No. 155.
Mr. Denby to Mr. Bayard.

No. 509.]

Sir: I have the honor to submit a few observations on the monetary and banking system of China.

The stranger, on arriving in China, is struck with the apparent inconvenience of the monetary system, but a short residence tends to create an opinion that the system is well adapted to the people, at least in some respects.

The financial business of the foreigner is done either in Mexicans or taels, as he prefers. Drafts on London are in pounds sterling. His bank account is kept in taels or Mexicans, as may be preferred. Ordinary accounts in the stores in Shanghai are kept in dollars. The commercial business is done mostly in taels. As the price of silver varies every day, the transfer of dollars into pounds, pounds into taels, and taels into Mexicans is bewildering. Usually the tael is worth $1.40 in Mexicans.

China has hitherto resisted all schemes for the establishment of a mint as understood in Western countries. Yet China coined iron money under the reign of Huang Ti, two thousand six hundred years before Christ.

This coin has been replaced by a copper piece called chien, because it originally weighed a mace (one-tenth tael). This Coin and lump silver are the only public signs of the value of products and the only instruments of ordinary barter. The popular name of this coin is cash.”

The monetary system as affecting silver is arranged on the principle of weight, and the divisions have the same names—taels, mace, candareen, and cash. The computation is decimal.

Each cash should weigh, as Williams states, 58 grains troy, or 3.78 grams, but there are in various localities smaller cash in circulation, [Page 228] and the rate of exchange varies in different parts of the land from 500 to 1,800 for a silver dollar. There are big cash and little cash. The Peking cash passes 5 for 1 silver cent or 500 for $1.

Taking into consideration the immense population of China and the poverty of the people, a good argument may be formulated to sustain the legislator who created “cash.” If there was to be but one coin it was necessarily the smallest.

While great weight makes transportation difficult, so that copper coin is not often carried from place to place; on the other hand the incumbrance of quantities of coin is so great that every one seeks to get rid of it.

For transactions to be consummated at a distance the copper coin must be changed for silver, but in small transactions in the various localities its circulation is rapid. It thus happens that silver in the Empire and coin in the districts fulfill exactly the intention of the Government.

In the open ports, and wherever Europeans have afoot-hold, the Mexican dollar readily passes current. At Peking the missionaries, whose dealings are with the poorer classes of people, use exclusively the tael and the cash. But the two foreign merchants located here and the legations habitually keep their accounts in Mexican dollars.

The tael varies in weight in various centers.

The Hai Kuan (customs) tael is the heaviest, and the one with which the Government makes its payments. It is worth $1.22½ gold at the present rate of exchange.

The copper coin, as coined by the Government, never varies in purity. No matter what the value of copper may be, the same quantity enters into the coin. Williams gives the contents of this coin as follows: Alloy of copper 50, zinc 41 J, lead 61, and tin 2, or of equal parts of copper and zinc.

It must be said that the Chinese have succeeded reasonably well in maintaining the equilibrium between silver and cash and between these two metals and the needs of commerce.

Monsieur Simon, who wrote a valuable paper on this subject, accounts for the first result by the non-existence of foreign enterprises which offer to pay large interest on silver, but more particularly by the Chinese law which permits interest at 30 per cent. While this law exists no country can compete with China as a market for silver.

As to the depreciation of silver it depends on many causes and can not be avoided. Its inconveniences are manifold, especially to the poorer classes, whose wages do not increase as the value of silver diminishes. The Government seeks to avoid the effect of depreciation by making new issues of cash. Because the importation of foreign silver tends to diminish the value of silver in the Empire, there is a strong party here opposed to foreign commerce.

It may be remarked that the depreciation of silver is one of the great evils attending commercial operations in China. The European who desires to remit a part of his earnings home, finds that his silver tael varies in value every day. The lower silver goes the less sterling it will buy and the more he loses.

The rate of exchange on London and the demand are the criteria of the profits of the trade with China. It is, therefore, evident that when exchange on London is low, for example, when, as in August, 1886, the Shanghai tael was worth 4s. 7¾ instead of 4s. 11½d., the price in January, 1885, the merchant in China can not get his goods laid down in this market for the same price in sterling as before. The market value of [Page 229] the goods not having increased he has to bear a loss proportional to the fall in exchange.

The interest laws of China, with which the operations of banking are intimately connected, date from the year 1250 of our era. The enormous rate of interest is curiously defended by several writers. It results, they say, in securing economy in order that the borrower may repay the ‘loan, in producing greater industry, in deterring persons from borrowing, in reducing the number of renters of land, and in increasing the number of land owners, and in inducing circumspection with regard to new enterprises. It is further stated by men of business, that this 30 per cent, is only a maximum founded on the probability that the oscillations of the price of silver will never exceed that sum. It must be understood, also, that the ordinary rate of interest rarely exceeds 20 or 22 per cent., and money may be had at 12 per cent., though sometimes it exceeds even 30 per cent.

Silver is ordinarily cast into pieces of 10 taels value bearing some resemblance to a Chinese shoe, being a lump hollowed out in the center and raised at the sides and ends. Larger pieces of the value of 50 taels are almost the exact shape of a shoe. They are from 97 to 99 per cent, pure silver. Gold bullion is cast into bars like cakes of India ink, weighing about 10 taels. In the early days of foreign trade the Mexican dollar was cut into pieces as it was in our Western States. Pieces were punched out of it until it lost recognition as a coin. I have seen in the South of China hundreds of these mutilated pieces which are of no use but to be melted into bullion. It is the custom in the South of China to stamp Mexican dollars and they are then called “chopped dollars.”

Williams has little to say about the banking system of China, but his views, in the general, are correct. The subject is worthy of more attention than he accorded to it, and is becoming day by day more important. The progress of trade, the necessities of the Empire, and the importunity of foreigners seeking concessions of banking privileges, have latterly attracted the attention of the whole world to banking in China.

There does not exist in China any State bank so-called. The issue of paper money dates back to the earliest historic period. The reader of Marco Polo wearies of the continual and unvarying description given by him of the countries that he visited. The monotonous statement is forever repeated that “they issue paper money and bury their dead.” This statement is sometimes all that is said and constitutes a chapter.

Kublai Khan bought everything valuable his people had and paid in paper money, a system much commended by Marco Polo as resulting in the possession of endless treasure without any cost. This system had the usual result, and a rebellion ensued which overthrew the reigning dynasty.

Five hundred years before Christ Government bills, which were utterly worthless, were in forced circulation. In 1455, according to Williams, they were suspended, and, except during the Taeping rebellion in 1858, no bills have been issued since. These bills were current in the capital only. As there is no profit to a government in the business of banking except in the issue of paper money and as only a bank of issue requires special privileges, China has, as a state, nothing to do with banking. There is, however, in each province a private bank which performs the functions of the treasury for the Government and receives the taxes. It requires payment in silver purer than the silver of the locality, and thereby makes 2 per cent, as compensation for its services. These banks are like all other private banks and perform all the usual functions.

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There are also private banks of emission, but they are not numerous. They exist chiefly at Peking. They issue notes of as low denomination as 10 cents. Their bills do not pass current out of Peking. These notes are worth more than cash, and a great business is done in exchanging one for the other.

The Government tolerates these banks of issue rather than favors them. In the event of suspension of payment the Government takes, possession of the bank and administers its affairs for the benefit of the bill-holders. There are few cases where there are, after failure, any but nominal assets. Usually when disaster comes the banker disappears, as with us, with the assets and the loss is total.

The true Chinese bank is the bank of discount and deposit. These stand high in popular confidence. It does not appear that they derive any great benefit from governmental action.

For aught that can be ascertained to the contrary, these banks are as old as history. Their existence 2,600 years B. C. is well established. The creation of paper money and the existence of banks are contemporaneously described, and, possibly, the coinage suggested the bank.

The insecurity of Chinese houses and the danger from fire made banks of deposit a necessity. All classes in China have bank accounts. The business of the banks is to discount paper, negotiate bills of exchange, to loan money on land or personal property, and to buy and sell the precious metals. There is no governmental limit to their establishment. They sell bills of exchange at short dates to any point in China. The Hong-Kong and Shanghai Banking Corporation, and other foreign banks, have largely interfered with the sale of foreign bills and bills running a long time. The banks, ordinarily (except in Peking) pay interest on deposits, sometimes on daily balances. They agree also to give the parties every facility for borrowing. The custom is that a depositor can obtain on his own paper, as a loan, twice the amount of his deposit, but only for a few days’ accommodation.

Deposits may be withdrawn at will and interest (except in Peking) received up to date of withdrawal. The foreign banks also pay interest on deposits, but they stipulate for fixed terms. The Hong Kong and Shanghai Banking Corporation pays 5 per cent, on fixed deposits.

The bank, for a consideration, guaranties the paper of its customers. It sometimes happens here, as elsewhere, that the deposits are ten or fifteen times greater than the capital of the bank.

There exists in Peking a clearing-house system which will compare favorably with that of New York. Bach depositor receives from his banker a book with two columns, in one of which will be entered his deposits, and in the other to his debit all the sums he may disburse. He then sends all his creditors to his banker to be paid, and in the evening he sends his book to his bankers. The next morning the clerks of the various banks get together and indicate in their books the various sums that they are to disburse or receive for their patrons. The balances are paid in cash, or are left to stand over on interest until the end of the year.

It is said that the banks assist each other in case of difficulty and extend the time of payment to any solvent bank requiring it.

The system of demanding immediate payment by holders of bills, which has resulted in so many commercial crises in America and elsewhere, does not exist here. The Chinese banker allows ten or fifteen days in which the debtor bank can raise money at home or procure it from the provinces. Failures take place here as elsewhere, but a bank which rests on a solid foundation, that might have been ruined by sudden pressure, secures time to raise funds and save itself.

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These financial difficulties ordinarily supervene only at the end of the year, when all debts must be settled. At the time of the Chinese New-Year, and at two other periods, the fifth and eighth moon festivals, every man settles up, and to allow a debt to go over these periods is considered disgraceful. Especially does this rule prevail at the Chinese New Year, which occurs in February of our calendar. These great periodical settlements have hitherto had the effect to prevent financial crises such as have occurred in other countries.

It is the practice of the Government to allow its moneys to be deposited with the banks of the best class when any danger is anticipated. Thus, at the end of the year large deposits are made by the Government officials in the banks, to enable them to meet their obligations in cases where there has been unusual stringency in the market.

In cases of general suffering the Government also makes loans of grain to cultivators of land and other necessitous people, to be repaid, with interest, in kind.

There is little counterfeiting of bank bills. Often the depositor waits and sees the bills filled up in sums to suit him. I know one case where a very worthy gentleman thus received notes representing 100 taels in the morning, and the bank closed before night. He came to me, and I presented his case to the Tsung-li Yamên. The Yamên denied all responsibility, but promised to see that the assets were properly administered. A Government officer took possession of the bank, the cashier having fled, but my friend never received a cent of his 100 taels.

Circular letters of credit are issued by the banks, which are good in China where the banks have agencies. Money is remitted from place to place in bills as at home. The rates are much higher than with us, as transportation is private and very costly.

No statistics that I know of are published relative to banks. Bankers are reticent. There is considerable competition between the native and foreign banks, and information as to business is designedly withheld. The branch of the Hong-Kong and Shanghai Bank at Peking keeps large sums on deposit in about twenty banks, but receives no interest thereon.

The native banks “milt” the silver received without charge, which is all the consideration the Hong-Kong and Shanghai Bank receives for its deposits.

The ordinary rate of interest at Peking is 1 per cent, a month.

Silver comes to the capital from the provinces in small wooden logs. The inside is dug out, the silver put in, and the pieces of wood bound together with iron bands, and it is thus carted to the treasury.

Among foreigners in China there is a general desire for coinage and a national bank. The rivalry between the various nationalities is so great that any particular scheme by one nationality is attacked by all the others. This happened, notably, when the Philadelphia syndicate sought to obtain concessions at Tientsin.

In spite of the abundance of banks existing in China, making it a country as thoroughly provided with banks as any country in the world, still the banks often succumb to financial difficulties. Some of their difficulties originate from non-fulfillment of the obligations assumed by the local authorities. This happened recently in Shansi, where, during the campaigns in the northwest, the banks lost many millions of taels. There being no Government bank the private banks can get no relief when it is most needed, except as I have already stated.

It must be remembered, in considering the general question, that the [Page 232] people and the merchants have little confidence in the good faith of officials. As China is practically divided into twenty-one separate local governments, with almost absolute authority in the viceroys or governors, this want of confidence in financial matters results in serious evils. A national bank would restore confidence and give solidity to financial operations. The leading paper in China, the North-China Daily News, proposes to overcome opposition to a scheme of general or national banking by an organization composed of leading firms in all commercial countries. It proposes that the stock of such an institution be divided up amongst the various nationalities, reserving a large portion for the Chinese. By this means international jealousies would be removed, and the bank would be worked on broad and honest principles.

My judgment is that China will not accede to any such scheme. There is evident purpose on the part of the Chinese rulers to reserve for their country the great franchises of public institutions, such as railroads, steam-ship lines, telegraphs, and banks. This policy is logically correct. The chief objection to it is the delay necessary to instruct and educate this people, which is now earnestly and strenuously striving for improvement and progress.

There seems to be no reason why our banking system might not work successfully in China. If China would intrust the whole subject to some great American financier, I do not doubt that the success which has attended the operations of the imperial maritime customs under Sir Robert Hart would be realized in banking and coinage.

There is no confusion in the world comparable to the financial muddle in governmental operations in China. The immense benefits which would accrue to the Government from a good system in the collection, distribution, and remittance of revenues are patent to all observers. The superintendence of financial matters in China would be a career worthy of any man’s ambition. It is needless to say that unimpeachable reputation and great ability would be requisite.

It is well to say also that the accomplishment of such a plan must be worked out by individual effort. The legation could aid only by courtesy and by the private personal influence of the minister. If he had the authority to pledge his Government to any financial scheme it would be unwise to exercise it, but he has no such authority.

Knowing, as I well do, that national pride would be gratified by the prominence of my fellow-citizens in any great work of progress in China, nothing would be left undone by me that is consistent with public duty to forward such a work.

I have etc.,

Charles Denby.