Once upon a time (before 1927), China had a relatively free banking system. Privately owned banks operated throughout China. The largest Chinese banks and all foreign-owned banks were headquartered in Shanghai. Banks in China issued notes that were redeemable in silver, the traditional Chinese medium of exchange. The notes from each bank circulated freely with the notes from other banks. Chinese banks did without government regulation; instead, competition prevented “inflation” (aka counterfeiting).
In 1927, the Chinese banks were trapped between Communists and Nationalists. Violence organized by Communist labor leaders crippled industry in Shanghai. Chiang Kai-shek made Shanghai banks a deal they couldn't refuse; his forces would suppress the strikes, in return for loans to the Nationalist government.
In 1927, the first year of the Nationalist regime, these "loans" accounted for 49 per cent of government revenue. The government continued to increase its spending and debt.
In the spring of 1928, T.V. Soong (Chiang's Triad-connected brother-in-law) forced the Shanghai banks to become dependent on high-interest "guaranteed" government bonds. Skeptical bankers were arrested. By 1932, Chinese banks located in Shanghai were stuck with between 50 per cent and 80 per cent of Nationalist government bonds.
Also in 1928 Soong founded a government "Central Bank" (patterned on the US Federal Reserve), the “State Bank of the Republic of China." Soong appointed many of the directors of private banks to a figurehead board of directors of the Central Bank. Nationalist officials who controlled the issuance of government bonds often gained seats on the boards of private banks. Just as in the US, those with inside information on Central Bank manipulations quickly became a privileged class of kleptocrats.
The final blow to the freedom of the Chinese financial system came from Franklin Roosevelt's New Deal Administration. In 1933, the U.S. government began to purchase large amounts of silver. In June 1934 the Silver Purchase Act was passed. This Act instructed the United States Treasury to purchase silver until the world price of silver rose above $1.29 per ounce, or until the monetary value of the U.S. silver stock reached one-third the monetary value of the gold stock. (Note that this huge US government expenditure occurred at the worst time in the US Great Depression, when most ordinary Americans were struggling desperately to avoid bankruptcy).
As a result of the U.S. manipulation, from early 1933 to the middle of 1935 the price of silver had tripled. Thus, suddenly Chinese who owed silver-backed money had their debts tripled. Just as in the US paper-money deflation of 1929, businesses went bankrupt and laid off workers.
To add to the disruption, the Nationalist government imposed export controls on silver. Doubtless Soong's Triad pals made a bundle from smuggling silver along with their previously favored opium.
The new Central Bank was granted monopoly privileges, such as exemption from the silver export controls. The Central Bank became the most profitable financial institution in China. Although it held only 11 per cent of the assets of all Chinese-owned banks, it received 37 per cent of total Chinese banking profits in 1934.
Too late, the largest private bank, the Bank of China, attempted to cut its ties to the Nationalists. The Bank of China started selling off government bonds at a loss.
On March 23, 1935, the Nationalist government seized control of the Bank of China as well as the second-largest private bank. Finance minister H. H. Kung removed the managers and replaced them with appointed officials.
In June 1935, Kung used the three government-controlled banks – the Bank of China, the Bank of Communications, and the Central Bank of China – to buy up the notes of several smaller banks in Shanghai. Then the three government banks simultaneously presented the notes for redemption. The private banks were unable to redeem all the notes at once. Kung declared the banks to be insolvent and seized direct control.
By July 1935, the Nationalist government wiped out private banking in China. All Chinese banks were looted of real assets.
On November 3, 1935 the Nationalists announced an unbacked paper money. Only notes issued by the three largest government banks – the Bank of China, the Bank of Communications, and the Central Bank of China – would be legal tender in China. All institutions and individuals who owned silver were ordered to exchange it for the new "fa-pai" currency within six months (just as Americans had been ordered by Franklin Roosevelt to turn in their gold in 1933).
Once they had a fiat currency, the Nationalists counterfeited fast and hard. Between 1935 and 1949, the price level rose by a factor of over a thousand. Nationalist government printing presses were unable to keep up with the deficits. Chinese currency printed in England had to be flown in over the Himalayas on US C-47s.
So that is how China was stolen from the Chinese people. Later the original thief was robbed by another, and had to run to Taiwan to live out his life on US foreign aid. In recent years the Chinese people have wrested some of their property back from the second thief's bureaucratic heirs… but that is another tale.
February 3, 2005
