Thomas Tooke

Archive for February, 2013|Monthly archive page

The native banks during the Chinese republic

In Banking principles on February 10, 2013 at 4:19 pm

Here is an historical account of the native banks of China from a book Frank by Frank Tamagna prefaced by T.V. Soong.

“The native money market developed in decentralized units, without national co-ordination. At the beginning of 1937, its largest institutions were located in commercial centers of the country and their activities did not extend beyond the limits of the district and a few outside cities. Native institutions grew up as a result of local needs, remained free from support and supervision by the Government and established local self-regulating bodies which contributed toward maintaining the decentralization of their activities and certain differences of methods.”

[…]

“Native banks and their guilds were the central institutions of the native money market. A native bank may be defined as a financial firm established in the form of single propertiorship or partnership by members of a family, a clan or a closed circle of friends, for the purpose of handling deposits, lending, remittances and exchange of money, with unlimited responsibilities guaranteed by all resources of the proprietor or of the partners. Partner-owners of native banks varied from two to ten in number; four, five and six partners were the most common. As a general rule, proprietor and partners did not participate directly in the management of the bank, which was entrusted to a salaried man, the manager, a person of proved ability and technical knowledge. The manager was the chief executive of the bank and was responsible to the owners for the actual results of his administration.”

“The staff was usually recruited from apprentices after a normal training period of from two to five years or more, during which they received a very low salary, if any. The bank´s employees were divided into two groups, the “indoor” and the “outdoor” staff, and into eight divisions, the responsible offices of which were traditionally called the “Eight Heads”.

“Both the indoor and the outdoor staff participated in the earnings of the bank to the extent of about 20% of its net profits.”

“The Chief of the outdoor staff were the Street Runner (or Customers Man) whose functions were to solicit business, act as middleman between the bank and its clients and make credit investigations; the Market Representative, who participated in all discussion at the guild for the determination of the official native interest rate and of the determination of the official native interest rate and of the official exchange rate between the local currency and the national and other currencies; and the Bank Agent, who was in charge of the transfer of accounts and money and relations with the modern banks. ”

“Chop Loans and the Native Interest rate. Aside from capital and deposits, the native banks derived their means from “chop loans” and note issue, whose importance declined greatly in recent years. The chop loan was a typical inter-bank call loan with no security requirement; it was used not only among native banks, but also between native banks and foreign and modern banks. Chop loans were used mostly by native banks to settle debit clearing positions and to meet payment of checks and drafts drawn by other native banks, by modern banks and by customers. Native banks in Shanghai and in other Treaty ports, however, managed these loans in a way similar to that by which bill brokers of western markets manage call money from the banks, that is, in investing surplus funds of commercial banks and of foreign banks. In times of market crisis these loans were always strictly curtailed and called back, thereby causing serious difficulties to the native banks, which had the funds tied up in slow or illiquid assets and lacked re-discount facilities. ”

COMMENT:

China is certainly not new to banking, and it would be a big mistake to underestimate today the knowledge and understanding of their monetary authorities. The old system of native banks seem to be quite well set-up at the micro-economic level with the proper incentive to avoid moral hazards (unlimited liability partnerships), however those banks seem to suffer from the lack of facility of  centralized rediscounting (read central bank) as it seems that when wholesale interbank call money funding dried up, some instruments hard time find a place to get re-discounted for liquidity.

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An account on Silver embargo of 1927 in China

In Monetary depreciations, Uncategorized on February 3, 2013 at 1:13 pm

Mr Frank M. Tamagna wrote an interesting book in 1942 called ” Banking and Finance in China”. It was written under the Institute of Pacific relations. It is important to note that indeed the United States in the mid thirties did purchase some Silver. After the onset of the 1929 debacle the price of Silver plunged, which initially gave a devaluation advantage to China which was on a Silver standard, the United States though purchased large amount of Silver which had the result of suppressing this devaluation advantage a few years later. Those actions resulted in a large swings in the price of Silver. Over the long run though, those attempts were futile. Before that 1930s episode which we will relate in another post, there is the episode of 1927.

As Tamagna wrote:

“In the autumn of 1924, the opening of hostilities, between armies in the two provinces of Chekiang and Kiangsu provoked a banking crisis which involved the three important money markets of Shanghai, Ningpo and Hangchow. Some institutions failed when the native bankers associations refused support; others just managed to overcome their difficulties with the help of modern banks. Foreign banks then decided to stop any further advances of call money to native banks. The crisis was followed by a curtailment of speculative operations and by period of extreme caution. The crisis of 1924 marked a definite slowing down of the boom. In the interior of China, a series of local crises spread along with the northward march of the National Revolutionary Army, which left Canton in July 1926. During the following year, embargoes on the exports of Silver were imposed by most of the provincial governments; the depreciation of the local currencies advanced rapidly, and the native banks, especially those connected with army leaders or politicians, suffered hard setbacks. With the establishment of the National Government in Nanking in 1927 and the impulse given to the modernization of the country and the banking system, the native banks entered into an era of decline.”

The piece is anecdotal account of yet another attempt to embargo precious metals, whenever there is distress with the local currencies.  This attempt was futile as all the other ones in preventing the fall of the currency, but the policy makers have to do something so they try it anyway.