Thomas Tooke

Posts Tagged ‘China’

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.”

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.”

The Exchange Rate of China and the Currency reform of December 5th 1935

In Currency reforms on March 2, 2013 at 9:28 pm

Frank Tamagna wrote in 1942 in his book Banking and Finance in China:


The issue and payment of drafts in foreign currencies requires a previous operation: namely, the fixing of the exchange rate at sight and forward. In the ‘twenties the Chinese market was entirely dependent for it upon the foreign banks. The opening rates of the Hongkong and Shanghai Banking Corporation were published at 9.30 a.m. in Shanghai and at 10 a.m. in the other branches and these were accepted as the official quotations in the market.  They were expressed in sterling on the basis of the T/T rate on London, while for other currencies the London cross-rate was used. In 1930 the National Government introduced the Customs Gold Unit, an accounting currency based on a hypothetical pure gold content of 60.1866 centigrams (equivalent to gold weight of the “Sun”, the monetary unit proposed by the Kemmerer Commission), and the Central Bank of China began quoting its exchange rate in taels and yuan on the basis of the T/T rate of Shanghai and New York.

After the United States went off the gold and the exchnage rate between Shanghai and New York could no longer be used, two important changes took place. Beginning in March 1934 the exchange of the Customs Gold Unit in silver yuan was calculated according to the London rate of gold ingots on the previous day and the T/T spot rate on London. After September 1934, he daily rate of the Customs Gold Unit thus established was used for figuring the standard price of gold in the Shanghai market, on the basis of which settlement could be legally effected for incomplete forward gold transactions and “no opposition could be brought to the fore by either party”. The steps taken by the Central Bank of China tended to bring the exchange of the silver currency under its control and to restrict the opportunity for arbitrage operations, as theses were effected through fictitious buying and selling of gold bars in the Shanghai market.

The position of the foreign banks was, however, only slightly impaired by these measures, because as long as silver was the monetary unit of the country, foreign exchanges rates frequently diverged from the price of silver in gold, and these variations permitted profitable manipulations. During the period from 1931 to 1935, at first owing to the rapid decline in the price of silver and later owing to its rapid rise, foreign banks often had difficulty in obtaining at current rates forward exchange to cover their daily transactions. As a result, they increased the margins between buying and selling rates, by lowering purchasing rates or raising selling rates or both, thereby obtaining considerable profit. Cross-rate operations were in fact made not only for genuine requirements, but also for speculative purposes, especially during the rapid changes in international exchange rates. Shanghai was a typical speculative market on bullion and exchanges, and foreign banks developed into the most important medium through which such operations were carried out.

Following the currency reform of 1935 (nationalization of Silver on December 5th 1935), foreign banks liquidated most of their silver and turned the rest over to the Currency Reserve Board. The Government banks, in turn, sold the silver abroad in exchange for foreign currency. Some silver was sold in the open markets of Bombay and London, but most of it was transferred by special arrangements to the Treasury of the United States. “

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.