Thomas Tooke

Posts Tagged ‘deflation’

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”

COMMENT:

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. “

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