Thomas Tooke

Archive for April, 2013|Monthly archive page

The Chinese currency reform of 1935, details on the operations.

In Currency reforms on April 28, 2013 at 4:41 pm

Here what we learn from Frank Tamagna.

“The monetary reform of November 1935 provided for nationalization of silver and for a managed currency. At about the same time the United States Treasury gave indications that the price of silver was going to be decreased. Foreign banks found themselves with reserves of a highly problematic value. However, as they entertained serious doubts regarding the new currency, they were reluctant to give up their silver holdings. Local conferences followed between foreign banks and officials of the Currency Reserve Board (in Shanghai, Tientsin, Tsingtao, Tsinan, Hankow, and Canton), and by the middle of January 1936 the first agreement was reached in Shanghai. Although no official statement was issued, it was understood that the Central Bank of China had agreed to issue legal tender (national yuan) notes against delivery by the foreign banks of a sum consisting of 60% in silver an 40% in securities, including bonds, stocks and debentures;  to pay interest for two years on the silver delivered, and to make a deposit of equal amount at the banks turning over the silver, receiving a lower rate than the interest paid to the banks on the silver. Similar agreements were reached in other cities, and silver stocks were thus surrendered by all banks, with the exception of the Japanese, which adopted a position of watchful waiting until March 1937, when they decided to follow the common policy. The condition stipulated represented an actual premium on the silver delivered. ”

“A certain pressure on foreign banks was brought by the British Government. On November 4th, 1935 the British Ambassador in Nanking issued an Order-in-Council forbidding British subjects in China to make payments in Silver of any debt or other obligation. An embargo was placed on the white metal in Hongkong on December 5th, 1935 by a Currency Ordinance, which nationalized all the silver in circulation or in bank reserves, and set up an  Exchange Fund held by the colonial government. The specie reserve of the three banks of issue, the Hongkong and Shanghai Banking Corporation, the Chartered Bank of India, Australia and China the Mercantile Bank of India, amounting to HK$ 98.9 million (Hk$ 43 million less than at the end of 1934), was taken over by the colonial government against delivery of certificates of indebtedness for the same amount. The steps taken by the Hongkong Government were in harmony with the reports of the Commission on currency of 1931 and of the Commission on Trade of 1934-1935, which had come to the conclusion that “Hong-kong is economically a part of China, and must remain on a silver standard so long as China does.” But the presence in the Far East of Sir Frederick Leith-Ross, the official British adviser to the Chinese Government, gave rise to reports that British authorities had done more than simply back China´s currency reform of 1935.”


The Foreign banks in China in the 1930s, the money bags of China.

In Currency reforms on April 28, 2013 at 4:33 pm

Frank Tamagna discusses the situation of foreign banks in China before and after the currency reform of 1935.

“Silver stocks. Before the monetary reform of 1935, foreign banks used to keep their reserves in silver bars and coins; they were the money bags of the country, through which all international movements of white metal were passing. In 1921 nearly 70 per cent of the silver stocks of Shanghai was held by the foreign banks, but in the following years their importance as money-keepers was somewhat lessened, and in 1931 they held only 33% of the Shanghai Silver stock. During the two years following, as a result of spectacular inflow of silver into the vaults of Shanghai, holdings of the foreign banks rose to over 50% of the total. A reversal in trend followed very rapidly in 1934, however, when silver was exported by the foreign banks at unprecedented speed. Stocks in Shanghai were depleted until April 1935, when a “gentlemen´s agreement” between foreign banks and Chinese authorities was reached through the good offices of Dr T.V. Soong, newly appointed to the chairmanship of the Bank of China, in order to restrain the banks from making further shipments of Silver abroad. It is impossible to state how effective the agreement was, since despite the fact that little silver was left in Shanghai, the decline in stock of the foreign banks continued.l It feel from CN$ 55 million at the end of April to CN$ 36.7 million in September 1936. This decline, however may have been caused by buying operations of the Government banks, in order to cover their expanding note issue and for shipments to the interior, where the stocks had been depleted by exports and hoarding.”

How the Silver buying from the US starting in 1933 brought havoc to Chinese banks.

In Deflationary Periods on April 28, 2013 at 3:31 pm

The native Chinese banks went through serious problem in connection with the US policy.

Here is what Frank Tamagna wrote in 1942:

” The immediate cause of the their sharp decline from 1935 to 1937 was however, the deflationary situation created by the rise in the price of silver, following the silver purchase policy adopted by the United States in 1933. This brought about an increase in interest rates, a freezing of funds and difficulties in the collection of advances and loans. The deflationary situation was anticipated in the interior by a least two years, owing to the steady flow of Silver to the Treaty ports accompanied by the fall in agricultural prices and political and military disturbances. During 1933 and 1934 the official net shipments of silver from the interior to Shanghai amounted to CN$ 238.9 million. Measures to stop this outflow were introduced by the provincial governments. Kwangtung and Kaingsi, the two southern provinces financially dependent upon Hongkong, promulgated various measures in 1931, 1932, and 1933. At the beginning of 1934, Hunan prohibited the shipments of silver in excess of CN$500 and levied export tax; despite this, the financial stringency continued and the provincial bank was forced to withdraw silver from Hankow in order to make advances to the local native banks. Restrictions on the export of silver were introduced by the Kansu and Shensi governments. Silver and banknotes, amounting to about CN$34 million, were shipped by the Government banks from Shanghai to Hankow between the second half of 1934 and the first half of 1935.”

“At the new year´s settlement of 1934 some native banks in Tientsin were forced to close. During the course of the year the stock of silver in the city declined from CN$105.2 million to CN$43.6 million, the financial market becoming increasingly stringent. The collection of outstanding credits proved to be extremely difficult and some twenty-five other native banks closed late in 1934. A more conservative attitude from the part of the remaining banks permitted them to weather the new year´s settlement of 1935 satisfactorily, but in the following June a panic caused two more native banks to fail. Some bankruptcies also occurred in Peiping at the same time. During 1936 the business of native banks in northern China was further curtailed by the lack of “legitimate trade”, the the overflowing “special trade” (smuggling)) from the Japanese-controlled area of “East Hopei” was financed directly by Japanese banks.”

“The situation in Shanghai remained satisfactory until late in 1934, owing largely to the liquid funds accumulated in the market. The stock of silver in the city increased from CN$266.2 million at the end of 1931 to CN$562.3 million the middle of 1934. The Shanghai modern banks, without fully utilizing their power of expansion, increased the note issue in circulation from CN$245.4 million to CN$359 million. The monetary base (silver and notes) of the market had thus been expanded in two and a half years by CN$410.2 million, and the problem for the banks was to find profitable investments for their funds in a period of business depression”


The situation of buying silver from the United States is to force upwards the price of Silver. Silver being tied to the currency it means that everything falls against the currency, including agricultural commodities. In that situation, the debt become harder to repay, creating a credit contraction and a natural fall in the stock market. Evidently that loans would fail making the currency deposit fail. The inevitable consequence of such a Silver rise promoted by the United States would be to render the export sector of China uncompetitive and mail Chinese bank fail. The inevitable remedy would be to sever the link between the currency and the metal or for the United States to stop repressing the dollar against the money standard of China in order to favor their trade in that part of the world.

“The situation was reversed in the summer of 1934 by the drain of silver abroad and by the shipments of funds by the Government banks to other centers (Hankow, Tsingtao, Tientsin, Foochow, Amoy, etc..), where the monetary stocks in Shanghai declined to CN$ 335 million in December 1934, and although the bank note issue had been further increased by about CN$60 million, a portion of it was shipped to the interior and the rest was not sufficient to neutralize the increased hoarding of silver coins. With the new year´s settlement of 1935 four Wei-wah native banks failed and ten more were obliged to reorganize. In June 35 some thirteen native banks were in liquidation, and two more small institutions failed in the subsequent September. “

Trading of Cash bar and fictitious bar of Gold in the 1930s in China

In Uncategorized on April 28, 2013 at 12:17 pm

It is the purpose of this blog to show with specific examples how history rhymes. To that end here is a piece that Frank Tamagna wrote back in 1942.

“Dealing in silver coins and bullion and in gold represented an important activity of the native banks, for both exchange and speculative purposes. Dealing in silver was very active from 1933 to 1935, but it was brought to a standstill by the nationalization of the metal and the stabilization of the currency in 1935. Dealing in gold was basically a speculative activity; operations covered “cash” gold bars if actual delivery was contracted for, and “fictitious” gold bars if the transaction was to be settled at a later data by either paying or receiving differences in accordance with price variations. Usually the cash bar commanded a premium over the fictitious bar, which constituted the bulk of speculative activity. Operations in the gold market were sharply reduced after the stabilization of the exchanges and the Shanghai Gold Stock Exchange ceased operations in August 14th, 1937 after almost two years of inactivity and financial losses.”