to make payments in times of harvest by selling agricultural products at low prices. In so doing, the cooperatives made fat profits. In July 1933, based on a variety of the Four Banks businesses, the Japanese puppet regime further established Manchurian Daxing Company which had pawn broking as its major business. It was affiliated with the Central Manchurian Bank and headquartered in Changchun, but it had branches throughout the northeast of China (275 branches by 1936) and it exploited local people in the pursuance of profit. To make the northeast of China an industrial base for it to build its military and expand its aggression, the Japanese imperialists merged three Japanese-funded banks in Northeast China, namely, the Bank of Democratic People‘s Republic of Korea, Zhenglong Bank153, and Central Manchurian Bank, and established the Manchurian Industrial Bank in December 1936 with a capital of 30 million yuan (in puppet currencies). Apart from the ordinary business of commercial banks, it mainly issued bonds for developing industries and provided funds for the industrial development of Japan in Northeastern China. In this way, within only a few years‘ time, the Japanese puppet regime formed a monopoly financial system centered on the Central Manchurian Bank with other financial institutions such as Manchurian Investment Bank, financial cooperatives and Manchurian Daxing Company as supplements. To achieve its comprehensive control of the finance of Northeastern China, the puppet Manchurian regime published the Banking Law in November 1933 in obedience to the order of Japanese Kwangtung Army and began to forcibly register banks and money shops in Northeastern China. Before the end of June, 1934, 169 banks and money shops applied for registration, but only 88 got a businesslicense by the end of December. Since these banks and money shops were forced to transfer 30% of their deposits to the Central Manchurian Bank and their lending activity was overseen by the Central Manchurian Bank, they either directly or indirectly financed the Japanese imperialists‘ aggression towards China.

153

The bank was located in Changchun, Jilin Province. 60

Chapter 5 Finance During the Anti-Japanese War Period (1937-1945) In 1937, Japanese imperialists waged an all-out war in China and took control of the affluent coastal regions of east China. With a portion of the capital stolen from these occupied areas, the Japanese aggressors established a number of financial institutions including Mengjiang Bank154, China Joint Reserves Bank155, Central Reserves Bank156and forced them to issue puppet currency. They also launched a currency war against China in an attempt to strangle China‘s economic dynamism and after the Pacific War of 1941 broke out, they took over China-based British and American financial institutions. After the KMT government retreated to West China, it tightened its financial control in these regions. However, because the KMT government was corrupt and officials abused their power for personal gain, a wave of gold unrest broke out in Chongqing and severe inflation occurred in both the Japanese-occupied areas and KMT-controlled areas. To promote production, stabilize commodity prices, combat puppet currency and support the Chinese people‘s resistance against the Japanese aggressors, governments in CPC-led anti-Japanese revolutionary bases set up their own banks and issued bian bi (border currency 边币)157, kang bi (resistance currency 抗币)158 and other kinds of currencies.

5.1 Finance in Japanese-occupied zones 5.1.1 Finance in Japanese-occupied zones of northeastern China After the July 7th Incident of 1937, Japanese imperialism further tightened its economic and financial control of northeastern China with a view to expanding the aggressive war and turning northeastern China into a key base for it to build its military forces. As the major financial pivot of the Japanese puppet regime, the monopoly status of Manchuria Central Bank was further reinforced. Cashing in on its role as the overall financial hub in northeastern China, it actively promoted the Civilian Savings Campaign, forcing enterprises and residents to open savings accounts. During the ten years from 1935 to 1945, its annual savings target increased by 11 times from 500 million yuan to 6,000 million yuan and in 1945 its savings accounted for 46.2% of the national income. Besides this, it also used its position as the only bank with issuing rights in northeastern China to keep on issuing paper notes in excess. From the end of 1935 to the end of 1937, its note issue increased by over five times from 199 million yuan to 1.317 154 Mengjiang Bank was a puppet bank established by the puppet regime in Zhangjiakou, Hebei during the anti-Japanese War. Mengjiang referred to the Japanese-occupied areas of Inner Mongolia and Xinjiang. 155 China Joint Reserves Bank was a puppet bank established in north China during the anti-Japanese War. 156 Central Reserves Bank was a puppet bank established by Japanese aggressors and the puppet regime which issued bank notes that mainly circulated in Japanese-occupied areas. 157 Bian bi was a kind of bank notes issued by banks in anti-Japanese border regions. Bian means ―border‖ in Chinese. 158 Kang bi was a kind of bank notes issued by banks in anti-Japanese border regions. Kang means ―resistance‖ in Chinese. 61

billion yuan. Before 1945 when Japan surrendered, its issuing of notes had soared to 13.6 billion yuan, an increase of 68 times from 1935. After the Pacific Ocean War broke out, the Manchuria Central Bank took over the banking assets of Britain and America and other countries in northeastern China. From 1932 to 1945, the Japanese puppet regime issued a total of 56 kinds of Manchurian Central Bank Notes and government bonds, amounting to 3.025 billion yuan, and all were forcibly sold by the Manchurian Central Bank. From its establishment to 1944, the Manchuria Central Bank made a fat net profit of 200.96 million yuan through exercising financial control for the Japanese puppet regime and providing financial services to it. Its capital mainly went to the industrial development of the Japanese puppet regime and the expansion of Japanese aggression in China. Its bank loans increased from 210 million yuan in 1937 to 660 million yuan by 1940. By June 1945, its bank loans jumped to 10.1 billion yuan, an increase of 47 times from 1937. Meanwhile, its percentage of total bank loans in northeastern China was also on the rise, from 36.6% in 1937 to 62.8% in June 1945. The capital of the Manchuria Industrial Bank also increased to 100 million yuan and its business scope expanded. Moreover, the Japanese puppet regime also established Agricultural Promotion Cooperatives, the Agricultural Promotion Gold Treasury and other financial institutions throughout northeastern China and the financial system with the Manchuria Central Bank at its core was further extended. By contrast, private banks in northeastern China were further frustrated. In August 1945 when Japan surrendered, the entire northeast of China had only 16 private banks left and a majority of them had capital from the Manchurian Central Bank and Japan. Even the four private banks funded by national capital were controlled by the Japanese puppet regime and were merely appendages of it.

5.1.2 Finance in Japanese-occupied zones inside Shanhaiguan Pass159 From July 1937, Japanese troops took territories in North China, East China and South China, destroying and occupying industries, mines and transport facilities, and also large areas of land in the affluent eastern Chinese regions. They also occupied a total of over 50 public or private banks, including the Bank of China, the Central Bank and the Bank of Communications in the Japanese-occupied zones, causing a loss of hundreds of million yuan to China. In addition, they also issued enormous military notes in Central China and South China by force to seize China‘s strategic supplies and shift the burden of war onto the Chinese people. In the occupied zones of Shanhaiguan Pass and the Inner Mongolia, the Japanese aggressors adopted a divide and rule strategy and established a number of puppet regimes such as the puppet North China Political Affairs Committee, the puppet National Government headed by Wang Jingwei160 and the puppet Mengjiang Joint Autonomous Government161. The Japanese aggressors transported a large portion of gold, silver and foreign exchange seized from China‘s financial industry to Japan and used only a small proportion to found puppet banks that were nominally managed by Chinese collaborators. They successively established Mengjiang Bank, China Joint 159 Shanhaiguan Pass, also known as ‗Yuguan Pass‘ was an important pass in the east of the Great Wall in Ming Dynasty. It was located in Qinhuangdao of Hebei Province. 160 Wang Jingwei (May 4, 1883-November 10, 1944) was a Chinese politician. He was initially a member of the left wing of the Kuomintang (KMT), but later became increasingly anti-Communist after his efforts to collaborate with the CCP ended in political failure. 161 Mengjiang Joint Autonomous Government was a puppet regime founded in Chahar and Suiyuan (in today‘s inner-Mongolian Area) that was manipulated by the Japanese aggressors. 62

Reserves Bank, and the Central Reserves Bank as the Central Bank of Mengjiang Joint Autonomous Government. They also established the puppet North China Political Affairs Committee and the puppet-led National Government headed by Wang Jingwei respectively, and exercised financial control in occupied zones. In 1939, the Japanese puppet regime established the Hua Xing Commercial Bank in Shanghai. Mengjiang Bank was set up in November 1937 with an authorized capital of 12 million yuan. It was headquartered in Zhangjiakou but it had branches in Datong (大同), Guishui (归绥), Baotou (包头), Duolun (多伦), Beiping (today‘s Beijing 北平） and Tianjin, etc. It issued Mengjiang bank notes which were pegged to the Japanese yen at the rate of 1:1 and circulated in the occupied areas of Inner Mongolia, North Hebei and North Shanxi. Apart from issuing currencies and ordinary banking business, it was also responsible for providing financial guidance to and exercising financial control of Inner Mongolia. Therefore, it was a tool of Japanese aggressors to rule the finance and seize resources from Inner Mongolia. China Joint Reserves Bank was established in February 1938 with a capital of 50 million yuan. It was headquartered in Beiping and had branches in many provinces including Hebei, Henan, Shandong, Shanxi and cities like Tianjin and Qingdao. Its head office and branches alike had advisors of Japanese origin and it issued enormous joint notes (also referred to as joint reserve notes), which circulated in Beiping, Tianjin, Qingdao, Jinan and Henan (河南) and other Japanese-occupied zones and recalled or exchanged legal tender with them. It transported a majority of legal tender obtained to Shanghai to arbitrage foreign exchanges. The Central Reserves Bank was established in January 1941 with an authorized capital of 100 million yuan. It was headquartered in Nanjing and had branches in several cities including Hangzhou (杭州), Suzhou, Guangzhou, Hankou, Bengbu (蚌埠) and Ningpo. It issued central reserves notes which circulated in Nanjing, Shanghai, Jiangsu, Zhejiang, Anhui, Jiangxi, Hubei, Guangdong and other Japanese-occupied areas. Central reserves notes were pegged to legal tender at the rate of 1:1 and could be exchanged for legal tender. The aim of issuing central reserves notes was to destroy the credibility of legal tender, arbitrage foreign exchange, purchase China‘s goods and commodities and solve financial problems facing the puppet national government led by Wang Jingwei. It was ruled by Japan that reserves notes were forbidden to circulate in Northeast China, North China and Mengjiang, and China must not take any measure that did harm to the implementation of its military notes policy. Instead, China should assist Japan in carrying out the military notes policy. Hua Xing Commercial Bank was established in May 1939 in Shanghai with a capital of 50 million yuan, half from the puppet regime led by Wang Jingwei in Nanjing and half from Japanese-funded banks including Industrial Bank, North Korea Bank, Taiwan Bank, Mitsui Bank and Mitsubishi Bank. Nominally, it was a commercial bank, but practically, it enjoyed the privileges of issuing bank notes and dealing in the national treasury and political affairs of the puppet reformed government. Bank notes issued by it were called Hua Xing notes. To combat legal tender, Hua Xing notes were pegged to legal at the rate of 1:1 at first. But later, they were linked to USD and circulated in the Japanese-occupied zones of North China and Central China. After the establishment of the Central Reserves Bank, Hua Xing Commercial Bank‘s privileges of note issue and national treasury management were abolished. Therefore, it became a purely 63

commercial bank and Hua Xing notes were withdrawn from circulation with central reserves notes. Apart from the above-mentioned four major banks in Japanese-occupied areas inside the Shanhaiguan Pass, the Japanese aggressors also established the Northern Chahar Industrial Bank, Mongolia Alliance Investment Bank, Northern Shanxi Investment Bank, Farmers‘ Bank of Hebei Province, Eastern Hebei Bank, among others in North China; the Local Bank of Jiangsu, Investment Bank of Henan, Suxing Bank, and Zhongjiang Bank, etc. in Central China; trust companies and other puppet financial institutions in South China. During the later period of the anti-Japanese War, all puppet regimes endeavored to expand the issuance of puppet notes and exploited the wealth of people in the Japanese-occupied zones through inflationary policies. From the end of 1938 to 1945 prior to Japan‘s surrender, the volume of joint reserves notes and Mengjiang bank notes issue rose by 1,200 times and 100 times respectively. In comparison, from January 1941 to August 1945, the volume of central reserves notes issued rose by 340,000 times. While the Japanese occupied zones were inflicted with hyperinflation, Japanese imperialists plundered a large quantity of food and other supplies for military use or transported them to Japan. The overflow of paper notes and shortage of food as well as other necessities led to a price surge in Japanese-occupied zones. Compared with the wholesale price index of 1936, in 1941, prices in North China rose by 3,050 times and in Shanghai by 97,401 times. Such a substantial rise in prices brought about tremendous suffering to people in Japanese-occupied zones.

5.1.3 Finance in Shanghai during the Isolated Islands period and after the outbreak of the Pacific War of 1941 Before the outbreak of the anti-Japanese war, Shanghai was the financial center of China. When KMT troops left Shanghai in November 1937, the surrounding areas had already been occupied by Japanese troops, but the Shanghai International Settlement and French Concession were still under the control of Britain, America and France as Japan had not yet declared war on Britain, America and other countries. Therefore, Shanghai‘s concessions during this period of time were referred to as ‗isolated islands‘ and the business of foreign-funded banks, KMT bureaucratic capital funded banks and other financial institutions funded by national capital continued there. As the warfare spread, an increasing number of people sought refuge in Shanghai‘s concessions and carried their capital there. Japanese banks and enterprises also used Shanghai‘s concessions to conduct arbitrage of foreign exchange and supplies. Consequently, business and finance in Shanghai‘s concessions grew rapidly and experienced a temporary energy boost. At that time, Shanghai‘s arbitrage of imports, exports and foreign exchange and speculating on gold were very active, to such an extent that Shanghai‘s concession were referred to as ―the second free market in the world after New York‖. By the spring of 1940, Shanghai‘s concessions had 208 banks, almost three times more than the pre-wartime. Meanwhile, the number of money shops doubled and the volume of bank deposits increased dramatically. By the first half of 1939,Shanghai‘s bank deposits (in terms of legal tender) amounted to three billion yuan (in legal tender), about 60% of total national bank deposits at that time. Besides this, the transaction volume of negotiable securities and notes was also on the rise. 64

By April 1940, the average daily transaction volume exceeded49.90 million yuan, over 15.5 times that of the end of 1937. Nevertheless, although Shanghai‘s concessions were under the protection of European countries and America, Japanese aggressors often sent spies there to kill or kidnap clerks of KMT bureaucratic capital funded banks or planted bombs in these banks during their office hours, in an attempt to undermine the Chinese government‘s financial activities in Shanghai. After the Pacific War broke out in December 1941, Japanese troops entered the Shanghai concessions and took over China-based British and American enterprises and financial institutions. The Central Bank, Chinese Farmers‘ Bank, and Central Trust of China run by the KMT were also taken over by them and liquidated and later disbanded. Other institutions such as the Bank of China and the Bank of Communications were taken over and reorganized. The Finance Ministry and Central Reserves Bank of the puppet Wang Jingwei regime were moved into Shanghai‘s concessions to manage Shanghai‘s private financial industry directly. To fill the vacuum in the financial industry left by the British and American capital as well as KMT bureaucratic capital, traitors and speculators related to the Japanese puppet regime rushed to establish private financial institutions in Shanghai. By the conclusion of anti-Japanese war, the total number of Shanghai‘s banks, money shops and trust companies rose by 2.5 times compared with the pre-wartimes. There were banks named after various industries, like Bank of Cotton Industry, Bank of Cotton Cloth Industry, Bank of Dyeing and Weaving, Bank of Silk Industry, Bank of Fabric Industry, Bank of Wine Industry, Bank of Fishery and Bank of Pottery, among others. In fact, almost all industries except the coffin industry were used to name banks. This was a strange phenomenon which manifested in Shanghai‘s financial industry under the control of Japanese puppet regime. At that time, since prices kept rising, bankers generally believed that interest gained from making loans could not offset losses arising from currency depreciation and it would better for them to start businesses with their capital. As a result of this belief, most large and medium-sized banks of Shanghai during this period established trade companies and trust departments, hoarding commodities and trading negotiable securities; as for small banks and money shops, they all took on businesses as a sideline. After the Pacific War, foreign exchanges were frozen, gold trade was restrained, supplies were running short and speculative financial activities were centered on real estate and negotiable securities. Since there was a certain limit on real estate speculation, more and more speculators diverted their interest in securities, especially in trade of corporate stocks. As a result, stock companies sprouted up like mushrooms. For instance, in 1942 alone, 120 new stock companies were founded. Fearful that stock speculation might be overheating, in August 1942 the puppet government headed by Wang Jingwei published ―Provisional rules and regulations on outlawing the trade of Chinese stocks‖ through its Industrial Ministry and also closed down a batch of stock companies. However, after a senior Japanese economic advisor inspected Shanghai, he vigorously advocated stock speculation, believing that this could direct Shanghai‘s idle money towards stocks, reduce supplies horded by Shanghai‘s residents and contribute to Japanese troops‘ extortion of supplies. Therefore, in September 1943, the puppet regime led by Wang Jingwei also assisted Shanghai Huashang Stock Exchange to resume its business so as to provide a unified market for 65

Shanghai‘s stock trade. It specialized in domestic enterprise stock trade and formulated a total of 75 operation regulations, ruling that it should have 200 brokers. The first batch of stocks that went public after its approval was of 108 different kinds. In early 1945, Shanghai Huashang Stock Exchange decided to initiate a kind of ‗convenient trade‘ (backwardation conducted once a week). It was hoped that this would facilitate short purchase and selling and stimulated stock speculation fever. Such kind of stock speculation fever lasted until August 1945 when Japan surrendered.

5.2 Joint Office of the Four Banks and the KMT government’s financial control of the Great Rear Area162 The September 18th Incident alerted the KMT government of the possibility that the Japanese imperialists might wage an all-out war against China. Therefore, it proposed to ―adjust original production organizations and control social and economic actions‖. However, holding on to the hope that Japan might not harbor such an intention, it did not fully prepare itself for the impending war and did not adjust its economy until the all-out anti-Japanese war broke out. As a result, KMT-controlled zones fell into a state of chaos instantly with the market oscillating and depositors rushing to withdraw money from banks which led to financial turmoil and a drain of massive capital. The speed of the financial crisis was aggravated by the fact that it had been simmering since the Battle of Shanghai in 1937. In such a state of emergency, the KMT government hastened to authorize the Central Bank, Bank of China, Bank of Communications and Chinese Famers‘ Bank to establish a Joint Discounting and Lending Committee in charge of wartime discount and lending. Later, it published ―Measures on Stabilizing Finance in Harsh Period‖ which restricted the withdrawal of deposits to check the flight of capital. From then on, China‘s wartime finance began. To further establish and consolidate its wartime financial monopoly system, the KMT government ordered Central Bank, Bank of China, Bank of Communications and Farmers‘ Bank to form the Joint Office of Four Banks in Shanghai in August 1937. In November of the same year, it moved the Joint Office of Four Banks to Wuhan and renamed it General Administration of the Joint Office of the Four Banks or General Office of the Four Banks. Meanwhile, the KMT government established over 50 branches of the Joint Office of the Four Banks in major Chinese cities. As the anti-Japanese War further expanded, the KMT government transferred the Joint Office to Chongqing and reorganized it according to the ―Outline of Measures on Improving Central Financial Institutions at Wartime‖ published it in September 1939. In so doing, the KMT government transformed the Joint Office of the Four Banks into a centralized institution, enlarged and empowered it and entrusted it with the task of designing and implementing its wartime financial and economic policies. The Council was the supreme decision-making organ of the Joint Office of the Four Banks with 162 During the anti-Japanese War, the front lines were in northern, eastern, central and southern China. People usually referred to the KMT areas in southwestern and northwestern China which were not occupied by the Japanese invaders as the Great Rear Area. 66

Chiang Kai-shek as President, Kung Hsiang-hsi, the then President of the Central Bank, Soong Tzu-wen, the then Governor of the Bank of China and Qian Yongming, the then Governor of the Bank of Communications as managing directors. All matters concerning the formulation of national financial and economic plans and operation guidelines of the Joint Office of the Four Banks, business and institutional adjustment of the Four Banks, the verification of statutes and systems and the examination and allocation of major obligations were determined by the council. The Council had under it a Wartime Financial Committee, a Wartime Economic Committee and an Agricultural Financial Planning Committee responsible for deliberating over wartime financial and economic policies and relevant major issues. The Joint Office of the Four Banks had branch offices in all provincial cities and other cities with large numbers of industrial and commercial enterprises whose major responsibility was to examine and verify loans, remittance and other joint business of local banks. After the Joint Office of the Four Banks was reorganized by the KMT government, its internal structure was consolidated and its nature changed a lot. Now, it not only took full charge of the business of the Central Bank, Bank of China, Bank of Communications and the Chinese Farmers‘ Bank, but was also held responsible for all major economic policies related to wartime finance. In other words, it had become the leading and supervising body on wartime finance of the KMT government. Chiang Kai-shek held many posts inside the KMT party, government and military, but only two organs were under his direct leadership. One was the Military Commission where he was the chairman. The other was the Joint Office of the Four Banks where he was the president of its Council. He concerned himself with everything to do with the Joint Office of the Four Banks to such an extent that even the appointment of a section chief of the Audit Department had to be subjected to his approval. From this, we can see that banks and troops were equally important to Chiang Kai-shek and the Joint Office of the Four Banks and the Military Commission were the two essential pillars for him to control banking and the army and, therefore, power. In June 1939, the KMT government published the Public Treasury Law, ruling that ―organs that manage cash, notes, securities and other properties for government are called public treasuries‖, that financial departments at all levels were authorities of public treasuries and that the Central Bank managed the receipt, custody and transfer of public treasuries‘ cash, notes and securities, and the custody of receipts from properties. Before the Public Treasury Law was implemented, all national tax revenue was collected and stored by each tax collecting office before they were submitted to the national treasury. Now, taxpayers had to submit tax to the local central bank agent directly and all fiscal expenses must be allocated by the central bank to recipients with payment documents drawn and issued by the Ministry of Finance. Branches of public treasuries in those places with local branches of the Central Bank were managed by local branches of the Central Bank. Branches of public treasuries in places without branches of the Central Bank were entrusted to the management of the Bank of China, the Bank of Communications and the Chinese Farmers‘ Bank as well as post offices. The implementation of the Public Treasury Law reinforced the function of the Central Bank to manage the national treasury, which played an important role in managing the national income and expenditure, and consolidating the strength of the Central Bank to transfer funds and exercise financial monopoly. 67

In May 1942, in obedience to Chiang Kai-shek‘s order on tightening the control of the Four Banks, the Council of the Joint Office of the Four Banks formulated the Measures on Dividing and Examining Business of the Four Banks and re-divided business of the Central Bank, Bank of China, Bank of Communications and Chinese Farmers‘ Bank. The measures ruled: 1) From July 1st, 1942, the central bank will take full charge of the issue of legal tender. Legal tender issued by the Bank of China, the Bank of Communications and the Chinese Farmers‘ Bank and their reserve funds should all be handed over to the central Bank. 2) The Central Bank is also responsible for the acceptance and storage of reserves against deposits of all public and private banks, arranging the acceptance and payment of foreign exchange, managing the national treasury exclusively and dealing in clearing and rediscounting. 3) The bank of China is mainly responsible for managing the acceptance and payment of the government‘s foreign obligations, developing and supporting China‘s foreign trade, making loans to and investment in undertakings related to foreign trade, dealing in foreign exchange in foreign trade and overseas remittance, managing domestic industrial and commercial remittance, savings and trust business. 4) The Bank of Communications is mainly responsible for making loans to and making investment in industry, mining, transport and productive enterprises, handling storage and transport affairs, raising or bearing corporate liabilities and corporate stocks, and dealing in savings and trust business. 5) The Chinese Farmers‘ Bank is mainly responsible for dealing in making loans to and making investments in agricultural production, managing financial transaction involving land, making loans to cooperative undertakings, managing agricultural warehouses, trusts and agricultural insurance, and managing saving deposits. The enforcement of ―Measures on Dividing and Examining Business of the Four Banks‖ allowed the Central Bank to possess note-issue rights and foreign exchange management rights. Since note-issue and foreign exchange management were the most important two aspects of the then finance industry, the control of note-issue rights and foreign exchange management rights strengthened the Central Bank‘s monopoly over finance in KMT-controlled zones. Its President, Kong Xiangxi, was also promoted from a managing director of the Council of the Joint Office of the Four Banks to its Vice-President. Before the anti-Japanese war, the Central Bank‘s influence had already been on the rise, but it failed to overtake that of the Bank of China and Bank of Communications. During the anti-Japanese War, the establishment of the Joint Office of the Four Banks enabled the Central Bank to unite the strength of the other three banks to reinforce its control of national finance. In addition, with the implementation of the Public Treasury Law, Measures on Dividing and Examining Business of the Four Banks and Measures on Unifying Issuance, the influence of the Central Bank gradually exceeded that of the Bank of China and the Bank of Communications. Capital sources of the Bank of China, the Bank of Communications and the Chinese Farmers‘ Bank were reduced, regulations from the Central Bank restricted them, and their business operations were controlled by the Central Bank. From this, we can see that the monopoly of KMT bureaucratic capital was substantially strengthened and the monopoly of 68

note-issue rights by the Central Bank provided opportunities for KMT government to implement unrestricted inflationary policies exploit wealth and expand bureaucratic capital. Originally, Chongqing only had a few small banks. After the anti-Japanese War broke out, the KMT government retreated to western China and set up the Joint Office of the Four Banks in Chongqing. Therefore, the center of the Four Banks and Two Bureau bureaucratic capital financial system was shifted to Chongqing. A large number of banks were transferred to Chongqing, including three of the Four Northern Banks, King Cheng Bank, Continental Bank, China and South Bank, two of the Three Southern Banks, Zhejiang Investment Bank and Shanghai Savings and Commercial Bank, the Four Mini Banks, China Merchants Bank, China Investment Bank, Si Ming Bank and China Domestic Commodities Bank as well as Xinhua Savings Bank, China Agricultural and Industrial Bank. The HSBC, Standard Chartered Bank, Citi Bank and Banque de l‘Indochine also established branches in Chongqing. Soon, Chongqing became the wartime financial center of the Great Rear Area. The KMT government made Chongqing its center and tightened its wartime financial control of the entire Rear Area. In April 1938, the KMT government promulgated the ―Outline of Measures on Improving Local Financial Institutions‖ and endeavored to enhance the financial strength of local financial institutions in the Great Rear Area so as to regulate funds for agricultural and industrial development there. In January 1940, the KMT government published the County Bank Act, ruling that the capital of a county bank should exceed 50,000 yuan and at least half its shares should be commercial shares (held by merchants). In addition, county banks were not allowed to buy and sell real estate, negotiable securities, etc. The County Bank Act imposed many restrictions on county banks, but it made some contributions to the development of county banks and the expansion of local financial network. In August 1940, the KMT government published ―Tentative Measures on Managing Banks in Harsh Times‖, ruling that private banks were forbidden from doing business as a sideline, hoarding commodities or buying and selling commodities for their clients so as to eliminate illegal speculative activities of commercial banks. Besides this, the measures also ruled that banks must set aside 20% of their total deposits as reserve funds and had them deposited at the Central Bank, the Bank of China, the Bank of Communications and the Chinese Farmers‘ Bank(later they could only be deposited the Central Bank). Therefore, the financial strength of the Central Bank was further consolidated. However, because ―Tentative Measures on Managing Banks‖ failed to be carried out to the letter and many commercial banks continued to establish business firms and engage in hoarding and speculation, in December 1941, the KMT government further published ―A Revised Tentative Measure on Bank Management in Harsh Times‖. The revised measures focused on restraining the increase of commercial banks (excluding county banks or banks run by overseas Chinese), forbidding bank clerks to do business with bank deposits, exercising an overall examination of business of banks and money shops, etc. The implementation of these measures and the overall examination of banks in particular, played a certain role in limiting banks‘ speculative activities and reinforcing the wartime financial control of the KMT government. From December 1942, the KMT government sent ‗bank supervisors‘ to 17 cities including Chengdu, Xian, Lanzhou, Guilin, Kunming and Guiyang to examine and verify the use of loans 69

offered by banks and money shops and to examine accounts related to banks and money shops within their jurisdiction. Later, it promulgated a series of acts on standardizing bank accounts items, forbidding commercial banks to establish new branches in 25 specific cities and prohibiting banks and money ships to accept gold securities. To sum up, during the anti-Japanese War, the KMT government exercised an increasingly strict control of local banks and commercial banks, but the Central Bank, the Bank of China, the Bank of Communications and the Chinese farmers‘ Bank were exempt from restriction of certain rules and regulations.

5.3 Over-issue of legal tender After the Japanese imperialists waged the all-out war against China, they soon took large areas of the affluent eastern regions, soon leading to a sharp decrease in fiscal revenue of the KMT government. From August to December, 1937, the monthly fiscal revenue of KMT government was only 16 million yuan, less than half that of pre-wartime. During the war, due to the substantial rise in military expenditure, the annual fiscal expenditure of the KMT government in the first two years rose to over one billion yuan. From the second half of 1937 to the end of 1938, the fiscal revenue was 760 million yuan while fiscal expenditure during the same period jumped to 3.29 billion yuan, representing a deficit of 2.52 billion yuan. Even in such circumstances, the KMT government ―did not take fiscal problems seriously‖ and tended to ―continue the old way of solving fiscal problems through domestic and foreign loans‖ during the early period of the anti-Japanese War. In September, 1937, in the name of national salvation it issued a total of 500 million yuan in government bonds and the people of China and overseas Chinese alike purchased about half of them out of patriotism. However, from the 1938 to 1940, government bonds issued by the KMT government did not sell well. In 1940, the KMT government only obtained eight million yuan by selling government bonds while the fiscal deficit was as much as to 3.963 billion yuan. In these circumstances, domestic government bonds alone were far from enough to make up for the fiscal deficit and foreign loans were not enough to help much either. Therefore, the fiscal deficit of the KMT government during the anti-Japanese War was basically made up for by cash advances from banks. As advances kept increasing, banks constantly increased the issuing of legal tender. Before the anti-Japanese War, it was ruled that a bank could not issue legal tender unless it had 60 percent reserves of cash and 40 percent reserves of negotiable securities behind it. By September 1939, after the ―Outline of Measures on Consolidating Finance‖ was published, it was ruled that commercial bills, warehouse receipts, stocks and the like could be used as cash reserves. This actually removed the restrictions on note issue and legal tender could be issued at random and in excess. Worse still, after July 1942 when the right of legal tender issue was monopolized by the Central Bank, requirements on reserves became meaningless. With the rapid increase in the issuing of legal tender, the printing and transport of legal tender became a heavy burden for the Central Bank and a variety of large-denomination bank notes were issued. Denominations of 50 yuan came out in 1940, denominations of 100 yuan in 1942 and denominations of 1,000yuan in the first half year of 1945. In 1937, the issue of legal tender was 70

1.64 billion yuan. By 1942, the issue had reached 34.36 billion yuan and rose further to 1.03193 trillion yuan by 1945, a remarkable increase of over 628times from 1937. Inflation as such was bound to drive up prices and the crop failure of 1940 further led to a faster rise in prices than in legal tender issue. In response, the KMT government took a variety of measures including limiting the prices of daily necessities, monopolizing salt, sugar, matches, cotton and other necessities and, collecting land tax in kind, but these were only expedient measures and could not curb the root of the sharp price rises. In fact, they produced some unintended side effects instead. Commodity prices therefore kept rising and by the August 1935, the wholesale price index in Chongqing rose by 1,792 times from 1937 and over 90 times from 1941. Because economic life in the Rear Area had long been in a situation where the rises in note issuing and commodity prices strived to catch up with each other, the social economy was in disorder and the national economy almost collapsed.

5.4 Gold and foreign exchange market in KMT-controlled zones During the anti-Japanese War, frequent changes took place in the gold and foreign exchange market in KMT-controlled zones and jobbery in gold or foreign exchange savings and government bonds also became frequent, which was very common in the financial history of KMT-controlled zones during this period of time. Before the anti-Japanese War, the KMT government forbade gold export, but it permitted domestic free trade of gold. After the war broke out, the Finance Ministry of the KMT government published Measures on Forbidding to Accept and Sell Gold in August 1939 and outlawed the gold trade. After the Japanese army raided Pearl Harbor, America changed its view on the anti-Japanese War. In February 1942, American president Roosevelt telegraphed Chiang Kai-shek, expressing America‘s willingness to help China by offering enormous loans to it. Soon, on March 31, representatives from China and America signed a$500millionloan agreement in Washington which granted an enormous sum of $500 million to China. The KMT government used 220 million to purchase 6.28 million ounces of gold in America and transported it to China in an attempt to preserve the value of legal tender and contain the rise commodity prices in the Great Rear Area. After purchasing the gold from America the KMT government announced, in June 1943, that it would permit free the trade of gold and designate the Central Bank to sell gold according to market prices. Therefore, speculative markets in gold emerged in rear areas. The official price163 (or guan jia) of gold fixed by the Central Bank kept rising, so did the market price of gold. For instance, on November 8, 1943, the official price of gold was 12,000 yuan per liang, but on December 3, it rose to 13,000. On February 1, 1944; it further rose to 15,000 and in only eight days, it jumped to21, 500. On November 16, 1944, one liang gold at the official gold price plus 20 percent ‗township deposits‘ was worth 24,000 yuan (legal tender), but 163 Official price, or guan jia in pin yin, referred to the price fixed by the central government or designated financial institutions of the central government. 71

the market price of gold was 36,000 per liang. By March 29, 1945, the official gold price soared to 35,000 yuan per liang and further to 50,000 yuan per liang by June 8, but the market price of gold was as high as 182,000 yuan per liang that month. Whenever the office gold price was to change, some well-informed dignitaries and commercial racketeers would spread rumors about the impending rise in the official gold price so as to create confusion in gold speculation markets and profit from it. In August 1943, the Council of the Joint Office of the Four Banks decided to use gold purchased from America to open two kinds of gold deposits. One involved the depositing of gold in one-year, two-year or three-year terms and repay the principal with interest in gold at maturity; the other was to deposit gold in legal tender converted from gold according to the list price of gold and repay the principal in gold and pay the interest in legal tender. In so doing, the KMT government attempted to absorb non-governmental capital, withdraw legal tender from circulation and stabilize its value. However, ever since it had offered gold deposits service, once gold price rose, depositors would rush to banks to withdraw money to buy gold and deposit it into the bank. As a result, interest on the black market would soar and the financial market would be starved of money and be severely contained. After November 3, 1944, as gold was failed to be transported to the Central Bank, the Central Bank began to sell irregular futures instead of gold. Uncertain about irregular futures, many gold purchasers hesitated to buy them and fewer people opened gold deposits. For this reason, on March 28, 1945, the KMT government made a secret decision to raise gold price from 20,000 yuan per liang to 35,000 yuan per liang from the next day. Unexpectedly, this secret decision quickly spread and a dozen of private and public banks, big companies, bureaucrats and rich merchants in Chongqing looted gold that very night and made tremendous profits overnight. After the KMT government‘s secret decision to raise gold prices was disclosed in a newspaper, a gold panic was set off. This disorder, known as the ‗Gold Unrest of Chongqing‘ was triggered by the corruption inside the KMT government and the power abuse of government officials. In China, newspapers reported this news and demanded the strict punishment of the persons involved. Foreign countries also censured the KMT government over its decision. In response, the KMT government reluctantly sentenced the then Central Bank Country Director and the then director of the Financial Affairs of the Finance Ministry to three years and two years respectively and let pass responsibilities of other officials and dignitaries. According to statistics, from the time the KMT government opened gold deposits to June 1945 when it stopped opening gold deposits, over 80 billion yuan legal tender (slightly over two million liang gold) was withdrawn from circulation. To preserve the value of gold, some small and medium merchants and rich individuals often bought gold deposits when gold was inaccessible. However, they never dreamed that the KMT government would suddenly announce that all depositors must contribute 40% of their gold deposits and people were outraged by the KMT government‘s blatant extortion. In addition, the KMT government also ruled that gold deposits could not be drawn unless the depositor had a sum of 400 liang (the value of an entire gold brick) deposited at the bank. In so doing, the KMT government attempted to restrain people from drawing gold deposits, but this did harm to depositors, small and medium capitalists in particular. At the start of anti-Japanese war, the KMT government endeavored to maintain the exchange 72

rate of legal tender against foreign currencies and traded foreign exchange without limit. But, the fact that a totaled 7.5 million pounds of foreign exchange was sold within only one month after the July 7 Incident frightened Chiang Kaishek and his followers. Therefore, they published the ―Measure on Stabilizing Finance in Harsh Times‖ to prevent the flight of capital on the one hand, and negotiated with foreign-funded banks to ask them to stop giving foreign exchange to speculators and those who move their purchased foreign exchange out of the country on the other. However, speculation in foreign exchange remained active as before. In March 1938, the KMT government published the ―Measures on Examining the Application for Purchasing Foreign Exchange‖ and stopped the Bank of China, the Bank of Communications and the Chinese Farmers‘ Bank from selling foreign exchange. British and American banks in Shanghai, however, declared their exemption from the restrictions and traded foreign exchange according at their own list prices. Consequently, the gap between the official price and market price of foreign exchange kept widening and black trade of foreign exchange began to run rampant. During the later period of the anti-Japanese War, the KMT government continued to maintain the official exchange rate of legal tender against USD at 20:1, but only a few influential dignitaries could afford foreign exchange at such an exchange rate. Most people speculated in foreign exchange on the black market and this is what fermented speculative activities on the black market. By July 1945, the price of USD in terms of legal tender on the black market of Chongqing was 1:2889, exceeding its official price by over 140 times. Taking advantage of the speculation in foreign exchange, the Four Major Families164 and other KMT bureaucrats unfairly made large fortunes and a majority of their USD deposits in America were accumulated through speculation. Apart from opening gold deposits, the KMT government also used a portion of loans from America as funds and began to issue National Construction Savings Certificates from April 1942. The certificates fell into three kinds in terms of their maturity: one year, two years and three years. Depositors could purchase them with legal tender at the USD/legal tender exchange rate of 1:20 and got their principal and interest paid either in USD equivalent to the face value of their certificates or in legal tender converted from the face value of their certificates according to the list price of the Central Bank at their maturity. From May 1942, the KMT government further issued Allied Victory Government Bonds which could be purchased by legal tender at 100yuan=$6from May 1942 to February 1943 and100yuan=$5 from March to October 1943. From 1944, the KMT government began to repay the principal once a year by means of drawing lots and paid back the bonds in 10 years. Since the KMT government‘ credit rating was extremely poor, its government bonds were unpopular with people at first. But as legal tender kept depreciating and the price of USD on the black market gradually rose to exceed its official price by many times, purchasing the USD government bonds was fairly profitable. In October 1943, although more than 30 million USD government bonds were still to be sold, Kung Hsiang-hsi and other government officials declared that government bonds had been sold out and secretly pocketed the rest of the bonds. Their misappropriation of government bonds sparked heated controversies the National Participating 164 The Four Major Families referred to Chiang family represented by Chiang Kai-shek, Soong Family represented by Soong Tze-wen, Kong family represented by Kung Hsiang-hsi and Chen family represented by Chen Guofu and Chen Lifu that controlled politics and finance of China in the first half of the 20 th century. 73

Committee repeatedly proposed to investigate the issue. In 1945, Kung Hsiang-hsi, vice-president of the Executive Council, Finance Minister, vice-President of the Council of the Joint Office of the Four Banks, President of the Central Bank, was pressed to step down due to public criticism.

5.5 Finance in anti-Japanese Bases After the all-out anti-Japanese War broke out, in adherence to the principle of KMT-CCP cooperation and uniting all nationalities to fight against Japanese imperialism, the Red Army and the Southern Red Army Guerrilla were reorganized into the Eighth Route Army and the New Fourth Army of the KMT Army respectively. Soon, the Eighth Route Army and the New Fourth Army arrived at the enemy‘s rear battlefield165 and set up bases there to pursue guerrilla war against Japanese troops. By the end of 1940, CCP-led troops successively established a number of revolutionary bases, including: Shanxi-Gansu-Ningxia Border Region, Shanxi-Chahaer-Hebei Border Region, Shanxi-Hebei-Henan Border Region, Hebei-Shandong-Henan Border Region (Shanxi-Chahaer-Hebei, Shanxi-Hebei-Henan Border Region and Hebei-Shandong-Henan Border Region were known ‗Shanxi-Hebei-Shandong-Henan Border Region‘), Shanxi-Suiyuan Border Region, Shandong Base in Northwestern China and North China; North Jiangsu anti-Japanese Revolutionary Base, Central Jiangsu anti-Japanese Revolutionary Base, South Jiangsu anti-Japanese Revolutionary Base, East Zhejiang anti-Japanese Revolutionary Base, Northern Huaihe River anti-Japanese Revolutionary Base, Central Anhui anti-Japanese Revolutionary Base, Western

Henan

anti-Japanese

Revolutionary

Base,

Hubei-Henan-Anhui

anti-Japanese

Revolutionary Base, Hunan-Hubei-Jiangxi anti-Japanese Revolutionary Base, etc. in Central China; Dongjiang River anti-Japanese Revolutionary Base

166

, Qiongya anti-Japanese

167

Revolutionary Base , etc. in South China. Among them, Shanxi-Gansu-Ningxia Border Region was where the the Central Committeeofthe Communist Party of China and the Central Military Commission were located. Each anti-Japanese Base functioned as a self-contained strategic unit and had an anti-Japanese democratic government which coordinated the local military, politics, economics and public finance in a relatively independent manner so as to sustain its resistance against Japanese aggressors. To cover the military expenses consumed by the lengthy anti-Japanese War, develop the economy of the anti-Japanese bases and wage economic campaigns against Japanese troops, anti-Japanese democratic governments set up their own financial institutions one after another following the establishment of the Bank of Shanxi-Gansu-Ningxia in October 1937. They set up 40 banks including the Bank of Shanxi-Chahaer-Hebei Border Region, The North Sea Bank, the Bank of South Hebei, the Farmers‘ Bank of Northwestern Shanxi, the bank of the YangtzeriverandHuaiheRiver, the Bank of Yanfu Border Region168 and issued currencies in the anti-Japanese bases including bian bi(border currency) kang bi(anti-Japanese currency).In this 165 The enemy‘s rear battlefield referred to the battlefields in enemy-occupied zones. Here, it referred to Japanese-occupied zones. 166 Dongjiang River anti-Japanese Revolutionary Base was located at the mouth of the Pearl River and on the sides of the Guangzhou-Kowloon Railway. 167 Qiongya referred to Hainan Island. 168 Yanfu Border Region was located in Jiangsu Province. 74

way, anti-Japanese democratic governments held on to their resistance against Japanese aggressors in the financial field under tough circumstances. After the government of Shanxi-Gansu-Ningxia Border Region was founded in 1937, the National Bank Northwest Branch was restructured into the Bank of Shanxi-Gansu-Ningxia Border Region with an initial capital of 100,000yuan. In 1941, it received 1.2 million yuan from the Finance Department of the government of Shanxi-Gansu-Ningxia Border Region. It was headquartered in Yanan and had four branches of Suide (绥德)169, Sanbian (三边)170, Longdong (陇东)171 and the central Shaanxi Plain (关中), each having subsidiaries and offices under it. To accumulate capital, the Bank of Shaanxi-Gansu-Ningxia Border Region also opened Guanghua Store (光华商店) with several branch stores. It was in charge of purchasing and managing goods and materials and ensuring supplies to party and government organs and troops. During the early period of anti-Japanese War, the Bank of Shanxi-Gansu-Ningxia Border Region only issued vouchers named after Guanghua Store without issuing any currency. In early 1941, after Chiang Kai-shek engineered the South Anhui Incident of 1941172 and stopped paying military expenditure to the Eighth Route Army and the Fourth Army, the CCP government, with a view to overcoming wartime financial difficulties and developing the economy of anti-Japanese bases to continue to fight against Japanese imperialism, promulgated a decree in January 1941 which banned the circulation of legal tender and authorized the Bank of Shanxi-Gansu-Ningxia Border Region to issue bian bi. It also ruled that only bian bi could be used in the border region and Guanghua Store vouchers were withdrawn from circulation gradually. Thereafter, work of the Bank of Shanxi-Gansu-Ningxia Border Region entered into a new phrase. To meet financial and war needs, the Bank of Shanxi-Gansu-Ningxia Border Region took the initiative to issue bian bi. By the end of June 1944, it had issued a total of 3.8 billion yuan bian bi. Meanwhile, it also allocated expenses to offices and troops timely to ensure supplies to the CCP, governments and troops. In addition, it also worked with the government to curtail expenses, mobilize people to save money, combat black market of legal tender and to moderately tighten the issuing of bian bi. From July to September 1943, in order to ensure the supplies of daily necessities in the approaching winter against the tense political situation, the Bank of Shanxi-Gansu-Ningxia Border Region had to expand the issue of bian bi, which caused severe fluctuations in both finance and commodity price. In December of the same year, the Northwest Bureau of the Central Committee of the Communist Party of China decided to stop issuing bian bi, suspend military expenses over a course of three months and ruled that all legal tender must be converted and all public stores173must be subject to uniform management. Thanks to these effective measures, prices in Shanxi-Gansu-Ningxia Border Region moved towards stability. In addition, the Bank of 169

Suide County was located in the north of Shaanxi Province. Sanbian County referred to the following three counties altogether, namely, Dingbian, Anbian and Jingbian in north Shaanxi. 171 Longdong generally referred to Qingyang city of Gansu Province. 172 The Southern Anhui Incident of 1941, also known as New Fourth Army Incident or the Wannan Incident, occurred in China in January 1941 during the Second Sino-Japanese War, during which the Chinese Civil War was in theory suspended, uniting the Communists and Nationalists against the Japanese. 173 Public store was a kind of store in the old China which was run by government. 75 170

Shanxi-Gansu-Ningxia Border Region also offered enormous funds to government organs and troops for them to conduct productive activities, allocating agricultural loans and loans for addressing crop failure, and made loans to and made investment in public industry. In 1944, Shaanxi-Gansu-Ningxia Border region‘s output of crops, cotton and daily necessities increased remarkably, revenue and expenditure were in balance and finance and commodity price were stable on the whole. In a better financial condition, on May 1944, the Northwest Fiscal and Financial Office decided to issue Shaanxi-Gansu-Ningxia Border Region Trade Company Commercial Certificates to replace bian bi at the ratio of 1:20 with the intent of better combating legal tender, rectifying finance and animating the financial market. In January 1948, the Northwest Bureau of the Central Committee of the Communist Partyof China merged the Bank of Shaanxi-Gansu-Ningxia Border Region and the Farmers‘ Bank of Northwest Shanxi into the Farmers‘ Bank of Northwest China. The Shanxi-Chahar-Hebei Border Region was a relatively old one established during the anti-Japanese War. In February 1938, the Congress of Military, Government and Civilians was held in the Shanxi-Chahar-Hebei Border Region and a Provisional Executive Committee was voted for. At that time, domestic and foreign trade and exchange of goods and materials in the Shanxi-Chahar-Hebei Border Region was seriously affected by monetary and financial chaos in Hebei Province, Shanxi Province and Chahar Province. The situation was made even worse by Japanese imperialists who established the puppet Joint Reserves Bank and issued massive puppet currencies to purchase goods and materials in the region. To foil the Japanese imperialists‘ scheme, unify currencies of the Shanxi-Chahar-Hebei Border Region, protect and develop economy of the region and support the Chinese people‘s resistance against Japanese imperialists, the Congress of Military, Government and Civilians approved of the decision on founding the Bank of Shanxi-Chaer-Hebei Border Region and issuing currencies. In March of the same year, the Bank of Shanxi-Chaer-Hebei Border Region opened in Wutaishan County, Shanxi. It had three branches in Central Hebei Military Command, Heibei-Shanxi Command and Hebei-Chahar Command and offices in each military command. It issued bian bi, known as bian bi of the Shanxi-Chahar-Hebei Border Region. To ensure the stability of the currency, the government of the Shanxi-Chaer-Hebei Border Region stressed that if a bank was to issue currency, it should have 100 percent reserves behind it, 40 percent in cash and 60 percent in physical goods and pledges. Shortly after bian bi was issued, the Bank of Shanxi-Chaer-Hebei Border Region set out to combat miscellaneous paper notes issued by local authorities, social organizations, financial institutions, merchants, puppet paper notes (notes issued by the puppet China Joint Reserve Bank), legal tender, etc. To begin with, they banned the circulation of puppet paper notes, gold and silver and also cracked down on miscellaneous types of other paper notes. Within no more than two years‘ time, it eliminated all miscellaneous paper notes in the region that came from Shanxi, Chahar and Hebei as well as Beiping and Tianjin. It combated legal tender in a different way. At the outset, it safeguarded the circulation of legal tender. After the South Anhui Incident, it issued, but did not accept legal tender. Plus, tax collecting organs and trade departments of the Shanxi-Chaer-Hebei Border Region unanimously refused legal tender. As a result, legal tender circulating in the Shanxi-Chaer-Hebei Border Region depreciated sharply. In this way, the Shanxi-Chaer-Hebei Border Region became the first to have an independent monetary market 76

dominated by paper notes issued by its own bank. In the spring of 1938, CPC organizations in Jiaodong Area (胶东区)174 initiated anti-Japanese armed struggles, took Penglai County (蓬莱)175, Huangxian County (黄县)176 and Yexian County (掖县)177 and established an anti-Japanese democratic government of the three counties and the North Sea Chief Inspector‘s Office. In August of the same year, it further established the North Sea Bank at Ye County which had under it branches in Penglai County, Huang County, etc. The North Sea Bank and its branches issued North Sea Paper Notes which simultaneously circulated at parity with legal tender. The North Sea Bank was originally of a joint public-private nature and it had a total capital of 250,000 yuan, 70% in private shares and 30% in government shares. In the spring of 1939, the North Sea Bank was forced to close its doors due to the joint attack of KMT troops and Japanese troops on the three counties, but North Sea Paper Notes still circulated among local people. In August of the same year, the North Sea Bank was reestablished in Zhanggezhuang(张各庄)178 bordering Laiyang (莱阳)179 and Zhaoyuan (招远)180. In August 1940, following the establishment of the Wartime Work Promotion Committee of Shandong Province, the head office of the North Sea Bank was formally set up and the North Sea Bank of Jiaodong became a branch of it. Afterwards, it further set up numerous branches including the Central Hebei Branch, the South Shandong Branch, the Costal Branch and the Bohai Sea Branch as well as their sub-branches and offices. In the beginning, the North Sea Bank issued only a small amount of paper notes which hardly met market demand. Therefore, its branches issued an additional amount of notes as fractional notes. Later, in order to combat legal tender, monopolize currency issuance and meet the growing market demand caused by the constant expansion of anti-Japanese bases, it remarkably increased the issue of North Sea Paper Notes. During the entirety of the anti-Japanese War, revenue and expenditure of the Shandong anti-Japanese Base were in balance on the whole, the monetary market was stable, and the market value of North Sea Paper Notes was relatively high. In August 1938, the anti-Japanese regime of the Southeastern Shanxi anti-Japanese revolutionary Base established the Shang Dang Bank181 and issued paper notes known as Shang Dang Paper Notes. After the Southern Hebei Executive Office was established in October 1939, the

Shang

Dang

Bank

was

merged

into

Southern

Hebei

Bank.

After

the

Shanxi-Hebei-Shandong-Henan Border Region Executive Committee was established in 1941, the Southern Hebei Bank became an independent unit led by the government of the Shanxi-Hebei-Shandong-Henan Border Region. It was headquartered in Licheng County, Shanxi Province and had four regional branches: the Branch of Southern Hebei anti-Japanese Base, Branch of Taihang anti-Japanese Base, Branch of Taiyue anti-Japanese Base and Branch of Hebei-Shandong-Henan anti-Japanese Base. (In 1943 and 1944, Branch of Southern Hebei anti-Japanese Base and Branch of Taiyue anti-Japanese Base were incorporated into the Industrial 174

Jiaodong area referred to the area in the east of Jiaolai River of Shandong Province. Penglai County was located in Shandong. 176 Huangxian County was located in the city of Longkou of Shandong Province and in the northern part of Jiaodong peninsula. 177 Yexian County was the original name of Laizhou City of Shandong Province. 178 Zhanggezhuang was a town located in the City of Yantai, Shandong. 179 Laiyang was a county-level city affiliated to the city of Yantai, Shandong Province. 180 Zhaoyuan was a county-level city affiliated to the city of Yantai, Shandong Province. 181 Shang Dang Bank was located in Nangou Village of Qin County, Shanxi Province. 77 175

and Commercial Bureau of Shanxi-Hebei-Shandong-Henan Border Region which suffered repeated natural disasters in an attempt to downsize the army and simplify government organizations with a view to lightening burden on the people). The Southern Hebei Bank issued Southern Hebei paper notes and withdrew Shangdang notes from circulation. Because the Shanxi-Hebei-Shandong-Henan Border Region was divided into fragments and blockaded by Japanese troops, Southern Hebei paper notes issued by different branches of the Southern Hebei Bank were printed with such characters as Taihang, Taiyue and Pingyuan. Branches in different regions issued paper notes independently and paper notes issued by one branch could only circulate in the region where the branch located. At first, Southern Hebei paper notes were issued mainly to cover the military and government expenses of the Shanxi-Hebei-Shandong-Henan Border Region and before 1942, 65% went to the government of the Shanxi-Hebei-Shandong-Henan Border Region in the form of an overdraft. After 1943, a larger proportion of paper notes were used for production and production loans rose year by year. Besides this, branches in different border regions also issued promissory notes to purchase crops and other goods and materials. This successfully curbed commodity price, stabilized the value of North Sea Paper Notes and regulated the market. In the early 1940, the Jin-Sui Border Region set up the Executive Office. In May of the same year, based on the Local Farmers‘ Bank of Xing County, Shanxi Province, the Executive Office founded the Farmers‘ Bank of Northwestern Shanxi and began to issue Northwestern Shanxi paper notes or ‗Western Farmers‘ notes‘. The Jin-Sui Border Region was economically backward and had only a small amount of fiscal revenue. Therefore, Northwestern Shanxi Paper Notes were issued mainly for solving fiscal problems. In 1943, The Jin-Sui Border Region embarked on the Great Production Campaign and the Farmers‘ Bank of Northwestern Shanxi provided able support by making tremendous loans to people. After the Southern Anhui Incident of January 1941, the Central Military Commission rebuilt the Military Headquarter of the New Fourth Army in Yancheng (盐城), Northern Jiangsu and decided on founding the Jiang-Huai Bank in Yancheng. In June of the same year, the Jiang-Huai Bank set up a branch in Pincha Town (拼茶镇) of Central Jiangsu. In July of the same year, Japanese aggressors launched a ‗mopping-up campaign‘182in Northern Jiangsu anti-Japanese Base and the anti-Japanese base was soon under threat. In such circumstances, the head office of the Jiang-Huai Bank retreated with the Finance Ministry of the Headquarter of New Fourth Army and later closed. But the Central Jiangsu Branch was preserved and led by the Executive Office of Central Jiangsu. In November 1942, the Executive Office of Central Jiangsu published a notice and instructed the Jiang-Huai Bank to issue kang bi or resistance paper notes (also called Jiang-Huai Paper Notes) and the exchange rate of kang bi against legal tender was 1:5. After kang bi were issued, the Jiang-Huai Bank made greater efforts to combat legal tender and manage goods and materials. The value of kang bi was great. Later, because of the constant depreciation of legal tender and constant appreciation of kang bi, the Jiang-Huai Bank issued new kang bi and the exchange rate of new kang bi against legal tender was 1:50. Thereafter, some 182

The mopping-up campaign was a military strategy of the Japanese aggressors to counter the Eight Rout Army‘s guerrilla war. 78

branches and offices of the Jiang-Huai Bank also issued local circulation notes as fractional currency to satisfy the growing demands of circulation arising from the expansion of liberalization zones. After the Southern Anhui Incident of 1941,in the spirit of the First Enlarged Meeting of Central China Bureau of CPC Central Committee, banks were successively established in other anti-Japanese bases of central China such as Huaihai Local Bank and Yanfu Bank in the northern and southern part of Northern Jiangsu Area respectively: Jiangnan Bank in Southern Jiangsu Area, Huainan Bank in Huainan Area, Huaibei Local Bank in Huaibei Area, Great River Bank in Central Anhui Area, Henan-Hubei Construction Bank in Henan-Hubei Border Region, and Eastern Zhejiang Bank in Eastern Zhejiang Area. All these banks issued their own currencies. When China‘s resistance war against the Japanese aggressors entered into the strategic counter-attack stage and the anti-Japanese revolutionary bases in Central China became a reality, the issuing and use of different currencies in various regions became out of the step with the development of the war. For this reason, the Military Department of the New Fourth Army issued an order to establish the Bank of Central China issuing its own banknotes and reconfigure the Bank of Jianghuai, Bank of Yanfu, Bank of Northern Huaihe and Bank of Southern Huaihe into branches of the Bank of Central China. Most banks in the revolutionary bases mentioned above were financial organs sponsored, led and managed by local democratic governments, and were an essential component of local government bodies. Apart from accepting deposits, offering agricultural loans, investing in industry and commerce and conducting remittance, they were also entrusted by local democratic governments to issue bank notes, manage gold treasuries, manage financial affairs, deal in public bonds, trade gold and silver and combat currency issued by the puppet Japanese regime. Apart from banks, credit cooperatives were set up in some revolutionary bases. Take the Shanxi-Gansu-Ningxia Border Region as an example. Thanks to the elimination of the feudal land system, development in rural areas, improvement of people‘s livelihood and growing commercial prosperity, some peasants and craftsmen managed to accumulate a small sum of money ―which could hardly make a difference unless assembled together‖. The need to gather together scattered money in the hands of peasants and craftsmen laid the basis for establishing and developing credit cooperatives in rural areas and animating rural finance. In March 1943, the Goumen Credit Cooperatives of Southern Yan‘an was set up with 128 members, 115,000 yuan share capital, 20,000yuan deposits and 87,000 yuan loans. With the help of the Bank of Shanxi-Gansu-Ningxia Border Region, its business grew rapidly. By May 1944, its members increased to 648, share capital to 4.35 million yuan, deposits to 7.72yuan and loans to 14.28 yuan. With its fast growth, it also motivated the development of other credit cooperatives in the border region. In the course of their construction, credit cooperatives in the border region summed up a set of good practices: 1) be oriented towards people and production; 2) stick to managing credit for the people with governmental assistance; 3) adhere to the principle of gathering shares for the necessity of the cause; 4) follow the policy of employing cadres with both honesty and ability. By the end of 1944, the entire Shanxi-Gansu-Ningxia Border Region had over 30 credit cooperatives and 500 million deposits. All the credit cooperatives were led by the Co-operatives at county level 79

and cooperated with the Bank of Shanxi-Gansu-Ningxia Border Region. In 1945, the Shanxi-Hebei-Shandong-Henan Border Region established two credit cooperatives in Tunliu County and Siyuan County of Taiyue Mountainous Area183 respectively. Rural credit cooperatives played a positive role in regulating rural finance, assisting agricultural production and combating usury activities. With the further development of mass production in revolutionary bases, banks in revolutionary bases made enormous agricultural loans. For instance, the Bank of Shanxi-Hebei-Shandong Border Region made 16.57 million loans in 1942. In 1943, it made a loan of 95.7 million, an increase of nearly five times in only one year. In 1943, to prepare for the next winter, the Bank of Shanxi-Hebei-Shandong Border Region made a loan of344.9 million to support agricultural mutual cooperatives and develop agriculture and sideline operations as well as develop industry and handicraft production. According to incomplete statistics, from 1939 to 1945, the percentage of agricultural loans in total bank loans for different banks was 38.9% for the Southern Hebei Bank, 34.9% for the Bank of Shanxi-Chahar-Hebei Border Region and 62.5% for the North Sea Bank. These agricultural loans helped tide over the harsh times of crop failure, attacked usury activities in rural areas, aroused people‘s enthusiasm for production, and promoted the growth of production. They also combined production with bank notes issued by banks in border regions, stabilized currency and finance in revolutionary bases and financed the Chinese people‘s resistance against the Japanese aggressors.

5.6 Currency War: the battle to control currency during the anti-Japanese War period The battle to control currency was a special war between China and Japan at the time of the anti-Japanese War. Although it was free from gunfire and explosions, it was no less fierce than regular armed battles. Since modern wars rely heavily on the national economy, a currency war can be seen as an economically-based duel between the combatants involved. After the Japanese aggressors launched the all-out war in China, it not only seized Chinese territories and goods by force, but also attacked China‘s monetary finance in an attempt to kill two birds with one stone: to strangle the vigor of China‘s economy at wartime on the one hand, and plunder China‘s economic resources to support its global strategy on the other. Japanese aggressors took the following several measures to conduct currency war: 1) To capture the capital of Chinese-funded banks in occupied zones and establish puppet banks; 2) To issue puppet bank notes, counterfeit legal tender and bian bi and combat or exclude legal tender and bian bi, etc. 3) To arbitrage and seize China‘s foreign exchange with legal tender or through other means. 4) To transport Japanese goods to China and purchased China‘s imported strategic supplies. 183

Taiyue Mountainous Area referred to the area along the Taiyue Mountain in the south of Shanxi Province. 80

5) To loot China‘s gold and silver. Since Japan spent a large sum of foreign exchange reserves in importing raw materials so as to support the hyper-development of military industry before wartime, it had already been forced to sell gold in the international market before waging the all-out aggressive war in China in 1937. After the war broke out, Japanese aggressors tried every means possible to seize China‘s foreign exchange. China Fir Organ, a spy agency of the Japanese aggressors, forged and issued four billion yuan legal tender, 2.7 times that of the total legal tender issued by the KMT government in 1937.Inoccupied zones, the Japanese aggressors established many banks such as Mengjiang Bank, China Joint Reserves Bank, and Hua Xing Commercial Bank issued bank notes by force and exchanged the legal tender of Chinese civilians with puppet bank notes. Then, Japan arbitraged foreign exchange in Shanghai with legal tender looted from Chinese banks, counterfeited legal tender and legal tender it exchanged by puppet banknotes. However, the KMT government still insisted on the original exchange rate of legal tender against foreign currencies: 1yuan=30cents or 12.5 pennies. Therefore, the Central Bank had to provide foreign exchange at this exchange rate indefinitely in Shanghai and other cities which resulted in a flight of massive amounts of capital. Before the anti-Japanese War, the KMT government had foreign exchange reserves of US$ 250 million, but in only half a year‘s time, it lost 36% of them. Finally awakened and anxious, the KMT government promulgated ―Method on Applying for Purchasing Foreign Exchange‖ and relevant rules on March 12, 1938, which put an end to the practice of providing foreign exchange indefinitely. According to these rules, matters concerning the sale of foreign exchange must be managed by the head office of the Central Bank or the agent of the Central Bank in Hong Kong and people must get the Central Bank‘s approval to use foreign exchange. After the Central Bank made an examination, it could sell foreign exchange to them. These rules were objected to by British and American banks. At that time, the KMT government had begun to control foreign exchange, but due to the opposition of foreign merchants, its control was loose and people could easily obtain permission to purchase foreign exchange. After the Method came into effect, foreign-funded banks in Shanghai forsake their ‗equal agreements‘ with the Central Bank and their foreign exchange rate no longer accorded with the legal foreign exchange rate. Therefore, black markets of foreign exchange prospered which facilitated Japanese aggressors‘ arbitrage of China‘s foreign exchange with legal tender. Holding the belief that that stabilizing foreign exchange rate could safeguard both the credibility of legal tender and the investment interests of China-based enterprises of Britain and America, the KMT government began to offer foreign exchange secretly through the Bank of China in Shanghai and entrusted the HSBC in Shanghai to sell foreign exchange according to black market prices from July 1938. At that time, Shanghai had already been occupied by Japanese aggressors, but the KMT government still ordered its banks to provide foreign exchange in Shanghai‘s concessions. This was beyond comprehension. Some scholars ascribed it to the KMT government‘s intention to please Britain and America so as to get foreign assistance. From 1938, the KMT government promulgated a series of laws and regulations, including ―Method for Merchants to Export Commodities and Effecting Settlement in Foreign Exchange‖, 81

―Varieties of Foreign Exchanges to Pay for Export Commodities and Payment Measures‖, ―Method on Dealing with Exchange Rate Difference when Receiving Export Goods‖, ―Method on Protecting Production and Promoting Export Sales‖, and took some relevant measures. These laws and measures worked to some extent in strengthening the management of foreign exchange, preventing legal tender, gold, silver and other payment goods from flowing to Japanese-occupied zones, stimulating the export sales of foreign exchange generating goods and increasing the KMT government‘s foreign exchange income. However, due to the tremendous demand for foreign exchange in Shanghai, the Chinese government run out of its foreign exchange reserves by the early 1939 and was forced to resort to Britain and America. On behalf of the British government who decided to help stabilize China‘s legal tender, the HSBC and the Chartered Bank made a loan of five million GBP to China with a low annual interest rate of 2.75%. This fund of five million GBP and another five million GBP from the KMT government constituted a stabilization fund of 10 million GBP under the management of the Stabilization Fund Committee co-founded by China and Britain. After the stabilization fund was founded, China continued to supply foreign exchange in large quantities to the Shanghai black market and the Hong Kong black market to stabilize the foreign exchange rate in the black market. This further facilitated Japan‘s arbitrage of China‘s foreign exchange. Japanese aggressors amassed a large sum of legal tender in occupied zones and transported legal tender to Shanghai to buy foreign exchange. In only three months, the stabilization fund of 10 million was almost exhausted and a majority of it fell into the hands of Japanese aggressors. As a result, since the KMT government overemphasized the stability of the exchange rate of legal tender during the China-Japan currency war during the early period of China‘s resistance against Japan, it lost tremendous amounts of foreign exchange. Worse still, since a majority of foreign exchange lost by the KMT government was purchased by Japanese aggressors, China was for a long time in an adverse situation during the anti-Japanese War. Between May and June of 1939, Japanese aggressors continued to purchase foreign exchange with billions of legal tender which made its way to the Shanghai foreign exchange black market. Under such circumstances, the KMT government had to forsake the original exchange rate and adopt measures including rejecting legal tender circulating in North China and stamping place names on large-denominated banknotes. In September of the same year, the Second World War broke out in Europe. Consequently, price of GBP fell and the KMT government managed to hold on by purchasing depreciated GBP with the stabilization funds. By the early 1941, the remaining stabilization funds were no longer sufficient to support the KMT government. Given that legal tender was pegged to both GBP and USD, Britain and America reluctantly made loans to the KMT government simultaneously in April 1941.As before, Britain lent five million pounds to China and America increased its loan to $50 million this time. Afterwards, the KMT government set up a new committee composed of representatives from China, Britain and America in charge of the utilization and management of the stabilization fund and fixed new official exchange rate of legal tender: 1 yuan=$5.3125cents or 2.03125 pennies. Besides this, America, Britain and the Netherlands also declared in July of the same year to freeze the deposits of Japan and China in their countries. This also helped forestall the flight of China‘s 82

capital and maintain the official exchange rate of legal tender at a certain level. During the early period of China‘s resistance against Japanese aggressors, the KMT government lavished an enormous sum of foreign exchange on the stabilization of the exchange rate of legal tender, but a majority of it fell into the hands of the Japanese. Therefore, Japan‘s financial strength was reinforced in the process. The KMT government made no account of the volume of lost foreign funds, which was estimated to be worth as much as billions of USD. Meanwhile, since the KMT government exercised a loose control over gold, gold became the object of speculators and a large sum of gold fell into the hands of the Japanese. In response, in August 1939, the KMT government issued the ―Methods on Outlawing Accepting and Selling Gold and Gold Products‖, which forbade the non-governmental trade of gold and gold products including gold utensils, gold accessories and gold coins and authorized the four banks (the Central Bank, the Bank of China, the Bank of Communications, the Agricultural Bank) and their delegated units to purchase gold held by the common people nationwide and procure gold deposits of silverware shops. It also ruled that anyone conducting private trade of gold would be severely punished. The enforcement of this method outlawed public gold trade and tightened the government‘s control of non-governmental gold deposits. This was of great significance in China‘s currency war against Japan, but it could still not terminate black gold trade. In June 1943, the KMT government lifted its ban on free trade of gold. After the Pacific War broke out in December 1941, as the puppet Japanese regime could no longer arbitrage China‘s foreign exchange and was increasingly exhausted by the protracted war and the stagnation of international trade, it changed its economic strategy and concentrated on purchasing goods and materials from China with legal tender. The KMT government also passed the Act on Determining Basic Principles of Current Wartime Economy at the Fifth Session of the Ninth Plenary Conference of the Central Committee which decided to ―make more efforts in the economic war between KMT and Japan, prevent smuggling and purchase goods and materials in Japanese-occupied zones and transport them to other areas as soon as possible‖. Therefore, goods and materials became the focus of the economic war between KMT and Japan. Japanese aggressors also waged the currency war against CPC-led revolutionary bases by forging a large sum of bian bi in China and transporting it to revolutionary bases through various means with a view to destroying the economy of revolutionary bases. In response, the governments of revolutionary bases compiled many comparison tables to help people tell the difference between forged and real bank notes and cracked down on forged bank notes. This fight against forged bank notes enhanced the creditability of bian bi and other bank notes issued by banks in revolutionary bases. Japanese troops also attacked the currency of revolutionary bases with joint reserves notes, puppet bank notes and miscellaneous bank notes. Banks in the revolutionary bases adopted the strategy of combing political power and economic power in an effort aimed at ―forbidding the circulation of puppet bank notes and miscellaneous bank notes‖ to combat and exclude puppet bank notes and miscellaneous bank notes. In this way, the credibility of bian bi and other bank notes issued by banks of revolutionary bases was increasingly strengthened. During the early period of China‘s resistance war against Japan, bank notes issued by banks in revolutionary bases were usually guaranteed by legal tender and circulated simultaneously with 83

legal tender at a fixed exchange rate. This was because legal tender issued by the KMT government had already been in circulation nationwide, the KMT government doled out military expenses to the Eighth Route Army and the New Fourth Army in legal tender and the value of legal tender was relatively stable. After the Southern Anhui Incident of 1941, the KMT government stopped allocating military expenses to the Eight Route Army and the New Fourth Army and adopted inflationary policy which led to constant depreciation of legal tender. To avoid losses, anti-Japanese democratic governments explicitly banned the circulation of legal tender in revolutionary bases and banks in revolutionary bases began to engage in a complex and tough combat against legal tender. Shandong revolutionary base was a case in point. Due to the excessive issue of legal tender around 1942, legal tender devaluated dramatically. Japanese aggressors plundered large quantities of goods and materials from revolutionary bases with legal tender and this prompted people in Shandong revolutionary base to initiate three anti-legal tender campaigns which finally achieved victory with the elimination of legal tender throughout the revolutionary base.

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Chapter 6 Finance during the Chinese War of Liberation (1945-1949) After China‘s victory in the anti-Japanese War, the Four Banks and Two Bureaus took over the financial institutions owned by the puppet regime and expanded rapidly. Despite, however, the monetary capital now being concentrated in the hands of KMT bureaucrats, due to the Civil War instigated by Chiang Kai-shek and his followers, the fiscal deficit expanded. To make up for this, the KMT government issued more and more bank notes and this intensified hyperinflation. The KMT government attempted to rescue the dying monetary system through abolishing legal tender and adopting gold coin certificates and silver dollar certificates, but failed. When the KMT‘s rule collapsed, its fiscal and financial system broke down and foreign imperial financiers simultaneously withdrew from China. By contrast, revolutionary bases constantly expanded and integrated into a whole new democratic financial system, and gradually occupied the dominant position throughout the country.

6.1 The monopoly of the Four Banks, Two Bureaus and One Treasury over finance After China defeated the Japanese aggressors in the anti-Japanese War in 1945, the KMT government used America‘s airplanes, warships and landing boats to transport its troops from the Rear Area to areas that were originally occupied by Japanese troops, seized large and medium-sized cities, strongholds and transport links, and took over a large number of industries owned by the puppet regime. Since many KMT officials were involved incorruption, bribery and theft, this take-over process was referred to by the people as ‗daylight robbery‘. The KMT government took over a total of 944 financial institutions together with their branches, among which 29 were owned by Japan including Yokohama Specie Bank, Korean Bank, Taiwan Bank, and Deutsch Asiatische Bank, and five were owned by the puppet regime, i.e. the puppet Manchurian Central Bank, puppet Central Reserves Bank, puppet China Joint Reserves Bank, puppet Mengjiang Bank and puppet Hua Xing Commercial Bank. According to the Finance Ministry of the KMT government, when the Central Reserves Bank was taken over, it had 550,000 liang gold, approximately 7.64 million liang silver, 370,000silver coins and US$5.5 million. When China Joint Reserves Bank was taken over, it had 170,000 liang gold, US$10.2 million and 26,544 GBP. When the Manchurian Central Bank was taken over, it had 8 liang gold, 310,000liang silver and 240,000 silver coins. Other movable and immovable properties taken over by the KMT government were in greater amount. It was estimated that in Jiangsu, Zhejiang and Anhui alone, the KMT government took over 511.769 million liang gold and 8.57101 billion liang silver not including the enormous foreign exchange, negotiable securities, real estates, etc. taken over by it from these areas. Most financial assets owned by the puppet regime were taken over by the Four Banks and Two 85

Bureaus. For instance, to take over financial assets in Shanghai and Nanjing, the Ministry of Finance of the KMT government ruled thatit was up to the Central Bank to take over Korean Bank, puppet Central Reserves Bank, puppet Hua Xing Commercial Bank and branches of puppet Central Manchurian Bank in south China and puppet provincial and municipal local banks; the Bank of China was to take over Japan Yokohama Specie Bank and Deutsch Asiatische Bank; Bank of Communications to take over the Sumitomo Bank, the Bank of Shanghai Joint Stock Company and the Bank of Hankou Joint Stock Company Shanghai Branch; the Central Trust of China was to take over Mitsubishi Bank, the Empire Bank and their affiliated enterprises and organs, puppet Central Trust of China, puppet Central Insurance Company, puppet Central Savings Association; the Bureau of Postal Services and Remittance was to take over the puppet Bureau of Postal Services and Remittance, the puppet Sino-Japanese Industry Bank, the puppet China Industrial Bank, and others. By taking over financial institutions, the Four Banks and Two Bureaus expanded instantly and developed to become the largest group funded by national monopoly-capital. Besides this, the Four Banks and Two Bureaus also cashed in on clearing puppet banknotes including military notes, central reserves notes, joint reserves banknotes and Mengjiang notes that were forcibly issued by the puppet regime to con people in the occupied zones during the anti-Japanese War and swindle the people in Japanese occupied zones of their wealth. The exchange rate of legal tender against puppet banknotes fixed by the puppet regime was extremely unreasonable. For example, although the ratio of legal tender to central reserve notes should have been1:80 considering the constant depreciation of legal tender and its low purchasing power, the actual ratio was 1:200, which substantially devaluated central reserves notes and made central reserves notes held by residents almost worthless. Figures showed that the KMT government made a profit of 300,000 liang gold from the 4.1401 trillion yuan central reserve notes exchanged by it with legal tender alone. This explains why people considered the KMT‘s clearing of puppet banknotes in occupied zones as ‗robbery‘ from local people. The influence of KMT bureaucrats‘ monopoly financial capital grew rapidly. According to an estimate in June, 1946, 2,446 out of the 3,489 banks and branches in KMT-controlled areas(over 70% of the total) were funded by national monopoly capital. Another estimate showed that by the end of 1946, the Four Banks and Two Bureaus alone had 852 branches and its deposit volume reached 5.4881 trillion yuan, 91.7% of the total bank deposits in the entire country. Since the volume of deposits is the paramount indicator of a bank‘s credibility, these figures demonstrated that the vast majority of monetary capital in China had been monopolized by the KMT. In November 1946, the KMT government further announced the establishment of the Central Cooperative Gold Treasury with Chen Kuo-fu184 as its director. Other key positions were also taken by members of the CC Clique185. It had a capital of 60 million yuan, with 30 million from the national treasury, 20 million from the Four Banks and 10 million from provincial and municipal governments and municipal cooperative treasuries. It was headquartered in Nanjing and had branches in municipalities and counties nationwide engaging in deposits, loans, remittance, etc. Apart from ordinary financial business, it also shouldered the task of supporting Chiang 184 Chen Kuo-fu (October5, 1892-August 25, 1951) was a Chinese politician in the Republic of China. He was born in Wuxing of Zhejiang. 185 CC Clique referred to the political party led by Chen Kuo-fu and Chen Li-fu that had close relationship with Chiang Kai-shek. 86

Kai-shek‘s military attack against liberalization zones and provided economic support to landlords in the name of ‗rural relief‘ and ‗agricultural loans‘. After it acceded to the Joint Office of the Four Banks, it could make mortgage loans at any time. After the establishment of the Central Cooperative Treasury, the Four Banks Two Bureaus and One Treasury became the KMT‘s bureaucratic financial system. Since branches of the Central Cooperative Gold Treasury were found in all counties and municipalities across the country, national financial monopoly capital could better infiltrate into every corner of the country. With the enormous monetary funds, the KMT monopoly financial capital went all out to expand loans to and investments in industry and commerce to control the social economy of the entire country. The development of KMT central bureaucratic capital financial system thereby reached its peak. The Central Bank had stakes in many banks including the Chinese Commodities Bank of China, Si Ming Bank, China Industrial Bank, China Merchants Bank, China Farmers‘ Bank and so on. The Bank of China had 40 percent shares of China Textile Construction Company (a post-war monopoly enterprise) and had investment in 85 factories, mines and enterprises including Sin Hua Bank Limited, Guangdong Bank, China Insurance Company, China Cotton Company, Namyang Brothers Tobacco Company, China-made goods joint company, Yangtze Electric Company, Huainan Ore Channel Company, and others. The Bank of Communications also had investment in 52 factories, mines and enterprises. In addition, the China Farmers‘ Bank, the Central Trust of China, the Bureau of Postal Services, Savings and Remittance also increased their investment in factories, mines and enterprises. By making loans and investment, then, the Four Banks and Two Bureaus controlled a sizable proportion of social economic enterprises.

6.2 The hyperinflation in KMT-controlled areas As aforementioned, hyperinflation in the Rear Area during the anti-Japanese War was mainly caused by the KMT government‘s over-issuing of legal tender in an attempt to cover the growing fiscal deficit. Indeed, during the period shortly after the anti-Japanese War, the KMT government enjoyed circumstances conducive to eliminating the fiscal deficit. To begin with, after resuming control of a large stretch of land in affluent eastern regions, its revenue surged as the ordinary tax revenue and administrative revenue in its annual fiscal budget of 1946 increased by about nine times compared with the previous year. Furthermore, through taking over goods and materials from Japanese aggressors and the puppet regime, KMT government gained a large sum of fiscal revenue. In addition, the substantial reduction of military expenses after the war was also a favorable condition for the KMT government. However, because the KMT decided to launch the Civil War, the KMT government lavished a great sum of money on munitions and military equipment and maintained 4,500,000-5,000,000 troops, the fiscal expenses of the KMT government increased rather than reduced. The Civil War was extremely expensive. Estimates suggest that in1946, the KMT government‘s spending on the maintenance of a single army division was enough to support 30 or more universities and the annual soldier‘s pay of its 200 divisions cost 2.88 trillion yuan, excluding cost in guns, munitions and other equipment. The bulky military expense stood at over 50% of the KMT government‘s fiscal expenditure and 87

increased to nearly 70% in 1948, larger that it was during the anti-Japanese War. Therefore, one of the outcomes of the Civil War was the remarkable annual growth of fiscal expense which could have been eliminated or reduced. The deficit of 1.1067 trillion yuan in 1945 rose to 4.6978 trillion in 1946, an increase of over four fold, and 29.3295 trillion in 1946, an increase of six fold. The deficit was even larger in 1948 and in the first seven months, it exceeded 434 trillion yuan, a surprisingly sharp increase of 14 fold when compared with the total deficit of 1947. The percentage of deficit in fiscal expenditure also rose annually from 47.1% in 1945 to 62% in 1946 and 67.5% in 1947. To make up for the constantly growing fiscal deficit, the KMT government took a series of measures such as selling assets taken over from the puppet regime, asking for foreign loans abroad and issuing government bonds domestically, levying more taxes and selling the gold and foreign exchange of the government, but the actual revenues from these measures were not to the satisfaction of Chiang Kai-shek and his followers. By the end of 1946, the assets of 500 billion yuan sold by the KMT government to the public were soon exhausted by the enormous military expenses and, because of political and economic instability, people lost interest in purchasing fixed assets. Most foreign loans of the KMT government were used to buy foreign ships, equipment, and raw materials which did not help solve financial problems. Besides, the KMT government had more and more difficulties in issuing government bonds due to opposition from the public. Moreover, the KMT government‘s practice of collecting tax in kind and levying more taxes caused public resentment and led to social unrest and heavier taxes did not solve the deficit problem since extra taxes were retained by officials in the process of tax collection. In February 1946, the KMT government decided to open a foreign exchange market and sell gold to consume the surplus social purchasing power caused by fiscal deficit. Unexpectedly, in only eight months after the opening of the foreign exchange market, 60% of its USD reserves in the Central Bank were consumed. This saddened Chiang Kai-shek and he was forced to constrain and control foreign exchange once again. Although the KMT government continued to increase the gold supply, gold price kept rising because capital across the country flew to Shanghai in exchange for gold. The rising gold price triggered a gold turmoil in Shanghai and shocked the whole nation. The KMT government further spent 60%of its gold reserves in making up for the fiscal deficit, but failed. Under such circumstances, the KMT government was pressed to take emergent measures in February 1947 and stopped selling gold. The then Director of the Executive Council, Soong Tzu-wen and President of the Central Bank, Bei Zhuyi were forced to step down. Although financial experts in the KMT government tried to come up with a variety of means to make up for fiscal deficit, it kept expanding because the Ministry of Finance of the KMT government ―could not but cover the military expenses‖. After 1947, fiscal deficit of the KMT government was almost entirely compensated for by issuing banknotes in excess. As Figure 6-1 shows, the annual fiscal deficit was offset by loans from the Central Bank. By the end of 1947, because the KMT government borrowed too much money from the Central Bank, the Central Bank was forced to stop making loans to private industries. The deficit caused by the bank providing advance money for the government was covered by an extra issue of bank notes. 88

From Figure 6-1, we can see that in 1946, bank notes issue increased by 2.6942 trillion yuan, far exceeding the proceedings gained from selling puppet assets, gold and foreign exchange that year. In 1947, the bank notes issue further increased by over nine times from the previous year and the increased in bank notes issue during January and July of 1948 reached 341.5737 trillion yuan. Figure 6-1 Statistics of Fiscal Deficit, Advances and Increases in Bank Notes Issue of the Central Bank

Year

Fiscal deficit

Advances Central Bank

of

the

New bank notes issue

1946

46,978

46,978

26,942

1947

293,295

29,3295

294,624

January-July 1948

4,345,656

4,345,656

3,415,737

Data Source: The History of Inflation in China authored by Zhang Gongquan and translated by Yang Zhixin, p.110.

In June 1937, the total legal tender issue was 1.41 billion yuan. By August 1945, after eight years of Chinese resistance against Japanese aggressors, this figure rose to 556.7 billion and by August 1948, it further rose to 663.6946 trillion, a surprisingly sharp increase of 470,705 times compared with the prewar period. Since legal tender issue increased constantly and rapidly, the printing and transportation of banknotes became a headache for the KMT officials that were in charge of financial and economic affairs. Branches of the Central Bank nationwide, notably those in Chongqing, Kunming, Xi‘an and other places far from Shanghai often telegraphed the head office for help once they ran out of banknotes. To avoid public censure, the Central Bank dared not print large-denominated banknotes and it instead printed more 2,000-yuan-denominated guanjin certificates (or Custom exchange certificates worth 40,000 yuan) to circulate simultaneously with legal tender. This was to cover the fiscal deficit by issuing large-denominated bank notes which actually forebode the collapse of legal tender system. Hyperinflation inevitably led to a spiraling rise in commodity prices. From May to December 1946, the wholesale commodity price in Shanghai and Chongqing soared by 50% and 43% respectively. Confronted with such a big rise in commodity prices, in February 1946, the KMT government reassumed methods it once used during the anti-Japanese War such as restraining the prices of daily necessities like powder, cotton yarn, cloth, fuel and salt and limiting salaries. However, this strategy failed shortly after its implementation. Prices further skyrocketed at a speed even greater than that of the increase in issuing bank notes. From December 1946 to December 1947, the wholesale price in Shanghai and Chongqing rose by over 13 fold and nearly 14 fold respectively. By August 1948, the wholesale price in Shanghai rose by nearly 60 fold from December 1947 and the wholesale price in Chongqing during this same period rose by over 37 fold (See Figure 6-2).

89

Figure 6-2 Legal Tender Issue and Price Indexes

Time

Legal

Tender

Issue Indexes

Issue(billions)

Shanghai‘s wholesale

price

Chongqing‘s wholesale

indexes

indexes

1937.6 

14.1

1

1

1

1945.12

10,319

732

885

1,405

1946.12

37,261

2,642

5,713

2,688

1947.12

331,885

23,537

83,796

40,107

1948.8

6,636,946

470,705

4,927,000

1,551,000

price

Data Source: A History of Finance in Modern China published by China Financial Publishing House, 1985, p.298.

In terms of purchasing power, the value of one yuan legal tender fell to 7/100,000 in the three years after the anti-Japanese War. The changes in purchasing power of legal tender (100 yuan) from 1937 to 1938 has been illustrated in terms of commodities: in 1937, 100=2 heads of cattle; 1939, 100=1 head of cattle; in 1941, 100=1 pig; in 1943, 100=1 chicken; in 1945, 100=1 fish; in 1946, 100=1 egg; in 1947, 100=1/5 fried bread stick and in 1948, 100=1/500 liang rice. Hyperinflation led to such an extreme depreciation of legal tender that people had to use bags to carry massive amounts of banknotes to buy only a few daily necessities.

6.3 The collapse of gold coin certificates and silver dollar certificates Facing a severe fiscal and financial crisis, the KMT government used its political power to plunder people of their wealth in an attempt to reverse the situation. On August 19, 1948, Chiang Kai-shek as the newly elected President of the Republic of China issued the Emergent Order on Managing Finance to the effect: 1) Adopting gold coin certificates as standard currency and abolish legal tender; 2) The outlawing of any private possession of gold, silver, silver coin and foreign bank notes which should be traded in to the authorities within specified timescale. 3) Registering and managing the Chinese peoples‘ foreign exchange deposits abroad, and sanction anyone that violates this rule. 4) Regulating finances and tightening economic control so as to stabilize prices, balance the national budget and international settlement. On the same day, Chiang Kai-shek also released a series of complementary rules including the ―Method on Issuing Gold Coin Certificates‖, the ―Method on Dealing with Gold, Silver and Foreign Exchange held by the Masses‖, the ―Method on Registering and Managing Foreign Exchange Deposits of People of the Republic of China Abroad‖ and the ―Method on Regulating 90

Public Finance and Tightening Economic Control‖. The ―Method on Issuing Gold Coin Certificates‖ ruled: 1)for a bank to issue gold coin certificates, it should have100 percent reserves behind it, of which 40 percent should be in gold, silver and foreign exchange; 2) the upper limit on gold coin certificate issue was two billion yuan; 3) one yuan gold coin certificate should contain 0.22217 grams of pure gold and was worth $25 cents but it could not be converted into USD; 4) one yuan gold coin certificate could be exchanged for three million yuan legal tender. In fact, since it was ruled that gold coin certificates could not be converted into gold or USD, its gold content or price in terms of USD was meaningless and the restriction on gold coin certificate issue was nothing but a deception. At that time, the total legal tender issue was 663.6946 trillion yuan which could barely be exchanged for 222 million yuan in gold coin certificates. The total worth of legal tender and currency notes issued in Northeast China previously was only equal to 230 million yuan gold yuan notes. Therefore, in less than three months, the KMT government had broken through the upper limit of 200million yuan on gold coin certificate issue, which had already left room for 10 times more actual money supply than money demand. In such case, the exchange price of gold coin certificates against legal tender was substantially enhanced. One yuan gold coin certificate was worth three million yuan legal tender and a 100-yuan-denominated gold coin certificate was worth 300 million yuan legal tender. Therefore, the so-called gold coin certificate reform was a disguised policy of issuing banknotes in excess and further implementing inflationary policy. Since it was a hasty decision of Chiang Kai-shek to issue gold coin certificates, there was no time for the Central Bank to print banknotes stamped with the characters ‗gold yuan‘. The first issue of gold coin certificates, therefore, was actually discarded banknotes previously printed by the Central Bank. To popularize gold coin certificates, the ―Emergent Order on Managing Finance and the Economy‖ further ruled that prices of all commodities and services across the country must be frozen at the their local price in terms of gold coin certificates on August 19, 1948, and this should be strictly carried out by local supervisors. Meanwhile, the KMT government also ruled in the name of combating hoarding that commodities were permitted to be stored for no more than three months and must be subject to sporadic inspection. Commodities had been in storage for over three months would be confiscated. The order also said that gold, silver, silver coinage in and foreign currencies held by people had to be converted into gold coin certificate at the exchange rate of 1 liang gold=200yuan, 1 liang silver=3 yuan, 1yuan silver coin=2yuan and $1=4 yuan. Anyone who refused to exchange his/her gold, silver, silver coin and foreign currencies within the time limit would have them all confiscated. To successfully implement the policy on gold coin certificates, Finance Minister, Wang Yunwu, relied on an anticipated loan of $500 million from America. For this reason, he visited America in the name of participating in the IMF Board Meeting in late September of 1948, but received cold-shoulder treatment from the then US president, Harry Truman. The Washington Post even sharply commented that ―given the Civil War and the constant expansion of troops, any form of monetary reform at such a historical time is doomed to failure.‖ To fully carry out the ―Emergent Order on Managing Finance and Economy‖, the KMT government not only employed political forces like police, gendarmerie and spies, but also 91

established an economic control committee. Meanwhile, it also designated a couple of major cities as economic-control zones and appointed Yu Hung-Chun (俞鸿均)186, the then President of the Central Bank, and Chiang Ching-kuo (蒋经国)187 as economic supervision commissioners of Shanghai, and appointed Soong Tzu-wen188and Chang Li-sheng (张厉生)189 to similar posts in Guangzhou and Tianjin respectively. The reason why Chiang Kai-shek sent Chiang Ching-kuo to Shanghai as the economic supervision commissioner to exercise a power control of local economy was that he desired to develop the economy of Shanghai. After Chiang Ching-kuo arrived in Shanghai, he instructed his staff to publicize that he came to ―combat financial tigers and protect commoners‖. He set up a supervision institution in the Central Bank in Shanghai and to better command the supervision institution, he transferred his army stationed in Southern Jiangxi to Shanghai as the mainstay of the campaign against Shanghai‘s financial tigers. He also transferred to Shanghai the ‗construction‘ team formerly led by him and reorganized it into the Shanghai Youth Service Team, as the backbone of the campaign. Later, he selected over 120 million youths from Shanghai Youth Service Team and divided them into 20 groups to conduct activities throughout Shanghai with a view to expanding the influence of Shanghai Youth Service Group. He also organized a demonstration by over 100 million youths in Shanghai. Besides all this, Chiang Ching-kuo also maneuvered all military forces in Shanghai such as guards, inspectors and gendarmerie to suppress any disobedience by force. In a word, he was overwhelmingly influential in the Shanghai of the day and his campaign against Shanghai‘s financial tigers became a hot topic. After Chiang Ching-kuo arrived at Shanghai, he not only forced people from all walks of life to hand in their gold, silver and foreign currencies, but also stringently limited prices. When pressing people to submit gold and silver, he targeted powerful figures in finance, industry and commerce first, and summoned financial magnates including Qian Yongming (钱永铭), Zhou Zuomin (周作 民), Li Ming (李铭) and Dai Li‘an (戴立庵), industrial and commercial tycoons such as the Rong Brothers (荣氏兄弟)190, Liu Hongsheng (刘鸿生)191 and Du Yuesheng (杜月笙)192 to his office and threatened them into surrendering their gold, silver and foreign currencies. His intimidation produced results which could be evidenced by what Liu Hongsheng said to his men after he returned home: ―The prince of our commander Chiang Kai-shek seemed to be truly angry and horrible today. For safety‘s sake, I am afraid I‘d better do as he said.‖ Therefore, Liu Hongsheng reluctantly handed over 800 liang gold, several thousands of pieces of silver coin and $2.3 million. With financial and commercial heads taking the lead, major banks 186 Yu Hung-Chun (4 January 1898 – 1 June 1960), widely known as O. K. Yui, was a Chinese political figure who served as premier of the Republic of China on Taiwan between 1954 and 1958. 187 Chiang Ching-kuo (April 27, 1910 – January 13, 1988), Kuomintang politician and leader, was the son of Generalissimo and President Chiang Kai-shek and held numerous posts in the government of the Republic of China (ROC). 188 Soong Tzu-wen (December 4, 1891 – April 26, 1971) was a prominent businessman and politician in the early 20th century Republic of China. His father was Charlie Soong and his siblings were the Soong sisters. 189 Chang Li-sheng (1901–1971) was a Kuomintang politician and Secretary General of the party from 1954 to 1959. 190 Rong Brothers referred to RongDesheng and RongZongjing. They were important national capitalists of China who opened money shops and ran the first Powder Mill. 191 Liu Hongsheng (1888–1956) was one of the early industrialists in Shanghai, founder of Zhoushan High School. 192 Du Yuesheng (August22, 1888-August 16, 1951), nicknamed ―Big-Eared Du‖, was a Chinese triad boss who spent much of his life in Shanghai. 92

in Shanghai also handed over large sums of gold, silver and foreign currencies. Pressed by political power, a number of Shanghai citizens also surrendered hard currency which they had saved for future use. By the end of October 1948, people in Shanghai, including financial industry leaders, small and medium-sized industrialists and merchants, and ordinary citizens had been forced to submit a total of 11.46 million liang gold, 960,000 liang silver, 3.69 million yuan silver coin, $ 34.42 million and 11million HK dollars. The KMT government also set up over 60 exchange and remittance locations throughout the country and coerced people to convert gold, silver and foreign currencies into gold coin certificates. On September 30, 1948, the KMT government prolonged the time limit for converting gold, silver and foreign currencies to gold coin certificate to October 31. Under the high-handed rule of KMT regime, by the end of October, people in KMT-controlled areas had submitted to the Central Bank a total amount of gold, silver and foreign currencies as follows: gold, 1.67million ounces; silver, 8.881 million ounces; silver dollar, 23.56 million yuan; USD,

49.852millionyuan;

HKD,

86.097millionyuan;

deposits

in

foreign

currencies,

$10.698million and a total of $179.612millionother foreign currencies. According to the estimate from Executive Council of the KMT government, the gold, silver and foreign currencies submitted by the people this time accounted for slightly less than 20% of the total amount of gold, silver and foreign currencies in all of China. And since gold coin certificates the KMT government given to people who submitted gold, silver and foreign currencies depreciated dramatically and soon became almost worthless, the KMT government‘s conversion of gold, silver and foreign currencies was little more than theft from the people. Chiang Ching-kuo also made impressive efforts in price control. On the third day after the release of the ―Emergent Order on Managing Finance and Economy‖, he mobilized staff of six military units in Shanghai to conduct sporadic inspections of Shanghai‘s markets, warehouses, docks and stations and punished violators of the order by ―revoking their licenses, prosecuting persons in charge and confiscating their commodities‖. He set up stands throughout Shanghai to conduct inspection and receive information from people and organized inspection teams, information collection teams and so on. He also sentenced to death a number of people for sabotaging economic control and partaking incorruption and taking bribes, including the chief of the military police, the chief of the inspection team, and the director of garrison headquarters. In addition, he arrested over 60 people including Du Weiping (杜维屏), the son of gang leader, Du Yuesheng, and Rong Hongyuan (荣鸿元), the boss of Shenxin Silk Factory. Due to his severity in punishing economic criminals, he was described as ‗China‘s economic Tsar‘ by foreign journalists, and considered by some Shanghai people as uninterested ―Justice Bao (包青天)193‖. Although Chiang Ching-kuo endeavored to crack down on financial tigers, he was unlikely to touch the interests of KMT officials and their relatives due to the decayed bureaucratic system. For instance, Du Yuesheng once publically asked Chiang Ching-kuo ―treat goods hoarded by the Yangtze Company as other quality products of Shanghai and do not crack down on them‖. Yangtze Company was founded in Shanghai by Kung Ling-kai, the eldest son of Kung Hsiang-his. When Chiang Ching-kuo instructed his economic supervision group to inspect a 193 Justice Bao referred to Bao Zheng(999–1062), is a legendary official in China‘s Song Dynasty and the Chinese symbol of justice. 93

couple of warehouses belonging to Yangtze Company and sealed up large quantities of horded goods and materials including imported automobiles, automobile parts, western medicine, wool fabric, paints, steel, gauze and crops, Kung Ling-kai hastened to ask for Soong May-ling‘s194 help and to intervene in the affair under the patronage of Chiang Kai-shek. As a result, Chiang Ching-kuo had to suspend the inspection of the Yangtze Company. It turned out, therefore, that the so called ‗Justice Bao‘ only dared to combat unimportant merchants rather than the real financial tigers. Limiting prices by force was an expedient strategy which could not solve the root of the problems. Since common people had previous grievous experiences of losing money due to legal tender depreciation, they were more willing to buy commodities as a store of value. This was especially true after the KMT government prolonged the time limit for converting gold, silver and foreign currencies into gold coin certificates which increased people‘s doubts on the creditability of gold coin certificates. Therefore, after October 2, people rushed to buy whatever they saw with gold coin certificates as they feared they might suffer huge losses arising from a sharp depreciation of gold coin certificates overnight. There were many reports on how people rushed to snap up commodities. In Shanghai, as it was reported, ―people crowded into famous cloth stores along Nanjing Road and wool fabric stores along Henan Road immediately after they started business and commodities were sold out instantly‖; it was also reported that ―there was no fresh meats in the market, vegetables were scarce and expensive and edible oil was snapped up‖. Amidst this national crisis, panic purchases of rice took place in over 40 cities which involved in excess of 170,000 people. Merchants purposefully hoarded the daily necessities which they had purchased with a view to selling them later at higher prices. Therefore, the seemingly stable commodity price at the market was actually caused by an extreme shortage of commodities. It was said that ―many stores are empty of any commodities‖ at that time. Chiang Ching-kuo announced a scheme to register stock in Shanghai to combat hoarding and speculation and to regulate market supply based on an inventory of commodities. However, merchants tried to hide their commodities without reporting them to the government. Some even paid an extra transportation charge to hide their commodities in railway carriages so that they could move them around in Wuxi, Zhenjiang and other places near Shanghai, just like mobile storehouses. In addition, in many places, with local government officials regulating commodity trading at open markets, buyers and sellers secretly conducted trade at black markets instead. In the early October, the KMT government further declared the increase of taxes on cigarettes and alcohol. In essence, this was to cause a rise in the prices of these goods which would inevitably lead to the rise in the prices of other commodities. It was said that this move by the KMT government handicapped Chiang Ching-kuo and other practitioners of the price-control policy. Facing the wave of national panic purchasing, the KMT government had no idea of what to do. At a meeting on the economic crisis held by the Legislative Court, someone proposed to ―admit the failure, terminate price-control policy and maintain market order‖. In early November, the 194 Soong May-ling (March 5, 1898– October 23, 2003) was a First Ladyof the Republic of China(ROC), the wife of Generalissimoand PresidentChiang Kai-shek. She was a politician, painterand the chairman of Fu Jen Catholic University. 94

Legislative Court convened a meeting and decided to lift price controls and permit people to hold gold, silver and foreign currencies. This pronouncement signaled the failure of Chiang Ching-kuo‘s campaign against financial tigers in Shanghai. On November 6, after publishing an apology in an article entitled ―To Shanghai Citizens‖, he resigned from his post as economic supervision commissioner and left Shanghai in low spirits. As early as in November 1948, the total gold coin certificate issue had exceeded the originally fixed quota of two billion yuan. From then on, the issue soared rampantly to over 20 billion yuan in January 1949 and further jumped to 200 billion yuan in March, 5.1612 trillion yuan in April and 67.9458 trillion yuan in May, over 33,970 fold more than the fixed quota. The face values of gold yuan notes also continuously increased. In March 1949, 5,000-denominated and 10,000-denominated gold coin certificates were issued; in April, 50,000-denominated and 100,000-denominated gold coin certificates were issued; in May, 500,000-denominated and 1,000,000-denominated gold coin certificates were issued. As a matter of fact, the Central Bank also printed 5,000,000-denominated gold coin certificates which were not issued because of the liberation of Shanghai by the Chinese People‘s Liberation Army. Once price controls were abolished, prices of commodities at the market rallied. With the over-issue of gold coin certificates, prices of commodities skyrocketed. Take the rice price as an example. During the price control period, one dan195of rice cost 23yuan. But only one month after price controls were revoked, the price of rice soared to one dan=1,800yuan and further to be one dan=440 million yuan in five months. This meant that, if one dan of rice consisted of 320 grains of rice, then one grain of rice cost 137 yuan. Thus, there was a popular saying among people then: one grain of rice, 100 yuan; one piece of cloth, 150,000yuan. Go to hell, damned Chiang Kai-shek.‖ From Figure 6-3, we can see the extent of the escalation in the number of bank notes by the KMT government and the rises in prices in KMT-controlled zones. Figure 6-3 Legal Tender and Gold coin certificate Issue Indexes and Price Indexes of Shanghai

Time

Indexes

of

Legal

Wholesale

Price Indexes

Tender and Gold coin

Price

Indexes of Rice

certificate June 1937

1

August 1948

470,704.4*

May 1949

144,565,531,914.9**

1

1

5,714,270.3

5,279,034

36,807,692,307,691.3 47,601,809,864,252

Note: * refers to Legal Tender; ** refers to Gold coin certificate in terms of legal tender. Data Source: Wonder about in the Garden of Financial History (1990) authored by Hong Jiaguan, p.318.

The data obtained from the official statistics of the KMT government listed in the first and second columns is already phenomenally large, but larger still is the data in the third column which indicates the rise in the food price. From Figure 6-3, we can see that during the 12 years from June 1937 to May 1949, the amount of banknotes issued by the KMT government increased by 144.5 billion fold and the wholesale price index and food price in Shanghai in the same period 195

Dan is a measure of volume in the old China. Usually, 1 dan=100jin=50kg. 95

increased by 360,000 fold and 470,000 fold, exceeding the increase in the amount of new banknotes issued by 248 fold and 324 fold respectively. This served as a compelling evidence of the severity of inflation and the sharp fall in the purchasing power of banknotes. During the period when gold yuan notes were issued, in particular, the total amount of banknotes issued increased by 307,000 fold in 9 months while at the same time wholesale price in Shanghai rose by 6441,000 fold and the food price by 9,017,000 folds, which was unprecedented in the global history of inflation. Due to the lack of credibility of the gold coin certificate, even some local KMT governments openly refused to use it. Places such as Taiwan, Guangdong, Sichuan, and Yunnan, explicitly forbade the use of gold coin certificates. Military expenses to KMT troops were also paid in gold or foreign currencies rather than gold coin certificates. In addition, barter trade prevailed in more and more places. In April 1949, the People‘s Liberation Army of China crossed the Yangtze River (大江) and Nanjing, the original capital of the Republic of China was liberated. The KMT government quickly fled to Guangzhou in retreat. To make last-ditch stand, on July 4, 1949, the KMT government stationed in Guangzhou declared the introduction of silver dollar certificates and ruled that a 1 yuan silver dollar certificate could be exchanged for 500 million yuan gold coin certificates or one yuan silver dollar. It also ruled that people could only redeem silver dollar certificates in Guangzhou, Chongqing, Fuzhou, Chengdu, Kunming, Guilin, Hengyang, Lanzhou and Guiyang. People in other places could only ask others to mail silver dollar to them or entrusted others to convert silver dollar certificates into silver dollars. Shortly after the introduction of the silver dollar certificate, Xinhua News Agency was instructed by the CPC to announce that newly liberalized zones would only accepted silver and rejected silver dollar certificates and other currencies issued by local KMT governments. This announcement dealt a fatal blow to the silver dollar certificate and triggered a run on it fewer than 10 ten days after it was issued. By then, the KMT authority had already transferred gold and large sums of silver and foreign exchange to Taiwan. Thus, the KMT government in Guangzhou only had a meager amount of gold to cover military expenses and its silver was almost used up. Its fiscal deficit exceeded fiscal revenue by many times and it still relied on silver dollar certificates to make up for the deficit. As silver dollar certificates could not be converted anywhere and was not trusted by the public, silver dollar certificate runs happened frequently. Since people across the country refused silver dollar certificates, the KMT government issued 100 million silver dollar certificates with only 20 million yuan silver dollar behind them, but they only circulated in equal amounts in Guangzhou and Chongqing. Therefore, although the silver dollar certificate was a relatively new creation, its demise was just around the corner. In October 1949, shortly after Guangzhou was liberated, silver dollar certificate system collapsed.

6.4 Non-governmental financial industry’s gradual decline After the anti-Japanese War, the KMT government ruled that all financial institutions set up under 96

the approval of the puppet regime must stop doing business and be rectified within a set timescale. It also sent officials to examine financial institutions that continued doing business during the Japanese occupation under the approval of the pre-wartime Finance Ministry of the KMT government and to report to the current Finance Ministry of KMT government. As a result, in Shanghai alone, nearly 30 private banks and money shops went out of business. So did dozens of private banks and money shops in Beiping (today‘s Beijing) and Tianjin, and the private financial industry was substantially weakened. Soon, however, these private banks and money shops exploited their connections with government and managed to obtain permission to resume business. With the anomalous prosperity of commerce and vigor of financial speculation, private banks and money shops continued to increase. However, due to the rapid expansion of the influence of bureaucratic monopoly capital, the financial strength of private financial institutions became relatively weaker. This could be seen from the change in the percentage of the total deposits in the country held by them (an important indicator of the financial strength and credibility of a bank). Statistics showed that from 1936 to 1946, the percentage fell from 43.5% to 8.3% and it would have been smaller if die-hard local bureaucratic banks were taken into account. Because of the development of hyperinflation, deposits and loans absorbed by banks funded by national capital shrunk remarkably from pre-wartime if measured by converting them into gold. Shanghai Commercial and Savings Bank ranked the first among private banks in terms of volume of deposits. Before the war, its deposit volume was worth 1.71 million liang gold and loans worth 1.23 million liang gold. After the war, its deposit volume and loans were worth 10,000 liang and 4,000liang respectively. Second to Shanghai Commercial and Savings Bank was the Kin Cheng Bank which at one time overtook Shanghai Commercial and Savings Bank to rank first. Before the anti-Japanese War, its deposit volume was worth 1.39 million liang gold. After the War, its deposit volume fell to 1,554 liang gold, a decrease of nearly 1,000 times. The decline in the amount of deposits and loans reveals to us two things. On the one hand, national capital banks reaped certain benefits from the hyperinflation by absorbing massive deposits before the war which depositors were unable to withdraw during the war, and paying depositors fixed interest and repaying them the principal. However, since the value of banknotes had fallen substantially due to hyperinflation, banks made profits in the process. On the other hand, the future of banks funded by national capital was worrisome in that they reaped these benefits at the expense of numerous depositors. In the case of the continued and rapid development of inflation, even a rise in interest could not offset the lost value of currency. Therefore, it was no longer a good option for enterprises and residents to deposit money in banks. This inevitably led to the contraction of the value of deposits in terms of gold and the decline of the financial strength and status of banks funded by national capital, and a reduction in their ordinary business. To rescue its public finance from collapse, the KMT government tightened its control and intensified its oppression of the private financial industry in the following ways: 1) It banned the use of bills. In July 1947, the KMT government instructed the money industry not to use bills before all bills deposited by people were collected. Although money industry 97

repeatedly objected to this rule, the KMT government turned a deaf ear to its objections and promulgated the ―Provisional Method on Restricting the Use of Intraday Bills‖ which provided that bills, with exception to promissory notes, bills of exchange, remittance receipts and certificate checks, were not permitted to be used. As a result, a large number of clients withdrew promissory notes and cash from banks and this led to a sharp increase in the cash demand which private banks were unable to meet. 2) Submit deposit guarantee reserves. The Banking Law issued by the KMT government in September 1947 ruled that private banks should surrender 5-10% of term deposits and 10-15% of demand deposits to the Central Bank as guarantee reserves. Moreover, they should also submit another 7% of time deposits and 15% of demand deposits to the Central Bank as cash reserves. Consequently, workable capital was substantially reduced. 3) Submit balances of promissory notes to the Central Bank. In June 1948, the KMT government further ruled that private banks and money shops must submit all the balances of promissory notes drawn by them to the Central Bank or Shanghai Clearing House. In consequence, private banks and money shops had to borrow money, strike a balance between borrowing and lending on the trading day, and get their balances back the next day. This involved complicated procedures and increased difficulties in regulating funds. Worse still, private banks and money shops tended to suffer a loss when effecting payment in both legal tender and silver dollar. 4) Submit increased capital to the Central Bank within set timescales. In September 1948, the KMT government issued the ―Method for Commercial Banks to Regulate Capital‖ which provided that the minimum capital volume of banks in Shanghai should be no less than 500,000 yuan gold coin certificates, and half of the increased capital of commercial banks should be deposited at the Central Bank for three months during which period any use of them without approval was forbidden. This is to say, Shanghai alone had to submit 70 million gold coin certificates to the Central Bank and all deposits of private banks were frozen at the Central Bank for three months. As a result, private banks had no capital to regulate their banking operations and suffered tremendous losses in the situation of rising commodity prices. 5) Press people to hand over gold, silver and foreign currencies. In August 1948, the KMT government introduced gold coin certificate reform and outlawed any private possession of gold, silver and foreign currencies and the private financial industry bore the brunt of the impact of these reforms. Finance industry leaders like Qian Yongming, Zhou Zuomin, Li Ming and Dai Li‘an, to name just a few, and medium and small money shop keepers were all ruined, which further impaired the financial strength of private banks. 6) Control interest rates. In August 1948, the KMT government began to implement a price-control policy and ruled that the lending rate made by private banks must be verified by the Central Bank. It also repeatedly lowered the lending rate by force. Since deposit interest rates would be much lower once the lending rate was lowered, depositors rushed to withdraw deposits and to deposit their money in underground financial institutions whose deposit interest rates were higher. This severely impaired the capability of private banks to attract deposits. In sum, due to hyperinflation and the intensification of government control, the already declining deposit business of private banks and money shops went from bad to worse and was on the verge 98

of collapse. If we make an assessment on the value of the deposit volume of commercial banks throughout the country according to Shanghai‘s wholesale commodity price indexes before the anti-Japanese War, we will see it on a downward trend: around 62 million yuan in June 1946, 47.74 million yuan in June 1947, and 7.5 million yuan in August 1948. If we compare the deposit volume of all commercial banks throughout the country with that before the anti-Japanese War, the result will be more frustrating, with the former accounting for only 5‰ of the latter. In terms of deposit composition, the percentage of time deposits became increasingly smaller while that of demand deposits became increasingly larger. Generally speaking, demand deposits accounted for over 90% of the total deposit volume of private banks and demand deposits only accounted for a fairly small part of it. For instance, the ratio of demand deposits to time deposits of Zhejiang Industrial Bank was 18:1 in 1947.By the end of 1948, the figure rose to35:1, which means by that time demand deposits had accounted for over 97% of the total deposits of Zhejiang Industrial Bank. At that time, industrialists and merchants alike preferred to store commodities rather than currency so that they would suffer less if currency depreciated and demand deposits were merely the minimum settlement funds they prepared for future payment. Therefore, long-term capital available to private banks and money shops decreased gradually. The development of hyperinflation led to not only a decrease in the sum of industrial and commercial loans of commercial banks but also a shortening in the length of maturity of industrial and commercial loans. Since most industrial and commercial loans were discount loans and loans with foreign exchange as collateral which matured in no more than one month, usually 10-15 days, they contributed little to the development of productive enterprises. At that time, the entire non-governmental financial industry made it its major business to hoard principal commodities and supplies and engage in speculation in gold, silver and foreign exchange. Amidst the financial speculation, underground money shops appeared. In the situation of severe inflation and rising prices, many idle funds in society were lent not through banks or regular money shops, but through underground money shops. Underground money shops produced such great returns on lending and achieved such strong influence that they had actually become the arbitrator of the market interest rate. By contrast, since the non-governmental financial industry only participated in speculation for survival, their role in the development of industry and commerce was gradually weakened and they were on verge of collapse.

6.5 The retreat of foreign banks from China After the anti-Japanese war, the financial influence of the original fascist allies, Germany, Italy and Japan vanished from China and their banks in China were taken over by the Four Banks and Two Bureaus of the KMT government. During this period, there were a total of 14 China-based foreign banks. Four were British funded: the HSBC, the Chartered Bank, Chartered Mercantile Bank and Sassoon Corporate; Two were French funded: BanquedeI‘Indochine, Chinese-French Industrial and Commercial Bank; Two were funded by Holland: Holland Bank and Anda Bank of Holland; one was Belgian-funded, the Bank of Belgium and the other five were funded by America: Citibank, the Chase Bank, American Express, the International Bank of U.S.A and Bank of America Corporation. 99

Although China-based foreign banks shrunk in number, they were still very powerful. According to the Central Bank, the total assets of foreign banks in Shanghai in October 1947 accounted for 26.2% of the total assets of Shanghai‘s financial industry and this figure further climbed to 36% by August 1948. In contrast, the percentage of assets of domestic banks in Shanghai‘s financial industry declined in this same period. At the same time, the percentage of deposits in foreign banks in Shanghai was also on the rise: 11%in 1945, 17% in October 1947 and 20% in May 1948. Besides this, the percentage of the lending volume of foreign banks also increased: merely 4% in 1945, rising to 31% in October 1947 and 48% in September 1949. The rise of American strength was a prominent feature of foreign financial influences in post-war China. After the anti-Japanese war, Citibank was renamed the First Citibank and became an emerging consortium of eastern America that had intricate connections with other American consortiums. The Chase Bank, having been under the control of by Rockefeller Consortium since 1929, became more powerful after it merged with the Manhattan Bank. The Bank of America acted as the financial pivot of the western American consortium. As the largest banks in America, the First Citibank, the Bank of America and the Chase Bank all intensified their activities in China after the anti-Japanese war. According to the U.S Economic Cooperation Agency, when America provided financial aid to the KMT government, the financial business involved had to be managed by American banks and the remittance and exchange of funds were handled exclusively by the First Citibank and the Chase Bank. Moreover, the American government also stipulated that China had to deposit loans from America at American banks at low interest rates before they used them. After the anti-Japanese war, the bulk of China‘s foreign trade was with America and USD was the major foreign exchange used by China at that time. It was estimated that $60 million-$100 million were in circulation in the Chinese market of the day. In addition, compared with other foreign banks, China-based American banks enjoyed more opportunities to conduct remittance and exchange between China and America. For this reason, after the anti-Japanese war, the business of China-based American banks grew remarkably and their assets doubled what they were before the war. In short, their influence surpassed that of other foreign banks. Nevertheless, well-established and time-honored China-based British banks represented by the HSBC were still quite influential though their financial operations after the anti-Japanese war, though they were weaker than those of China-based American banks. The volume of banknotes issued by the HSBC, the Chase Bank, the Chartered Mercantile Bank of India, London and China and other British banks at the Chinese market then stood between 500 million and 600million yuan. China‘s foreign exchange market, then, was mainly manipulated by American and British banks and both official and underground foreign exchange rates were actually decided by Citibank and HSBC. Since fluctuations in foreign exchange rates influenced Shanghai‘s black market of gold and prices, China‘s financial market was still manipulated by foreign financial forces to a great extent. This manifested because of the semi-colonial nature of finance in KMT-controlled zones. With the development of revolution in China and the collapse of the KMT government‘s fiscal and financial system, foreign banks reluctantly decreased their branches in China step by step and 100

concentrated their business in Shanghai. After the fall of KMT‘s rule in the Chinese mainland, the financial forces of America, France, Belgium and Holland retreated from China and only the HSBC and the Chase Bank remained in Shanghai. After the People‘s Republic of China was founded in 1949, the new Chinese government cancelled the privileges of foreign banks in China and banned the circulation of foreign currencies. Finally, the manipulation of foreign banks in China‘s finance became history.

6.6 The nationwide victory of the new democratic financial system After China‘s victory in the anti-Japanese war, the Chinese people longed for peace and democracy. However, Chiang Kai-shek, supported by U.S. imperialism, tore up peace agreements again and again and launched a gigantic counter-revolutionary civil war. Under the leadership of the CPC, people and troops in liberated areas launched a strategic defense strategy and smashed offensives by KMT troops. In July 1947, the People‘s Liberation Army (PLA) shifted its strategy from defense to offense and began to conduct interior-line operations. From September 1948, the PLA initiated three world-famous campaigns, the Liaoshen Campaign196, the Pingjin Campaign, and the Huaihai Campaign, and liberated vast areas north of the Yangtze River. After April 1949, the PLA crossed the Yangtze River and soon liberated vast areas of land south of the Yangtze River and the Grand Northwestern China197. On October 1, 1949, the People‘s Republic of China was founded. By the end of the same year, the entire country, except Tibet and Taiwan, was liberated. In August 1945, the CPC Central Committee instructed the Eighth Route Army of 100,000 soldiers in Hebei, Rehe, Liaoning, Shandong and Central China to march into Northeastern China to meet theNortheastern Chinese anti-Japanese Amalgamated Army. After they met each other, they co-established the Northeast Liberated Area. Later, some new liberated areas were also established. People‘s governments in liberated areas gradually established a new democratic financial system in newly liberated areas. For instance, the people‘s government of Northeastern Chinese Liberated Area set up the Bank of Northeastern China in November 1945 and issued banknotes called ‗Banknotes of the Bank of Northeastern China‘. The people‘s government of the City of Dalian set up the Bank of Dalian in 1946 which was later incorporated into the Bank of Northeastern China. The people‘s government of Inner Mongolia set up the People‘s Bank of Inner Mongolia in 1948 and issued banknotes called ‗Banknotes of Inner Mongolia‘. The people‘s government of Central China set up the Farmers‘ Bank of Central Plains and issued banknotes called ‗Banknotes of Central Plains‘. The people‘s government of Chaoshan and Dongjiang of Guangdong Province set up Yu Min Bank and Xin Lu Bank respectively, but because of the 196 The Liaoshen Campaign was the abbreviation of Liaoning-Shenyang Campaign, was part of the three major campaigns along with HuaihaiCampaignandPingjin Campaign launched by the People‘s Liberation Army (PLA) during the late stage of the Chinese Civil War. 197 The Grand Northwestern China referred to the five provinces of Shaanxi, Gansu, Ningxia, Qinghai and Xinjiang. 101

development of revolution they were closed down within six months and replaced by the Bank of Southern Chinese People. At the same time, when banks were established in new liberated areas, the financial system in the already liberated areas began to integrate and unify. After Shijiazhuang of Hebei Province was liberated, the two liberated areas of Shanxi-Chahar-Hebei and Shanxi-Hebei-Shandong-Henan became a single contiguous area. In May 1948, they were merged into the North China Liberated Area and their banks were also merged into the Bank of North China. In January 1948, Shanxi-Gansu-Ningxia Border Region and Shanxi-Suiyuan Border Region were incorporated into Northwest Liberated Area and the Bank of Shanxi-Gansu-Ningxia Border Region and the Farmer‘s Bank of Northwestern Shanxi were incorporated into the Farmers‘ Bank of Northwestern China. In November 1948, drastic changes took place in the development of China‘s revolution. Chairman Mao pointed out that ―one more year is enough for us to overthrow the KMT government‖. To meet the needs of launching a country-wide march and conducting economic construction, the Bank of North China, the Bank of North Sea and the Farmers‘ Bank of Northwestern China were incorporated into the People‘s Bank of China in accordance with the decision of the Central Committee of the Communist Party of China. From December 1, 1948, the People‘s Bank of China began to issue banknotes as the unified currency of the liberated areas of North China, East China and Northeastern China. The People‘s Bank of China took the original Bank of North China as its head office, the Bank of North Sea was reorganized into the People‘s Bank of China Shandong Branch and the Farmers‘ Bank of Northwestern China was reorganized into the People‘s Bank of China Northwestern Branch. The establishment of the People‘s Bank of China marked the initial formation of a centralized and unified financial system of the new China. Thereafter, the People‘s Bank of China gradually expanded and government-owned banks in liberated areas, except the Bank of Northeastern China and the People‘s Bank of Inner Mongolia that preserved temporary autonomy, were all transformed into branches of the People‘s Bank of China one after another. The Farmers‘ Bank of Central Plains was reorganized into the Central Plains Branch of the People‘s Bank of China located in Wuhan; the Bank of Central China was changed into the Central China Branch of the People‘s Bank of China in Shanghai; the Farmers‘ Bank of Northwest China win Jiangsu and Anhui area was changed into the Northwestern China Branch of the People‘s Bank of China located in Xi‘an and the People‘s Bank of the South was changed into the South China Branch of the People‘s Bank of China located in Guangzhou. The new Chinese government confiscated bureaucratic banking capital and it became a major source of funds for state-owned banks under the new democratic financial system. In new liberated areas, financial institutions originally funded by bureaucratic capital were taken over. The funds of banks that used to be directly led by the KMT central government or local governments such as the Four Banks, Two Bureaus and One Central Cooperative Gold Treasury and all provincial, municipal and county banks were confiscated. Commercial banks run by the ‗Four Major Families‘198, major bureaucrats and principal war criminals such as Yu Hua Bank of Shanxi and Ya Dong Commercial Bank also had their funds confiscated. After these banks were 198 The Four Major Families referred to Chiang family represented by Chiang Kai-shek, Soong Family represented by Soong Tze-wen, Kong family represented by Kung Hsiang-hsi and Chen family represented by Chen Guofu and Chen Lifu that controlled politics and finance of China in the first half of the 20th century. 102

taken over, their capital was owned by the people, but the national bourgeoisie could legally preserve their private shares that had been confirmed. Using these banks, the People‘s Bank established branches at all levels in new liberated areas. By merging and reorganizing government-owned banks in liberated areas, confiscating funds and transforming banks funded by bureaucratic capital, the People‘s Bank of China kept establishing new branches. At the end of 1949, it further set up the Southwest China Branch in Chongqing. Moreover, it also set up under each branch subsidiaries at provincial and municipal levels, regional sub-branches, sub-branches and offices at county levels, business offices, savings agencies, etc. Therefore, a unified and extensive network of national banking institutions was formed. The Bank of China and the Bank of Communications in new liberated areas retained their original names and continued to do business after they were taken over and helped manage foreign exchange business and long-term investments. China Merchants Bank, China Industrial Bank, Si Ming Bank and Xinhua Trust and Savings Bank and other official-commercial joint banks originally run by KMT continued to do business under the supervision of personnel dispatched from the People‘s Government and their private capital shares were still recognized. As for private banks and money shops in liberated areas, people‘s governments in liberated areas issued methods and directives on managing the private banking industry according to related polices of the CPC and their practical situations. Especially after the successive liberation of Beijing, Tianjin, Shanghai and Hankou in 1949, people‘s governments in all administrative regions promulgated relevant regulations and intensified their management of private banks and money shops. In the course of safeguarding the legal operations of private banks and money shops by law, people‘s governments across the country ruled that to avoid speculation, private banks could only engage in lending, remittance and exchange, accepting deposits and managing treasuries, and could not conduct commerce. They also ruled that private banks and money shops should submit deposit reserves so as to safeguard their credibility and the interests of depositors. Moreover, they also imposed requirements on the capital volume of private banks and money shops and urged them to register their capital volume within certain time limits. In addition, the People‘s Bank of China also intensified its comprehensive inspection of private banks and money shops. Its stringent management of private banks and money shops combated rampant speculative activities by them and steered them to engage in fair business, which played a positive role in stabilizing finance, supporting production and transforming the management style of private banks and money shops. In the villages of liberated areas, people were in urgent need of capital to develop the rural economy, but they could neither obtain capital from usury which had already been outlawed nor from banks whose agricultural loans were too small to fully satisfy their needs for capital. In such cases, it was highly necessary to develop rural credit cooperatives that could mobilize the masses to put their money together, establish new lending relations and regulate rural finance. As early as during the anti-Japanese war, Shanxi-Gansu-Ningxia Border Region had already embarked on a pilot trial of rural credit cooperatives. So did Shanxi-Hebei-Shandong-Henan Border Region in 1946. These two border regions introduced their experience to other areas and 103

rural credit cooperatives enjoyed remarkable development. According to a survey in 1947, there were over 800 rural credit cooperatives in Shaanxi-Gansu-NingxiaBorderRegion, Taihang Revolutionary Base and Taiyue Revolutionary Base. Ever since their establishment and primary development, rural credit cooperatives had played a positive role in mobilizing and concentrating idle funds in rural areas, addressing financial difficulties facing their members, boycotting usury and developing the rural economy in liberated areas. On the eve of the founding of the People‘s Republic of China, the new democratic financial system composed of the national bank (the People‘s Bank of China), specialized banks, private banks, money shops and credit cooperatives had taken initial shape with the national bank, namely, the People‘s Bank of China, as its mainstay and in a leading position. With the constant expansion and integration of liberated areas, the new democratic financial system gradually established its domination throughout the country. In the course of establishing the new democratic financial system, the government of the People‘s Republic of China also launched currency wars against KMT reactionaries. During the Chinese People‘s War of Liberation, KMT reactionaries took a variety of measures such as forging banknotes and making loans in legal tender to grain purchasers for them to purchase grain from liberated areas at a high price to introduce legal tender to liberated areas with a view to looting supplies and destroying the economy of liberated areas. Under the leadership of CPC and people‘s government, banks in liberated areas launched many campaigns against counterfeit legal tender and gold coin certificates. For instance, once a new liberated area was established, local banks would immediately forbid legal tender from circulation so that bank notes issued by the democratic government of the liberated area could dominate the market rapidly and circulate more widely in the area. To prevent the masses from economic losses, the governments of liberated areas took the measure of accepting legal tender moderately and excluding legal tender gradually. They constantly adjusted the exchange rate of their bank notes against legal tender so as to exclude legal tender, consolidate their bank notes and stabilize prices in liberated areas. Thanks to these flexible measures, governments of liberated areas won victories in their fight against legal tender and gold coin certificates. Because of the continuous victories of CPC in the Chinese People‘s War of Liberation, the liberated areas gradually became a single contiguous area and economic and trade contacts between liberated areas increased. Consequently, currencies dispersed in liberated areas could no longer satisfy the rising demand. Under such circumstances, the unification of currency was put on the agenda. To conduct the work on unifying currencies, two methods were adopted. One method was to expand the circulation zone of currencies issued by branches in one liberated area to other liberated areas. The other method was to establish a new unified bank and to withdraw old currencies from circulation to be replaced with new currencies issued by the new unified bank. After the People‘s Bank of China was established, it issued bank notes called RMB. In the beginning, RMB circulated simultaneously with other currencies in liberated areas according to fixed exchange rates: 1 yuan=100 banknotes issued by the Bank of Southern Hebei or 100 yuan banknotes issued by the North Sea Bank; 1,000yuanbank notes issued by the Bank of Shanxi-Chahar-Hebei Border Region; 2,000 yuan bank notes issued by the Farmer‘s Bank of Northwestern China or 2,000yuancommercial certificates issued by the Shaanxi-Gansu-Ningxia 104

Border Region Bank; 100yuan banknotes issued by the Bank of Central China and 3yuanbank notes issued by the Bank of Central Plains. In 1949, the head office of the People‘s Bank of China instructed its subsidiary organs to take various measures such as to accept old currencies through banking business, to exchange other currencies with RMB and to stop issuing old currencies or repay depositors in old currencies to withdraw other currencies from circulation. In this way, by the time the People‘s Republic of China was founded in 1949, a unified currency mark dominated by RMB had formed on a national scale and the Chinese mainland had entered into a period with a unified currency system. Further, the establishment of the new democratic financial system throughout the country and the conformation of RMB as the unified currency of China played an important role in the founding of the People‘s Republic of China and the recovery and development of the national economy of the People‘s Republic of China.

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This book is the result of a co-publication agreement between Social Sciences Academic Press (China) and Paths International Ltd (UK). ----------------------------------------------------A Brief History of Finance in China Author: Chen Zhengping Translator: Qian Suqin Polisher: Alastair Robert Wilson ISBN: 978-1-84464-148-2 Copyright © 2014 by Paths International Ltd, UK and by Social Sciences Academic Press, China. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. The copyright to this title is owned by SOCIAL SCIENCES ACADEMIC PRESS (CHINA). This book is made available internationally through an exclusive arrangement with Paths International Ltd of the United Kingdom and is only permitted for sale outside China.

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