Eastern Banking Essays in the History of HSBC

NUNC COCNOSCO EX PARTE THOMAS J. BATA LIBRARY TRENT UNIVERSITY cEll'O, Digitized by the Internet Archive in 2019 with funding from Kahle/Austin Foundation https://archive.org/details/easternbankingesOOOOunse EASTERN BANKING ESSAYS IN THE HISTORY OF THE HONGKONG AND SHANGHAI BANKING CORPORATION The Hongkong Bank Group History Series: No. 1 General Editor: Frank H H King The Hongkong Bank Group History Series 1. Eastern Banking: essays in the history of The Hongkong and Shanghai Banking Corporation. Edited by Frank H H King. Proceedings of a Conference held in the Centre for Asian Studies, University of Hong Kong, December 1981 (in preparation) 2. A guide to the papers of Sir Charles S Addis. By Margaret Harcourt- Williams, with a biographical introduction by Roberta A Dayer 3. A history of the Imperial Bank of Persia and its successors. By Geoffrey Jones. 4. Life with the Hongkong and Mercantile Banks, 1917-1950: an oral history. 5. The early China loans, 1874-1895. By David J S King. (projected) A history of the Chartered Mercantile Bank of India, London and China —and its successors. By Frank H H King. temm ‧m:.#fe ‧ ■"' Banking Hall, Shanghai Branch, early 1930s EASTERN BANKING Essays in the History of The Hongkong and Shanghai Banking Corporation Edited by Frank H H King Professor of Economic History University of Hong Kong THE ATHLONE PRESS London First published in 1983 by The Athlone Press Ltd 58 Russell Square, London WC1B 4HL, England (E) The Athlone Press, 1983 (The views and opinions expressed in this publication are entirely those of the respective authors and do not necessarily reflect the views and opinions of The Hongkong and Shanghai Banking Corporation. The essays are works of private scholarship and, whilst every effort has been made to ensure the accuracy of facts stated, The Hongkong and Shanghai Banking Corporation is in no way responsible for their accuracy or for the views and opinions expressed.) Acknowledgement is made of a grant from The Hongkong and Shanghai Banking Corporation to the Centre of Asian Studies, University of Hong Kong, for the financing of the history conference and a subsidy for the publication of the proceedings. British Library Cataloguing in Publication Data Eastern banking.—(The Hongkong Bank Group history series) 1. Hongkong and Shanghai Banking Corporation— History—Congresses I. King, Frank H.H. II. Series 322.1'2'0951'25 HG3355.H/ isbn 0-485-15017-4 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without prior permission in writing from the publisher. Printed in Great Britain by Nene Litho, Earls Barton, Northants Bound by Woolnough Bookbinding, Wellingborough, Northants CONTENTS Preface Notes on Contributors xii List of Illustrations xvi 1. International Banking and its Political Implications: The Hongkong and Shanghai Banking Corporation and The Imperial Bank of Persia, 1889-1914 by David McLean 1 2. The Young Charles S Addis: Poet or Banker? by Roberta A Dayer 14 THE HISTORY OF THE CORPORATION 3. Establishing the Hongkong Bank: The Role of the Directors and their Managers by Frank H H King 32 4. The Hongkong Bank and the Extraterritorial Problem, 1865-1890 by Peter Wesley-Smith 66 5. The Financial Statements of The Hongkong and Shanghai Banking Corporation, 1865-1980 by T A Lee 77 6. Compradores of The Hongkong Bank by Carl T Smith 93 7. Four Major Buildings in the Architectural History of The Hongkong and Shanghai Banking Corporation by Christopher L Yip 112 THE BANKNOTE ISSUE 8. Variety in the Note Issues of The Hongkong and Shanghai Banking Corporation, 1865-1891 by Judith Sear 139 Appendix: An outline of the problems of The Hongkong and Shanghai Banking Corporation's note issue by Frank H H King 150 CONTENTS 9. The Hongkong and Shanghai Banking Corporation Factor in the Progress Toward a Straits Settlements Government Note Issue, 1881-1889 by W Evan Nelson 155 ORAL HISTORY SYMPOSIUM 10. The Hongkong Bank Group's Oral History Projects by Frank H H King, Christopher Cook and Catherine E King 180 11. The Hongkong and Shanghai Banking Corporation on Lombard Street by Christopher Cook 193 12. The First Trip East--P&0 via Suez edited by Catherine E King 204 THE HONGKONG BANK IN CHINA 13. China's First Public Loan: The Hongkong Bank and the Chinese Imperial Government "Foochow” Loan of 1874 by David J S King 230 14. Prosperity and Collapse: Banking and the Manchurian Economy in the 1920s and 1930s by Felix Patrikeeff 265 15. Defending the Chinese Currency: the Role of The Hongkong and Shanghai Banking Corporation, 1938-1941 by Frank H H King 279 THE HONGKONG BANK IN ASIA: COUNTRY STUDIES 16. A History of the Japanese Silver Yen and The Hongkong and Shanghai Banking Corporation, 1871-1913 by Takeshi Hamashita 321 17. The History and Development of The Hongkong and Shanghai Banking Corporation in Peninsular Malaysia by Chee Peng Lim, Phang Siew Nooi and Margaret Boh 350 18. A Preliminary Look at the Role of The Hongkong Bank in Netherlands India by J T M van Laanen 392 CONTENTS 19. The Guarantee Shroffs, The Chettiars, and The Hongkong Bank in Ceylon by H L D Selvaratnam 409 20. The Hongkong Bank in Thailand: A Case of a Pioneering Bank by Thiravet Pramuanratkarn 421 21. The Hongkong Bank in the Philippines, 1899-1941 by Roy C Ybanez 435 THE HONGKONG BANK IN EUROPE 22. The Hongkong Bank in Lyon, 1881-1954: Busy, but too Discreet? by Claude Five1-Demoret 467 23. The Hamburg Branch: The German Period, 1889-1920 by David J S King 517 THE HONGKONG BANK POSTWAR 24. Financing Hong Kong's Early Postwar Industrialization: the Role of The Hongkong and Shanghai Banking Corporation by Y C Jao 545 25. The Asian Dollar Market, Asian Bond Market, and The Hongkong Bank Group by S Y Lee 575 26. Organizational and Structural Change in The Hongkong and Shanghai Banking Corporation, 1950-1980 by S G Redding 601 27. Branching of The Hongkong and Shanghai Banking Corporation in Hong Kong: A Spatial Analysis by Victor F S Sit 629 THE HONGKONG BANK GROUP 28. The Mercantile Bank of India on the East Coast of Malaya by S W Muirhead 655 29. The Mercantile Bank in Madras and Financial Antecedents by N S Ramaswami 700 CONTENTS 30. Hang Seng Bank Limited: a Brief History by Y P Ngan 709 31. Marine Midland Bank in an Analysis of Regulatory Environment and Corporate Structure by Arthur B Ziegler 717 OTHER BANKS 32. Wells Fargo and Chinese Customers in Nineteenth- Century California by Harold P Anderson 735 33. Lombard Street on the Riviera: the British Clearing Banks and Europe, 1900-1960 by Geoffrey Jones 753 APPENDIX The Hongkong and Shanghai Banking Corporation Group Archives by S W Muir he ad 778 Index 786 PREFACE When in 1979 The Hongkong and Shanghai Banking Corporation decided to commission a new history, the Chairman, MGR Sandberg, accepted the argu. ment for a multi-archival approach. At the same time it was obvious that no historian could, within reasonable time limits, search out all the materials likely to be found throughout the world dealing with the Hongkong Bank. There followed from this two key decisions: first that Frank H H King, as the economist commissioned to research and write the history, would seek associates in the various countries in which the Bank had operated, and secondly, when these scholars had produced papers dealing with specific aspects of the Bank's history, there would be a conference in Hong Kong during which the results of their research could first be discus. sed and subsequently published. In some cases we were fortunate in finding scholars already research. ing closely related topics—Roberta Dayer and W Evan Nelson come immedi. ately to mind. In other cases, a specific research agreement was designed and adminstered overseas—thus H L D Selvaratnam worked through the Marga Institute in Colombo, Roy C Ybanez through the U.P. Business Research Foundation in Quezon City. Not all those who agreed to search local archives wished to present papers, but we remain equally indebted to, among others, Evelyne Andre in Belgium and Gary Watson in Canada, while Elizabeth Ng, appointed a senior research assistant in the Centre of Asian Studies, searched copies of PRO files available in Hong Kong and twice visited England on research assignments. Frank King himself worked in the India Office Library, the National Archives of the United States, the U.S. Treasury, the Hoover Library, the Columbia University Library and had the opportunity to visit places covered by those represented at the conference. We had hoped that we might use this opportunity to invite other bank historians and archivists to a concurrent symposium on methodology, but various schedule conflicts prevented this from being fully worked out. Nevertheless we were fortunate that Harold Anderson of Wells Fargo could present both a substantive paper on his bank as well as make a presentation dealing with his History Department in the San Francisco head office. We were especially concerned with oral history methodology and problems, and we were able to conduct a brief session on this topic—and these contribu. tions are published in this collection. While all the papers published here are of considerable value to historians and can be grouped roughly into general sections, it was imprac. tical to attempt covering the Bank's history in a systematic way. These are contributions, certainly to the Bank's history, hopefully also to our general knowledge of banking history and to the economic history of each of the countries covered. When the decision was made to give full publication to the proceed. ings, we agreed that where possible authors should be given the opportunity of expanding or rewriting the actual conference paper. In addition two or three new essays have been included to better reflect the state of re. search. The actual sub-editing and preparation for off-set was undertaken PREFACE by Catherine E King with terms of reference to attempt uniformity of style within each essay but to retain individual reference and spelling systems. In some cases editing had to be done without reference to the author. The decision to publish was a sound one; that being so, to do this as speedily as possible seemed to be a high priority. The conference also marked the first time in which the Archives of the Hongkong Bank Group have been made systematically available to scholars. This is not simply a sign of previous reluctance; it is more a practical matter. During the 1950s and early 1960s, J R Jones, the Bank's legal adviser, collected material for a centenary history. In the course of this, many historical documents and much important correspondence were copied and preserved; Jones also wrote to staff members and collected their stories both of banking and of personal interest. This small collection formed a valuable basis for a study of the Hongkong Bank, yet it was but a selection from a vast quantity of materials some of which were subsequently destroyed, some stored inaccessibly. With the completion of the centenary celebrations, history was put to one side. The nucleus of a history archive remained but could not be properly utilized. Nevertheless when Sir John Saunders appointed Brian Ogden as the Bank's first full-time Secretary, he instructed him to preserve and develop the Archives. The task needed further work if the Archives were to become a base for historical research, and when MGR Sandberg became Chairman in 1977 he offered and Ogden accepted the post-retirement assignment of Controller of Group Archives. Then the collection process and centraliza. tion of control began in earnest. The mass of materials, especially from the Shanghai Branch, presented a new problem—that of cataloguing and management. This is, of course, an on-going assignment now under the direction of S ULMuirhead, the new Controller. The use of the Hongkong Bank Group's Archives by scholars participa. ting in the history conference marks, therefore, a stage in the development of a significant resource. Participants had used local sources to a point; they then, where relevant, supplemented their research by consulting the Archives in Hong Kong. And it is at this point that the contribution of S W Muirhead and his colleague Margaret Lee should be acknowledged, for on them fell the task of providing access to the materials, processing requests for photographs and architectural plans, as well as making a contribution to the conference itself. They were well supported by the Archives staff. In common with most corporations, the Hongkong Bank requires scholars to sign an agreement to obtain the Bank's permission before publishing material obtained from the Archives. This practice was followed for those using the Archives and whose papers appear in the present collection. In every case the material collected was approved for publication by the Bank. The Hongkong Bank History Conference is, in a sense, a public declara. tion by the Hongkong Bank Group of its interest in its own history. A new history of The Hongkong and Shanghai Banking Corporation was commissioned in 1979; upon completion, this is to be followed by preparation of a his. tory of the Chartered Mercantile Bank of India, London, and China—now the Mercantile Bank. Meanwhile Geoffrey Jones has been commissioned to write a history of the Imperial Bank of Persia, now The British Bank of the PREFACE Middle East. For these banks supplementary oral history projects have been authorized. In 1981 Sir John and Miss Robina Addis presented the papers of their father, Sir Charles S Addis, to the Library of the School of Oriental and African Studies, University of London, and the Hongkong Bank has grant. ed a sum sufficient to cover the proper cataloguing of the collection and the publication of a guide. The Hang Seng Bank, Ltd has commissioned an in-house history for its 50th year as a financial institution in Hong Kong. These Proceedings, important in themselves, are therefore the first step in a major contribution to business and banking history. This is a multinational adventure in scholarship, in keeping with the global status of The Hongkong Bank Group. As a policy it marks a change from the long Bank's founding to tell him and King Centre of Asian Studies University of Hong Kong March 30, 1982 accepted advice committee, "Tell above all write of A F Heard, an American merchant on the nobody anything that you are not obliged nothing explanatory...". Frank H H NOTES ON CONTRIBUTORS HAROLD P ANDERSON, currently assistant vice president and corporate archiv. ist of Wells Fargo Bank, received his PhD degree from the Ohio State Uni. versity in 1978. He previously served as a Teaching and Research Fellow in the Department of History at Stanford University and as an archivist at the Hoover Institution on War, Revolution and Peace. CHEE PENG LIM is an Associate Professor and Chairman, Division of Analyti. cal Economics, Faculty of Economics and Administration, University of Malaya, Kuala Lumpur. He graduated from the University of Malaya and the University of East Anglia, Norwich, England. He has acted as consultant to the IDC of Japan, the IBRD, the ILO, and ECOSOC. Among his publications are Japanese Direct Investment in Malaysia and A Study of Small Entrepren. eurs and Entrepreneurial Development Programmes in Malaysia as well as contributions to professional journals. CHRISTOPHER COOK has worked for the BBC for the past thirteen years, and for the last seven of these has produced British television's only regular oral history programs, 'Yesterday's Witness.' Since 1978 he has been interviewing for the Archives of John Swire and Sons, and in 1980 he was invited by the Centre of Asian Studies, University of Hong Kong, to advise the Hongkong Bank History Project on an oral history program and undertake a series of interviews with the retired staff of the Hongkong Bank and the Mercantile Bank; in 1982 he will begin interviewing retired staff members of the Imperial Bank of Persia/British Bank of the Middle East. He is currently preparing a collection of reminiscences of life for the British on the China Coast between the two World Wars for publication in the Fall of 1982 and is producing a series of thirteen oral history programs for BBC television on life in Britain in the 1930s. ROBERTA ALLBERT DAYER is the author of Bankers and Diplomats in China, 1917-1925: The Anglo-American Relationship (London, 1981). Presently she is writing a biography of Sir Charles S Addis and is interested in the relationship between private finance and foreign policy, particularly in China. CLAUDE FIVEL-DEMORET is a French scholar, now based in London, where he is preparing his doctoral dissertation on "Banking and the Sugar Industry in the British West Indies during the period of Free Trade" for the University of Paris-Sorbonne, under the supervision of Professor Francois Crouzet. He is currently Honorary Librarian of the Business Archives Council, London. TAKESHI HAMASHITA was, until March 1982, Associate Professor, Faculty of Economics, Hitotsubashi University. In April he became an assistant pro. fessor in the Institute of Oriental Culture, Tokyo University. An MA of Tokyo University, he is the author of 'Kindai Chugoku ni okeru boeki-kinyu no ichi kosatsu (Trade finance in nineteenth-century China), The Tokyo Gakuho 57:116-117 (March 1976), of which the English translation will be NOTES ON CONTRIBUTORS published in State and Society: Japanese Perspectives on Ming-Ch'ing (1983 projected). Y C JAO is Reader in Economics, University of Hong Kong, and the author of several important studies on the monetary and banking system of Hong Kong, including Banking and Currency in Hong Kong (1974) and (with S Y Lee) Financial Structure and Monetary Policies in Southeast Asia (1982). He was a member of the Hong Kong Government Tax Reform Committee, 1976. GEOFFREY JONES gained his degrees of MA and PhD from Corpus Christi College, Cambridge. His first book, The State and the Emergence of the British Oil Industry, was published in 1981, and he has also published a number of articles about British multinationals and overseas banks before 1939. He was Research Fellow of Corpus Christi College, Cambridge, 1977— 79, Research Officer in the Business History Unit, University of London, 1979-81, and is now Lecturer in Economic History at the London School of Economics. He is currently engaged in writing a commissioned history of the British Bank of the Middle East. CATHERINE E KING has a BA and MA from the University of Kansas and holds an MPhil in Old English from the University of Oxford where she is a member of Linacre College. She was formerly head of the Department Lingnan College, Hong Kong, and has taught in the Hong Kong University of Maryland. She is currently engaged as editor kong Bank History Program. of English at program of the for the Hong- DAVID J S KING, is a senior research assistant in the Centre of Asian Studies. The conference paper has been extracted from his report, "On the Relations of the Hongkong Bank with Germany, 1864-1948", now in the Bank's Archives, and the paper on the First China Loan from his research report on the Early Loans to the Chinese Imperial Government, 1874-1894. David King was a student of St. Stefan's, Augsburg, Phillips Academy, Andover, and Yale University, from which institution he graduated in classics and linguistics in 1980. FRANK H H KING is Professor of Economic History in the University of Hong Kong and consultant in history to The Hongkong Bank Group. A graduate of New Mexico Military Institute, he studied economics at Stanford and Exeter College, Oxford, where he completed his DPhil degree in 1959. His several publications deal with Asian economics and politics with special reference to money and banking, including the history of the Hongkong Bank. JAN T M VAN LAANEN studied economics at the Katholieke Hogeschool, Tilburg, and in 1974 joined the staff of the Department of Social Research of the Royal Tropical Institute in Amsterdam. His research interests cover eigh. teenth and early twentieth century Indonesian economic history, and he is presently preparing a doctoral dissertation on the monetization of the Netherlands—India/lndonesian economy. He is the author of Money and Banking 1816-1940, volume six in the series 'Changing Economy in Indonesia' (The Hague, 1980) . NOTES ON CONTRIBUTORS LEE SHENG-YI is an associate professor in the Department of Business Administration, National University of Singapore. His important publica. tions include Monetary and Banking Development of Malaysia and Singapore (Singapore University Press,1974), PublicFinance and Public Investment in Singapore (Institute of Banking and Finance, Singapore, 1978), and Financial Structures and Monetary Policies in South East Asia (London: MacMillan Press, 1982). TOM LEE is Professor of Accountancy and Finance at the University of Edin. burgh, having previously held a similar post at the University of Liver. pool. He is also Convener of the Scottish Committee of Accounting History and the author of numerous books and papers, many of them in the area of accounting history. DAVID MCLEAN is a Lecturer in History, King's College, University of London. His doctoral dissertation was concerned with the role of The Hong. kong and Shanghai Banking Corporation in British Far Eastern foreign pol. icy, while his Britain and her Buffer State: the Collapse of the Persian Empire, 1890-1914 (1979) brought into focus the role of the Imperial Bank of Persia (now the British Bank of the Middle East). S W MUIRHEAD is Controller of Group Archives, The Hongkong and Shanghai Banking Corporation. He joined the Mercantile Bank of India, Limited in 1952 and served as Agent, Kuala Trengganu, in 1956-57. His later assign. ments included postings in Ceylon, Burma, and Hong Kong, where for the last fourteen years he has served in the Hongkong Bank Trustee Limited. He was elected a Fellow of the Institute of Bankers in 1980. W EVAN NELSON is from Cambridge, Massachusetts, where he took his BA at Harvard University in 1977. He is currently at Duke University researching his doctoral dissertation on the British imperial administration of over. seas banking in colonial Singapore and adjacent areas. Y P NGAN is a Senior Assistant General Manager of Hang Seng Bank Ltd and has been associated with the organization for 28 years. Joining the Bank in 1954, he is now Company Secretary and Head of the Personnel Division. FELIX PATRIKEEFF, a resident of Hong Kong, is currently completing his DPhil dissertation on Russian politics in Northern Manchuria at St Antony's College, Oxford. N S RAMASWAMl is an author and retired newspaper editor in Madras, a well- known local historian and an expert on the history of Indian cricket, on which subject he has published several works. GORDON REDDING is Professor of Management Studies, University of Hong Kong. After an initial degree at Cambridge, he spent ten years as an executive in the United Kingdom researching for a PhD in organization theory at Man. chester Business School. In Hong Kong since 1973, he has been researching into Asian companies and cross-cultural differences in management. NOTES ON CONTRIBUTORS JUDITH SEAR shares with her husband, Tim, an interest in collecting the note issues of The Hongkong and Shanghai Banking Corporation—an interest developed during their years in Southeast Asia. Now resident in Fort Worth, Texas, Judith is a freelance copy editor and is completing a Master's degree in English literature at Texas Christian University. Both Judith and Tim Sear attended the conference. VICTOR F S SIT is currently lecturer in the Department of Geography and Geology, University of Hong Kong. He is the author of a number of books on small industries, including Small Scale Industries in a Laissez-faire Economy (1979), Small Entrepreneur Development in some Asian Countries (1979), and editor and main author of Urban Hong Kong (1981). CARL T SMITH is a resident of Hong Kong and teaches theology at Chung Chi College, the Chinese University of Hong Kong. His research into the busi. ness history of Chinese families in Hong Kong has made him an authority on the comparadoric system and the relationship of the personalities involved. THIRAVET PRAMUANRATKORN is assistant professor in the Faculty of Political Science, Chulalongkorn University, Bangkok. He received a PhD in anthro. pology from the University of Washington, 1979, and is an executive member of the Thai University Research Association (TURA). In 1982 he accepted a year's appointment as visiting professor at Bungaku-Bu, Kobe University, Japan. His main fields of interest are urban anthropology and sociological change. PETER WESLEY-SMITH, BA, LLB, PhD, is Senior Lecturer in Law, University of Hong Kong. He is the editor of the Hong Kong Law Journal and the author of Unequal Treaty, 1898-1997. CHRISTOPHER L YIP received his MA in Architecture at the University of California, Berkeley, where he taught for three years and was the academic program advisor in the College of Environmental Design. During 1981 he was a Research Fellow of the Centre of Asian Studies, University of Hong. Kong. He is currently completing a PhD in architectural history at Berkeley and is Assistant Professor at the Environmental Design College of the Univer. sity of Colorado, Boulder. ARTHUR B ZIEGLER has spent more than twenty-five years within structure of Marine Midland Banks, Inc, one of the pioneer companies in the United States. As a Senior Executive Vice is among the top policy makers in that nation's fourteenth lar the corporate bank holding President, he gest bank. ILLUSTRATIONS Banking Hall, Shanghai Branch, early 1930s frontispiece A. Four main buildings (with Christopher Yip's essay) following page 112 1. The Hong Kong Head Office of 1886 ("Jackson's Folly") from the southeast. 2. The north facade of the Hong Kong Head Office taken in about 1900 after the completion of the Praya reclamation. 3. The Shanghai Branch of 1923, drawing by Palmer & Turner. 4. The Shanghai Branch on the Bund in the 1930s. 5. The Shanghai Branch, construction of the ducting for the air conditioning under the main floor, September 1921. 6. The Shanghai Branch octagonal hall. 7. The Shanghai Branch ground floor plan, blueprint. 8. The Shanghai Branch banking hall. 9. The Shanghai Branch Chinese department. 10. The Shanghai Branch Manager's Office. 11. The Hong Kong Head Office of 1935. 12. The Foochow Road elevation of the Shanghai Branch of 1923. 13. The Hong Kong Head Office of 1935, east side. 14. The Hong Kong Head Office of 1935, Plan "A". 15. The Hong Kong Head Office of 1935, Plan "B". 16. The Hong Kong Head Office of 1935, main floor plan. 17. The Hong Kong Head Office of 1935, three lantern designs for the Des Voeux Road Entrance. 18. The Hong Kong Head Office of 1935 banking hall. 19. The Hong Kong Head Office of 1935 banking hall vault. 20. The Foster design for the Hong Kong Head Office of 1985. B. Banknotes (with Judith Sear's essay) following page 144 1. $25 Company note overprinted "Yokohama". 2. 100 tael specimen note on Shanghai, cancelled 4 September 1877. 3. Hankow 10 tael specimen from 1886. 4. Singapore $10 "radar" note. 5. Hong Kong $100 Bradbury, Wilkinson note, around 1886. 6. Hong Kong $5 1st January 1901 reverse. 7. $5 Hong Kong specimen 1st January 1906. 8. Magnification of vignette on Hong Kong $5 specimen. 9. Magnification of vignette on Peking $100. 10. Chefoo $5 1st September 1922. 11. Hong Kong $5 1st October 1927. 1. INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS: THE HONGKONG AND SHANGHAI BANKING CORPORATION AND THE IMPERIAL BANK OF PERSIA, 1889-1914 by David McLean The ways in which international banks and European governments have worked together during the past century has become, in recent years, of growing interest to historians in the fields of imperial expansion and foreign policy. There are specialised studies for the different regions of Africa, Latin America, and the Middle and Far East, with more adventurous histor. ians attempting to generalise and to describe the limits within which financiers and political administrators worked. This is especially so with respect to the British Foreign Office and British financial institutions. Efforts have been made to determine the extent of support which the govern. ment gave to bankers, bondholders, and concessionaries and to illustrate the circumstances in which exceptions to its policy of laissez-faire were made. Nearly all such studies, however, have viewed the connection between politics and finance from the standpoint of diplomats and politicians. This has usually been for good reasons. For one thing, since this rela. tionship needs to be viewed against the wider perspective of international relations, the actions and opinions of politicians are an essential element in any investigation. For another, it is for the most part the archives of government departments and public servants which have survived and which are most readily available. But where the records of financial houses do exist, it is rewarding to see the link between business and government through the eyes of those who controlled the affairs of powerful overseas banking corporations. The Hongkong and Shanghai Banking Corporation and the Imperial Bank of Persia (later the British Bank of the Middle East) are cases in point. The latter in particular has a remarkable archive which stretches back to its founding in 1889. The records of the Hongkong Bank have fared less well over the years and by comparison far less remains for the years before 1914. But from the surviving documents it is certainly possible to look at each bank's involvement with international politics and to obtain a clearer view of the special association which they enjoyed with the British government. In 1960 the two banks were merged into the Hongkong Bank Group. It may be considered logical, therefore, to compare the operations of these formerly independent houses. Even without this post-war merger their early histories offer certain similarities. Their staffs overlapped for one thing. Sir Thomas Jackson who was chief manager of the Hongkong Bank in 1876-88, 1890-1, and 1893-1902 was also a director of the Bank of Persia from 1903 onwards and was its chairman from 1908 until his death in 1915. Caesar Hawkins, a director of the Imperial Bank from 1908 until his retire. ment in 1939, had been for years with the Hongkong and Shanghai Bank in China and Japan, and, like Jackson, he brought to the Persian bank a wealth EASTERN BANKING of experience and financial expertise. William Keswick, a founder, first chairman (1889-99), and director of the Imperial Bank until his death in 1912 was also chairman of the Biitish and Chinese Corporation—the great Far Eastern syndicate formed in 1898 by the Hongkong Bank and Jardine, Matheson & Co. for the financing and construction of Chinese railways. Common directors meant business connections, too, as for example, in 1905 when, at Jackson's suggestion, the Imperial Bank acted as an underwriter for the Hongkong Bank's Japanese government loan. When in 1904 the Hongkong and Shanghai Bank took on the Bank of Persia's exchange business in Bombay, the managers in Tehran praised the Hongkong Bank staff for never taking unwarranted risks and for never sending them bad bills. "The Hongkong Bank is an analagous institution to ours," the chief manager, Joseph Rabino (1889-1908), wrote home in 1900;^ as the years passed the truth of his observation was to become ever more apparent. Given that both banks were operating in economically backward and politically unstable countries, inevitably parallels were to be drawn. Both brought the principles of English banking to areas where disorder and corruption were the prevailing mode of business and both were very con. scious of it. Ewen Cameron, the London manager of the Hongkong and Shanghai Bank from 1893 until 1905, proudly told the Foreign Office in 1896 that, unlike its competitors, his bank was not in the habit of bribing the Chinese in order to gain contracts. Such standards, though, were not always maintained. The bank, and its partner the British and Chinese Corporation, discovered soon enough that generous margins for the welfare of mandarin officials did have to be allowed in any business transactions. The Imperial Bank of Persia quickly realized that agreements with the Persian government were not decided simply by which European financial house offered the best terms. When the bank and its Russian competitor in Persia were negotiating for a state loan in 1898, one of its directors pre. dicted that "Russia is no doubt offering a larger bribe to the official than our modest ￡20,000.Dealing with officials at the Persian and Chinese courts always proved exasperating. From the viewpoint of the indigenous regimes the British banks were powerful institutions from which money might be obtained on as flimsy security as possible. The money which they borrowed, often no more than a few hundred thousand pounds, was little compared to the great potential of the London money market. Nonetheless, it was enough to enable such poor countries to meet arrears of pay to soldiers and officials and hence to bolster their ailing systems of govern. ment. From the viewpoint of the banks the danger of unsecured and desperate borrowing was obvious—especially when money was to be entrusted to such men as comprised the Persian cabinet in 1910: "a pack of irrespon. sible fools," the new Tehran manager, A 0 Wood, described them, "who do not understand what they are talking about. If the banks were conscious of their importance in China and Persia, there was some justification for it. Certainly they were there to make a ^■Rabino to Newell, 12 December 1900, l[mperial] B[ank] of P[ersia] archive, box X7/5. ^McLean to Newell, 23 July 1898, IBP archive, X74/3. ■^Wood to Newell, 29 October 1910, IBP archive, X7/14A. INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS profit, as the directors constantly reminded their staffs, but they also saw themselves as the servants of the native governments. The Imperial Bank in particular could hardly do otherwise; by the terms of its charter it was the state bank of Persia with a monopoly of note issue and silver coinage throughout the country. The bank's ambition, one of its directors wrote to a prominent Persian politician in 1908, was to "stand in the same relation to the Persian government as the Bank of England does to the British government."^ "Our policy must be to lead not drive the govern. ment," Sydney Rogers, the acting manager at Tehran, confirmed in 1910, "as after all they are an independent foreign state."-’ The Hongkong and Shanghai Bank also took pride in its services to the Peking government. During the Sino-Japanese war of 1894-5 it was the only institution which would advance money to China: indeed until 1895, one British diplomat observed, "the Hongkong and Shanghai Bank has always managed the private and official financial business of the Chinese government."R Neither bank wished to become caught up in the complexities of great power politics nor even to have greater contact than was necessary with the diplomatic lega. tions. Political considerations were generally regarded as obstacles in the way of legitimate commerce. This aversion to the world of politics was fully reciprocated by government officials at home. By the same token the Foreign Office, the Treasury, the Bank of England, and diplomats abroad had little but suspi. cion for private bankers and concessionaires. The British consul in Shanghai, for instance, foretold in 1898 that "the British public are going to be extensively swindled by syndicates and China company promoters."' The Hongkong Bank stood no higher in public esteem. When it asked for assistance with its loan to China in 1898 the Chancellor of the Exchequer urged the Foreign Secretary to leave the letter unanswered. "I think it time that communications from Mr. Cameron should be discouraged," he wrote to Lord Salisbury. "Cannot you stop this man from pestering us with his proposals?"R Government assistance for the bank did nothing but safeguard its profits, the Chancellor continued: "I will not place the purse of the country at the disposal of these people.it is perhaps ironic, there. fore, that a mutual dependence which nobody wanted should have developed nonetheless between the British government and the major banking houses operating in China and Persia before the First World War. The nature of that dependence and how it came about emerges from the records both of the Foreign Office and of the two banks themselves. Whatever the private wishes or public pronouncements of those involved ^MacKenzie to Hussein Kuli Khan, 18 April 1908, IBP archive, X74/5. -’Rogers to Newell, 2 April 1910, IBP archive, X7/14. ^Memorandum by Howard, enclosed in Dufferin to Kimberley, 9 July 1895, P[ublic] Rfecord] 0[ffice], London, F[oreign] 0[ffice] 27/3221. ^Brenan to MacDonald, 24 August 1898, enclosed in MacDonald to Bertie, 4 September 1898, FO 17/1336. RMinute by Hicks-Beach on Cameron to Foreign Office, 7 January 1898; and Hicks-Beach to Foreign Office, 11 February 1898, FO 17/1356. ^Hicks-Beach to Salisbury, 11 November 1900, Salisbury papers, kept at Hatfield House, class E, special correspondence, Sir M Hicks-Beach. EASTERN BANKING it seems obvious in retrospect that finance and politics could never be kept apart. In the late nineteenth and early twentieth centuries the powers of Europe were expanding their territories and influence into Asia, and, in view of the economic and political structures in nearly all Asian countries, state loans and financial concessions were among the most effective methods of such expansion. Predominance in trade and commercial supremacy were frequently the pretext for claiming special political privi. leges; the financial dependence of an indigenous government upon British, Russian, or French bankers acted as a valid reason for and could provide the means of denying advantages to their respective rivals. The British Minister in Tehran summed up the advantages of the Imperial Bank's loans to Persia: "the more we get her into our debt," he wrote in 1903, "the greater will be our hold and our political influence over her government."^ Rabino admitted in 1907 that questions of business and finance in Persia "are at present the real key to the political situation.^ So it was for China. Charles Addis, who replaced Cameron as the London manager of the Hongkong and Shanghai Bank in 1905, reflected in 1912 that "it is impos. sible to divorce finance from politics."^ The Foreign Office too conceded that the international banking consortium over which Addis presided to raise money for the Chinese government "was purely political in char. acter."13 By the 1900s both banks had effectively become the agents of political policy. A Secretary at the India Office made the point bluntly in referring to the Imperial Bank of Persia. It was there primarily to make a profit, he admitted, but "that does not prevent its existence from being a political asset to us. The Foreign Office has admitted 'the poli. tical importance' of the bank."^ Increasingly both banks were obliged to act in conformity with British government policy, and increasingly the Foreign Office found that it had to support them against foreign rivals, against the native governments, and even against other British financial houses. It is not difficult to find instances of the Imperial Bank and the Hongkong Bank acting in deference to the wishes of the British government. In 1895 the Hongkong Bank dropped its tender for a loan to China and at the suggestion of the Foreign Office it joined with an international syndicate headed by the London Rothschilds. Cameron made clear his disappointment: after having helped to maintain British commercial supremacy in China for so long, he complained to the Foreign Secretary, "you can understand the dismay with which I heard that we were about to be deprived of the position we had gained for our country and for ourselves—and that through the action of our own government."^ The Imperial Bank of Persia likewise l^Hardinge to Lansdowne, 18 July 1903, FO C[onfidential] P[rint] 8399. ^Rabino to Griffin, 4 April 1907, IBP archive, X7/12. l^Addis to Urbig, 28 February 1912, enclosed in Addis to Langley, 1 March 1912, FO 371/1314. ^Memorandum by Pratt, 21 August 1929, FO CP 13558. ^Slinute by Hirtzel on Foreign Office to India Office, 17 May 1916, India Office records, kept at India Office Library, London, L/P & S/10/224 file 1875. ^Cameron to Kimberley, 21 May 1895; quoted in D McLean, "The Foreign INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS withdrew at the last minute from a plan to sell off its unprofitable Ahwaz—Tehran road concession in 1901 as a result of intervention from the Foreign Office. George de Reuter, one of the bank's directors, complained that "with the pressure that has been put upon us we were no doubt forced to stay our hand ... but I am very sorry that this has come about. Four years later the British Minister at Tehran wrote quite plainly to the bank's chairman of "the sacrifices which the bank made in a patriotic spirit."17 In 1903, when the bank lent ￡2,000 to the Mullahs of the Meshed shrine, again it deferred to Foreign Office wishes. The Mullahs were a powerful force in Persia with whom the British government wanted the best possible relations. Not only did the British legation guarantee the loan, but it haggled over interest rates as well. "We should have insisted on 12 percent in the face of the Consul-General's insistence on 8 or 6 percent," Rabino reported home, "but having the legation guarantee and seeing the importance they attach to the advance we thought it advisable not to be too inflexible."* 1^ In 1907 the Foreign Office persuaded the bank to drop its claim for debt repayment against prominent nationalist politicians during the Persian revolution. Finally in 1909 when the Imperial Bank had an opportunity of profitable business in lending to the Shah, the Foreign Office advance lected. did all In strongly discouraged it any "We 'The Foreign Office asked us not to Wood, recol- detriment and often proved Shanghai Bank money to the government," the chief manager, scrupulously carried out their wishes to our own in our power to further their policy in Persia."1^ return for such "guidance" in their affairs, which contrary to their best financial interests, the Hongkong and and the Imperial Bank of Persia both received from the British government a measure of preferential treatment. Strictly speaking the Foreign Office should never have supported one financial institution at the expense of others; to do so was contrary to the government's public stance of non. intervention in private business and would create an outcry of disapproval in the City, in the Press, and in Parliament. Yet since these banks ful. filled a political function in the eyes of the Foreign Office, the normal rules of conduct had to be bent. Take the case of the Imperial Bank in Persia. After the Persian revolution ended in 1909 a number of London houses all expressed a willingness to lend money to the new constitutional government in Tehran. But Messrs. Samuel & Co., Crisp & Co., Messrs. Boulton, and the International Oriental Syndicate were all informed by the Foreign Office that it would look unfavourably on their loan projects. So too were Seligman Brothers who, however, were not so easily discouraged. With an offer of ￡2,500,000 to the Persian government on fairly generous terms and with an agent in Tehran who was well-liked by the new National Assembly, they threatened to oust the Imperial Bank from its role as the only British banker to the Persian government. The Foreign Office, though, Office and the First Chinese Indemnity Loan, 1895", Historical Journal, XVI (1973), 313. 1^de Reuter to Newell, 17 December 1901, IBP archive, X74/3. 17Hardinge to Griffin, 13 June 1905, IBP archive, X74/4. ^Rabino to Newell, 30 September 1903, IBP archive, X7/8. ^Wood to Newell, 14 August 1909, IBP archive, X7/13. EASTERN BANKING was quite determined that the field should be left clear for the Imperial Bank. "It is not at all desirable that the Seligman loan should succeed," an official commented. "What is the best way of choking Seligman off?"z The Persian government was officially informed that it would be a mistake to imagine that its financial problems could be solved by taking the Seligman loan, and as soon as the Imperial Bank reopened negotiations for its own transaction in October 1910 the Foreign Secretary told Seligman again that no other bank would receive any support from His Majesty's Government. In the end Seligman had to back down. The Imperial Bank's loan eventually went through, though in the eyes of Seligman's Tehran agent the bank's methods of conducting the business had been "scandalous". The London directors had stopped at nothing to prevent Seligman Brothers com. peting in the field of Persian loans. Had Seligman succeeded, the "ruinous percentages" of the Imperial Bank would have been brought to an end.^l But no other British bank was to succeed in competing for Persian business. As the chairman informed one of his fellow directors in 1913, the Foreign Office had stated quite specifically at a recent interview "that the Imperial Bank of Persia could not be overlooked in any financial arrange. ments the government might have with Persia. "22 The position with respect to the Hongkong and Shanghai Bank was very similar. The one real difference was that here the Foreign Office gave a specific written promise of exclusive support to the bank which was to remain valid until after the large reorganisation loan to the new Chinese Republic was issued following the revolution of 1911. As with the Imperial Bank in Persia, a number of British competitors all anxious to challenge the supremacy of the Hongkong Bank in China loan business were deterred from doing so by the Foreign Office. The Eastern Bank, the Chartered Bank of India, Australia, and China, and a syndicate headed by C.B. Crisp all came up against a stout defence of the Hongkong Bank's primacy in the field by government officials. Crisp, the most determined intruder, was made sharply aware of the "difficulty in which his bank will involve itself by coming into formal collision with the Foreign Office. Addis was at pains to remind the Foreign Secretary of the commitment to his bank. "Happily Edward Grey promises to stand firm," he reassured Newton Stabb, the chief manager in Hong Kong (1910-20), "so that we may reasonably hope the business is squelched."24 In the end Crisp's project was wrecked by diplomatic pressure on the Chinese government to abandon it. Nonetheless, uneasy about the growing swell of public criticism, the Foreign Office did ^Quoted in D McLean, Britain and her Buffer State: the Collapse of the Persian Empire 1890-1914 (1979), pp. 99-100. 2^W A Moore to E G Browne, 9 November and 23 December 1910. Papers of Professor E G Browne kept at the University Library, Cambridge, letters from Persia 1910-15, Add mss 7604. 22Jackson to Buchanan, 13 October 1913, IBP archive, X74/6. 23QUoted in D McLean, "British Banking and Government in China: the Foreign Office and the Hongkong and Shanghai Bank 1895-1914" (unpublished PhD thesis, University of Cambridge, 1973), p. 210. 24Addis to Stabb, 13 September 1912, H[ongkong] and S[hanghai] B[anking] C[orporation] Group Archives, box 2/27. press the Hongkong Bank to admit some other London houses into floating the reorganisation loan and this, for the Hongkong Bank men, was hard to swallow. "After our share of China loan business has been whittled down to vanishing point at the instance mainly of the Foreign Office," the Shanghai manager, Stephen, lamented, "this cry of 'exclusive support' and 'monopoly' is too exasperating."25 in fairness to Addis he at least did appreciate the embarrassing position in which the Foreign Secretary found himself and in October 1913, after a personal appeal by Sir Edward Grey, he formally released the British government from its obligation to support his bank. The whole relationship between the Foreign Office and the Hongkong and Shanghai Bank was a remarkable chapter in British Far Eastern policy and one in which, unthinkable as it had seemed from the Treasury's remarks in 1898, the British government had tied itself to a private banking corporation. Let us now look in greater detail at the precise reasons why these two banks developed their special association with the Foreign Office. It is easy to refer to reasons of political necessity, but that does nothing to explain just what those were. As mentioned earlier, both banks were operating in regions of the world where growing international tensions made their dealings with the native governments invariably a matter for wider concern. But that was by no means simply because of the leverage which a creditor nation might exert over a foreign debtor. There was the essential matter of loan security which any bank (backed up by its government) might exact from a near bankrupt kingdom—security which took the form both of the right to foreclose on the debtor's internal revenues and of restric. tions on the freedom of the borrower to spend the money as it wished. With respect to the former the revenue in question was primarily the customs duties which the Chinese and Persian governments levied at the coastal ports on foreign trade, and which was of vital concern to the British as the major sea-borne trader in both areas. As for the latter, the way in which loans were to be used was of crucial importance since in both coun. tries the British government wanted to see the emergence of politically independent and economically stable regimes able to resist the threats of Russian, German, and French encroachment. Cameron of the Hongkong Bank best summed up the importance of keeping the Chinese customs revenues free from non-British interference in 1895. Since its formation in 1863, the Maritime Customs service had been super. vised by a British Inspector-General, but that could change if the customs were pledged as security for loans from other European powers. "If the powers get control of Chinese customs as security for loans English influ. ence and prestige would suffer greatly," he predicted. "Any such control would have an injurious effect upon trade and sooner or later would be bound to lead to grave political complications."^ That was why the British government supported the Hongkong and Shanghai Bank in 1896 and 1898 to ensure that it was a British bank which made loans to China against such important security. The customs revenues of the ports in the Persian Gulf acquired a similar significance. Loans by the Imperial Bank of Persia "^Stephen to Addis, 30 October 1912, HSBC Group Archives, 13/156. ■^Memorandum by Cameron, 10 May 1895, FO 17/1253. EASTERN BANKING secured on the Gulf customs receipts prevented those revenues from being pledged to other foreign financiers—and given not only the supremacy of British trade in the Persian Gulf but also the strategic value of the region as opening into the Indian Ocean, the Foreign Office was always eager that the British bank should hold exclusive liens. There was no doubt of this in Wood's mind. "The Foreign Office I know is anxious not to let the security of the southern customs pass out of British hands," he wrote from Tehran in 1910, "and no doubt is using the bank as a lever to that end, for of course it (the Foreign Office) cannot conveniently interfere in this matter. "27 The importance which attached to loan security, then, illustrates the way in which the Hongkong and Persian Banks' business became factors in international politics. So too does the vexing question of which of the European powers would participate in loans which had a political dimen. sion. For the sake of international harmony, and in order to avert a dangerous scramble for financial privileges and concessions by the great powers in China and Persia, the British government decided that co-opera. tion between the bankers of the different European states was desirable whenever possible. The attempt in 1895 to find an international loan for China was a good example of this. The pressure brought to bear by the French and German governments made it impossible for the Foreign Office to sanction an entirely British loan; for this reason, Cameron was told by the Permanent Under-Secretary, "we have been compelled to get the assistance of the Rothschilds." "We could not support the Hongkong and Shanghai Bank in negotiating the loan to the exclusion of other countries."^R The same reasoning applied 17 years later. At the time of the reorganisation loan it was essential to steer a course for the reconstruction of China which had the consent of all the great powers. All were therefore represented in the multi-national consortium led by the Hongkong Bank. Even Russia and Japan, which had no capital to lend to China in 1912, were invited to participate. "When it became a question of establishing a measure of political control over China," the Foreign Office concluded, "these powers could not be left out."29 The banking consortium was effectively an arm of European diplomacy: the banks represented the wishes of and were given specific direction by their respective governments, and they were conse. quently unable to escape from pressures and considerations which at times had little relevance to straightforward financial arrangements. A further major reason why these banks became so closely associated with the Foreign Office was that they were inevitably drawn into the domestic politics of China and Persia. That could scarcely be otherwise in countries where the acquisition of foreign capital was often in itself the determining factor in the regime's survival. Addis remarked of the Chinese dictator Yuan Shih-k'ai in 1913 that "he rules today by virtue of the first issue of the reorganisation loan."^^ It could scarcely be otherwise, too, when important customers were officers of state—as in 1902 when the heir 27wood to Newell, 8 October 1910, IBP archive, X7/14A. ^Memorandum by Sanderson, 20 May 1895, FO 17/1253. ^Memorandum by Pratt, 21 August 1929, FO CP 13558. -^Addis to Hillier, 13 November 1913, HSBC Group Archives, 2/28. INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS to the Persian throne asked the Imperial Bank for money. Caught between his role as a cautious banker on one hand and that of guardian of powerful British interests in Persia on the other, Keswick confessed that "it is difficult to refuse his request and it is of questionable prudence to grant it.So much was the Imperial Bank caught up in Persia's domestic troubles that as early as 1897 Rabino noted that his post as Tehran manager had become a diplomatic as well as a business one. By 1909, in the midst of the revolution and civil war in Persia, Wood was starkly aware that "money is the key to the whole situation."32 The bank was torn between its duty to serve the government in Persia and its need to suit the wishes of the British government at the same time. "The Persian government are anxious that all our dealings with them should be devoid of politics," Wood continued to explain, "but since the entire situation here is purely political it is impossible for us to ignore the wishes of our government on whom we rely for support. "33 That need for support, in times of chaos and confusion, was a powerful reason for any British bank to be guided by the Foreign Office with respect to the lending or withholding of money. Another aspect of both banks' affairs which led them into closer ties with the Foreign Office was their involvement with road and railway concessions. As a partner with Jardine, Matheson & Co. in the British and Chinese Corporation the Hongkong and Shanghai Bank was a successful parti. cipant in the scramble for railway concessions in China in the late 1890s. Because of the strategic value of major trunk lines as the possible precur. sors of a political division of China among the great powers, the Corporation's applications received all the necessary backing from the Peking legation. Railway projects remained an important element in the diplomatic manoeuvrings of all the powers in China throughout the 1900s, not only in deciding the allocation of routes but also as opportunities for the sort of international co-operation which the British government had in mind. This was reflected in the British and Chinese Corporation's alliance first with German railway financiers starting in 1898 and then, after 1904, with the French. Railway promoters, however, could not be left alone to negotiate with the financial representatives of foreign powers. Referring to one of the lines to be developed jointly by the Corporation and the German consortium an official at the Foreign Office decided, in 1905, that "we must call upon the company to communicate to us every detail of their private negotiations with the German group so as not to allow purely finan. cial arrangements to prejudice the political aspect of the question."3^ Two years earlier the legation had assumed responsibility for a complicated sequence of railway negotiations with the Chinese government. This had resulted in the formation of a new British railway syndicate, the Chinese Central Railways Limited. In it the British and Chinese Corporation and one of its rivals, the Pekin Syndicate, had sunk their differences, but not without careful supervision from the Foreign Office and the sacrifice, as the chairman of the latter company put it, of business to "imperial" 3^Keswick to Newell, 2 September 1902, IBP archive, X74/3. 32wood to Newell, 27 March 1909, IBP archive, X7/13. 33wood to Newell, 9 July 1910, IBP archive, X7/14. 3^Minute by Tyrrel on Satow to Lansdowne, 27 June 1905, FO 17/1764. EASTERN BANKING interests.^5 The new syndicate, inevitably, was financed by the Hongkong and Shanghai Bank and the bank was strongly represented on its direct. orate. Through these connections with railway concessions, then, the bank again found itself working increasingly with the Foreign Office and with diplomats in China. In Persia the Imperial Bank was involved with the development of communications from the date of its foundation. Not with railways, which were barred in Persia before 1910 on account of the Russo-Persian agree. ments to that effect of 1890 and 1900, but with road concessions—the control of which soon became a matter of political concern. Not only did the Foreign Office restrain the directors of the bank from selling its Ahwaz-Tehran road concession in 1901, but in the following three years it organized the bank and Messrs. Lynch & Co. (who operated a subsidised steamship service on the Karun river at the head of the Persian Gulf) into the new Persian Transport Company for developing the route. It also paid out over ￡20,000 from secret service money to launch the venture. The Foreign Office nominated a director to the board of the new company too. It was no use the Imperial Bank claiming that "being a commercial under. taking [it] does not concern itself with political considerations" as it did in a letter to the Foreign Office in January 1902.^6 Had the bank relinquished the road concession, the Persians would have sold it straight away to the Russian government, and a major route down to the Persian Gulf would thereby have passed into unfriendly hands. An appeal to patriotism and the supply of hard cash made it perfectly clear to the Imperial Bank that there was no escaping the political role it had to play in helping to develop Persia's transport system with British capital and under British control. The new Transport Company was "our man of straw" in Persia the British Minister remarked; ^ the Foreign Office had successfully manipu. lated financial interests, the Imperial Bank included, to fit the ends of its Persian policy. As a result of all this the relationships which developed between the Foreign Office and the British banks in China and Persia were rarely free from tribulations. What is more, diplomats and officials never really overcame their dislike and suspicion of the world of high finance. "We are looked upon as Shylocks and men without bowels of compassion for the poor browbeaten Chinese," the British and Chinese Corporation's agent in Peking, J.O.P. Bland, told Addis in 1906.^R The truth, in fact, was possibly even worse than he had imagined. The Minister in Peking believed that the Corporation only wanted to sit on its concession rights and not to raise the money for railway construction. As long as the Foreign Office kept other British firms off the scene in China, the Hongkong Bank was perfectly happy, he continued; their approach was "real dog in the manger business" and their one aim "in every transaction is to outdo the Chinese in 'squeeze'."-5” "The British and Chinese Corporation stinks in the nostrils -^Pekin Syndicate to Foreign Office, 26 May 1903, FO 17/1618. ^Griffin to Sanderson, 10 January 1902, IBP archive, X2/2. -^Hardinge to Lansdowne, 1 July 1904, FO 60/714. /1906, FO 371/26 ^Bland to Addis, 25 May 1906, enclosed in Addis to Foreign Office, 9 July 39 Alston to Langley, 2 June 1913, Alston papers, PRO FO 800/247. INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS of the Chinese," the legation had complained in 1907, "and it is an uphill business fighting its battles.The Minister even had scant regard for Addis at the time of the consortium negotiations in 1912; "we are not mere tyros" he wrote to the Foreign Office. "It is easy for him [Addis] sitting in London to telegraph about mistakes in tactics but it is hard to adjust London requirements to the views of five other groups.Not everyone at the Foreign Office shared the Minister's critical views. Addis commanded respect in London and the Foreign Office knew only too well that large sums of money for investment in a country on the verge of anarchy could not be raised at the drop of a hat. There was one further problem: it was not altogether clear to the Foreign Office or the Peking legation just how good the Hongkong Bank's relations were with its partner Jardine, Matheson & Co. or indeed just how good the understanding was between the bankers in London and the head office in Hongkong. Aside from the strain imposed by political complications, there was no doubt that the British and Chinese Corporation had its own problems, too. The Minister in Peking assured the Foreign Secretary privately, in 1904, that "men in high positions out here in the Hongkong and Shanghai Bank openly express their regret that Sir Ewen Cameron and others entered into a combination with Jardine, Matheson & Co. to form the Corporation."^ Four years later his successor complained that "it is high time that the British and Chinese Corporation and the Hongkong Bank came to a definite under. standing as to their respective lines of business." As things stood, he went on, their agents in China had entirely contradicting views of how their common business should proceed—to such an extent that "the two agents largely neutralize each other's efforts.E.G. Hillier, the bank's agent, was in the habit of "running amok" from time to time and had to be called to order by the legation.^ J.O.P. Bland sometimes kept his superiors in the dark and, thinking the Corporation's days to be numbered, was playing the game of extracting all the compensation he could for him. self and his directors both from the Chinese and from the new Chinese Central Railways Ltd. It was widely known that board meetings could be a stormy affair in the Corporation. In addition to the strains between the Hongkong Bank and Jardine, Matheson, there was also the problem, apparent by 1906, of an ageing and forgetful chairman (Keswick) who, "some say", an Under-Secretary at the Foreign Office suggested, "is not so straight as we had hoped and believed. it was not always possible for government officials to work with banking interests as smoothly as they would have wished. On the other hand, the men of the Hongkong and Shanghai Bank and the Imperial Bank of Persia did not find things so easy either—as their criticisms of HMG's representatives reveal. The most frequent complaint by the banks against the British govern. ment was that it was too slow to appreciate the need for decisive action. ^Ojordan to Campbell, 17 October 1907, Jordan papers, PRO FO 350/5. ^Jordan to Langley, 27 November 1912, Alston papers, FO 800/246. ^Satow to Lansdowne, 11 January 1904, Lansdowne papers, PRO FO 800/120. ^Jordan to Campbell, 15 October 1908, Alston papers, FO 800/244. ^^Minute by Alston on Jordan to Grey, 6 February 1913, FO 371/1591. ^Campbell to Satow, 12 January 1906, Satow papers, PRO 30/33/7/5. EASTERN BANKING The Foreign Office wanted loans to China and Persia to be British loans, and yet they were not prepared to give a government guarantee which would enable the money to be raised. That was why the Russians were successful with their Persian loan of almost ￡2,500,000 in 1900. George de Reuter reflected in 1901 that Foreign Office policy in Persia for over thirty years had been one of "never taking active steps at the right moment but waiting until the eleventh hour when it was generally too late."^R After 1900 the bank's attitude towards the Foreign Office was one of reserve for several years; the board took the view that, having warned government offi. cials repeatedly in the late 1890s that more help was needed if British money was to be lent to Persia and a Russian loan averted, the bank "ought not," as another director, H. Coke (1892-1913), put it, "be expected to pull the chestnuts out of the fire for the British government."^ At times the Foreign Office was not only unhelpful but positively damaging to the bank's interests. When the bank was obliged to concede a disputed claim against the Persian government in 1905, Rabino had no doubt that "the result would have been different if the British legation had given us the support we required instead of using their utmost pressure to force us into the arbitration claimed by the Persian government."^R In China the Hongkong and Shanghai Bank often seemed to think that it fared little better—even at the height of its privileged position of monopoly support from the British government. There was little hope for any support from the Foreign Office for an industrial loan project in 1913, Addis wrote to Shanghai. "All you could expect would be 'diplomatic pressure' and in these times that is a broken reed, upon which, if a man leans, it shall pierce his hand."^9 The fact remains though that whatever tensions the shortcomings of both parties placed upon their association, the banks and the British gov. ernment did work increasingly close together in China and Persia in the 1890s and 1900s. Not because either bankers or diplomats particularly wanted to do so but because the wider problems of international relations and the internal politics of the areas in question compelled each to rely upon the other. For the British government the Hongkong Bank and the Bank of Persia represented powerful British interests whose success had become an essential element in Britain's prestige. In an age when finance became both an important tool in the rivalry between the European powers in Asia, and subsequently a means by which to achieve international co-operation, the activities of British banks and their standing vis-&-vis their foreign counterparts could not be ignored. For the banks themselves, government support was frequently required in competing with European houses, all of which had strenuous backing from their own legations. As the political frameworks of China and Persia slowly disintegrated before the revolutions of the early twentieth century, no banker could remain indifferent to the wishes of his own government—a lifeline for protecting staff, assets, and business operations in areas of turbulence and civil warfare. The banks ^Rde Reuter to Newell, 20 November 1901, IBP archive, X74/3. ^Coke to Newell, 19 September 1901, IBP archive, X74/3. ^RRabino to Newell, 22 April 1905, IBP archive, X7/9. ^Addis to Stephen, 8 October 1913, HSBC Group Archives, 8/117. INTERNATIONAL BANKING AND ITS POLITICAL IMPLICATIONS made their profits, but for the sake of political considerations they sometimes made their losses, too—as indeed in 1901 when the Treasury freely admitted that one of the Hongkong Bank's loans to a Chinese viceroy "was made not as a good banking business but from patriotic motives. That perhaps was the price to be paid for banking in unstable parts of the globe. Financial operations there carried with them an unusual and unavoidable political significance. One essential skill of the directors and staff of both the Hongkong and Shanghai Bank and the Imperial Bank of Persia before 1914 was to serve not only the country where their business was done but also the government in London which could ensure their success in so doing. ^Hamilton to Bertie, 15 January 1901, FO 17/1499. 2. THE YOUNG CHARLES S ADDIS: POET OR BANKER? by Roberta A Dayer* The career of Sir Charles S. Addis, KCMG (1861-1945) mirrors the history of the Hongkong and Shanghai Banking Corporation and in addition provides valuable details concerning the way in which Great Britain retained para. mount influence in China. To recount the experiences of young Addis in China is at the same time to describe the developing influence of the Hong. kong and Shanghai Bank and to show the way in which this Bank came to serve as the political instrument of the British government. Because Addis kept daily records and wrote detailed letters to friends and family members, we have an invaluable account of the training and experience of a young banker in China in the 1880s and 1890s.^ However, it is impossible to understand the Addis character without gaining some sense of the times in which he lived or the culture into which he was born. In 1861, the year of Addis's birth, British influence, which had already penetrated East Asia and Africa, was supreme and still growing. Queen Victoria presided over an enormous empire in which opportunity seemed unlimited; wealth there for the taking. As the young man grew to maturity, so too did the empire. By 1880, the year that Addis left his home in Edin. burgh to work for the Hongkong and Shanghai Banking Corporation in London, he had imbibed the belief that the British were born to rule, as well as the conviction that privilege carried with it responsibilities; that those who went abroad had a civilizing mission—to raise the less fortunate of the world to British standards. These beliefs were so fundamental to the Victorian Era that they were as much a part of the Addis heritage as was his Scotch ancestry or the free church tradition of his clergyman father. The upper middle-class world of the Addis family provided a life of privilege and learning. Servants were taken for granted, as essential to the life of a gentleman, religion and the classics were the chief focus of a liberal education, and great time was devoted to literature, conversation and correspondence. The family was the most important institution in society and large families were the rule. Addis was one of twelve chil. dren. He himself fathered thirteen. The Calvinist virtues of thrift, hard work, moral uprightness and devotion to duty were regarded as unassailable. Addis's life was to demonstrate the advantages which such a heritage bequeathed—its certainty, confidence, optimism and faith in the ultimate triumph of righteousness and goodness instilled a sense of purpose, gave security and direction to life which future generations could regard with both envy and wonder. Perhaps because Addis so well "exemplified the best *The biographical sketch of Addis included in the paper is copyright by the Dictionary of Business Biography and reprinted by permission. ^Unless otherwise indicated, all the citations below are from the Addis papers, which are in the Library of the School of Oriental and African Studies, London, England. THE YOUNG ADDIS qualities of the Victorian era," there is a remarkable thread of consis. tency running through the fabric of his long life.2 This consistency of behaviour and belief both explains his reputation for integrity and makes the old man in his eighties clearly recognizable as that same young man who set out for China in 1883. Before examining closely the early experiences in China which were to shape Addis's future career, I first would like to provide a brief biographical survey, quoted in fact from my contribution in the Dictionary of Business Biography. Charles S. Addis was born in Edinburgh on 23 November 1861, the elev. enth child of a Free Church of Scotland minister, Thomas Addis, and his wife, Robina (n￡e Thorburn). Although he was a gifted student, Charles rebelled against the rigorous academic demands which his father made of him and quit the Edinburgh Academy at age sixteen, determined to make his own way as a merchant. He became an apprentice for Peter Dawie & Co., General Importers, in Leith. Following his apprenticeship, Addis set off for London in 1880 where he obtained a position with the Hongkong and Shanghai Banking Corporation. An important turning point in the young Scotsman's career came in 1883 when he was transferred to Singapore and then to the head office in Hong Kong. While home on his second leave in 1894, Addis met the young woman, Elizabeth Jane Mclssac, who a few months later became his bride. Their unusually long and happy marriage produced thirteen children, six sons and seven daughters. In 1905 Addis was appointed to the London office of the Hongkong and Shanghai Bank, where he became senior manager in 1911. His new duties included membership on the Board of Directors of the British and Chinese Corporation and the Chinese Central Railways, both of which were partially owned by the Bank. In addition, Addis was appointed British Censor to the State Bank of Morocco and became a Director of the Eastern Telegraph Co., Ltd. His achievement in organizing the first international banking consor. tium for China was rewarded with a knighthood in 1913. Sir Charles's success in gaining government backing for the Hongkong and Shanghai Bank in the Reorganization Loan of 1913 to China gave the bank great advantages over its other British competitors. While Sir Charles continued to be deeply involved in China affairs throughout his career, the move to London had enlarged the scope of his interests and broadened his expertise. In 1914 he became a member of the Council of the Royal Economic Society, which put him in close contact with academic theorists such as John Maynard Keynes, as well as government economists and leaders. Later membership in such groups as the Tuesday Club and the Royal Institute of International Affairs afforded Sir Charles the opportunity to exchange views with leading statesmen and men of af fa irs. During World War I, Addis's knowledge of international markets and credit conditions became especially valuable to the government as Britain strove to meet the financial burdens caused by war. In 1917 Sir Charles was appointed to the Cunliffe Committee which was to consider financial 2R G Hawtrey's obituary of Sir Charles S Addis, Economic Journal, 56 (Sept 1946), 507-10. EASTERN BANKING reconstruction after the war. The next year he was appointed a Director of the Bank of England, shortly thereafter becoming a member of the important Committee of Treasury. Following the war Addis served on the Committee on Indian Currency in 1920 and as a financial expert to the Genoa Conference in 1922. He was elected President of the Institute of Bankers in 1921. Despite these new responsibilities, Sir Charles continued to influence Far Eastern affairs, being regularly consulted by the Foreign Office and the Cabinet throughout the 1920s. His position as Manager of the British Group of the China Consortium (which he had helped to reorganise in 1920) involved regular consultations with his American counterparts in the House of Morgan. Through such contacts, Addis was able to preserve the dominant influence of the Hongkong and Shanghai Bank over China's financial affairs, and was rewarded with the KCMG in 1921. As close friend and advisor to Montagu Norman, Governor of the Bank of England, Addis supported Britain's return to the Gold Standard in 1925 and consistently fought for the principles of free trade. In 1924 Sir Charles became involved in the reparations question when he became British Director of the Reichsbank, which was reorganized as part of the Dawes Plan. Five years later he helped to draft the Young Plan for German reparations, which included plans for a Bank of International Settlements. Addis became a Director and Vice-President of the Bank of International Settlements. Following his retirement from the Bank of England and the Bank of Interna. tional Settlements, Addis spent two months in Canada as a member of the Royal Commission on Banking for Canada in 1933. While Sir Charles's great achievements partially can be explained by intellectual ability and physical vitality, of greater significance were his indomitable will, personal integrity and spiritual strength. Addis's philosophy best can be summarized by the scriptural verse which he often quoted: "to whom much is given of him shall much be required." Although not dogmatic, Addis remained a confirmed believer, not only in God but in the perfectibility of man. He viewed his own efforts as a contribution to world peace. Above all, Sir Charles was a family man, devoted to his wife and chil. dren, with whom he shared his love of music, literature and nature. His last years were spent at Woodside, a lovely estate forty miles south of London in Sussex. He became a church warden in the little church at Frant, where he is buried. This then was Sir Charles Addis. What were the secrets of his success? Who and what were the chief influences? Addis credited Sir Thomas Jackson, the Chief Manager of the Hongkong and Shanghai Banking Corporation from 1876-1888, 1890 and 1893-1902 as one of the most important persons to shape his career. In 1886 he described Jackson to his father: What a grand fellow he is! Sound to the core, straight in all dealings; honest to the backbone; and withal a heart as tender as a woman's! Fiery, if you like, but I don't believe in a man who has not got a temper. In fine, it is a privilege to have served two years and more under such a chief. I believe I am a THE YOUNG ADDIS better man from knowing him.R To his mother Addis confided his great respect for Jackson and wrote: "Next to my father's opinion and yours, there is none I value so highly as his."^ Jackson evidently recognized that Addis was torn between his love of literature and his desire to do well in banking, for he reminded the young banker before he took up his Peking assignment that he had chosen a commer. cial, not a literary career.^ During his first years in Hong Kong, from 1883-1886, Addis lived in a Bank mess, with other young employees, several of whom remained lifelong friends thereafter. He described Hong Kong life to his mother: Gaieties continue apace. We are living at high pressure. I begin Chinese at seven every morning except on Tuesdays—mail days—when I start work in the office before seven. An inces. sant round of parties occupy the evenings.R One of the most treasured activities was the Chinese Reading Club. The President, Dr. Chalmers, who had been a missionary in China for over thirty years, was described by Addis as "one of the greatest living sinologues." We meet every Tuesday night at 9 o'clock at Chalmers' house and there seated round a large table with paper and pencil beside us, while the centre of the table is littered with dictionaries and the works of different authorities. ... I enjoy it very much. ... It does one good after days of small talk and small things to breathe even for so short a time a loftier and purer atmosphere.^ This last sentence provides a revealing glimpse of the inner tensions Addis was experiencing. Although he liked his job, he disliked the effects which life in Asia often produced, such as materialism. He observed to his mother: "I sometimes think we Bankers are like Doctors—we always see people at their worst ... Money has a dreadfully hardening influence on most of us."R Most of all, he hated the way Europeans treated the Chinese, as simply a source of profit. After describing the beauty of the Western Hills to his sister, Susan, Addis commented: Not thirty years ago the Christian nation of England planted her guns on that little hill to the West and shelled and shattered the antique towers, the gorgeous palaces till not one stone stood upon another. I do not think that one of us can look down on the scene, lovely in desolation, without a bitter feeling of shame, that we should ever have had a hand in an act so RAddis to Father, 27 Feb 1886. ^Addis to Mother, 9 April 1886. RAddis recalled this in a letter to his sister Croppie, 11 June 1981. RAddis to Mother, 8 Jan 1886. 7Addis to sister Annie, 23 Jan 1886. RAddis to Mother, 22 Nov 1886. EASTERN BANKING shameless, so barbarous. No wonder they hate us. They tell a crying child as I pass that if he does not be quiet the "foreign devil" will come to him.^ Addis hoped that European influence could be made to benefit the Chinese as well as the Europeans. Unlike many of his associates, Addis was deeply, interested in Chinese beliefs and customs—sensitive to the long cultural tradition which sur. rounded him. Part of this awareness may have resulted from contact with his Chinese teacher, Au Fou, whom he deeply revered. He described Au Fou: For two years morning after morning we have sat together-- teacher and scholar. An old man with huge goggle spectacles but as keen in his wits as many a younger. ... He always spends the whole of Sunday forenoon with me. He comes after breakfast and with tobacco and those little Chinese covered cups of tea we talk over our different customs or he tells me story after story of China's old heroes and I sometimes tell him a story of our Land--he listens rather incredulously, though too polite to express his incredulity—and somehow I think we always finish up with the belief strengthened that folks with [pig]tails are very like those without and that a strong chain of human sympathy binds together the children of one father.^ One senses in the above account underlying beliefs which must have had their origin in Addis's early religious training and upbringing in the Manse. Religion and faith remained matters of central concern which he discussed at great length with friends and family members. He wrote to Susan: ". . . perhaps you agree with John Bright, as I do, that religion and politics are the only things worth talking about."H Addis took an intellectual approach to religious questions, free of the dogmatism which he despised. He believed that all great religions share a common truth, and as for practice, he loved to quote the verse from Micah in the Old Testament: "And what doth the Lord require of thee, but to do justice, love mercy and walk humbly with the Lord" as the ultimate religious command. ment. "If any so-called religion takes away from this great saying of Micah, I think it wantonly mutilates while if it adds thereto I think it obscures the perfect ideal of religion."12 Given this view, Addis must have been very pleased to hear his Chief, Jackson, quote the same passage as his own rule of life. Jackson told Addis: ". . . the fact is, only a good man can be a good banker. Any mean or dirty tricks is not less fatal to business than to a man's private character."1^ After recounting this conversation, Addis wrote, "he makes me proud to be a banker."^ It seems ^ Addis to sister 1RAddis to sister 11Addis to sister 1^Addis to Annie , 1 3 Ad d i s to Annie, l^Ibid . Susan, 15 June 1886. Etta, 1 March 1886. Susan, 10 July 1886. 23 Jan 1886. 9 July 1887. THE YOUNG ADDIS clear then, that Addis was a very idealistic young man, bred in that Victo. rian tradition of moral uprightness and devotion to duty and imbued with a sense of mission. However, he was more capable of criticizing his own culture than were many of his contemporaries. The other Bank officer most influential in Addis's career was Ewen Cameron, the Manager of the Shanghai Branch and, later, of the London Branch. Addis believed Cameron was responsible for his appointment to Peking in 1886 and that he helped to secure his later appointment as Joint Manager in London in 1905.^ Writing in 1932, Addis credited Cameron, whom he succeeded in the London Office, with leaving him the bequest of securing for the Hongkong and Shanghai Banking Corporation "a paramount position in the London market in respect of the finance of China".^ While Addis was in Hong Kong, he formed a close friendship with Lieu. tenant Dudley Mills who was stationed in Hong Kong with the Royal Engi. neers. The two young men, though quite different in personality, were both intellectuals, fond of reading and discussion and eager to explore China. They took trips into the countryside, visiting temples and learning more about the customs of the Chinese people. After his transfer to Peking, Addis began what was to be a lifetime correspondence with Mills, in which both confided their dreams, ambitions, motives, doubts and disappoint. ments. When Mills was about to leave Hong Kong, Addis wrote him: "It is possible that what interest I had in China might have died a natural death but for your sympathy and the infection of your energy. In May 1886, as he set out for Peking, Addis eagerly anticipated the adventure ahead. After sailing from Hong Kong to Tientsin, he travelled the last eighty miles to Peking on horseback—a long, hot and dusty trip. He described his arrival: At three in the afternoon I drew reins under the walls of Peking. What a thrill of wonder and delight went through me as I saw for the first time these frowning walls and decaying towers. Under the Chinese city wall we rode and down by the moat to the gate that leads into the Tartar City where the Imperial pleasure parks were green with Spring and the palace roofs flashed yellow in the sun.^ The move to Peking proved enormously important in Addis's career, for it was in the Imperial capital that he became associated with the diplo. matic community and with Sir Robert Hart, the famous Inspector-General of the Imperial Maritime Customs. When Addis relieved Guy Hillier, the Agent in Peking, the Hongkong and Shanghai Banking Corporation had no legal right to have an agency in that city, since the Ch'ing rulers had refused to open l^Addis to brother George, 3 April 1886. ^Quoted in Maurice Collis, Wayfoong: The Hongkong and Shanghai Banking Corporation (London, 1965), p. 157. 1^Addis to Mills, 9 March 1887. In an undated manuscript, "Peking in the Eighties, II", Addis credited Professor Douglas with "first awakening an interest in Chinese people and their civilization". l^Addis to Father, 11 May 1886. EASTERN BANKING Peking to foreign commerce. ^ Addis intended to make the most of his unique position. He described his plans to his brother Tom: If we can gradually get in with the Chinese by means of loans and such like business, make ourselves indispensable to them and ultimately be permitted to do business openly of course shall be first in the field and a magnificent field it will be when the resources of this great country in the North are open.zu The above comment demonstrates a keen awareness of opportunity, both for the Bank and for himself. Addis recognized that although there was not much business in Peking at the moment, there soon would be. In the next few years if China begins to open up there will be a great future for Peking. If I can get a grip of things now, my foot will be on the bottom rung.^l At first the inexperienced young Acting Agent felt somewhat over. whelmed by his new position of responsibility and authority, but he adapted quickly and soon reveled in it. Fortunately, an acute sense of humor pre. vented Addis from becoming overly impressed with himself. Only a few days after he had established his office in the back room of a small hotel, where the Agency would escape the detection of Ch'ing officials, Addis described his situation: "Well, here I am in my little office, monarch of all I survey, despatching and receiving telegrams, issuing drafts, etc.— alone in Peking, except for my Chinese staff. And to a friend in Hong Kong, he confessed: It tries my gravity to sit back in my chair and look wise while I discuss business with some man who is old enough to be my father. However, I talk learnedly about the market fluctuations and the future price of silver and as I am the only banker here, there is no one to contradict me. Then I get daily telegrams of the London and Shanghai market so that I know more than most of o o them. J Addis believed that his primary function was to gather information and establish contacts with Chinese and British officials. He wrote to Leith, his immediate superior in Tientsin: "I take it I am sent here as a sort of watchdog, a picker up of unconsidered trifles, and my field must be almost entirely in social intercourse."^ From the beginning Addis enjoyed the closest relations with the British Legation, which showed that it welcomed the Bank's co-operation by secretly sending Addis translations of its l^Addis Diary, 1886: "Peking in the Eighties". ■^Addis to brother Tom, 4 July 1886. ■^Addis to Father, 4 April 1886. ^Addis to Fleming, 22 May 1886. 2^Addis to Craig, 4 July 1886. ^Addis to Leith, 31 May 1886. THE YOUNG ADDIS documents.25 Unlike other foreign banks operating in East Asia, whose primary interests lay in India and Ceylon, the HSBC's chief interest was in financing the China trade. Founded in 1865 with its headquarters in Hong Kong, the Bank was eager to promote friendly relations with the rulers of China through providing loans, both at the provincial and central government level.26 At the time Addis arrived in Peking, competition among international banking groups was just beginning to threaten the HSBC's special position, making diplomatic co-operation more important to the Bank.Replying to an enquiry from Cameron in Shanghai about a possible loan of taels 300,000, Addis explained: O'Conor of the Legation would prefer to wait a day or two; [he] wants [the] Chinese to act spontaneously; All loans (or nearly all) take their rise in Peking. Now that we have German Syndi. cates and French Syndicates and a host of others eager to snatch up business it is of immense importance to acquire daily infor. mation. You can only get that from the Chinese. Besides my boy I have ten Chinese in my employ, none of whom speak a word of English except one shroff who speaks a little pidgin English.28 Thus Addis employed Chinese to keep him informed of Ch'ing politics, whose complexity and secrecy continued to mystify Europeans. Addis described Chinese customs to his brother Tom: "They are fond of waiting until such matters [as loans] are extorted from them, as if they were favors.In addition to the Chinese which he employed, Addis courted good relations with local bankers and compradors in Peking. He accepted their invitations to dinner and returned their hospitality. ^ The success of these techniques was demonstrated that fall when a loan for tls 700,000 was completed. Despite his success, Addis had found the compli. cated manoeuvers very frustrating. His relief to have it over can be sensed when he reported to his mother: The Great Loan is paid to the satisfaction of everybody and most of all to your humble servant who was mortally afraid there would be some hitch and who was not particularly happy in the possession of over a million of dollars in his strong room . ..^1 One further responsibility the Acting Agent in Peking assumed was to purchase gold for the Bank. He wrote Tom: 2^Addis to Gersham Stewart, 23 June 1886. 26collis, Wayfoong, pp. 24, 59-67. 27p0r evidence that international competition for political loans was not limited to China, see David McLean's essay on the HSBC and the Imperial Bank of Persia, 1889-1914, No 1 above. 28^ddis to Cameron, 16 June 1886. 2^Addis to Tom, 4 July 1886. ^Addi s to Susan, 4 Sept 1886. -^Addis to Mother, 22 Nov 1886. EASTERN BANKING We do a fair trade in gold and have been a source of excellent business to many of the Chinese and so we are winked at and if we can only hold on long enough we become an established fact and far too much a necessity to be packed off. After his first six months in Peking, Addis was proud to report that the Bank business had more than doubled and could even boast of a small profit.33 Nor was success limited to the business world. The handsome young bachelor found himself much sought after in the elaborate round of teas and dinners which was characteristic of the foreign community in Peking. In the social world, where women's preferences counted, Addis's physical appearance and personality gave him many advantages. He was tall, curly- haired, had sparkling blue eyes and was considered very good looking. Perhaps because he had several sisters and aunts with whom he felt close, he was not in the least self-conscious with women. The hostesses in Peking were delighted to include him in their gatherings, especially when they found that he could sing, recite poetry and was willing to take part in theatrical productions. In addition, Addis liked to ride, play tennis and soon joined the hockey team. Since the foreign community was small and cut off from the rest of the world for several months in the winter, its members were almost forced to become well-acquainted. The normal social barriers, which in England might have prevented the young banker from being received by State Ministers, were less restrictive in Peking. Thus Addis soon grew to know many impor. tant people on a very informal basis, thereby gaining social experience and self-confidence as to his ability to hold his own in the intricate world of high diplomacy. As one might expect in such situations, there was no such thing as a secret—gossip and rumor ran rampant; flirtations and romance eased the boredom of the long, cold, isolated winter months. Equipped with high intelligence, great energy and a lot of time, Addis took an interest in everything. His natural curiosity, combined with good writing skills, made him an ideal reporter. When Alexander Michie, the editor of The Chinese Times in Tientsin, invited Addis to send him news of Peking, Addis responded with a long letter describing social events. Michie proceeded to publish the whole letter anonymously, calling it "Peking Notes". Flattered to see his words in print, the new author con. tinued to write regularly for The Times, reporting on both the foreign community's activities and on Chinese politics and beliefs.34 since the young banker was taking part in such a variety of activities, he could provide firsthand reports on inside news, safe in his anonymity. One thing led to another. When Addis's close friend from Hong Kong days, James Stewart Lockart, wrote requesting information for the Folklore Society in Hong Kong, Addis contacted local missionaries and teachers, asking them to 32Addis to Tom, 4 July 1886. 33Addis to J Stewart Lockart, 17 Feb 1887. 3^Addis to Michie, 14 Dec, 21 Dec 1886; Addis to Mother, 21 Dec 1886; "Peking Notes", The Chinese Times (18 Dec 1886), pp. 98-99. THE YOUNG ADDIS write papers on Chinese beliefs and practices.33 Shortly thereafter, the missionaries made Addis a member of the Board of Managers of the Tract Society and Recording Secretary. Addis confided to Lockart that he was "forced to accept for fear of cooling their folk-lore ardour".36 Despite this disclaimer, it seems obvious that this energetic Scotsman loved acti. vity and took pride in responsibility. Soon after arriving in Peking he reported to his Aunt Mansfield that he was a member of the Royal Asiatic Society and was up for election in the Peking Oriental Society, and that he was "as happy as a King".3^ During that first summer Addis was able to spend several hours a day studying Chinese, but once the fall social season got under way, with its endless round of dinners, balls and athletic events, the study of Chinese received less and less time. Addis wrote to his brother George: ". . .if Cameron really wants to have men to be of use in Chinese he must treat us as students and give us a clear two years (like the Legation students) to do nothing but work at Chinese."33 Actually, one suspects that Addis simply found too many other subjects more stimulating and worthy of attention. In this early stage of his career, Addis thought of himself as a young radical, recklessly denouncing existing institutions. Hardly had he become a member of the Peking Oriental Society when he began to agitate for change. Using The Chinese Times as his mouthpiece, Addis launched an attack on the Society's programming, criticizing a recent paper on the "Evolution of the Chinese Language", as a topic undeserving of attention. Now, if ever, when the air is thick with rumours of railways and postal unions and the general advance of China on the path of Western progress, now, if ever, when we believe the oyster is about to open, is the time to acquaint ourselves with the pre. sent throbbing life of the empire.3^ The impatient and somewhat intolerant critic attempted to enlighten his fellow Europeans through writing articles and also by presenting papers at the Young Men's Literary and Debating Society, which he helped to orga. nize. He gave the first address on "Our Intercourse with China", in which he explored the relations between merchants and consular officials in China.^ At the next session of the Young Men's Literary and Debating Society, Addis chaired a debate on "The Influence of the Press''.^3 Another area of interest to Addis were the relations between the 33Addis to Secretary, Peking Oriental Society, 26 June 1886; Addis to Lockart, 3 July, 28 Aug 1886. 36Addis to Lockart, 3 July 1886. 3^Addis to Aunt Mansfield, 26 July 1886. 33Addis to George, 27 Sept 1886. 3^The Chinese Times, 12 Feb 1887, p. 225. Addis described the shocked reaction to this article in a letter to Mills, 7 March 1887. ^Addis to J L Chalmers, 17 April 1887; "Peking Notes", The Chinese Times, 16 April 1887. ^3The Chinese Times, 23 April 1887; Addis to Mills, 18 May 1887. EASTERN BANKING foreign missionaries in China and the other Europeans. He decided to write a series of articles on "The Missions of Peking", because he felt that "the ignorance of missionaries and their work shown by foreign residents in China is deplorable and I should be glad if any feeble efforts of mine could enlighten their darkness. Throughout the summer of 1887 The Chinese Times ran Addis's articles describing each denomination's work in China.^ And so, after only one year in Peking, Addis had established himself as an author and activist as well as a banker. Despite his early success in journalism, Addis had doubts about the wisdom of continuing, fearing that he might be "drifting away too much from his career as a banker. At the same time, he became more critical of the diplomatic aspects of his work, confiding to his sister: "After 18 months in Peking I begin to think that diplomacy is only another name for lying. He described himself as tired of the "unreality and worldliness" of the diplomatic life and exhausted by the demands of entertaining constant visitors. To Lockart he explained: My position here is certainly a unique one. I am in the crowd and yet not of it, and no doubt my independent position brings me a lot of confidences from all sides which no one else enjoys to such an extent. But at what a cost! I feel as if I had become a machine which someone inside me was working: as if I had a dual personality . . . the tea duties; opium; the duties of consular officers in connexion with trade; the establishment of a national bank; a mint; a note issue; a post-office; con. tracts; imperial loans; loans to departments and sub-depart. ments; the telegraph amalgamation; syndicates—oh! the hours ... I entered upon diplomacy with a zest. I succeeded in it (excuse the arrogance. I am writing you frankly) and the fruit has turned to ashes in my mouth. I am weighed down with the utter futility of it. However, regardless of the doubts and uncertainties, the fact was that Addis had laid the foundations for a successful career as an international financier during these months in Peking. He may have been tired, but he was also proud .of his achievement; well-aware of the significance of what he had accomplished. Furthermore, the first year had produced a sobering effect on the Acting Agent, who admitted that "increased responsibility ^Addis to Mills, 28 June 1887. / o 4JAddis wrote his Mother that he and Jamieson had written these articles together, 3 Aug 1887. The series began in The Chinese Times on 25 June 1887 with an article on "Christian Missions". On 16 July, "The Methodist Episcopalians" followed; next was the "American Board Committee of Foreign Missions" on 30 July, and finally "The American Presbyterian Church Mission" on 20 August 1887. ^Addis to Lockart, 10 Sept 1887. ^^Addis to Etta, 20 Sept 1887. ^Addis to Lockart, 10 Sept 1887. THE YOUNG ADDIS etc. has taken a good deal of the wild spirit out of me."47 A serious romance further complicated the young banker's life in Peking. For some time, Addis had been enjoying the company of Harriet Denby, the daughter of the American Minister in Peking, whom he described as . . .very fair, medium height, speaks with a drawl rather than a twang, exquisite hands and feet, waltzes divinely, has a sweet, innocent expression, and is extremely natural and sensible withal.48 According to Addis, the ladies of the diplomatic community were plotting to marry off Miss Denby (who appeared willing) to young Charles (who was not). Despite his appreciation for her intelligence, beauty, charm and character, Addis did not think he was in love with Miss Denby. His ability to resist, to prevent the relationship from becoming too serious, to withstand the temptation to let fate take its course that winter of 1887-88 said much for the self-control and rationality of the young bachelor. After much agoniz. ing and soul-searching, he determined to wait until after his first leave home before proposing. After their last evening together, Addis sadly con. fided to his diary: Well, it is all over. What a pleasant friendship it has been. But only friendship? I hardly dare to answer that question now. And yet I did rightly. I am glad I am free. A year at home will let me know better.* * 4^ In April, 1888 Addis began a year's leave, journeying home by way of Australia, where he visited his sister Etta, and the United States, where he saw Miss Denby in her hometown of Logansport, Indiana. With relief, he definitely decided that she was not the wife for him. Most of the year was spent with his family in Scotland and England and visiting friends. Before leaving China, Addis had talked over his future with both Michie and Cameron. Michie advised Addis to set his goal on the London Managership and wrote one of the London officers that Addis was "thrown away in Peking".-^ Inspired by such a goal, the ambitious young banker determined not to spend his entire leave visiting. While in Scotland, Addis wrote an article on "Railways in China", which he submitted for consideration to Contemporary Review.^ Addis described his motives to Mills, writing that if the article were to be published, "it would of course be a great puff for me at an important time as it would be read in China just prior to my name coming up there for a 47Addis to sister-in-law Elsie, 10 May 1887. 48Addis to Etta, 24 Dec 1886. 4^Addis Diary, 22 April 1888. ^Addis Diary, 30 Oct 1888; 2 May 1889. ^Charles S Addis, "Railways in China", Contemporary Review, LV (May 1889), 742-51. EASTERN BANKING new appointment."^2 The next day he added: "I confess the object is not a high one—self advertisement. But it is an honest motive at any rate. In a less degree my object is to arouse the British trader.Unfortunately, the publication of the article did not have the desired effect. When Addis returned to China in the Spring of 1889, he found that the Bank's leadership had shifted to F. de Bovis and G.E. Noble, neither of whom seemed to appreciate his unique abilities. Or perhaps they feared the potential of this energetic, self-confident and articulate young man.^ In any event, Addis was not pleased with his new assignment to Tientsin. He described the daily routine to his sister-in-law: I rise at 6:30 a.m. My Chinese teacher comes at 7 and we read till 8 or a little after. Then breakfast and a smoke and per. haps a stroll to the shipping office to see what steamers have come in but more generally to the office at once, say 9 a.m. Tiffin at 12:30 and office again till 5. Then a ride or tennis and a chat at the club or a visit and so home to change for dinner. At night and on Sundays are the only chances for read. ing. One must read the newspapers Chinese and Home, a banker cannot afford to be ignorant of anything transpiring either at home or abroad which may affect his business—and what does not?55 Despite the fullness of his days, Addis found Tientsin boring and confining: the physical surroundings affronted his senses, the lack of intellectual companionship frustrated his need for stimulating conve rsation. . . .this is a most hideous, dung-heap, in the centre of kept little oasis of about a wide. We have literally only to ride or drive. . . ° depressing, sterile, dirty, dusty, which we live in a trim and well mile long and a few hundred yards one road two miles long on which Although bored and depressed by his assignment, Addis had not lost his enthusiasm or optimism: We still pound away at railways and bridges and loans. Things move slowly but I think they are moving and another ten years should see a big development of China. Railways mean mines and mines are everything . The news that H. Hewat, the Agent in Peking, was feeling "seedy" and 5^Addis to Mills, 2 Dec 1888. ^Addis to Mills, 3 Dec 1888. ^"H&SBC Half-Yearly Reports", The Chinese Times, 9 March 1889. ^Addis to sister-in-law Carnie, 17 May 1889. ^Addis to Croppie, 19 June 1889. ^Addis to cousin Bob Hill, 23 May 1889. THE YOUNG ADDIS needed to be relieved came as a welcome opportunity for Addis to return to the Capital. During July and August, he was able to renew his old friend. ships as well as meet new officials, such as John Jordan, the future British Minister to Peking, and Francis Aglen, who was to play such an important future role in China as Inspector General. Regardless of the hot, dry weather, there were stimulating people to talk to and weekends could be spent in the beloved Western Hills.^^ In September Addis returned to Tientsin for a few months before learning with great relief that he had been appointed corresponding clerk in Shanghai. However, the months in Tientsin and Peking had not been fruitless. During this period Addis read extensively, wrote a column for The Chinese Times called "Tientsin Notes", and had his first two "leaders" published. One was titled "Exchange" and the other dealt with "New Railroads in China".^9 The editor, Michie, became one of his closest friends and confi. dants. His earlier interest in the missionaries, in bringing clerical and lay people closer together continued to be a matter of central concern. To missionaries he stressed the need for Westerners to understand China, frankly stating to one acquaintance: "We don't want the Church of Scotland here--we want the Church of China. And we shall have it."^0 Unlike many of his contemporaries, he welcomed religious controversy, commenting that controversy produced discussion and "we all want more light. The last dinner which Addis hosted before leaving Tientsin included missionaries, academics and writers, which was most unusual in Tientsin society. After describing the success of the evening, Addis wrote: "The dinner was a bold attempt. The result was complete success. I wish we could see more of the missionaries than we do but that miserable social gulf divides us."^ Clearly, Addis was not a man to be bound by rigid social conventions. His wide circle of acquaintances resulted from his membership on a number of organizations, such as the Literary and Debating Society and the Committee of the Tientsin Public Library. The move to Shanghai gave Addis an ideal opportunity to pursue his varied interests, employ all his energies and talent. Almost immediately he became a director of the Society for the Diffusion of Christian and General Knowledge among the Chinese and the Secretary of the Shanghai Library. He wrote his friend Mills, "I like meddling with books and to control such a big library takes my fancy. Here was not a man who shirked work! He also ioined the Shanghai Volunteers, which involved him ‧ . ￡ C m drills almost every day. J One important new experience was public speaking. In May 1890, Addis debated the topic "On Educating the Chinese" for the Shanghai Literary and ^Addis Diary, June, July, August 1889. 59"Exchange" (9 Nov 1889), "New Railroads in China" (16 Nov 1889), The Chinese Times. ^Addis to Tom, 26 Sept 1889. ^Addis to Croppie, 27 Oct 1889. ^Addis to Croppie, 1 Dec 1889. ^^The Chinese Times, 16 Nov 1889. k^Addis to Mills, 14 Jan 1890. ^Addis to Mother, 29 Jan 1890. EASTERN BANKING Debating Society. Addis took the position that it was the duty and obliga. tion of the International Settlement to provide education for Chinese children. He said: "We claim to point the way to a higher civilization and to that there is but one way—education." As to the claim that Europeans should not interfere with the Chinese, Addis dismissed this argument with characteristic candor: "Not interfere? Why what is the whole history of our intercourse with China but one long succession of interferences?"RR What surprised the young banker was how much he enjoyed the experience of addressing several hundred people: I spoke rapidly for a little over half an hour. It was a delightful sensation. There was not a trace of nervousness. I felt the people were interested. I had them in hand from the start and I do not think their interest flagged for a moment.' Only someone of enormous self-confidence could react in such a way. Here was another important indication of leadership ability, for leaders must not only be confident of their own views but be able to persuade others to adopt them, and take pleasure in doing so. In Shanghai Addis began writing a weekly column for the China Herald and the North China Daily News called "Quidnunc", which dealt with current events and activities. Occasionally he wrote articles of more sub. stance.^5 Once again he worried about whether or not he should continue his side interest in journalism, regarding it as a kind of "showing off." Most of all he feared lest the writing interfere with his future career in banking. In a long letter to Mills, Addis explained his ambition to "some day be Manager," and described his view of the perfect banker: How can he best fit himself for the future? Business first. He must show himself punctual intelligent hardworking. He must be of good address, obliging in manner politely firm and decided and not ill-looking. He must be able to express himself by word and pen clearly, concisely, cogently. Sympathetic in drawing men's confidences he must be discreet in retaining them. He must cultivate closely the art of observing narrowly men and things--the sine qua non of a good banker. He must note the march of events and be quick to draw his inferences. Hardest task of all he must try as far as poor human is capable of it, ^S Addis, "On Educating the Chinese" manuscript in Addis papers; repor. ted in North China Daily News, 16 May 1890. ' Addis to Mills, 15 June 1890. Reporting on a later speech on 2 March 1896, Addis wrote Mills: "No one ought to lecture unless the sound of his own voice or the proclamation of his own ideas or the ideas he has cribbed from other people are to him their own reward." -^Addis to Mills, 27 Feb 1891. Not all the "Quidnunc" articles were writ. ten by Addis. See Addis to Mills, 31 May 1891, and "Notes by Quidnunc" in the North China Daily News, beginning 29 March 1890 and ending in Dec 1890. THE YOUNG ADDIS to be honest. That is my ideal. That I believe is my metier. To this probably I am called, or to express more exactly what I mean, my duty at present is to act as if the future had an "Honourable" in store for me and to equip myself for the coming of responsibility to the best of my powers. To do anything now which might impair my future usefulness, nay, to neglect anything which might increase my capacity for being useful is therefore a sin.69 Trying to reassure his friend, Mills advised him that the "Quidnunc" column could do no harm but the public interest questions were more produc. tive and observed: The fact is you and I are priggish and pedantic—you are in addition able, influential etc . . . but we are both inclined to be didactic and priggish—this is to some extent unavoidable with self-conscious self-analyzing people.^ Perhaps this constant self-analysis and criticism caused Addis to worry unduly; to overemphasize the conflict between his ambition for fame and fortune and his love of literature and writing. However, there was no doubt that Addis was dissatisfied with the slow progress he was making in his banking career. Understandably he was very tempted to make a change when two different firms offered him positions. He first sought the advice of his brother George, explaining: There is no doubt that with the departure of Jackson my position is much changed. He told me when I first went up to Peking that I should get my Agency in 5 years. One of the directors told me too, that Jackson specially mentioned my name to them before he left. Then after that I came out. Cameron asked me if they had said anything at Head Office. I said no. So he wrote himself. Noble replied through [de] Bovis that they regretted they had no post to offer me but they would give me a special salary of $250. . . . Since then Noble has appointed by seniority. As things go now I shall be lucky if I am made accountant within 5 years. And then my pay is only $300. The best years of my life will be gone before I can possibly be an Agent. On the other hand, Addis continued, he hated to "throw over 8 years of ser. vice in a fine bank."'7-*- 6^Addis to Mills, 20 April 1890. ^Mills to Addis, 16 May 1891. ^Addis to George, 15 Feb 1890. Five years later, Addis wrote a fuller account of the inner politics of the Bank to Mills, indicating that in 1889 he had declined a proposal to accept the position of Chinese expert to the Bank and had then been returned to the "rank and file", at an extra salary. Addis claimed that de Bovis, the sub-manager at Hong Kong, had "Couched message in such grudging terms" that Addis had refused to EASTERN BANKING The process by which Addis decided to stay with the Hongkong and Shanghai Banking Corporation revealed much about his character—in parti. cular his straightforwardness and loyalty. First Addis decided to "talk the whole thing over with our manager and asked his advice as a private friend.He wrote of not wanting "to desert the HSBC", which suggests that in Addis's eyes, staying or leaving was a question of loyalty. When considered in those terms, he chose to remain with the Bank./J Given the nature of his future career, it is somewhat ironic that Addis gave as an additional reason for staying, his reluctance to become involved in the China loan business again. "I am sick of those endless negotiations with Chinese which never come to anything," he wrote. ^ In time it would be such negotiations which would facilitate his emergence as a world-famous financier. Yet, despite his decision to remain with the Bank, Addis continued to be dissatisfied since he felt that he was not being given a chance. "We have Leith, Veitch, Cook, Rickett, Broadbent, Balfour, Oxley—all sticks, all tried and found wanting, but all young and likely to hang on for another quarter of a century.'^ Furthermore, he felt overworked, and fore. saw no improvement. Every year the claims of business seem to grow more exacting and one pursuit after another falls within the range of the tenta. cles which suck the life out of their victim or leave it so maimed that it is incapable of seizing its old food and dies of inanition. I see now that the time is not far distant when I shall never open a book at all from one Year's end to the other, when the newspapers shall be my sole intellectual pablum, and my declining years shall drag to a close with never a hobby to vary their monotony or an interest to cheer, unless it be growing tulips or studying the share lists. And that is because they will not give us time to ourselves. I call it sweating.^ Nevertheless, Addis persisted, stayed with the job. The next ten years were to be trying ones for the young banker who had experienced such rapid progress early in his career. In 1891 he was appointed to Calcutta, where he came in contact with an entirely new lan. guage and culture. However, he continued to find the daily routine of banking depressing. In these circumstances, he comforted himself with the belief that "our life, our real life, is after all lived within. The nineties were testing years, when someone with less loyalty and will-power acknowledge it. Addis felt Jackson and Cameron favored him, while de Bovis, whom he denounced as an "unscrupulous dog", opposed him (16 May 1895). ^Addis to Crop, 22 Feb 1890. ■^Addis to Michie, 4 April 1890. ^Addis to George, 15 Feb 1890; Addis to Crop, 22 Feb 1890. ^Addis to George, 2 June 1890. ^Addis to Susan, 23 Aug 1890. ^Addis to Croppie, 11 June 1891. THE YOUNG ADDIS might have accepted the enticing offers made by other firms in Shanghai, or might have abandoned China and banking altogether. Addis's refusal to give up demonstrated his tenacity, self-discipline and faith. During this difficult period, Addis found comfort in his reading, which ranged widely, from monetary theory to philosophy, religion, history, literature and poetry. To his sister he suggested: "... without faith life is bearable nowhere, but least of all in a foreign country."78 And to Mills he wrote: I confess life would seem very meaningless to me without the poets. I have been reading Browning, you see. 'God's in his heaven, all's right with the world.' There's a deal of comfort in a belief like that in however modified a sense it may be held.79 One of the thoughts which he liked to quote was "all service ranks the same with God."80 Thirty years later he would be comforting his own son with these lines, when h￡ faced uncertainty in the choice of profession. In retrospect, it is clear that the early years in the Far East pro. vided the opportunities for young Addis which were to determine his future career. The chance to see and experience a vastly different culture enabled him to acquire a sensitivity to the views of Chinese statesmen which served him well in later years. The social experience in Peking could never have been acquired in class-conscious England. The writing and debating skills were also to prove invaluable when Addis served as a gov. ernment witness or financial expoert at international conferences.81 Happily, along with succes came the free time for the literature, music and enjoyment of nature which Addis feared he might never have as an "ordinary banker."82 jf the decision to remain with the Hongkong and Shanghai Banking Corporation turned out to be fortunate for Addis, it was no less so for the Bank. For Addis's recognition of the opportunities which lay ahead in China; his vision of the role which the Bank could play in China's develop. ment, and his determination to promote and defend the Bank's interests, helped to assure the survival of the Hongkong and Shanghai Banking Corpora. tion as the pre-eminent foreign financial institution in East Asia. 7RAddis to Crop, 27 July 1890. 79Addis to Mills, 15 Sept 1890. 8^Addis to Croppie, 11 June 1891. Addis wrote a fuller quotation to Mills on 7 June: "All service ranks the same with God—With God, whose puppets best and worst are We. There is no first nor last." Citing "Pippa's other song". 81Addis wrote Michie (8 May 1891) to say goodbye when Michie was leaving China and told him: "I am as heavily in your debt as one man could be to another. . . . You taught us to look around, you taught us to think." 82Addis wrote his close friend Murray Stewart, 9 Jan 1897, that he had been "shelved as a result of literary & Sinological taint". 3. ESTABLISHING THE HONGKONG BANK: THE ROLE OF THE DIRECTORS AND THEIR MANAGERS by Frank H H King There are many themes one might pursue in describing the founding years of the Hongkong Bank. There are the statements of intent in the prospectus: the Hongkong Bank was to finance local trade, to operate on Scottish bank. ing principles, to parallel the position of the Presidency Banks in India, and to assist in the development of a sound monetary system in Hong Kong— including currency reform and the end of the compradoric system. It is legitimate also to consider the founding in the light of the speculative mood of the financial crises in the years around 1866, to note the ill-fate of several of the Bank's founders, and to sympathize with the strong oppo. sition of Jardine Matheson. These conflicting approaches can be summarized by suggesting that the Bank was simply pragmatic. Whatever its founders may have said, they turned the development of the Bank over to an exchange banker, Victor Kresser, and he just kept it going while founding houses collapsed, the mint failed, and the last compradore retired 100 years later. The stress on paradox, of showing the strength of the Bank on the one hand and the shaky beginnings on the other, may make a good story—indeed it is one I tried to recount in an inaugural lecture—but it neglects the examination of the underlying need for a local bank and the routine, per. haps mundane, steps which the Board of Directors and the management took to establish the Bank and to organize it to achieve its primary task—to meet the requirements of its constituents as a local bank.^ The complications which subsequently arose and which seem to fill the files of the Public Record Office derived from the efforts of the Treasury to catch up with authorization of acts already undertaken and to reconcile these with gener. al imperial policy and legal principles complicated by a failure to read the files or to interpret relevant international law correctly. And to avoid the accusation of generalization, one can note three esoteric but strongly debated points: that the Treasury officials (i) forgot that the Hongkong Bank was alone among chartered-type banks in having unlimited liability for its banknotes, (ii) didn't know why the Treasury had previ. ously required all the Hongkong Bank's banknotes to be made payable in both the place of issue and in Hong Kong, and (iii) were mistaken in the ques. tion of the extraterritorial impact of colonial legislation incorporating a business enterprise, a subject developed by Dr Wesley-Smith in the next presentation.^ ^The Bank's prospectus is in Maurice Collis, Wayfoong: The Hongkong and Shanghai Banking Corporation (London, 1965), pp. 255-57. My inaugural lecture, 'British Chartered Banking: Climax in the East', is in my Asian Policy, History and Development (Hong Kong, 1979), pp. 1-18. 2p Wesley-Smith, "The Hongkong Bank and the Extraterritorial Problem, 1865- ESTABLISHING THE HONGKONG BANK This paper, therefore, examines the early history of the Bank from the point of view of those who founded it and who sought, whatever their grand promises and preliminary announcements might have held out, to organize a bank to serve their needs. In expressing these needs and the purpose of the new Bank, promoters and journalists alike stressed the difference between a 'local' bank and an 'exchange' bank. While the distinction was never absolute and could not in practice be maintained, an understanding of the arguments presupposes some knowledge of the distinction being attempted. For the present purposes one may define an exchange bank as one which was primarily concerned in the finance of inter-regional trade; in 1864 when the Hongkong Bank was being promoted, there were several such banks in Hong Kong and Shanghai with which the promoters had business connections, and consequently they did not wish to seem to be developing a competitive organization which might pro. voke reaction and lead to a cancellation of their existing banking facili. ties. A 'local' bank was understood in the context of the distinction between exchange banks in India and the Presidency banks, e.g. the Bank of Bengal, which were permitted the right of issue but did not operate in the exchanges and were designed primarily to finance regional economic develop. ments. Thus in stressing that the Hongkong Bank was to be a 'local' bank, the promoters were not merely protecting themselves from a potentially adverse reaction by the London-based exchange banks; they were stating a positive policy--the Hongkong Bank was established to meet the financing needs of the region, while leaving the inter-regional exchanges to the existing banks. From this it should be understood that 'local' refers not to Hong Kong alone, but to Hong Kong, Shanghai, and the ports in immediate, regional trade relations. From the very first the Provisional Committee were unable to maintain this distinction; some observers feared it had been wholly abandoned. But despite a pragmatic approach by the promoters and first Directors, the distinction was legitimate and certainly influenced policy. With these points clarified, the history of the Bank's establishment may be continued. Although The Hongkong and Shanghai Banking Corporation was founded after the enactment of general limited liability and banking legislation in the United Kingdom, the Colonial Office had not abandoned its concepts of imperial uniformity nor had the Treasury renounced its responsibilities for banking and financial supervision, especially in the Colonies. The Board of Directors of the new Hongkong Bank had specific problems, they were not wholly familiar with Imperial requirements, and communications were time- consuming and involved. Thus they were concerned often with minutiae which were as frustrating to them and to the Hong Kong Government which supported the Bank's aspirations as they were to a Treasury well-aware that they had inherited a task which had always been difficult and was by then virtually unnecessary. The Treasury, therefore, did not always insist on its rules being implemented, but (i) the burden of proving the desirability of an exception was on the Bank or the Colonial authorities and (ii) there was 1890', essay No 4 below. This is but one example of the problems which exercised officials at the time and which now seem irrelevant or mistaken. EASTERN BANKING some inconsistency in the Treasury's degree of flexibility. These problems and others were handled by the Bank's initial Provi. sional Committee and later by the Board (Court) of Directors. That this is worthy of comment requires explanation. Although the Board were seen to be active in the first years of the Bank's existence, subsequently the Board appeared to fade from public view and the Bank's actions and policies become associated with its chief manager--or even with, for example, its Shanghai or London managers or, especially in the days of Sir Charles Addis, with the Chairman of the Bank's London Consultative Committee. In recounting the story of the establishment of the Bank, therefore, the focus is naturally on the decisions of the Board of Directors, particu. larly in the first ten years, that is, to the financial crisis of 1874-75. The story is worth recounting for its own sake, but it also provides a base for examining in a very general way the subsequent role of the Bank's Board, providing, in the final part of the paper, an opportunity for a preliminary reassessment. A sound proposal in a speculative atmosphere The immediate impetus for the founding was the announcement of the planned Bank of China, a Bombay promotion, and the events immediately following can be made to take on something of the aspects of musical comedy.3 in fact, the swift reaction of the P&O agent, Thomas Sutherland, is significant at two totally different levels: (i) it illustrates why Sutherland became Chairman of the P&O at an exceptionally early age—he was obviously a brilliant man, and (ii) it proves that there must be considerable truth in A F Heard's statement that the Hong Kong merchants had long been consid. ering the founding of a local bank.^ A speculative reaction might have been organized quickly, a bubble company might have been set up at a dinner party, but the authority of the Provisional Committee and the sober manner in which it addressed itself to the initial tasks, surmounting the problems which each member may have been facing with his own trading company, con. firms the hypothesis that, while the announcement of the planned Bank of China sparked the action, the Hongkong Bank was the consequence of a real need, previously thought out, if rather grandly expressed in an unneces. sarily specific way in the initial announcements. Although the Provisional Committee for the Hongkong Bank then began immediate negotiations for a proper charter under the Colonial Regulations, it took from October 1864 to August 1866 for the charter, in the form of a colonial ordinance, to be actually passed, and a further five months for -^See my, 'The Bank of China [Bombay] is Dead', Journal of Oriental Studies 7:39-62 (1969), reprinted in King, pp. 19-41. ^Augustine Heard and Company papers, Baker Library, Harvard University, Albert F Heard to his brother John Heard, III, 29 July 1864 (HL-40). AFH was a member of the Hongkong Bank's Provisional Committee. Support for the argument that a local bank had long been discussed is also found in the original announcement issued by Dent & Co. China Mail (28 July 1864). ESTABLISHING THE HONGKONG BANK the new corporation, under Woldemar Nissen its German Chairman, to comply with the initial capital requirements and be declared operative.^ Had the Committee delayed operations until that date, the whole scheme, despite the underlying need for such a bank, would have had to have been abandoned, if only because of the problems of the sponsoring firms. Then, as now, time is the destroyer of business deals still in the negotiation stage; success depended on immediate action and operations began without a charter as the Hongkong and Shanghai Banking Company Limited--a bold move which was to have the additional advantage that the Imperial Treasury would deal with the Bank as a going concern rather than as a speculative prospect. Nevertheless the decision for immediate operations was to create some difficulty later. The activities of the Bank as the Hongkong and Shanghai Banking Company Limited in this waiting period, 1865 and 1866, naturally set a pattern the record of which would not appear in the documents avail. able to the clerks of the Imperial Treasury in their subsequent and peri. odic summaries of the Corporation's history. Uninhibited by the Colonial Regulations, for example, or by thoughts of extraterritorial problems, the Banking Company issued one-tael notes in Shanghai, or, before that, opened a branch in Shanghai and set up agencies on the China coast, for which, once incorporated, it had to ask authorization some two years after the event.^ Certain early decisions would be questioned subsequently as if they had been violations of Colonial Regulations, which were, of course, inapplicable to the Bank in its 'company, limited' years. General registration or special ordinance From the Imperial point of view precedent and prudence dictated a policy which was unclear to those in far-away Hong Kong aware only that general banking legislation permitting limited liability existed, as a matter of ^The original communications are included in a despatch from the Hong Kong Governor, Sir Hercules Robinson, to the Secretary of State for the Colonies, 29 Dec 1864, in CO 129/101. For the Colonial Regulations, see United Kingdom, Colonial Office, Rules and Regulations for Her Majesty's Colonial Service (London, 1843), pp. 75-79; see also in BT 1/462. The saga of the Bank's incorporation is told in the inaugural lecture cited or in the CO 129 and T.l files in the PRO, London. That a German was chairman was not by chance rotation, as it might have been later; Nissen had been voted a member of the first inspection committee and elected deputy chairmain by his fellow directors; he was obviously held in high esteem—and he was soon to be leaving the Colony. 6The Overland China Mail (1 Nov 1871), quoting the Shanghai Courier, reported that when the HSBC introduced one-tael notes into Shanghai, they were wel1—received but had to be withdrawn when the Bank was incorporated under the Hong Kong ordinance due to the provision against issue of notes of less than five dollars' value equivalent. The Bank's request for, inter alia, 'official authorization to Open Branches of the Corporation at Shanghai, Foochow, Yokohama and Nagasaki' was dated 21 August 1867, and is found in CO 129/124, f. 191. No reply has been located. EASTERN BANKING fact, in the United Kingdom. The Hongkong Bank could, of course, have been incorporated in London under the 1852 Act, but this would have negated the promoters' claim to be establishing a 'local' bank. The alternatives as seen in Hong Kong were (i) to incorporate under a special ordinance written in accordance with Colonial Regulations or (ii) to promote the passage of a Hong Kong limited liability ordinance and register under its provisions. The Provisional Committee placed their highest priority on the issuing of banknotes which would be accepted by the local treasury; this, given Imperial Treasury policy, required incorporation by special ordinance. Unfortunately the Colonial Regulations also required provision for the double liability of shareholders, and this the Provisional Committee of the Hongkong Bank were anxious to avoid. Having applied for the 'charter' or ordinance, therefore, they supported a Hong Kong limited liability ordi. nance under which they then registered. But Treasury policy was opposed to such a colonial ordinance permitting registration of banks. Thus the promoters of the Bank thought they had a choice; in fact, they did not. But much discussion and organizational delay lay ahead. To some extent the Directors were attempting to have it both ways, i.e. the advantages of a charter/ordinance--with the right for the Bank's note issue to be accepted by the colonial treasury--and immediate opera. tions through a general companies ordinance without fulfilling all the requirements a charter would demand. But the Hong Kong Government was unaware of the significance of the general-ordinance/charter differences while the Imperial Government assumed that a charter must be the Board's ultimate goal. On the basis of these off-setting misunderstandings all parties moved ahead. Acceptance of its banknotes was, as has been stated, a key objective of the Hongkong Bank. One of the requirements for such acceptance was that the Bank should have been 'in operation' a required period of six months. Indicating, perhaps, the Hong Kong Government's recognition of the Bank's local support and likely success, the Government agreed, on the basis of a letter received from the Bank's Hong Kong manager, Victor Kresser, to cal. culate the six months from 31 January 1865, the date of the signing of the original Deed of Settlement and not from 3 March, the date of opening of the Hong Kong office for public business.^ This was unusual first in that the six months of operation requirement had been, to put it mildly, leni. ently interpreted and secondly because acceptance of the notes was subse. quently continued in anticipation of incorporation by colonial ordinance during a period when the 'company, limited' was neither a company nor, in any way, limited. The Imperial Treasury had, however, a second requirement, that the Bank be in operation for a period of sufficient length to have gained the confidence of the public. No doubt W T Mercer, who was at the time the ^Mercer's correspondence with the Colonial Office on this subject is in No 121, 10 August 1865, in CO 129/106, ff. 77-78. He was aware of the 'confidence' aspect of the problem and stated it clearly in his letter to Kresser of 25 May 1865 in the file cited. See the announcement in the Hong Kong Mercury and Shipping Gazette (3 March 1865) relative to the commencement of business. ESTABLISHING THE HONGKONG BANK Officer Administering the Government and who had had considerable financial experience in Hong Kong, felt that the Hongkong Bank had gained the neces. sary confidence. But the Treasury had made allowance for local enthusiasms and had ruled that the period must be six months or the gaining of confi. dence, whichever was the longer period.R Thus the favourable interpreta. tion of the date of commencement of business was of crucial importance and is an example of how the establishment of the Bank was facilitated not only by determined action by the Directors but also by sympathetic co-operation from the local authorities which London chose not to question too closely— at least for the moment. This co-operation on the part of the Hong Kong Government was to be justified when, in November 1866, the Bank, still operating as the Hongkong and Shanghai Banking Company, i.e. without incorporation or limited liabil. ity, saved the Government from financial embarrassment by granting a loan of $100,000 at eight percent--provided, however, that the Government should handle its exchange transactions through the Bank.^ Nevertheless, the Imperial Government approved the Hong Kong Govern. ment's decision to accept the HSBC's note issue only on the understanding that a charter with provisions for double liability was the ultimate goal, despite the Bank's registration under the Limited Liabilities Ordinance, then still under review in London.^ Thus, even if the banking section of that ordinance had been allowed to stand, had the Hongkong Bank's registra. tion also continued, its note issue would not have been accepted at the Colonial Treasury. As stated above, there were two divergent courses being pursued by the directors at the same time. Although, they had applied for incorporation by charter (or ordinance) in order to obtain the advantages from a note issue being accepted, they objected to (a) the double liability provision and (b) the requirement that capital be fully called-up within a limited time.When other factors caused the introduction into the Hong Kong Legislative Council of a general companies ordinance permitting limited liability by registration, the Directors supported it and, on its passage (as No 1 of 1865) registered themselves and began operations as the Hongkong and Shanghai Banking Company, Limited.^ After consultations with the Board of Trade and the Treasury, the R Treasury minute relative to acceptance of the banknotes of the Commercial Banking Corporation of India and the East, T.1/6513A/16746. 9 Despatch No. 156, 14 Nov 1866, with an accompanying survey of the state of the Colony's finances, in CO 129/116, ff. 42-52. 1RT7/14 (20 April 1866), p. 61; see also Treasury to Colonial Office, CO 129/118, ff. 220-21. ^Francis Chomley, Chairman, HSBCo Provisional Committee, to Colonial Secretary, Hong Kong, 23 Dec 1864, in CO 129/101. ■^The Ordinance was sponsored by the Hong Kong Chamber of Commerce, but it had a difficult passage due to the opposition in Council of both James Whittall of Jardine Matheson and the Colonial Treasurer. Final passage was on 4 March 1865, see various Government Gazettes (which may be found in CO 132/8) and Legislative Council Debates (2, 9 and 23 Feb, and 4 March), reported in the local Hansard, CO 131. EASTERN BANKING Colonial Office informed the Hong Kong Government that the Limited Liabil. ity Ordinance must be amended to omit reference to banking companies, and the HSBC Board, recognizing a potential disruption of the Bank's business, protested the amendment. Thomas Sutherland, the P&O' s Hong Kong represen. tative and the initiator of the Hongkong Bank's founding, took up the matter in the Legislative Council, and required that his objection be recorded. He cited Indian and Australian precedents, neither particularly relevant in view of the terms of the Colonial Regulations and the problem of the 'profits of issue'. In fact, his request for legislation similar to the Act of 1862 may well have had an unfortunate consequence for the Bank— Sutherland was probably unaware that although the Act authorized limited liability for banks incorporated under its provisions, there remained a specifically stated requirement for unlimited liability for any note issue outstanding; thus, when the Hongkong Bank's incorporation was debated, this particular clause was insisted on by Jardine's James Whittall, and the Bank's shareholders had both double liability as required by the Colonial Regulations and unlimited liability for the note issue as required by the Act. But the colonial precedents were clear--at least, they were clear to British Treasury officials, which had the favourable consequence that, whereas the Bank was, from January 1866, without corporate status, the Bank's original application had been progressing through the various stages all the while and no time had in fact been lost in obtaining a charter. Then too, the Hong Kong Government had in any case treated the Bank as if its acceptance in some form was obvious, the merchants for the most part were in support, and perhaps only fluctuations in share prices could be said to provide some evidence of procedural and legal uncertainties.^ Indeed, the whole process of obtaining some form of incorporation was little understood and it is doubtful that day-to-day events were even reported in London. It was during this period, for example, that the Bank developed correspondent relations first with the London and Westminster and then with the London and County Bank. There is no evidence to suggest whether either realized the temporary or pending nature of the Hongkong Bank's status; they apparently made their decisions pro and con first on their estimate of the Bank's local support and secondly on the Hongkong Bank Company's performance.^ l^See despatch No 48 of 7 March 1866 in CO 129/112. ^Although the Limited Liability Ordinance (No 1 of 1865) passed the Leg. islative Council, it had been officially protested by James Whittall of Jardine Matheson, whose complaint was taken up in London by Robert Jar- dine, MP, and his banker, Abel-Smith, MP; CO 129/108, correspondence of Mercer and attachments, 1 Nov 1865. London's decision to require the omission of the banking section of the ordinance was notified to Hong Kong, 11 Oct 1865, causing the amended ordinance (No 2 of 1866) and the deregistration of the Hongkong Bank, which thus lost corporate status. See CO 129/104, No 38 of 10 March 1865, for early history of the Ordi. nance and Whittall's protest; see also T7/13 (Nov 1865), p. 365; for pas. sage of the amended ordinance see No 48 of 7 March 1866 in CO 129/112. iJNational Westminster Bank Archives, London; London and Westminister Bank, The tasks of the Provisional Committee and the Directors Thus we return to the main hypotheses concerning the success of the Hong. kong Bank the realized need for a local bank and the business-like way in which certain members at least of the Provisional Committee and the subse. quent Board (or Court) of Directors went about developing the institution's affairs. And in this there is need to distinguish between the private expectations which may in part have motivated Committee members—and were reflected in their frank correspondence with business associates—and their public role as promoters and directors of an enterprise, the success of which was as important to them as potential constituents as it was to them in their roles as initial risk-takers, entrepreneurs—or speculators. The Board, and before that the Provisional Committee, had to (i) continue negotiations with government on the charter application, as noted above, (ii) insure local support by (a) proper allocation of shares and (b) taking local requirements into consideration in their banking decisions, (iii) select senior staff, (iv) appoint agents in outports--which is further discussed in connection with materials from the archives of two founding companies, Augustine Heard and Siemssen's, (v) establish relations with London—and to learn how this should be done, (vi) co-ordinate calls for capital with the requirements of the business, and (vii) play a con. structive role in the establishment of a sound currency and in the ending of the compradoric system. In all these time-consuming tasks--'Bank meetings take up all my afternoons'--they were successful.^ When writing to the London and County Bank in October 1865, the Hong. kong Bank was able to report that after about four months in operation it had 130 local current and deposit accounts with, chiefly, mercantile firms, with an average balance of $1.6 million and that the Bank's note issue, which was reportedly received by the Government as 'legal tender' for government dues, reached nearly $1 million and was expanding. The Hongkong Government Gazette stated that notes issued by the Hongkong Bank, presum. ably in Hong Kong only, totalled HK$612,656 in October and were already the largest banknote issue in the Colony.^ Board minutes (B2893), letter quoted below, dated 13 Feb 1865, and London and County Bank Board Minutes (B2358), Vol 13, 7 Nov 1865, quoting a letter from the Hongkong Bank's London representative, W H Vacher, dated 28 Oct 1865. l^The quotation is from A F Heard in a letter to Dixwell, dated 19 Dec 1864 (HL-25, p. 172). The directors, as opposed to members of the Provi. sional Committee, were remunerated. A letter from the Bank's Hong Kong manager, Victor Kresser, to A F Heard (17 Feb 1867) states that the latter would receive 40 new shares worth $1000, i.e. $125 shares with $25 paid up, in payment for their services as directors from 1 January 1865 to 30 June 1866. Cambridge Univ Library, Jardine Matheson Archives, B7/15, HK8769. (Jardine Matheson handled Augustine Heard's affairs on the failure of the latter in 1875.) We are grateful to Mr Alan Reid of Matheson and Co. for permission to quote from these archives. ^London and County Bank Board Minutes (B2358), Vol 13, 7 Nov 1865, in a letter from Vacher to McKewan dated 28 Oct 1865. The HSBC note issue EASTERN BANKING 'Local support1 for a 'local1 bank 'Local support' suggests that there is someone local who can make financial decisions. If the traders of Hong Kong had been but junior agents of firms headquartered in London, Hamburg, or New England with banking connections established at home, what chance would a Hong Kong-based bank have had? Just as say the Malacca branch in the more recent inter-war period mainly if not exclusively serviced credit decisions made in Singapore, there would have been no room for independent choice, and a new bank, especially one headquartered in Hong Kong, could have made little headway. Augustine Heard and Company began in China and partners returned to Massachusetts, and, while they felt free to offer advice, they left the responsibility for decisions to the partners remaining on the China coast, but with Hong Kong dominant. And Siemssen's, too, had been founded on the China coast and the Hamburg office established only when Woldemar Nissen, the partner who was a member of the Hongkong Bank's Provisional Committee and Board, returned home in 1868. This was a pattern; decisions were made in Hong Kong by partners who needed a bank which could similarly make decisions in Hong Kong. Nevertheless, as the Heard and Nissen correspondence reveals, it might be wise to be cautious when writing home about activities involving a local investment. If then the Bank were to depend on local support, the directors had to make a wise allocation of shares. While the Committee did insure that their 'friends' were given all consideration, this was not inconsistent with reserving shares for potential 'constituents'; there was still oppor. tunity to insure that shares were reserved for leading firms, that the major proportion went to those interested in the China trade, and that sufficient were reserved for India and, later, London. Of the original 20,000 shares, 18,000 were allotted to Far Eastern residents and only 2,000 to those in Bombay and Calcutta; in March 1866 when the nominal value of the shares was halved (from $250 to $125), the Bombay and Calcutta alloca. tions were increased relatively and London was granted 1,000--reflecting, incidentally, the revised intentions of the Bank relative to business in these areas.0 When Russell and Company delayed their acceptance and reached $1 million for the first time in January 1868, see PRO CO 129/ 129, f. 292. l^j R Jones' draft survey of the Bank's history in the Group Archives. In comparison, note that the abortive Bank of China had allocated seventeen percent (or 5,000 of 30,000 shares) of its initial issue to potential China-coast constituents. Times of India (23 June 1864). The minimal allocation of HSBC shares to India reflects the Bank's reluctance to become involved in the aftermath of the Bombay speculations, indeed actual allocation of 10,000 shares applied for in Bombay was delayed at the request of the Bank's agents—Times of India (23 Jan 1865). But this initial attitude had soon to be modified in the interests of potential constituents, including directors, whose primary interest in the China trade also involved them in India. When the nominal value of the shares was changed from $250 to $125, see discussion below, new shares were issued to restore the total capital of the Bank to $5 million, and the certain other firms were unable to take up what was offered them, the Directors had to step in and buy to meet, as they put it, the charter requirements that all shares be subscribed. This explanation was accepted by an extraordinary meeting of shareholders on 27 March 1865.19 The records attest to the time and patience the Directors spent on this basic problem. The nice task of allocating over-subscribed shares—by 30 November 1864 there were 34,000 applications for 20,000 shares—especially since they had risen to a premium, was not done without local controversy, espe. cially in view of some opposition to the Bank per se, but a public meeting cleared up the charges and the committee was exonerated.20 Both A F Heard and Woldemar Nissen of Siemssen's were concerned with this problem. The biographical sketch of Arthur Sassoon, a member of the Bank's Provisional Committee and Board, stresses the local factor in the finance of international trade by explaining that the Bank would short-circuit delays in referring bills to houses in Bombay and faraway London.2^- But perhaps the most obvious way in which the Hongkong Bank proved itself designed to meet the requirements of its local constituents was in the Bank's early defiance of a decision by other exchange banks (if that term may be used in connection with the Hongkong Bank of that time) to shorten the usance period on bills from six to four months.22 The ostensible reason for this was the belief that long usance periods encouraged specu. lation and over-trading and that, given the consequences of this very visible on all sides, all speculative activities ought to be discouraged. This was quite sound as far as finance bills were concerned, but inappro. priate for the financing of merchandise trade, the usance for which ought to be geared to the specific requirements of that trade, which could be objectively shown to be closer to six than four months. So the Hongkong Bank received new customers who stayed with the Bank subsequently. It is 19 20 21 opportunity was taken for a new allocation on an altered geographical basis. That share allocation was a sensitive issue is a proposition which can be supported by noting that the failure of the Bank of China to set aside a sufficient number of shares to be allocated to those resident in Hong Kong and the China coast was a significant factor in uniting them behind the promoters of the Hongkong Bank. Reported in the Overland China Mail (1 April 1865); this followed rumours in, e.g. Hongkong Daily Press (9 and 11 March 1865). Russell and Company were represented on the Board from 1867. A F Heard makes frequent references to the allocation of shares, the time-consuming nature of the task, the system of priority, the number of applications and the state of the market; see, e.g. his letters to C E Endicott of 7 Dec 1864 (HL-25) and to John and Augustine Heard, Jr. of 30 Nov 1864 (FM-5). In Stanley Jackson, The Sassoons (New York, 1965), pp. 42-43. Arthur Sassoon was actually Abraham, the son of David Sassoon, but, as a 'man about town', he preferred (unknown to his father) to wear Western clothes and to use what he presumably considered a less ethnic name. Archives of Siemssen and Company, Hamburg; see Woldemar Nissen to Georg T Siemssen, 26 Aug 1866, for a discussion of the issue. Citations from EASTERN BANKING significant that the Hong Kong managers of the other banks recognized this and tried to delay implementation of their London instructions; they may well have done so, but eventually they had to obey not the dictates of their experience and the needs of their customers but the rules of a London directorate making a policy which, while not without basis, was unwisely applied in this situation. The Board did not so easily win the support of the important firm of Jardine Matheson and Company, otherwise their local success was virtually total. Sutherland had made his initial contacts with Dent and Company, long-standing rivals of Jardine Matheson, and this alone excluded any possibility of the latter's co-operation, although their opposition to the establishment of a bank in speculative times and their well-known general position that any bank would encourage over-trading, i.e. competition with Jardine Matheson, may have led Sutherland to Dent's in the first place. Dent's early failure freed the Board from the appearance of dependence on any single hong, another factor explaining the Board's success in obtaining local support, but for the general reasons stated Dent's failure would not immediately reconcile Jardine's to the Bank. Staffing and the establishment of branches The Provisional Committee and then the Board succeeded in overcoming one of the most serious problems facing new banking companies in this particular period, the employment of experienced bankers. Over the objections of certain British members of the Provisional Committee, Victor Kresser, the Swiss manager of the Hong Kong branch of the Comptoir d'Escompte de Paris, was appointed first Hong Kong manager, subsequently to be designated as Chief Manager, and despite the problems which arose later as a consequence of his investments in local companies, he did manage the Bank, set up the first Bank agencies, and work in co-operation with the equally able Shang. hai manager, David McLean.^ A Scotsman, McLean had originally planned to take up banking in Australia, but a shipwreck caused him to change course for Hong Kong and employment with the Oriental Bank. After a short period this archive are based on translations undertaken by David J S King. See also, HSBC semi-annual report, issued in August 1867, and London and China Express (e.g. 26 June, 10 July 1866). ^ibid. The notice announcing the shorter usance period and signed on behalf of the Chartered, the Chartered Mercantile, the Bank of Hindustan, the Delhi and London, the Comptoir d'Escompte, and the Oriental banks was published as a private announcement in the Hongkong Government Gazette 21: 412 (6 Oct 1866). The Hongkong Bank was conspicuous in its absence. 2^0n Kreser's nationality and British reluctance to appoint a foreigner as the Hong Kong manager, see Woldemar Nissen, a German member of the Provisional Committee, in a letter to his partner in Hamburg, Georg T Siemssen, 25 Oct 1864. On Kresser's dealings in local and regional investment projects, there are many entries in the HSBC Board Minutes; see, e.g. 3 May 1869 and 25 April 1870. Biographical material on McLean is from the HSBC Archives. he was posted to Shanghai, subsequently returning to the Colony where he gained a local reputation as the Oriental's acting manager. Thus in the summer of 1864 when McLean learned that he was to be replaced in Hong Kong, he was open to an approach from the new Hongkong Bank's Provisional Commit. tee, while his Shanghai experience made him a sound choice once Kresser's appointment had been agreed. The task of staffing the bank was rendered easier by the decision to use commercial firms as agents in outports, not to get involved directly in the trans-Pacific or trans-Atlantic exchanges, and to lean heavily on a London bank acting not merely as a 'correspondent' but as an 'agency'.25 In a period of notorious shortage of qualified bank managers, this policy proved particularly sound, since it permitted the Hongkong Bank to begin area-wide operations with a minimum of permanent staff, relying on the experience of the merchant houses, which, up to that time, had provided many if not all of their own banking requirements. That the Directors were disappointed in Kresser and seriously compromised by W H Vacher, their London appointee, is unfortunately true, but the choices were nevertheless sound when made. These first recruits could later be joined by victims of the failures of other exchange banks—Thomas Jackson, Chief Manager 1876-88, 1890, 1893-1903, had been with the Agra and Mastermans Bank in Hong Kong; these fortuitous appointments and subsequent phasing gave time to train juniors—men like A M Townsend—to be sent out from London, thus setting a pattern which would last until after World War II. These are the men Christopher Cook describes in his paper, 'The Hongkong and Shanghai Banking Corporation on Lombard Street.'26 Staffing was a serious problem at a time when the Bombay boom was seeing at least one bank founded every week--even bubble companies required the facade of respectability and had to appoint a manager, at least until the market went mad and a bank might be floated without anyone having decided on what to name it. 2? The Directors of the Hongkong Bank sur. mounted the problem in part by restricting the area of their operations to that in which the firms represented on the Board had intimate knowledge and business connections. By the end of 1865 agencies had been established at Bombay, Calcutta, Singapore, Manila, Foochow, Amoy, Swatow, Ningpo, Kiu- kiang, Yokohama and Hankow—a clearly defined area obviously related to the trade of Hong Kong. Nevertheless, this was to prove insufficient for the world-wide activities in which the Bank, despite its clearly conceptualized area of operations, had in fact to be represented. Thus even in 2^0n the impracticality of operating the New York/London exchanges through a New York Agency of HSBC, see George F Heard (who was then Chairman of HSBC) in a letter to his brothers, 27 April 1871 (FM-11), writing on the views of Kresser, the Chief Manager, and the HSBC Board of Directors. Concern was also expressed about entering into competition with Barings; there was the possibility of earning their ill-will in London. ^^Townsend (1847-1939) joined the Hongkong Bank in London in 1866 and went to Hong Kong as a junior in 1870. Cook's essay is printed as No 11 below. ^^King, 'The Bank of China is Dead', based on reports in the Times of India, 1864-1866. EASTERN BANKING the first year, the Directors had to look far afield and effect agency relations in San Francisco, Sydney, Melbourne, Paris and London--and shortly afterwards in Saigon, Nagasaki, Batavia, New York and Edinburgh. The reasons were varied but pressing: there was silver in San Francisco, the silk trade needed a French base, Hong Kong's trade network was expand. ing to include the French and Dutch colonies, Edinburgh might provide a deposit base—but what led the Directors to establish an agency in Valpa. raiso, Chile, is not recorded, and the name of this city drops almost immediately from the advertised lists--to be replaced by Santiago in 1982. The mention of Saigon and Manila is a reminder that the Directors had not yet learned the limitations of their 'charter-to-be.'2R Hong Kong's trade with both these ports increased beyond expectations and the Bank decided to establish direct agencies, i.e. offices staffed by employees of the Hongkong Bank rather than being operated by the merchant houses. (In the records this would be referred to as a 'branch' managed by an 'agent' and will be so referred to here, although there are objections.) To ensure the proper legal status the directors sought a revision of their ordinance of incorporation, and drafts of a revised ordinance (No 1 of 1872) were in fact sent to London for Treasury approval; the correspondence extends over the period June 1872 to June 1874 and is voluminous, but the problem of extraterritorial legislation and the uncertainty of the Treasury's right to authorize commercial activities in territories whose governments were classified as 'civilized'—which did not include British colonial terri. tories or countries with which Britain had treaties with provisions for extraterritoriality—forced negative decisions.2^ The Directors neverthe. less opened Bank branches both in Saigon and Manila—if the ordinance, as it stood or as proposed, could not authorize the act, neither could it, by the same logic, deny it; in this the Directors acted correctly and, in the end, the Bank was challenged not by the Treasury but in the Manila courts.^ Thus the limitations which the times and the legal interpreta. tions might have imposed on the Bank's activities were hardly operative. In summary, the Board's first priority was to establish branches in Hong Kong and Shanghai, supplemented by outport agencies to be run by merchants represented on or who were close to houses represented on the Board of Directors; second, as a special case, came London, the actual 28This section may be profitably read with Wesley-Smith's article, cited. ~^For the draft Ordinance No 1 of 1872, 'Hongkong and Shanghai Bank— Extended Powers', see CO 129/157, ff. 396-405; CO 129/160, ff. 262-64; further correspondence regarding other aspects of the legislation are in CO 129/167, ff. 37-41 and CO 129/168, f. 718. And, since the relevant decisions were those of the Treasury, see T.1/7304A of 1873, which includes the text of the proposed ordinance. 30The hist ory of the Hongkong Bank in the Philippines is surveyed in a paper by Roy C Ybanez, published as No 21 in this collection. The case referred to is the Jurado case, which is reported in some 52 HSBC Board minutes between 1887 and 1903. The British position had by then been modified in part because of a reciprocal commercial treaty with Spain. The Saigon operations were transferred from the original merchant house acting as agents to the Bank in 1870. nature of the presence to be determined on advice; third came agencies established farther afield but which were nevertheless essential for the finance of Hong Kong and Shanghai based economic activity. Then, as occa. sion required, these merchant agencies became 'branches'—either because of the failure of the agent, as in San Francisco, Manila, and New York, or because of the growth of business as in Saigon, or the threat of competi. tion as, much later, in Hamburg—but always the question, what is the relevance to the basic Hong Kong/Shanghai based operations of the Hongkong Bank? Though apparently acting boldly from a legal point of view, the Directors operated within a conservative framework consistent with the banking practice of the times and in keeping with their ability to control and to train suitably qualified managers—once again the Directors, as merchants themselves, showed a clear understanding of their area's finan. cing requirements, of their own capabilities, and of the Bank's responsibi. lities . Two directors—A F Heard and W Nissen—revealed in correspondence To assess the role of the Directors in these years of establishment, an examination of their relevant correspondence provides a touch of reality, an insight as it were to the limits of their altruistic promotion of a bank for the general commercial welfare. This is particularly useful if their subsequent—and declining—role is to be understood. To state, as was often done at the time, that the Bank had the support of all the leading merchant houses but one—Jardine Matheson—was important in view of the criticism of bubble company speculation then all too prevalent. This support was seen as likely to insure the Bank a certain amount of business, but it is essential to appreciate that the merchant supporters did not cut all their ties with other banks nor necessarily with their own non-banking financial facilities. Thus on the one hand the Directors as individuals had a lasting impact on the future of the Bank through the work done and the decisions made on the Board, although their obvious contribution may have been obscured by the later tendency, especially in the commercial folk-law of the China coast, to minimize the importance of the role of the Hongkong Bank's Board of Directors, but on the other hand, there were signs from the first that Directors, no matter how public spirited or far-seeing, would have problems being intimately involved in the management and fortunes of the Hongkong Bank. To repeat: a study of the initial success of the Bank in the founding years should be focused on the Directors who played a role similar to that prevailing in British joint stock banks of the period. This is the primary function of this paper, but, at the same time, points will emerge which should facilitate the assessment of the Board's later role—a topic to be given preliminary consideration in the closing section. Both A F Heard of Augustine Heard and Company and Woldemar Nissen of Siemssen & Company were on the Provisional Committee and were members of the first Board of Directors. Their papers have survived, giving an indi. cation of their attitudes and expectations, or at least so much as they wished to report to their partners in Massachusetts and Hamburg. The EASTERN BANKING content of their correspondence often contrasts with their actions--both need exposition and explanation if the initial success of the Hongkong Bank is to be understood in the context of the role of the directors. A F Heard stresses both the suddenness of the decision to form the Bank and the previous discussions about the need for such a Bank, but in stressing the former along with his surprise at being on the Provisional Committee--' today I see my name down on a Bank committee started here rather suddenly'—he may have been trying to minimize possible criticism by distant partners, including a formidable uncle, who would not wish him to spend excessive time on an 'extraneous' activity nor, which is as much to the point, lock up funds in it. 31 'I wish', wrote A F Heard, 'to keep aloof from anything that locks up money.'32 The Heards were in Hong Kong as merchants. In setting out Augustine Heard's strategy or long-run planning, Heard made it clear that, while he saw the wisdom of setting up a local bank and of pooling resources, he expected a direct return, primarily in the grant. ing to Augustine Heard and Company of several of the Bank's projected outport agencies and of the patronage of Manila and possibly New York.33 Meanwhile Heard was keeping his connections with the Asiatic Bank and the Commercial Banking Corporation of India and the East and also hoping to act as their agents in several ports. 34 in a sense, it is true, this was consistent with the idea that the Hongkong Bank would not be an exchange bank, which the Asiatic certainly was, but would be a local bank--in the sense previously defined—the need for which arose from the development of Shanghai and Hong Kong, the Yangtze ports and the coastal trade. In this context A F Heard wrote his former associate, Charles A Fearon, who had recently been appointed a director of the Asiatic Banking Corporation in London, asking if the new bank, i.e. the Hongkong Bank, could be of any use to him, implying a complementary relationship between an exchange bank (the Asiatic) and a 'local bank' (the Hongkong Bank).33 Also consistent with 3^A F Heard to his uncle and senior partner Augustine Heard, Sr in a letter dated 28 July 1864 (HL-40). See also his letter of 29 July 1864 to John Heard, III (HL-40). In the same vein AFH subsequently wrote in detail to his colleague G B Dixwell, 5 Aug 1864 (HL-25, pp. 326-27), but the suddenness was due, as AFH well knew, to the need to get immediate news back to India and checkmate the plans for establishment of the Bombay-promoted Bank of China. 32Letter to Dixwell, 19 Dec 1864 (HL-25, p. 172). JJA F Heard to Dixwell, 4 Jan 1856, in which he notes the premium on bank shares and summarizes his firm's position on agencies: he hopes for Yoko. hama, Hankow and Foochow (in order of priority) and reminds Dixwell the firm will also have the agency for the Commercial Bank at Bangkok and Kiukiang, the agency for the Asiatic at Foochow and Hankow, and possibly the agencies for the Asiatic and Hongkong banks in Japan (HL-25, p. 221). 3^For example, A F Heard from Shanghai urged his younger brother, George F Heard, then in Hong Kong, to continue this policy of maintaining rela. tions with several banks, mentioning in particular the Comptoir d'Es- compte (HL-25, p. 339). 33Letter dated 27 July 1864 in (HL-40). this over-all policy is the fact that in 1865 Heard was attempting a China loan—the Hongkong Bank was but one important activity and investment of the firm.36 Brother John in Ipswich, Massachusetts, could not refrain from writing A F Heard in terms of the Farewell Address—no entangling alliances!37 As it happened, Augustine Heard and Company were appointed agents to only two minor ports, the Asiatic and the Commercial failed in the banking crisis following 1866, and the Heards were left heavily dependent on the Hongkong Bank; they could no longer hope to play off the banks or have them be 'made cows of and sucked at'. 33 Heard was 'disgusted' — 'Hang the Bank!'39 Manila went indeed to their correspondent firm Russell Sturgis and Company, but Kresser and the Board determined against a New York agency at that time, fearing the rivalry of Barings and other specialists. ^ As George Heard explained in 1870, the Hongkong Bank would not establish a US agency as there was too little business and the Bank used Duncan Sherman and Company as agents.^ But the Heard brothers--or some partner in the firm--continued to serve on the Hongkong Bank's Board until the firm's threatened failure in 1875 and they remained 'constituents'; men like the Heards made the Bank, but it was not to remain their tool. It served them, but only consistent with what the manager--and, in fairness, the Board— considered sound banking. The failure of so many Eastern banks had taught the need for sound banking at the same time as the consequent relative lack of competition made such banking practices enforceable. Woldemar Nissen, representing Siemssen and Company, would appear from his correspondence to have been primarily concerned with selling a piece of Shanghai property to the Bank for its branch there, and like A F Heard, he downplays the importance of his role in the establishment of and his subse. quent directorship in the Hong Kong Bank—'it doesn't mean much more than if you see my name mentioned in connection with the Sailors' Home or any such institution.'^3 He was also very much interested in the changing value 36()n the China loan, see A F Heard in Peking to George Heard in Hong Kong, 13 April 1865, and AFH in Tientsin to Robert Hart, 25 April 1865 (HL-25, pp. 402-4, with memo dated 21 April); see also D King, pp. 244-47 below. 37John Heard, III, to AFH, 9 Oct 1864 (HM-8). 38A F Heard to Russell, 3 Sept 1864 (HL-24). As aleady stated, the Heards remained close to the Comptoir d'Escompte, but this would hardly have been able to offer the firm adequate facilities. 39aFH to Dixwell, 22 May 1865 (HL-26). Heard again states his intention of remaining close to the Comptoir d'Escompte, where his contact appears to be the ill-fated E Morel, later employed by HSBC as their Lyon agent, 1882-89, and who resigned after misusing Bank funds. Theodor Dromel, the Comptoir's London manager, had a high regard for Augustine Heard, Jr and apparently knew the Heard partners, commending them to the Bank's Shang. hai manager, Hermann Wallich, in a letter dated 10 Jan 1868 from the private papers of Hermann Wallich, now in the possession of Governor Henry C Wallich, Federal Reserve Board, Washington, DC. ^See note 25 above. ^G F Heard to W Cryder, New York, 17 Oct 1870 (JL-4). ^Woldemar Nissen to Georg T Siemssen, 1 Dec 1865, from the archives of EASTERN BANKING of the Bank's shares and in the allocation to 'friends' in Germany, although in this he, like Heard, foresees the success of the Bank; the shares may be stags, but there is also expected long run growth. ^ The Hongkong Bank would succeed, as Heard put it, from its local support.^ Head Office, Hong Kong; in London, what? While flirting with registration under the limited liability ordinance, the Directors were kept surprisingly on course with the charter application. We have seen that they obtained the Comptoir's manager, Victor Kresser, whom one director at least (Woldemar Nissen) considered the most qualified person in the East; David McLean, also an able banker, was, as has been explained, selected for Shanghai. The Promoters were under pressure from the first to establish a London representation, but the Committee failed to obtain the services of the Chartered Mercantile's manager, Walter Ormiston, whom they had hoped to assign to London. The Board accepted that it needed contacts in London, but it based the Bank's plans, consistent with its over-all thinking, on a minimum represen. tation, a special agency, while leaning heavily on a major clearing bank as its real London base of operations. But there were to be problems--and not only in finding a suitable agent or manager. The Hongkong Bank's relations with London are unique in the history of British overseas banking. Several chartered banks had, indeed, been founded overseas, including the Chartered Mercantile and the then important Oriental Bank, but they had moved their headquarters to London, presumably in order to obtain an imperial charter and also to facilitate business in the world's financial centre, such business defined to include the listing of shares on the stock exchange. Both these banks, however, were founded in India, where special conditions prevailed; the Hongkong Bank sought the advantages of an imperial charter while headquartered in a colony. The Treasury would seem to have raised no objection to this in principle, although there were to be complications which were perhaps not foreseen. It is true that the Treasury noted the Bank would operate in Hong Kong and China only, but that was noting what the Bank told them and was consistent 43 44 Siemssen and Company, Hamburg. We acknowledge the kind cooperation of Siemssen's in making their archives available. Trans, by D J S King. Nissen to Siemssen, 10 Aug, 25 and 31 Oct 1864. A F Heard to John Heard, III, 25 Nov 1864 (FM-5). This is an equivocal letter, but on balance Albert attempts to quiet his brother's doubts and to predict the Hongkong Bank's success. See also T Dromel's later criti. cal assessment of the state of the Eastern Banks, where he notes that, as for HSBC, 'it is its local business and deposits which permit the bank to pay its dividends.' Letter to Hermann Wallich, 20 Jan 1870. London and China Express (26 Sept 1864); HSBC Board Minutes, 12 April 1865, records an offer to Ormiston at a salary of ￡1,200 p.a., but at the meeting of 26 July 1865, W H Vacher's appointment as London agent was confirmed. (The Chartered Mercantile is today, as the Mercantile Bank Limited, a member of the Hongkong Bank Group.) with the common practice of limiting an overseas bank's operation to a specified area, e.g. Latin America, South Africa, Australia, India, or the Far East. Although banks might expand their area of operation, that expan. sion was always limited by capabilities, communication potentials and, in some cases, overlapping interests of directors. The decision of the Hong. kong Bank to seek an imperial-type charter and yet to have a Hong Kong headquarters illustrates (i) that the claim to be a local bank concerned with intra-regional trade and local investments was sincere and (ii) the Directors showed an excusable lack of knowledge of the developments of colonial banking legislation and the limitations of a charter granted by a colonial legislature. But the fact is that the founders of the Hongkong Bank were aware of the London alternative and rejected it; in this resolve they continued, even when, at the turn of the century, the pressure of the China loan business reopened the question, at least in the minds of business contem. poraries. In the following sections are considered the steps which the Provisional Committee and first directors took to initiate a London connec. tion. short of establishing a head office there. First choice: the London and Westminster Bank Failing to recruit the Chartered Mercantile's former Hong Kong manager, the directors turned for assistance to Gilman and Company, represented on the Board by H B Lemann, who in co-operation with their London connections retained the services of their retiring Shanghai partner, W H Vacher, as special agent and opened an office in two small rooms on the first floor of Gresham House, 25 Old Broad Street, EC.^ The Directors did not, at first, intend to establish a branch, rather they had approached the London and Westminster Bank with the purpose of appointing them the London Agents of the Hongkong Bank. In February 1865, the London and Westminster replied: The Directors of this Bank have considered the offer you have been good enough to make to them of the London Agency of the Hong Kong and Shanghai Banking Company Limited and though they have of late declined similar proposals from Establishments in the East, yet in the present instance from the very high stand. ing of those connected with the China Bank the subject has been favourably entertained.^ This was a true compliment as the London and Westminster's reluctance to be drawn on by a foreign bank, i.e. one domiciled overseas, was attested to in ^HSBC Board Minutes, 26 July 1865; and biographical data, HSBC Archives. ^National Westminster Bank Archives, London and Westminster Bank Board Minutes (B2893), John G Cattley and Charles Freeman for the Board of Directors to Thomas Dent and R J Ashton, 13 Feb 1865. The Dent's Hong Kong taipan was F Chomley, Chairman of the Hongkong Bank; Ashton was Gilman's London representative then engaged in finding a suitable London agent for the Bank. EASTERN BANKING A O a letter to Hermann Wallich, the Comptoir d'Escompte's Shanghai manager. ° The terms were, inter alia, that the Westminster would accept bills drawn by the Hongkong Bank up to a maximum of ￡500,000 covered by approved bank or mercantile paper at or under six months sight (with roll-over per. mitted), and an uncovered position of a further ￡100,000 for exceptional purposes or circumstances, while the Hongkong Bank would keep on deposit a minimum balance of ￡10,000 without interest. ^ By the end of May, 1865, however, the Hongkong Bank was seen to be operating outside the terms of the agreement, the exceptional uncovered position being used immediately and the facilities requested being in excess of those agreed. The problem in Hong Kong was apparently that a change in the exchange rate had made it unprofitable to remit funds to London—it had been expected the sums called up from shareholders would provide the source of funds necessary to meet the terms of the agreement with the Westminster.50 in any case the London and Westminster protested and, after an exchange of letters, the London bank served notice that it would terminate the agreement with the Hongkong Bank in six months.51 It is an ironic point that A M Townsend, who was to play so important a role in the Bank as adviser to the Japanese Government and as senior London Manager, should have been intended originally for the Westminster Bank. He in fact worked the^e but a few weeks before his sponsor recom. mended he move to the newly established office of the Hongkong Bank in 1866; he became the first 'junior' in the sense used in Christopher Cook's paper, and after training went out East, via America as it happened. But he, like the directors of the London and Westminster, felt some qualms in dealing with so new an establishment; Townsend, however, overcame them.52 The London and County Bank—a relationship established In Hong Kong, the Directors had been dissatisfied with the limitations of the arrangement with the Westminster and authorized W H Vacher, their London representative, to seek other banking relationships, and he in turn began negotiations with the London and County Bank which were successful.55 ^5private papers of Hermann Wallich; the letter is dated 8 Oct 1868, but deals with the period under consideration. ■^London and Westminster Bank Board Minutes (B2893), 13 Feb 1865. 50]_,ondon an<3 Westminster Bank Daily Committee Minutes (B2904, p. 355), Vacher to the London and Westminster, 1 June 1865. c i . . J ■‘‧London and Westminster Bank, Minutes of a Special Board Meeting, 8 July 1865 (B2893, p. 275); see also previous minutes of 8 June and 6 July (pp 360 and 372). 5^As a member of the London Committee until the early 30's, Townsend saw himself as the living link with the past. HSBC Group Archives, Townsend; Cook, essay No 11. 55hSBC Board Minutes, 5 Aug 1865, initiating the search; 24 Aug 1865, receiving the Westminster's negative decision of 8 July (see above); and 28 Dec 1865, noting success of Vacher's negotiations with the London and County Bank. In 1867 Vacher recommended and the Board agreed that he be The London and County Bank approved a ￡1.5 million covered accommoda. tion with ￡100,000 uncovered (or less than the Hongkong Bank requested) but agreed to modify a requirement for a ￡20,000 minimum deposit to ￡10,000.* 5^ Thus the facilities granted were on balance enlarged, as the Hongkong directors had wished, but the London and County refused to act as agents, advising that this was not in the interest of Hongkong, which should rather enter into a correspondent relationship while establishing their own opera. ting office in London.55 While the directors had made it clear that they would have preferred to remain with the London and Westminster,56 the final outcome of negotiations was a break with that bank and the establishment of long-term relations as outlined above with the London and County and con. firmed in December 1865. But since the London and County and the London and Westminster banks subsequently merged, it is possible for today’s National Westminster and the Hongkong and Shanghai Bank to talk of more than 100 years of banking co-operation. Negotiations with their London correspondent continued as the Hongkong Bank attempted to expand its activities to include the finance of the China trade with India and Australia, meeting, in view of the additional sums involved, some resistance from the London and County which in February 1869 suggested that the Hongkong Bank seek additional facilities from another London bank.5^ The unsoundness of this advice was sufficiently obvious that the London and County reversed itself within the month, agreed to an extension of facilities, and required the Hongkong Bank not to deal with any other London correspondent.56 From this point on, the London bank's records show a continued series of letters negotiating various extensions of facilities, special and temporary arrangements, in fact a sound and developing business relationship which has, indeed, continued as the National Westminster is, as implied above, the Hongkong Bank's London clearing bank. The London register and consultative committee This did not, of course, solve the problem of the Hongkong Bank's London styled 'manager' rather than 'agent.' HSBC Board Minutes, 10 May 1867. 5^The Hongkong Bank's request was put by W H Vacher to W McKewan, General Manager of the London and County Bank, in a letter dated 28 Oct 1865; the modifications arise in the latter's reply dated 3 Nov and the London bank's Board approved the arrangements on 7 November 1865. National Westminster Bank Archives, B2358, pp. 357 and 361-71. 55Although this provision was effective from the first, HSBC Board Minutes indicate that the Hongkong Bank recorded formal change of status of the London operation at a Board meeting on 10 May 1867. 56HSBC Board Minutes, 5 Aug 1865. -^National Westminster Bank Archives, London and County Bank p. 341, 2 Feb 1869. For decisions on previous for varying facilities, see pp. 112-13, 145, 158, Vol 14, requests and 337. 58Ibid, 23 Board Minutes, Hongkong Bank 162, 221, 272 Feb 1869, p. 352 EASTERN BANKING shareholders. The Bank's shareholders in general faced at least two prob. lems which might have deflected their long-run optimism: (i) the persistent financial crises immediately following the Bank's founding and (ii) the fluctuations in share prices caused, at least in part, by what was seen as the changing status of the Bank's chances of suitable incorporation--shares were at a 30 percent premium in January 1865 and a 4 percent discount in August 1866.-^9 The Bank operated, as has been said, without any corporate protection at least between January and December 1866. But, despite these problems, shares had been allocated to 'constituents' and others deemed worthy in Hong Kong and throughout the East; thus it was not surprising that by mid-1865 shareholders were already requesting transfer facilities in various ports, and registers were accordingly opened in Shanghai, Calcutta, Bombay and London--trans fer could be made after approval of the local representative of the Bank.^0 However this did not mean that the shares could, in fact, be quoted on the London Stock Exchange—that required the specific permission of the appropriate committee, which resolved, in this peculiar circumstance of a British company headquartered in Hong Kong, that the Hongkong Bank must, inter alia, have an advisory committee in London. This was agreed by the Directors in 1867, but was not fully implemented until some years later. The important point is that the Bank had come into contact with London, that it had been subjected to London rules, but had by no means been tamed to London ways, and the dialogue between London Office and Hong Kong, between the London Consultative Committee and the Hong Kong Board of Direc. tors was soon to begin--with Hong Kong dominating whenever it chose to do so—except, of course, in those matters relating wholly to London regula. tions. On the other hand, noting that the final impetus for a London Committee may well have been W H Vacher's unsound investments, the Board in Hong Kong was able to have surveillance of the one manager (other than Hong Kong and Shanghai) capable of endangering the soundness of the Bank.^2 But 5^See, e.g. A F Heard to Dixwell, 3 Feb 1865 (HL-25); share prices had fallen on news that the Legislative Council had 'rejected' the Limited Liability Ordinance (subsequently passed). The ordinance was first voted against by both Chomley (the HSBC Chairman) and James Whittall of Jardine's, the former for technical reasons only. After clarification, the ordinance was enacted with Chomley's support. Despatch No 38 of 10 March 1865 in CO 129/104. See also CO 403/15, 11 Dec 1865, 24 March 1866; and notes 12-14 above. 6RHSBC Board Minutes, 17 Oct 1865. ^^HSBC Board Minutes, 15 July and 19 Dec 1867. The question of re-transfer of shares from the London register to other registers was unresolved. The actual London register was opened before the Board meeting of 10 Feb 1868, i.e. before the minuted decision for the establishment of a London Committee. 6^See that portion of the HSBC Chairman's speech at the February 1875 Annual Meeting of Shareholders which deals with the setting up of local committees. HSBC Group Archives. The Board, only a year earlier, had rejected a proposal to actually implement their previous decision to establish a London Committee—see HSBC Board Minutes of 8 Sept 1874; the ESTABLISHING THE HONGKONG BANK again the directors had achieved the best of both worlds; their London Committee was to provide them the London presence which would prove essen. tial in the era of the politically-oriented China loans, while yet they retained the immediacy of their Far Eastern headquarters. The Bank's capital, subscribed and paid-up Another example of the Directors' workmanlike approach to their Bank was in their capital policy. One of the two exceptions to the Colonial Regula. tions they requested was the modification of the requirement that sub. scribed capital be fully paid up within a limited specified period.63 Their argument from the first—and it was reinforced when their fears proved true—was that the capital should be paid up only when it could be profitably used; it should be subscribed so that it could be called for when but not before needed. The Treasury seems to have reacted to this as a rather new and not unreasonable idea—if you require premature payment of capital then it must be used, if dividends are to be maintained at a reasonable level: this will involve unsound investments. So this long. standing regulation was not insisted upon.6^ On the question of double liability, however, the Directors were less successful. While the Prospectus for the Hongkong and Shanghai Banking Company announced a capital of $5 million in 20,000 shares of $250 each, the actual incorporating ordinance (No 5 of 1866) provided for the same capital in 40,000 shares of $125 each.This change reflected the insis. tence of the Treasury that the shareholders have a double liability, that is, that they be liable for the amount subscribed plus an equal amount in the event of liquidation.66 The requirement originated in the 1830's when limited liability was unusual and granted as a special privilege as an off. set to the unacceptable risks which individual investors might be subjected to in the capitalization of a colonial bank. With the passage of general legislation, the 'privilege' for shareholders had become a 'burden,' but it was, at the same time, an added safeguard for the public and continued to be insisted upon as part of the Treasury's prudential policy. Under the terms of the original prospectus, the proprietors had sought a single liability, but there is evidence that they did not intend that the shares would be fully paid up. If, for example, they had paid up only $125, they would have been liable, in the event of failure, to a further $125, i.e. the balance of the subscribed amount. The Treasury was willing affirmative decision was dated 12 Feb 1875. For details of Vacher's unsound investments, see HSBC Board Minutes for 7 July 1874. 6%SBC Provisional Committee Chairman, F Chomley, to Governor of Hong Kong, 23 Dec 1864, on CO 129/101, and favourable response from the UK Treasury, 19 April 1865, in CO 129/108. 6^Treasury to Colonial Office, 19 April 1865, CO 129/108, ff. 305-6. 65Both the Prospectus and a portion of the Ordinance are reprinted in Col- lis, pp. 255-56 and 258. 66piscussed in T.7/13. For the HSBC Board discussion, see Hongkong Daily Press (6 March 1866). EASTERN BANKING to modify the requirement for the full payment of capital subscribed to permit payment to be accomplished later than the normally required time limits would have permitted, but the Board of Directors were aware that the full amount would eventually have to be paid up and then the liability of the shareholder for each share would have been $500. In view of the Treasury's position, therefore, the Board decided to issue the capital in shares of half the original amount. In this way both the shareholders and the Treasury achieved their aim: the shareholders restricted their per share liability to $250; the Treasury achieved for the Bank's customers a total shareholder liability equal to twice the amount which would be assumed as the basis for operating and prudential ratios; that: is, when the Bank's capital was fully paid up, it would be required to operate on the basis of this total sum, viz $5 million, while the total resources potentially available to creditors of the Bank at its winding up would be $10 million.If one assumes that overseas banking is twice as risky as domestic banking, then this differentiation is sound--subject, of course, to the general objection concerning the practical usefulness of a shareholder reserve liability in times of financial crisis, i.e. at a time when the reserve liability is most likely to be both needed and unavailable. This decision to double the number of shares had an additional con. sequence: it permitted the Board to make a new allocation, taking into account changed conditions and potential new constituents, a subject already considered.RR The Colonial Regulations, as embodied in the Hongkong Bank's ordinance of incorporation, required that no business was to be undertaken until one-half at least of the capital, which had to be fully subscribed, had been paid up. This is one reason for the delay between the passage of the ordinance on 14 August 1866 and the commencement of business as a corpora. tion on 29 December of the same year.R^ But of course the Bank was all the while undertaking banking—including a loan to the Hong Kong Government-- as the 'company, limited'. R^A simple example would be the Bank's note issuing authority, which, inter alia, was limited by Article XIII of the Ordinance to 100 per cent of its paid-up capital. The Treasury expected the Hongkong Bank to 'be governed by the amount of Capital actually paid-up' (CO 129/108, f. 305); share. holder liability was to be twice subscribed capital, but then the Treas. ury expected, under normal circumstances, that subscribed capital would be fully paid-up within two years of the commencement of business. RRSee note 18 and related text above. R^The ordinance was not agreed to in London until November; actually the capital was fully subscribed and one-half paid-up as required for the commencement of business by 15 December 1866, as proclaimed under the terms of the incorporating ordinance in the Hongkong Government Gazette of that date. But the Corporation did not take over the business of the Company, nor did it operate under the terms of the ordinance until 29 December 1866, when a resolution to this effect was approved by the Board of Directors at its first meeting after the Proclamation. HSBC Board Minutes. ESTABLISHING THE HONGKONG BANK There was a further 'requirement' that the balance of the capital should be paid up within two years from the commencement of business under the ordinance. Here the Treasury instructed the Governor to be flexible-- the regulations had become, for the moment, merely 'suggestions'. In response to the Board of Directors' request in December 1867, the Governor confirmed that a period of three years would be permitted, i.e. an exten. sion of one year in addition to the two permitted by the Regulations—i.e. to 15 December 1869; but, prior to this later date, the trading conditions in the Colony suggested another period of delay, which was granted in turn, this time for a further five years—to 1874.^R Thus, although the Board moved quickly to begin business, they were careful to limit the liability of shareholders to an amount consistent both with the requirements of the Colonial Regulations and, equally important, with the level of business being undertaken. Directors, being both consti. tuents and shareholders, were subject to the same financial constraints as 'outsider' shareholders; in this community of interest the Directors moved cautiously, limiting their capital, as the Treasury intended they should, to an amount which could be used for purposes they considered, not always correctly, to be sound from a banking standpoint. The Board of Directors—less successful policies The Bank was founded in 1865, shortly after the Hong Kong Dollar had been declared the official unit of account for the Colony.^ This abandonment of an Empire-wide attempt to force pounds-shillings-pence to be the univer. sal units of account and the positive policy implied in the decision to establish a mint in Hong Kong suggested that a reform of the Colony's com. plex currency system might soon be accomplished. Plans for the mint were well-advanced when the Hongkong Bank was first announced and the establish. ment of a local bank was confidently expected to facilitate the achievement of any such reform. Hong Kong merchants saw the confused state of the currency as a deterrent to trade, and the Promoters of the 'local bank' considered it their duty--and one of the attractions of the proposed Hong. kong Bank--to play a role in supplementing the improvements which were assumed to be underway. The more optimistic also expected the operations of the Bank would naturally cause a related reform, the end to the so- called 'compradoric system.'^2 As for the currency, the Directors from the first stressed the impor. tance of the note-issue, and the success of the Hongkong Bank's notes— ^For the first delay see file 3055/1868 in T.1/6773A (part 1); for the second, see T.7/15. ^Order in Council, 9 Jan 1863, effective from 16 Feb 1864; see Hongkong Government Gazette (13 Dec 1863). 7^As stated in the first announcement of the Hongkong Bank by Messrs Dent and Co, 29 July 1864; a clipping is in CO 129/101, f. 241; the Hongkong Daily Press (8 April 1865) hoped the Bank would provide clearing accounts to minimize the role of shroffs, but the Press feared that it was be. coming just another exchange bank. EASTERN BANKING quickly exceeding the total of the issue of all other banks—was surely part of what was hoped might prove to be a new currency system. The metallic coinage, however, resisted reform; by 1868 the Hong Kong mint had been proved a financial burden and its closure scheduled. The Directors moved decisively to save the situation, offering to subsidize the mint's operations for five years in return for a monopoly of the note issue. This offer was, predictably, turned down by the Treasury on the general grounds that it disliked monopolies and on the specific grounds that such a grant would be contrary to privileges granted other exchange banks by their char. ters. The mint was consequently closed. The most inconvenient problem, now that the mint had failed, was the shortage of one-dollar coins which would pass current without excessive bargaining and discounting. In 1872 the Board of Directors requested and were granted permission by the Governor in Council, acting under the Bank's incorporating ordinance, to issue one-dollar notes. This seemingly simple grant was totally contrary to precedent and, being a currency measure, should have been referred to London before being proclaimed in the Colony. At this point the Treasury became firm for two reasons: (i) the Treasury had long feared the issue of banknotes of small denomination because such notes were likely to be held by poorer members of the public supposedly liable to panic in times of crisis, and (ii) another monopoly in favour of the Hongkong Bank would be created since recent charter revisions had deleted the relevant permissive clause, and other chartered banks could not, therefore, be granted the one-dollar note issuing privilege. But the reform was needed; the Hong Kong public petitioned, and the Treasury, still concerned, agreed—subject to the issue being severely limited. Discussion of any elimination of the 'compradoric system' first requires some definition of the concept. The Directors presumably did not have in mind the dismissal of all compradores, but rather a lessening of the foreign merchants' dependence on the compradore as an institution. One reason for the so-called 'compradoric system' was the chaos of the coinage and, indeed, of the monetary system in general—knowledge of this basic but esoteric system seemed restricted to the Chinese who invented it, and the foreigner resented his dependence. Thus a reform or simplification of the currency was essential to ending the hold of the compradore over the merchants' transactions in cash or bullion. Then too, given the need for the merchant house to rationalize the holding of reserves—a need the Bank could immediately fulfil—the power of the compradore could, at the same time, be diminished, and his role, though still vital, be redefined along lines described in Carl Smith's paper below.Even then there would be room for trouble. 7^The HSBC offer is in a letter from Kresser to the Acting Colonial Secre. tary, 16 March 1868, transmitted 23 March 1869, CO 129/129, ff. 443-48; the Governor refused the Bank's conditions; the Bank withdrew, Kresser to Act Col Sec, 4 April 1868, CO 129/130, f. 100. 74The correspondence on the one-dollar note issue is voluminous and intel. lectually unrewarding, but see T.1/7457A of 1875. 7^Carl T Smith, 'The Compradores of the Hongkong and Shanghai Banking Cor. poration,' essay No 6 below. ESTABLISHING THE HONGKONG BANK The Board of Directors of the Hongkong Bank were thus managers of the reserves of the Far Eastern merchant community to which they themselves belonged. The merchant shareholders and depositors expected a return and they expected facilities when required. They had in effect, rationalized but retained the management. The Bank granted bonuses to deposit-holders and interest on current accounts, but this latter was not unusual for a bank established, as the Hongkong Bank was said to be, on Scottish prin. ciples. The Board's dividend policy has, however, been criticized on the basis of a cash-flow analysis, and certainly the Bank was forced by the 1874-75 financial crisis to thrice recommend that no dividend be paid while the Reserve Fund was virtually exhausted.In serving the local invest. ment requirements of the China coast and meeting expectations relative to interest and dividends, the Board endangered the future of the Bank. But, while the constituent firms supported the Bank and the community gave it its confidence, failure was not as close as later analysis might suggest; it was not considered a possibility at the time. The Hongkong Bank was also established to meet the local investment requirements of expected economic development, not only in Hong Kong and Shanghai and the Treaty Ports, but also in China itself. Accordingly the Board was prepared to advance $100,000 to the Hong Kong Government in 1866 when the long-established Oriental Bank Corporation was reported to be re. luctant; merchant houses had been pressing China loans, but now there could be further rationalization--loans negotiated by the merchant representa. tives of the Hongkong Bank on behalf of the Bank. The first public China loan was the Foochow Loan of 1874, perhaps the only bright spot in the Bank's report for that year At the same time the Bank began its career as adviser to Government and held Government funds.Although its attempts to establish a monopoly were rebuffed, the Hongkong Bank saw itself as 'The Bank' from the beginning and acted on this basis--a natural position to take since its Board represented, with one exception, all the 'European' economic interests and, through its compradore, many of the Chinese. 76see t A Lee, 'The Financial Statements of the Hongkong and Shanghai Bank. ing Corporation, 1865-1980,' essay No 5 below. ^For the Hong Kong Government loan see CO 129/116, ff. 42-52. China loans, real and imaginary, are discussed by A F Heard in his 1874-75 correspondence (HL-32), and the Foochow Loan of 1874 is thoroughly con. sidered in David J S King's essay No. 13, below. The Hongkong Bank was to benefit not only from the eventual failure of the Oriental in 1884, but also from the Oriental's reluctance to be involved in small loans to the Chinese government; see, for example, The I G in Peking, Letters of Robert Hart, Chinese Maritime Customs, 1868-1907, John K Fairbank et al, eds. (Cambridge, Ma, 1975), Hart to Campbell: 21 Nov 1874, pp. 183-84; 16 April 1881, p. 366; 24 April 1881, p. 368; and passim. 7^The HSBC took over the Hong Kong Government current account from the Ori. ental Bank in 1872 by offering better terms; see CO 129/158, ff. 145-57. The Bank however had been outbid by the Chartered Mercantile for the UK Treasury Chest business in China, see T.1/6974B of 1870. They would succeed later. EASTERN BANKING The Hongkong Bank also became closely, but less successfully, involved in the fortunes of a sugar company, small steamship companies, docks and related companies which, encouraged as Jardine Matheson's partners foresaw by the Limited Liability Ordinance of 1865, were generally financially unsuccessful, but with which the Directors and Victor Kresser were indivi. dually involved to an extent suggesting serious conflicts of interest. The failure of these investments was a prime factor in the depletion of the Reserve Fund and may have also been a significant factor in affecting a change in the role the Directors were to play in the management of the post-crisis Bank, which, under Thomas Jackson, not only openly assumed the role of an exchange bank, but became the exchange bank par excellence. The role of the Board of Directors—an assessment The Bank directors, then, played a crucial role in the setting up of the Bank and in its first ordering, a role which would bear comparison with that in most other joint stock banks of the period. Throughout the main period of this paper, that is from 1864 to 1874, the Directors as a Board or through sub-committees guided the fortunes of the Hongkong Bank, both 'Company, Limited' and Corporation, if not with uniform success then at least to the general satisfaction of their contemporaries. To the extent that the Bank had problems, they could be ascribed in great measure to the unexpected failings of previously sound managers and to the general crises in trade, through which the Bank performed with considerable skill. To the extent the Board were over-generous with dividends, with bonuses—then, remembering the initial concept of the Bank as 'local,' as a joint ration. alization of resources, was there almost the atmosphere of a 'co-operative' about the institution which pressed the Board into making a distribution of earnings which came close to endangering its existence? This is probably going too far; the simplest explanation is probably the best—the Board were prudent, but the disasters of the mid-1870s were simply unforeseen in their magnitude and reserves of $1 million proved barely sufficient. The record of the Board of Directors will stand historical examination; it will most certainly stand comparison with the record of contemporaries. All this seems merely to confirm what the Bank's incorporating ordi. nance clearly states: management was the responsibility of the Board (or Court) of Directors. One can go further. A questioning shareholder at the 1875 annual meeting, perhaps reflecting that this was the second time the dividend would not be paid, objected to the expenditure on the furniture in the new Shanghai office/residence. 'It is a common fault of Banks to put their manager in too prominent a position and lodge them palatially as if they were partners in the business. Now that was not the position the manager of joint-stock bank should occupy.'^ The Shanghai manager was, after all, not a partner in the business, he was merely a manager employed by a joint stock company. The difference was seen as something more than legal in status-conscious Hong Kong. ^From the report of the 1875 Annual Shareholders Meeting, 18 Feb 1875 HO.H.140.3), p. 7; HSBC Archives. ESTABLISHING THE HONGKONG BANK The Directors of the Hongkong and Shanghai Banking Corporation have been, however, unsung heroes for these many years; while the pictures of the Chief Managers grace the walls, the Group Archives hold no such collec. tion of Bank Chairmen, and the Directors, qua directors (for many of them were otherwise well-known on the China coast), are barely indexed. This is consistent with a prevalent 'in-house' assumption, that because the Chief Manager was eventually delegated, albeit on an annual basis, the task of 'managing' the Bank, the Board must have played little or no role. This assumption can then be supplemented by stories in which some Chief Manager has expressed himself strongly to an impertinent director—but these stories have defects: (i) they are usually hearsay, and (ii) they deal with a relationship between a strong Chief Manager and a Director who is acting alone and in an area which the Board had most definitely delegated to the former. That is, the stories deal with individuals acting as such and not with the Board of Directors. Although often expressed in anecdotal form, the assumption of a power. less Board is understandable. The Eastern staff of the Bank professed to be proud that juniors and senior managers were on a British-equivalent of 'first-name basis', i.e. they referred to each other by their last names, but department heads were, notwithstanding, senior and remote; the Chief Manager was a figure of awe, and the Board were beyond experience. There were no executive directors; from the staff only the Chief Manager attended Board meetings, and he wrote up the minutes--in Jackson's case with singu. lar lack of care—and the results were secret. But there is more specific evidence. In 1913 a dissident member of the Eastern Staff held a meeting in the City of London at which he revealed the existence of inner reserves and detailed the level of ignorance of the Board of the Bank's specific financial activities.R^* In the same year Sir Newton Stabb, as Chief Mana. ger, was writing to convince John Swire and Sons in London to permit the firm's 'Director-in-the-East' to become a member of the Hongkong Bank's Board of Directors, stating that meetings were only 'once a week usually' and promising that there would be 'scarcely any work' required.R^ There are, however, limits to revisionism. The purpose of this paper has been to state the role of the Directors during that first decade. But having performed this task, some speculation, perhaps, on the changing role of the Directors would help put the first years of the bank in context and .assist in an interpretation of later claims that the Board's role was dimi. nished—for there is no doubt but that the role of the Directors did change in just that direction which popular accounts insist; the problem is to put the change in perspective and to consider its causes and nature. Again the Heard and Nissen correspondence is revealing. Nissen enjoys being on the Provisional Committee because of the information it provides him; later George Heard learns for the first time how much of his company's paper has been bought by the Hongkong Bank.R^ Swire's later reluctance to R^This is referred to in J R Jones' typescript as the Forbes Skene case, and it was fully reported in the London press. R-*-Papers of John Swire and Sons, Library, School of Oriental and African Studies, University of London, Box 1183, dated 17 Oct 1913. R^Woldemar Nissen to Georg T Siemssen, 12 April and 1 Dec 1865; George F EASTERN BANKING work closely with the Hongkong Bank was based on his concern that informa. tion would reach trade rivals through the Board.In contrast, the Hong. kong Bank's success in attracting small, local firms in Lyon has been ascribed to its being a foreign bank without intimate local contacts and thus more likely to be able to maintain secrecy. Here was a dilemma which had not been satisfactorily resolved in the United Kingdom; directors if very actively involved would know too much of the secrets of their competitors and would have to pass on loans to their own and to rival companies; but if they delegated responsibility for prime banking functions they nevertheless remained responsible. There seemed to be two possible lines of solution: (i) appoint directors who were not in business—hardly possible in Hong Kong—or (ii) let management handle the problems, referring only a limited and clearly defined range of problems to the Board and then in such a way as to minimize objections. The first solution had been tried in England and, as Gilbart noted in his famous study of banking, had led to failure since a director not involved in business might not know anything about business; the second depends for its success on the wisdom of management and on the Board's proper selection of a chief manager.^ If Kresser were to become too involved in personal investments, if his successor, James Grieg, was to take the responsibility for the losses of the 1873-75 period, then in Thomas Jackson the Board found a manager whom they could trust. His appointment in 1876 followed a period in which the Directors had been severely criticized for permitting losses emanating in great part from those very joint-stock, local enterprises which the Bank, as a 'local' bank, had been founded in part to assist and with which sev. eral of the Directors had close business connections and, less excusably from the failure to adequately supervise the London manager—a specific fault in the system. With further failures of firms represented on the Board—the American Augustine Heard and Company and the German Pustau & Company, it may be that the Directors sensed the need for a modification of their role. This would have coincided with the appointment of Jackson under the chairmanship of E R Belilios, a former colleague of Jackson's in the defunct Agra and Masterman's Bank. At the same time there is a change in the nature of the Minutes--they no longer imply actions to be taken by Directors but are rather instructions of an increasingly general type to Heard to his brothers in Massachussetts, 28 Jan 1868 (FM-10). 8^in 1892 John Swire refused to seek financial support from the Hongkong Bank for his Taikoo Sugar Refinery because the HSBC Board included Jar- dine's representative and 'to seek assistance from this bank would there. fore be to play directly into Jardine's hands.' Sheila Marriner and Francis E Hyde, The Senior, John Samuel Swire, 1825-98 (Liverpool, 1967), p. 106. ^Jean Bouvier, Le Credit Lyonnais de 1865 h. 1882: les anndes de formation d'une banque de depots, (1961), II, 529. 8^James w Gilbart, A Practical Treatise on Banking, 6th edition (London, 1856). To be accurate, Kresser was not designated 'chief manager' until 1868, but, as manager of the Hong Kong office at such a time, he was effectively 'chief'. the Chief Manager. The Board did not surrender their authority; in the first place they could not do so—as far as legal requirements or the public were concerned, in the second place the Minutes of the Board show that they were kept informed of developments, approved or agreed to major decisions and thus participated in responsibility; they appointed sub. committees of inspection and kept abreast of the developing China loan business. This is all a matter of degree. The Board came to rely heavily on their successful Chief Manager while they remained in control; thus when Frangois de Bovis, the Tahiti-born Chief Manager (1892-93), was thought (probably unfairly) unable to cope, London shareholders petitioned for the return of Jackson, the Board at first disagreed, but when de Bovis went on leave in 1893, Jackson was recalled to Hong Kong and de Bovis returned to head the Lyon branch.in the final years of the century any analysis must take into account the person of the Chief Manager, and, therefore, a general statement on a changing structural or organizational relationship between Board and managers is hardly possible. But something further was occurring. The Eastern trade was conducted in silver, and silver was depreciating against gold. The exchange rate, often strongly influenced by the Hongkong Bank, became a matter of the greatest significance (and speculation) for those in business on the China coast. Information on the Bank's silver position and intentions could not be revealed to the firms through their representatives on the Board of Directors. The Board had, by its own decision, to be uninformed not only on routine operations, but also on key matters which were basic to an understanding of the Bank's financial position. From this could develop the 'inner reserves,' as Jackson attempted to keep the balance between gold and silver, and the consequential uninformative nature of the accounts. There were other changes which furthered the alienation of the Board from the day-to-day operations of the Bank. While it is admittedly some. what far-fetched to refer to the Hongkong Bank in its founding years as something of a 'co-operative', it is true that the merchants made common interest, that Germans, Parsees, Americans and English worked together as— to borrow an unlovely term from current jargon--Hong Kong belongers, but nevertheless retaining their own business and national interests. Although Jardine Matheson and Company partner William Keswick joined the Board of the Hongkong Bank in 1877, this reconciliation did not make the princely hong in all matters a friendly partner. The fact is the Directors were not wholly devoted to their Bank; W H Forbes, for over 20 years a Director and three times Chairman of the Hongkong Bank and a partner in Russell and Company, was in 1891 induced to found the so-called National Bank of China and was forced to resign his directorship of the Hongkong Bank in consequence—ironically this was on the eve of his company's bankruptcy. Jardine's, after rejecting an 1883 proposal by their Peking agent, 86HSBC Board Minutes, 14 July 1892 and 9 March 1893. Biographical informa. tion on Jackson in HSBC Archives; on de Bovis, born 1853 in Tahiti, was seen by Claude Fivel-Demoret in the Maire's Office of his place of burial, Reyrieux, Ain, France (30 km north of Lyon); thus the Hongkong Bank can still claim a French chief manager, vice Kresser, now known to have been Swiss. EASTERN BANKING Alexander Michie, to establish a bank to be called (yet again) 'Bank of China,' were active in the early 1890's in the Bank of China, the Straits and Japan, and with them in this venture were the Sassoons and Siemssen's Heinrich Hoppius, both companies being represented on the Hongkong Bank Board, with Hoppius a long-time director and thrice Chairman of the Hongkong Bank.R' The Jardine's operation began as a merchant bank with which the Hongkong Bank co-operated fully; later when the former became involved in the exchanges, the Hongkong Bank took a less enthusiastic position. Although there were external factors at work, particularly rival attempts to lend to the Chinese Government, it is interesting that these developments occurred during the chief managerships of G E Noble and Francois de Bovis, that is, in between the several tenures of Thomas Jackson. Coincident with Jackson's developing authority as manager was the growth of international trade rivalries and the changing nature of invest. ment in China. The Hanseatic merchant traditions kept the German trading firms loyal to the Hongkong Bank, but on the matter of railway investment the Hongkong Bank, founded as a Hong Kong bank, had to deal in a world of national concessions, and the Bank's linking with Jardine Matheson in the ‧ ‧ ‧ ‧ # , . O Q British and Chinese Corporation was significant. Meanwhile, however, the composition of the Board continued to reflect the Hongkong Bank's tradi. tional free trade, international attitudes. There was potential for conflict, avoided perhaps by the diminishing role of the Board of Directors and the London focus of the Bank's international lending activities. This cannot be a final judgement. Certainly Sir Newton Stabb stressed how little work a director had to undertake, but he was writing to the head R^Forbes resigned as Hongkong Bank director in 1891 after being accused of 'hostility'; Russell and Company failed the following year. Russell and Company's venture started under the title 'Banking Corporation of China,' then 'Bank of China, Limited' (Feb 1891) and then the 'National Bank of China,' which was wound up in 1911; see BT 31/4971/33210, BT 31/4988/ 33367, BT 31/15145/33713; Jardine's parallel experiment began as the Bank of China, Japan and the Straits, Limited, then the Trust and Loan Company ... and then the Bank of China and Japan, Limited; this last mentioned was established in 1894 in conjunction with Sassoon, Siemssen and Melchers interests and was wound up in 1902; BT 31/49173/33237, BT 31/ 4622/30349 and BT 31/6059/12877. For a note on the Melchers involvement, see Dieter Glade, Bremen und der Feme Osten (Bremen, 1966), p. 115. While there is evidence that coincidence in timing was due to common economic factors, it may be that the relationship between the Board and the management of the Bank had weakened by the Board's being, perhaps, insufficiently involved. As an added complicating factor, Jardine's were agents in certain outports for the Chartered Mercantile Bank; see Jardine Matheson Papers, Cambridge University Library, C41/13, letter of 9 July 1892. 88 °°For a survey of German merchants' relations with the Hongkong Bank and the Deutsch-Asiatische Bank, see the research report of David J S King in the HSBC Group Archives; see also his paper on the Hamburg Branch, printed as No 23 in this collection. of a firm who was notoriously unwilling for his managers to play an impor. tant community role as with the original Heard correspondence, interpre. tation often depends on full appreciation of the particular situation.R9 As one might expect, the Board were the official channel for communi. cation between the Bank, its shareholders and the public.90 ^.t impor. tant annual meetings, the Chairman spoke for the Bank and, for example, in the meeting following the revelations of E Morel's activities in Lyon the Chairman and the annual accounts came under severe criticism. 'I hold,' declared a shareholder, 'a very strong opinion that to a very considerable extent the Court of Directors are responsible for this loss. What are they paid for? Is it not to manage and direct the affairs of the bank?'91 This is what would normally be expected, but even this cannot be passed by with. out comment: for a significant period of time in the 1890s and through 1906 the Chairman of the Hongkong and Shanghai Banking Corporation was a German citizen, speaking for the Hongkong Bank's management at a time when the Bank was considered the instrument of British financial policy in the East.92 The international composition of the Board which passed on manage. ment policies furthering British interest was, of course, remarked upon by such anti-German jingoists as G E Morrison of The Times, but until 1914 the 'anomaly' continued.93 89see text related to note 81 above. 9^The HSBC Board of Directors had earlier exerted itself on this subject, criticizing a circular from Thomas Jackson, then on leave in London, sent out directly to London shareholders; see minute of 20 April 1875. 9^Fraser-Smith as reported in the North-China Herald (7 Sept 1889) p. 301. 92por the Hongkong Bank's international policy role, see David McLean, 'International Banking and its Political Implications' ... and references therein; as essay No 1 in this collection. To be specific on the German chairmen, there follows a list beginning with the brief chairmanship of Woldemar Nissen which happened to coincide with the signing of the Hong. kong Bank's revised Deed of Settlement in 1867: Nissen, July-December 1867; Adolf Andr￡ 1875; H Hoppius 1877; W Reiners 1883; M Grote 1887; L Poesnecker 1892; H Hoppius, 1893-94; J Kramer 1895-96; N A Siebs 1900-01, and A Haupt 1906. But in 1913 S H Dodwell was elected chairman because, as Stabb wrote to Addis, 'It will be difficult to know whom to make Chairman as we cannot put up a German.' HSBC London Office Archives, letter of 22 Jan 1913. Chairmen were, under the terms of the deed of settlement, elected by the directors, and given the tradition that this was done 'by rotation' and the fact that there were usually three to four, on occasion five, German directors, the above is not surprising. That the shareholders continued to elect Germans as directors in increas. ingly nationalistic times is a reflection of the notorious passiveness of shareholders; that no movement to unseat them was undertaken by represen. tatives of, say, Jardine Matheson or other leading British hong may be a measure of the lack of importance ascribed to membership on the Board or be, perhaps, a reflection of a more rational approach to economic vs nationalistic questions than that prevailing elsewhere. 93xhe Correspondence of G E Morrison, ed Lo Hui-min, 2 vols (Cambridge, 1978), Morrison to V Chirol (25 March 1905), letter 193, p. 295: 'The EASTERN BANKING This time the 'Bank' rather than the Board seemed to be pursuing con. flicting courses. The Board with members of varied national backgrounds remained responsible for management of a Bank which (i) continued the free trade traditions of Hong Kong and the financing of the China trade and of Treaty Port developments, (ii) held British Government and colonial accounts in the East, and (iii) was the British representative on interna. tional loan consortia; a Board with five German members managed a Bank with an Eastern staff which was almost entirely British. World War I would force decisions. Over the years many of the founding firms and others whose representa. tives were nominated to the Board of Directors, had failed. With the resignation of the five German directors in 1914 the continuity of the Board virtually ceased; Sassoons remained--otherwise the links with the past had been severed and thus perhaps the prestige of the Board and the influence of the directors were affected. Shanghai had, of course, always been important, but with the modernization of China and the new Nationalist Government based in the Yangtze Valley, with the rise of modern Chinese banks, with the growing financial requirements of an increasingly national. istic China, the role of Shanghai in the foreign economic penetration of China became overwhelming. Hong Kong remained the base of both the Hong. kong Bank and of many famous hongs of long standing on the China coast, but their profits were derived elsewhere, and there were powerful business leaders now stationed not in the Crown Colony, but in Shanghai. This too may have had an influence on the role of individual directors—men with perhaps not quite the same role in their own firm's hierarchy--on the Board of the Hongkong Bank. Thus all the logic is there to support the folk-law of the invisible Board and the unknown directors—certainly in the inter. war period. And yet the legal power--the ultimate power—remained with the Directors and the final story will assign them a larger role even in a period when Sir Newton Stabb, Sir Charles Addis, A G Stephen, Sir Vandeleur Grayburn and their colleagues of varying dramatic qualities most certainly dominated the Bank's public history. Despite then the significantly less important role of the Board of Directors, certainly before 1914 its local Hong Kong composition and the detailed knowledge its members had of the Eastern economic situation kept the Hongkong Bank as its founders intended it should be, a local bank. If later chief managers saw the Bank as an exchange bank, its income based on the finance of trade, they too were correct; if others saw its fortunes involved in the international loans to China, they too could find arguments (perhaps less cogent, but existing) to support their views. Yet the basis of all this was Hong Kong, Shanghai—China and Japan—and, by the end of the century, the Malayan peninsula and the Philippines, with India supplementary. Hongkong Bank is largely German, unfortunately.' See also, e.g. pp. 306- 7, 324-25 and 505, and V Chirol to Morrison, pp. 304-5. Morrison was simply irresponsible. While Sir Charles Addis might reign in London, the Bank remained with head office in Hong Kong, its Chief Manager there and reporting to taipans who were both Hong Kong residents and figures of some importance in trade and industrial development on the China coast and elsewhere in the Far East —for these were the men who still comprised the Board directing the affairs of the Bank, most definitely through the Chief Manager, but still responsible and operating from Hong Kong. Early in its history the Hong. kong Bank's note-issue was the most important in the Colony, its vaults the depository of government funds, and the members of its Board and later its Chief Managers on the councils of Government. Never a 'central bank' and always regarded with some hesitation by the Treasury in London, the Hong. kong Bank nevertheless established itself, through its Directors, as the Hong Kong bank and, from this base, the 'local' bank, not only for the Colony but also for the region. To the clerks of the Imperial Treasury, it seemed, the Hongkong Bank was always pressing, always asking favours--or having favours asked for it. But this was, to some extent at least, the consequence of its found. ing. Traditions established while the Bank was still but a 'company, limited,' special arrangements made to meet emergencies, to take account of the Bank as a 'going concern' had all to be understood at a time the Treasury was trying to remove itself from the task of promising the impos. sible—being responsible for the activities of chartered banks and managing inherited regulations which had long since lost their meaning. And the head office of the Hongkong Bank was not in the city where its managers could be summoned; it was in another world, the world of the Bank's founders and first directors who had set the tone throughout. 4. THE HONGKONG BANK AND THE EXTRATERRITORIAL PROBLEM, 1865-1890 by Peter Wesley-Smith For the first twenty-three years of its existence, the Hongkong and Shanghai Banking Corporation appeared to be under severe restrictions in its ability to carry on business outside Hong Kong. There were two reasons for this, though they were not always easily distinguishable. First, the bank was incorporated, not by charter under the royal prerogative, but by an ordinance of a subordinate colonial legislature, a legislature which was considered incapable of affecting events beyond the colony. This seemed to raise the legal doctrine of extraterritorial legislative incompetence.^ Secondly, the operations of banking institutions in far-flung colonial possessions required some sort of central control, in order to avoid disputes with other colonies and foreign countries and to protect local economies often crucially reliant on the financial soundness of note-issuing colonial banks. Treasury thus demanded and assumed it had acquired the means to supervise the Hongkong Bank. These two factors—one of law, one of policy—created a good deal of confusion. The legal principle seemed clear enough at first, though con. siderations of policy were of course variable and affected by geography: the activities of a Hong Kong bank expanding throughout Asia and beyond were viewed in London with an apprehension not shared by officials on Hong Kong island. Her Majesty's Government had to bear in mind the interests of all HM's subjects throughout the empire, whereas the Hong Kong government enthusiastically embraced the notion that what was good for the bank was good for Hong Kong. The problem was that political decisions were imple. mented by resort to a legal doctrine improperly understood. The extra. territoriality idea, perhaps because it was merely the legal expression of a requirement of imperial administration, did not receive close analysis. From the perspective of the late twentieth century, however, the failure to distinguish clearly between the political factor of imperial supervision and the legal factor of extraterritoriality appears to have sabotaged the coherence of policy-making in London, to the jeopardy of money-making in Hong Kong. Until the different issues of law and policy are disentangled, the controversies seem impossible to understand. The intention of this paper is to describe the legislation which established the bank, to explain the consequences when branches and agencies were set up outside Hong Kong and to analyse the legal arguments. ^See Wesley-Smith, 'Extraterritoriality and Hong Kong' (1980) Public Law 150. EXTRATERRITORIALITY THE INCORPORATING ORDINANCE AND THE ESTABLISHMENT OF BRANCHES AND AGENCIES The original ordinance* * 3 and deed of settlement The application by shareholders for an ordinance of the Hong Kong legis. lature to incorporate the Hongkong and Shanghai Banking Company was despatched to the Colonial Office at the end of 1864.3 Treasury had no objection to the incorporation of a bank whose business was limited to China and Japan,^ and the Hong Kong authorities were sent a copy of the charter of the Asiatic Banking Corporation to use as a model for the ordinance--an ominous precedent, since within a year or so the Asiatic was defunct. As an instrument issued under the royal prerogative, the charter was not open to any objection that it authorised banking operations at places outside Great Britain: restrictions it contained regarding territory were founded on policy, not on considerations of legislative competence. When adapting the model for Hong Kong purposes, however, it was necessary to accommodate the prevailing view that Hong Kong legislation could not take effect beyond the colony's territorial confines. The original section 4 therefore stated that the company was established for the purpose of carrying on the business of banking in Hong Kong—with the proviso, con. cerning which so many arguments were to ensue, that nothing herein contained shall restrict the said Company, with the consent of the Commissioners for the time being for execu. ting the Office of Lord High Treasurer in England, from estab. lishing any Banks or Branch Banks at London or at any Port, Town, City or Place in India, Penang and Singapore, or in the Dominions of the Emperor of China, or of the Tycoon of Japan, in or at which any British Consulate or Vice-Consulate is or may be hereafter established, and also without such consent as afor. esaid from establishing at London or any such Port, Town, City or Place, as aforesaid, Agencies for Exchange, Deposit and Remittance. The Lords Commissioners of the Treasury were uneasy about this pro. vision, wanting an amendment that, inter alia, branches not be established in the territories mentioned except with the consent of the governments of those territories.3 The colonial authorities were unwilling to alter the 3No 5 of 1866. ^Robinson to Cardwell, No 199, 29 Dec 1864: C0129/101. ^Treasury to Colonial Office, 19 April 1865: C0129/108. 3See Carnarvon to MacDonnell, No 87, 24 Nov 1866: C0129/118. Treasury's view seems to have been derived from objections by the Indian government to the Asiatic Banking Corporation's charter, the India Office requesting that, in future, banking companies 'be empowered to establish either Agencies or Branches in India only after they have conformed to the existing laws of that Country': India Office to Hamilton, 7 April 1865: T1/6584A/17745. EASTERN BANKING the ordinance (for fear of 'inconvenience and damage' to the bank 'from a rumoured disallowance'R). Treasury consented, instead, to amendment of the deed of settlement which was then being prepared.^ The Attorney General in Hong Kong, Julian Pauncefote, explained that section 4 should not be read as conferring the power to establish branch banks beyond the limits of the colony, since the Hong Kong legislature was not competent so to enact. The proviso was inserted—at the bank's request—in order to make it clear that their 'Hong Kong Charter' would not be vitiated by the setting up of branches outside Hong Kong. The estab. lishment of branches 'must be subject to such conditions as may be imposed by the Lords of the Treasury and the establishment of Agencies as well as of Branches must be subject to the controul [sic] of local Laws and to the Powers of local Governments.' These conditions were more conveniently incorporated into the deed of settlement than the ordinance.R Article 12 of the deed stated that the company should carry on the business of banking, in conformity with the provisions of the ordinance: Provided always that the Company shall not establish any Banks or Branch Banks under the provisions of the Fourth Clause of the Ordinance without the consent therein specified being obtained in writing and evidenced by the signature of two of the Commissioners for the time being for executing the Office of Lord High Treasurer in England; provided also that the Company shall not establish at any Place within the Territories under the Government of India, any Agency for Exchange, Deposit, or Remittance without the consent in writing of the said Commissioners, such consent to be evidenced in manner aforesaid, anything in the Fourth Clause of the Ordinance to the contrary notwithstanding. Article 14 read: The Company shall 'not carry on or engage in any business pro. hibited by the said Ordinance, nor in any case transgress or exceed the provisions, restrictions, or limitations of the Ordinance as to the nature and extent of the business of the company and the manner in which it is to be carried on . . . It will be observed that the ordinance did not purport to restrict the bank's freedom to operate overseas in any way, but article 12 of the deed required the written consent of the Treasury before branches were estab. lished in London, Penang, Singapore, China and Japan and before branches or agencies were established in India. Treasury seemed satisfied, however, that respectable bankers were firmly under government control and could not expand beyond the colony without specific authority from London. RMacdonnell to Carnarvon, No 205, 31 Jan 1867: C0129/120. ^Treasury to Colonial Office, 11 Jan 1868: C0129/135. ^Enclosure in MacDonnell to Carnarvon, No 205, 31 Jan 1867: C0129/120. EXTRATERRITORIALITY Yet vigorous expansion, with or without government approval, was the determined policy of the bank's first directors, and on August 26, 1867 the Governor of Hong Kong transmitted to the Colonial Office an application for the authorisation of branches at Shanghai, Foochow, Yokohama and Nagasaki and of agencies at Bombay and Calcutta. Branches had already been estab. lished in China and Japan and were doing great business.^ There is no record of formal consent by the Treasury. The initiative in 1870 for a new charter There is one reference in the files consulted to a request in 1870 directed to Her Majesty for a supplemental charter—presumably in recognition of royal freedom to grant extraterritorial privileges. The request was not granted, policy objections being the apparent reason.^ Ordinance No 1 of 1872 to justify the bank in momentarily of branches The failure to achieve Treasury approval of the branches and them by virtue of a new charter under prerogative powers placed breach of article 12 of the deed of settlement. Perhaps embarrassed by such illegality, and worried lest the opening elsewhere be jeopardised, the bank applied for and received an amendment to its ordinance in 1872. This provided that, with Treasury consent, the company could establish banks or branches at Saigon and Manila. Treasury officials disliked the amendment: 'My Lords observe that the object of the ordinance is to sanction the foundation of establishments in foreign Countries by ordinance of a Colonial Legislature which has no power beyond the limits of the Colony itself.' This was thought doubtful policy which might give rise to anomalies, consequently advised disallowance and the ordinance repealed9 * 11 12 before coming into operation.11- to be a matter of The Colonial Office was thus in effect 9 MacDonnell to Buckingham and Chandos, No 335, 26 Aug 1867: C0129/124. l^See minute on Colonial Office to Treasury, 13 June 1872: T1/7304A: the attempt (see below) to amend the ordinance in 1872 was open to all the objections raised in 1870, with the addition that 'the thing is to be done not by the Queen but by an ordinance of a Colonial Legislature which has no power whatever beyond the limits of the Colony and no foreign relations.' 1 -*-The usual procedure is for ordinances to be passed and assented to and brought immediately into operation, subsequent disallowance having the effect of repeal from the date of publication of the notice of dis. allowance. Ordinance No 1 of 1872, however, was not to come into oper. ation until Her Majesty's confirmation was proclaimed, and instead, in Proclamation No 5 of 1872 (Gazette 1872 Oct 19) the thing was disallowed. 12Treasury to Holland, 15 Aug 1872, and Holland to Kennedy, No 117, 29 Aug 1872: C0129/160. EASTERN BANKING The draft bill of 1873 Treasury was not simply relying on a narrow, legalistic view, and this was confirmed the following year when another attempt was made to amend the ordinance. This time a draft bill rather than an actual ordinance was sent home. Clause 2 sought a liberalisation of the proviso to section 4 such that nothing in the ordinance should restrict the company from establish. ing, with Treasury consent, branches or agencies 'at any Place out of the Colony.' The Colonial Office was told that the previous ordinance was not rejected on the sole ground of 'the want of power on the part of the Colonial Legislature to sanction the foundation of Banking Establishments generally in Foreign Countries'—in addition, 'the anomalies and doubtful questions which must attend any attempt to extend British authorisation to trading operations in other civilized and independent Countries ought to be avoided.'^-* The Colonial Office suggested to Hong Kong that the draft be amended,!^ but the Acting Attorney General, Thomas Hayllar, reported it was impossible to accommodate Treasury's views.!^ Treasury declined to change its mind, and in the Colonial Office it was minuted that it didn't matter much: the Saigon agency had already been in operation for two years and the government in Hong Kong, even with the requisite power, would never inter. fere with the bank wherever it went.!^ Jurado and Ordinance No 29 of 1889 The bank's application of 1873 was renewed, in only very slightly revised form, in May 1887, this time successfully. The immediate impetus was legal difficulties in Manila, where business was conducted through an agent: doubts about the ordinance led to doubts about the bank's standing to sue in Philippine courts (though not apparently to be sued). The legal objec. tion which had previously prompted Treasury to reject the bank's applica. tions was now found to be misconceived, and amendment of the legislation could remove the bank's supposed disability to carry on business in places not named in the ordinance. Should this be permitted? Treasury would raise no obstacles provided sufficient securities were appropriated to cover the average amount of the bank's notes in circulation: expansion of the bank brought greater risk of catastrophe at some remote branch and the note circulation in Hong Kong needed protection.!^ The Colonial Office instructed the Governor, Sir William Des Voeux, to amend the ordinance on the condition suggested by Treasury.!^ The situation in Manila, however, was rapidly approaching crisis pro. portions. On March 16, 1889 the firm of Jurado & Co, which, though previously adjudged bankrupt at the suit of the bank, had succeeded in 13 14 15 16 17 18 Treasury to Herbert, 26 Sept 1873: C0129/166. Kimberley to Kennedy, No 142, 3 Oct 1873: ibid. Enclosure in Kennedy to Kimberley, No 20, 3 Feb 1874: C0129/167. Treasury to Colonial Office, 12 June 1874: C0129/168. Treasury to Colonial Office, 9 Sept 1888: C0129/240. Knutsford to Des Voeux, 25 April 1889: ibid. EXTRATERRITORIALITY having the bankruptcy order annulled, embargoed the bank for a large sum of money. The judge refused to recognise the bank, which was said to have no legal status or 'personality' in Manila and thus possessed no right of appeal.The government at Manila, although accepting taxes from the bank since its agency was established in 1872, had decided in 1888 that the company could not be registered according to local law. The bank's strategy was two-fold: to seek an urgent amendment to its incorporating ordinance to the effect that nothing in that ordinance was to be construed as restraining the company from establishing banks at places not specifically mentioned, and to petition the Foreign Office to bring diplomatic pressure to bear at Madrid.* 2*-* On April 24, 1889 Des Voeux tele- grammed unsuccessfully for approval of the proposed amendment.2-*- The Colonial Office was sympathetic, however, and wished to proceed with the earlier draft. Approval could be given on condition that the bank secure its note issue by the deposit of securities specifically appropriated to cover the full amount of the note issue.22 After some haggling, Treasury agreed that, shareholders' liability being unlimited, noteholders were sufficiently protected if securities to the value of $2,500,000 (covering just one third of the possible issue) were deposited with trustees.2^ Ordinance No 29 of 1889 was accordingly passed, which replaced the proviso to section 4 with a clause that nothing therein should be deemed to restrict the company, with Treasury consent, from establishing branches or agencies 'at any place out of the Colony in conformity with the law of such place'2^—only the last eight words made this ordinance materially different from the rejected draft of 1873. The sequel to all this was that the bank collected various securities of a value exceeding $2,500,000 and deposited them with the Treasury Chest Officer in Hong Kong, the Acting Governor reported the fact to the Colonial Office in May 1890, and the Colonial Office approved. 26 when the full despatch was forwarded to Treasury, however, it was discovered that the proposed securities, consisting partly of mortgages without government support, were insufficient to provide an easily realisable reserve. A series of Treasury minutes indicates the nature of the official response: 'I do not care how the Colonial Office in its feebleness may have committed itself and I would simply refuse, and say that the Bank need not come to us for leave to set up establishments until they have provided proper secur. ities.' 'I am afraid this would be rather an idle threat, as the estab. lishments have been already set up; & they don't apparently care whether they have been set up legally or illegally. ' 'The Bank is a somewhat slippery customer to deal with.'26 When the bank sought Treasury sanction ^Enclosure in Des Voeux to Knutsford, No 146, 24 April 1889: C0129/241. 20Bank to Foreign Office, 13 March 1889: F072/1855; Foreign Office to Colonial Office, 12 April 1889: C0129/243. 2^Des Voeux to Knutsford, tel, 24 April 1889: C0129/241. 22Knutsford to Des Voeux, 25 April 1889: C0129/240. 2^See various correspondence and minutes in T1/8504C. ^Transmitted in Des Voeux to Knutsford, No 373, 12 Dec 1889: C0129/242. 26Wingfield to Treasury, 4 June 1890: T1/8504C. 26Ibid. EASTERN BANKING for twenty-five branches and agencies^ the Lords Commissioners protested at past irregularities: overseas establishments had been set up at places where previous Treasury consent was required but never received and at places at which its construction denied it the power to carry on business. The bank had 'systematically violated the instruments by which it was incorporated.'^8 Although the Jurado affair was the immediate cause of the 1889 ordi. nance which finally appeared to remove the fetters on the bank's extra. territorial operations, the company achieved the 'personality' it needed vis-^-vis the Manila courts before the ordinance came into effect. By the middle of 1889 it seems that the Supreme Court in Madrid had acknowledged the bank's status and the company was registered at Manila.^9 THE LEGAL ISSUES Hong Kong's extraterritorial legislative incompetence All parties were agreed that the Hong Kong legislature could not make law which took effect beyond the territory of the colony. This lay behind the crucial difference between incorporation by colonial ordinance and incor. poration by charter under the royal prerogative. But was the Hongkong and Shanghai Banking Corporation thus disabled from conducting banking opera. tions outside Hong Kong? Although there were inconsistencies on both sides of the argument, it was the answer to this question which was eventually at the core of the disagreement between the bank and the Treasury. The bank's position At the outset Mr Pauncefote, from his chambers in Hong Kong, recognised that the bank's incorporating ordinance could not purport to confer power to establish branches or agencies anywhere except in Hong Kong itself. But a lack of competence to permit entailed also a lack of competence to pro. hibit: the bank's advisers in 1866 had no doubt that the capacity to operate overseas was unaffected by the circumstance that the instrument of incorporation emanated from a subordinate legislature. In 1887 the bank submitted that a failure by the legislature to restrict banking business to the limits of the colony was not to act beyond its powers. ^ Two years later Mr John Francis QC reiterated that the Hong Kong legislature could not give express permission to a creature of its own creation to function 2?Bank to Meade, 26 April 1890: C0129/248. ^Treasury to Colonial Office, 17 June 1890: C0129/248. ^There is a rather scrappy file in the bank's archives summarising the history of the Jurado litigation. ■^Bank to Holland, 17 May 1887, enclosure 1 in Cameron to Holland, No 201, 1 June 1887: C0129/233. EXTRATERRITORIALITY beyond the confines of colonial territory: the intention of the framers of the original ordinance was to leave unaffected the bank's 'common law right to carry on business in any port or place foreign or English where by the law in force at that place, it might lawfully establish itself . . .'33 Unfortunately, Mr Hayllar reported that the object of the 1872 ordi. nance was to grant facilities to the bank for the opening of branches in Saigon and the Philippines. ^ This was an error: by the logic of the bank's position, a colonial ordinance was incapable of granting facilities outside the colony, and no authorisation was needed for banking operations in places not mentioned in the proviso to section 4. As Francis later recognised. Ordinance No 1 of 1872 was ultra vires: that did not, however, mean that the bank had no right to conduct its business in the Philippines 'if its Deed of Settlement authorized it, and the Spanish Law did not forbid.'33 Hayllar's error was compounded when the bank later admitted that, not being allowed to establish a branch at Manila (because of dis. allowance of the 1872 ordinance) it had conducted business through an agent instead-^—as though the bank was denied by its charter the ability to operate where and how it pleased. Treasury opinion The Lords Commissioners of the Treasury seemed almost mesmerized by the notion of extraterritoriality, and quickly objected that the Hong Kong legislature, in the 1872 ordinance, had overstepped itself. The following year Sir Reginald Welby suspected that legislative attempts to free the bank from its supposed territorial restrictions were based on a misconcep. tion: the bank had no privileges outside Hong Kong and Treasury could not by itself confer any such privilege. ^5 The Solicitor General agreed that, insofar as section 4 implied Treasury competence to authorise banking establishments beyong Hong Kong's borders, it was a 'piece of waste paper.'^6 The real question was how the bank could acquire the authority it needed. A colonial ordinance and a Treasury minute being insufficient, the only remedy, wrote a Treasury official in 1887, was for the bank to be wound up and re-constituted under the Companies Acts, since the imperial legislature could, and did, confer the capacity on registered banks to operate in overseas dependencies and foreign countries.^ Yet the defect in this reasoning had been exposed several years earlier when the bank requested approval for its Singapore branch (Singapore being, of course, expressly mentioned in the original section 4 of the incorporating ordinance). Treasury first stated that the branch should be set up under an ordinance of the Straits Settlements.-^ In 1881 ^Francis to Gollan, 29 March 1889, in F072/1851. ^Enclosure in Kennedy to Kimberley, No 4, 17 April 1872: C0129/157. J See note 31 above. 3^See note 30 above. -^Minute on Colonial Office to Treasury, 3 Sept 1873: Tl/7641. 3^See minute by EWH dated 19 Sept 1887 in T1/8302B. -^Ibid. ^Treasury to Colonial Office, 26 Nov 1878: C0129/183 EASTERN BANKING the consent required under section 4 was granted and the opinion offered that no Straits legislation was necessary if the law of that colony did not forbid it, because a bank incorporated and possessing the appropriate powers under the law of one colony could establish a branch in another colony. ^9 The assumption was that the Hong Kong bank, although unable to acquire capacity to operate in Singapore through Hong Kong law or Treasury approval, possessed it anyway by virtue of a general rule of law. The fact that Singapore was referred to in section 4 was irrelevant to the reasoning process, and this seemed to be finally recognised in 1888: A Colonial Ordinance has no doubt force only within the limits of the Colony; but by international law and intercolonial law the Corporate status of an Institution created by the laws of one Country or Colony will be recognised in other Countries and Colonies, provided that the Company in establishing itself out. side its country of origin does not infringe the instrument of its foundation, and provided that when so established it does not contravene the laws of the locality. Thus the only issue remaining was whether the instrument of the bank's foundation was infringed by the establishment of branches and agencies in places not mentioned therein. Was the bank disabled from operating outside Hong Kong? During the Jurado imbroglio, the Attorney General in England, acting in a private capacity, advised that the bank, in conformity with section 4 and the deed of settlement, could not legally be established in Manila through branch or agency.^ In this context the meaning of 'duly constituted according to English law,' as required by the Spanish government's declara. tion in 1883 for the purpose of doing business at Manila, was the focus of dispute. A Foreign Office adviser minuted: 'If therefore the particular association in question is not duly constituted according to English law for the purpose of carrying on business except within certain limits within which Manila is not included—the declaration of 1883 does not appear applicable to the case.'^ The bank, supported by the Attorney General and the Crown Solicitor of Hong Kong, insisted that their deed of settlement under the ordinance permitted—or did not prevent--the operation of an agency in Manila.^ But the Treasury asserted that the bank's founding instrument did not -^Treasury to Colonial Office, 19 Aug 1881: C0129/196. See also Treasury to Colonial Office, 1 Oct 1881: ibid. ^Treasury to Colonial Office, 9 Feb 1888: C0129/240. (Also contained in T1/8302B.) ■^Enclosure in Gollan to Salisbury, Commercial No 3, 25 March 1889: F072/1851. ^Sir w E Davidson on Francis to Gollan, 29 March 1889, in F072/1851. ^Bank to Foreign Office, 13 March 1889: F072/1855. EXTRATERRITORIALITY authorise it to establish itself in places other than those named in section 4. It was not until the amendment of 1889 had substituted 'any place out of the Colony' for the original list of specific places that the disability under which the bank had laboured for so long was removed. It is difficult to follow the Treasury line on this matter. If the bank was disabled from carrying on business in Manila, Saigon, Colombo, Rangoon, New York or Hamburg because these cities did not appear in section 4, although no prohibition was to be found in the ordinance or the deed of settlement, mere mention of China, Japan, Penang or Singapore could not enable the bank to establish itself there when the legislation was inopera. tive outside Hong Kong. The bank violated its charter when it opened unapproved branches in China, but not when its agency commenced business in Manila. Treasury was grievously inconsistent, while the bank's advisers failed to maintain the correct approach with sufficient clarity and persis. tence to challenge the established view. The Colonial Office never declined to accept Treasury advice, and it was left to the bank to conduct its affairs, inside and outside Hong Kong, more in accordance with the profit motive than in deference to HMG's misguided legal judgement. CONCLUSION Throughout the 1865-1890 period, it was the concern of Treasury officials— ever over-cautious—to avoid the problems they feared would arise if the Hongkong Bank was allowed to carry on its business wherever it wished. Until 1889 they used the extraterritoriality argument as their principal defence against the bank's expansion. But, just as they confessedly misconceived the international law on the subject, they were wrong about the extraterritoriality doctrine, which just did not arise in this case — Pauncefote had been careful to ensure that the ordinance was intraterri. torial in scope and it could not anyway have prevented the bank's overseas operations while remaining intra vires. The more effective device in Treasury hands was the requirement in the deed of settlement that Treasury consent to the establishment of branches in the places named. In relation to places not named Treasury had no control until the 1889 amendment. The new provision, which in effect brought the whole world outside Hong Kong within Treasury's supervisory authority over the setting up of branches, was rejected sixteen years earlier in the mistaken belief that troubles would thus be circumvented. Yet it is likely that, had the 1873 draft bill become law, the bank's Manila problems would not have occurred. Resort to the extraterritoriality doctrine, therefore, probably led to the very situation it was supposed to avoid. The doctrine itself grew out of the administrative demands of empire, and the final irony is that, as the empire dissolved, so did the extraterritorial limitation: the preferred modern view is that Hong Kong legislation can take effect beyond the colony ^^reasury to Colonial Office, 9 Feb 1888: C0129/240. See also Treasury to Colonial Office, 17 June 1890: C0129/248. EASTERN BANKING so long as there is some nexus between the subject matter and the territory. Control of a Hong Kong bank in its operations outside Hong Kong would now be thought clearly within the competence of the local legislature. 5. THE FINANCIAL STATEMENTS OF THE HONGKONG AND SHANGHAI BANKING CORPORATION, 1865-1980 by T A Lee* An Application of Cash Flow Accounting This study is unique for two reasons. First, no previous study has exam. ined the financial statements of a bank through its entire history. Secondly, no such analysis has employed the techniques of cash flow accoun. ting to highlight financial developments over such a considerable period of time. The study is therefore a pioneering venture which focuses attention on accounting and financial matters, but is not concerned directly with the wider business, economic and social issues dealt with in other papers con. tained in this volume. The history of the Hongkong and Shanghai Banking Corporation (HSBC) is presented in this paper through its published financial statements from its inception on 1 January 1865 to 31 December 1980. These statements summa. rise its activities, events and transactions over these one hundred and sixteen years, and serve as a useful bird's eye view of the changes which have occurred to the Bank during such a long period. This particular approach to business history has been rarely used, and only by accounting historians. The first such study was by Claire (1945) of United States Steel. Hill (1955) investigated the statements of the Continental Gas Association, and Hodgkins (1975) the first twenty-one years of Unilever. In addition, Edwards (1981) has examined a limited run of financial statements of various UK steel companies. But Lee (1977) was the first study of a major public company's financial statements throughout its then entire history. The technique of long-term, multi-period analysis of company financial statements has been rarely used by historians because of a number of fac. tors—first, the lack of published financial statements for the complete period (not a problem in the case of HSBC); secondly, the difficulty of a changing corporate and trading structure for the reporting entity due to takeover and merger, and the need to diversify and adapt to changing circumstances and tastes (again, not a problem with HSBC as it has remained a bank throughout the one hundred and sixteen years of analysis); and, thirdly, limited accounting and disclosure of information in company finan. cial statements, particularly prior to the 1950s and 1960s (and especially with banks such as HSBC due to generally accepted but restricted legal pro. visions which exist to this day in certain countries including Hong Kong). Thus, the non-accounting historian may not have been sufficiently tempted to use financial statements to describe business histories even *1 am grateful for the considerable help given to me by officials of the Hongkong and Shanghai Banking Corporation when interpreting figures, and to my colleague, Rod Ferrier, for his careful comments on earlier drafts. EASTERN BANKING when these sources of information were available. However, Lee (1977) has sought to demonstrate that it is possible for the qualified accounting historian to do so, and to employ the technique of funds flow accounting over long periods of time to avoid certain of the problems of subjective accounting practices in early financial statements. Funds flow also has the considerable merit of measuring financial change and development over periods of time--a matter of some importance to the business historian. The funds flow accounting technique involves taking successive balance sheets and related profit statements and, by comparing them, preparing funds statements reflecting the major sources of finance (for example, capital, loans and profit retained) and the major sources to which the total funding has been put (for example, the purchase of fixed assets, increases in working capital, payment of tax and dividends, and repayment of loans). These statements, when covering extensive periods of time, allow the business historian to assess the overall progress of the report. ing entity. However, because they contain data relating to inventories, debtors and creditors (that is, working capital) they remain influenced by any subjective accounting practices which have been applied to these items. For this reason, the conversion of funds flow to cash flow state. ments has been used in this paper, and avoids much of the problems affect. ing these or equivalent data in the financial statements of HSBC. This will be explained further in a later section. HSBC financial statements Banks are no strangers to subjective accounting practices and limited disclosure, and it should be no surprise to associate HSBC with such a situation. In fact, it has usually been the case in most developed free- enterprise societies that banks have been allowed legally to 'smooth' their financial results by use of techniques such as 'inner' or 'hidden' reserves and to disclose far less information than is expected or required for other trading concerns. The reason for this approach to reporting requirements is the need to reflect financial stability in banks for the benefit of depositors. But smoothing profits, and over- or undervaluing assets and liabilities in the balance sheet as a consequence, no matter how necessary and acceptable, make financial analysis a difficult process for the busi. ness historian. This in no way is meant to cast doubt on bank managements; it is merely a factual statement of banking practice. However, it can to a considerable extent be avoided by the use of an accounting technique which minimises the effects of movements to and from hidden reserves—particu. larly those which relate to the assets and liabilities of a bank which can reasonably be classified as working capital--that is, most items with the exception of properties and related assets, and investments. As the latter typically constitute a minority of a bank's total net assets, the effect of the technique on smoothing procedures is significant. The technique is entitled cash flow accounting, and has usually been described and used in relation to retail or manufacturing concerns. It aims to describe their operational financial results in pure cash terms, FINANCIAL STATEMENTS devoid of any arbitrary allocations and valuations. In effect, it takes the funds statement and, by netting the working capital change against the periodic profit (with depreciation and other arbitrary allocations elimi. nated) it produces a measure of operational cash flow without the influence of stocks, debtors and creditors. By rearranging the other funds items, which are usually in the form of cash anyway (for example, fixed asset purchases and sales, taxation, dividends and borrowings), it is possible to produce a cash flow statement free from any accounting smoothing. The technique is explained in Lee (1981) and, should a funds statement not be available (as in the case of HSBC) it is possible to derive one from the available balance sheets and linking profit statement. Given that HSBC is essentially a cash business, and has been so throughout its one hundred and sixteen year history, it appears to be suit. able to apply cash flow accounting to its available financial statements and produce cash-based data which avoid subjective accounting practices (in the main but not entirely) and do not depend on the availability of detailed disclosures and explanations of published figures. In essence, it reveals the underlying cash flow elements of HSBC. Applying cash flow accounting Due to the lack of full disclosure in all of the one hundred and sixteen years of reported information, the compilation of HSBC cash data has not been easy, but it has been possible to undertake in a reasonably approxi. mate way. The following sections are therefore not intended to be anything other than limited analyses which are near enough the truth of the underly. ing cash flow to warrant comment and explanation. As stated previously, it has not been possible to eliminate all the hidden reserve movements affect. ing properties, furnishings and investments (including those in subsidiary companies). The overall framework in cash flow terms is to describe the periodic changes in financial position as operational cash flow minus acquisitions of properties and investments (net of disposals) plus note issues and capi. tal issues—reconciling these movements to the change in cash and near cash assets. This concentrates attention on the main sources of funding for the latter items which are required to meet the immediate needs of depositors. It highlights in a defined period how much additional cash has been generated from depositors, after allowing for increased lending to customers and interest flows; and how much has come from the subscription of new capital by shareholders (new note issues have usually required depo. sits to be made with the Hong Kong government, and thus should be related directly with investments in any cash flow analysis). It avoids the notion of profit which is difficult to interpret in banking terms because of accounting allocations and valuations. And it describes, in relatively simple terms, how much of the available cash from banking and related oper. ations has been used to invest in new property, furnishings, deposits and securities, and subsidiary and associated companies, and how much has been made available for dividend distributions. Producing the above cash flow data is not easy, and does not avoid all EASTERN BANKING the problems brought about by generally accepted bank accounting. For example, HSBC has never disclosed its tax figures and therefore the follow. ing cash flow analyses will contain no mention of tax payments--the opera. tional cash flow being stated as 'after-tax'. In addition, although careful scrutiny of every scrap of information in the published financial statements can reveal to the experienced accountant considerable data on hidden reserve movements, not all of them can be detected. Those affecting properties and investments which fall into this category are considered to be small in relation to the adjusted figures which have been used. When applying cash flow accounting to a company such as HSBC, the main problem is identifying a bank's working capital and cash resources. This is not easy as no such classification is usually made—throughout its history, HSBC has followed generally accepted practice and listed its assets and liabilities without the major asset and liability headings which would appear in the financial statements of non-banking organisations. The problem is establishing what is the banking equivalent of stocks, work-in. progress, debtors and creditors. In a bank, all such items are monetary but are no less stocks, debtors and creditors for that. It was eventually decided for purposes of this paper that HSBC's working capital constitutes advances and loans to customers, trade bills and time deposits, minus current, deposit and other accounts, and drafts and other sums in transit. This left cash and short-term funds to be defined as period-end cash resources, and properties, investments and certificates of indebtedness as equivalent to fixed assets. These definitions were applied as consistently as possible to similar or equivalent items in the financial statements of HSBC over one hundred and sixteen years. Basic data The primary purpose of this paper is to examine the financial progress of HSBC in terms of its basic business—the flow of cash within the economic community. Thus the financial reports of the company from 1865 to 1980 have been converted into cash flow terms, and the resultant data are con. tained in Table 1. As suggested previously, this avoids the measurement of profit in traditional accounting terms, and makes it easier for the histo. rian to interpret the financial progress of HSBC. The calculated data have been divided for convenience into five main periods of time. This reduces the complexity and enormity of the data to manageable proportions. It also deals with significant periods in the bank's history--the first (1865 to 1875) representing the initial decade of activity in which the bank sought to survive in financial terms; the second ( 1876 to 1900) covers the crucial and difficult period leading up to the First World War, and in which economic conditions in the Far East were consistently difficult; the third (1901 to 1925) is mainly concerned with the influence of the First World War; the fourth (1926 to 1950) related to the bank's development during world-wide depression, and its management of the crippling effects of the Second World War; and the last (1951 to 1980) explains the post Second World War expansion in HSBC activities. The splitting of the financial history of the bank into these periods FINANCIAL STATEMENTS TABLE 1 THE HONGKONG AND SHANGHAI BANKING CORPORATION Summary of Cash Flow Results from 1865 to 1980 (in millions of Hong Kong Dollars) Period of Activity 1865- 1876- 1901- 1926- 1951- 1875 1900 1925 1950 1980 Total Operating cash flow 3.7 76.0 204.4 1,442.5 65,757.9 67,484.5 Less : investment in securities properties subsidiaries and associates 2.5 14.5 76.2 1,147.2 17,418.9 0.2 1.5 33.3 26.3 2,717.5 - - — 2.1 2,799.4 18,659.3 2,778.8 2,801.5 2.7 16.0 1.0 60.0 Less: dividends paid 3.5 33.1 (2.5) 26.9 Add: new capital received 5.0 9.3 new notes issues 1.9 10.6 Increase in cash 4.4 46.8 assets 109.5 1,175.6 22,935.8 24,239.6 94.9 139.5 266.9 264.6 42,822.1 3,039.5 43,244.9 3,480.2 (44.6) 2.3 39,782.6 39,764.7 35.9 - 409.5 459.7 32.8 710.4 6,618.3 7,374.0 24.1 712.7 46,810.4 47,598.4 of activity is obviously open to question, but they do contain the most significant financial events affecting its progress. In any case, the major emphasis is on periodic analysis; the results of individual years are of little significance as an annual period is too short to judge a bank s financial performance. The point of the following analyses is to concen. trate on major periods of activity; varying the length of the chosen periods by several years has been found to make little difference to the overall picture in each period. Table 2 outlines the main financial ratios of the bank as indicators of its progress over time and deals with its growth in terms of profits, cash flow, dividends, assets, and liquidity. These appear to be matters with which the historian ought to be concerned when assessing HSBC's prog. ress. It should be noted that, in order to provide proper comparisons of data over time, two corrections should be made where relevant the data ought to be described in constant general price-level terms in order to avoid the distorting effects of inflation and deflation (this has not been EASTERN BANKING possible in this case due to the lack of a suitable price index to make the necessary adjustments from 1865 to 1980); and data must be put in compar. ative terms when events have rendered them non-comparative (in this case, the number of shares in issue has changed over time due to disaggregation and bonus issues and, as in normal accounting practice in such situations, all share numbers are expressed in terms of 1980 equivalents). Tables 1 and 2 will form the basis of the remaining analyses in this paper. However, attention will also be paid to any significant‧changes in reporting practice which have occurred during the one hundred and sixteen years of activity being examined, as these are of specific interest to the accounting historian. TABLE 2 THE HONGKONG AND SHANGHAI BANKING CORPORATION Key Financial Indicators 1865 to 1980 Period of Activity 1865- 1876- 1901- 1926- 1951- 1865- 1875 1900 1925 1950 1980 1980 ( in millions of Hong Kong Dollars) Average annual operating cash flow 0.34 3.04 8. 18 57.70 2,191.93 581.76 Average annual profit before dividend 0.35 1.78 6.92 11.98 212.90 59.55 Average annual dividend paid 0.32 1.32 5.58 10.58 101.32 30.00 Point of time: 31 Dec 1865 1875 1900 1925 1950 1980 Earnings per share ($) 0.0021 0.0010 0.0131 0.0169 0.0212 1.2846 Dividends per share ($) 0.0016 0.0009 0.0081 0.0162 0.0192 0.6499 Assets per share ($) 0.1591 0.2057 0.6280 1.0450 5.1326 218.0447 Cash assets/current, deposit and other accounts (%) 14 16 30 14 31 22 FINANCIAL STATEMENTS The foundation: 1865 to 1975 The first eleven years of HSBC's life were exceedingly difficult due to the then world depression, and with the bank taking over banking arrangements previously undertaken by the merchant companies of Hong Kong. The bank's published financial statements during this period were simple summaries of figures, produced on a half-yearly basis. The balance sheet was typically a simple listing of assets in order of realisability and liabilities in order of priority of repayment. No classifications were made, and no corresponding period figures were given. The profit statement was merely a report of recommended appropriations of figures, the balance sheet having been prepared excluding these appropriations. There were no detailed notes to the accounts although the reserve fund was disclosed as a separate statement from 1867 onwards. Transfers to reserve appeared to be the method of accounting for the potential replacement of fixed assets rather than by means of formal depreciation policies. The auditor's report, signed by two individuals, was a simple statement that the finan. cial statements had been examined and found correct. It was therefore likely to have been a very limited audit, mainly concerned with checking the accuracy of the bookkeeping procedures and the arithmetic of the financial statements. The accounting, reporting and auditing can be summarised during this period as being typical of the times. The figures provide little direct insight into the financial progress and position of HSBC by 1875. Its profits before dividend for the year 1865 were $0.2 million and had fallen by 7% to $0.19 million in 1875, and earnings per share had decreased by 52% over the same period. Dividends per share, on the other hand, fell by 44% between 1865 and 1875 (despite an increase in dividend levels of 13%) and this reflects the difficult trading situation of the times. Total reported assets increased from $13.4 million in 1865 to $34.6 million in 1875 (158%). In terms of data per share, the equivalent assets increase for the period was 29% Thus, the levels of profits, dividends and assets appeared to have grown substantially in the first decade of activity, but, when expressed in 1980 equivalent per share terms, the increases were substantially less in the cases of profits and assets, and a decrease in the case of dividends. The cash flow situation more accurately reflects the problems of the bank during these times (as shown in Table 3). An operating cash flow of $3.7 million was generated over the eleven years (an annual average of $0.34 million) something less than the total reported profits before dividend of $3.8 million. It represented 35% of the total inflow of $10.6 million—the remainder comprising capital issues (47%) and note issues (18%). Remembering the need to invest to cover new note issues, investment (mainly of securities) constituted a low 25% of the total funds available; dividends represented a higher 33% (at $3.5 million, just less than the ten year operating cash flow) ; and cash assets were increased by the remaining 42%. However, by the end of 1875, the latter amounted to only 14% of the liability to depositors. All of these figures reflect the financial difficulties of the times which HSBC had to face—it depended on new capital for its long-term survival, and dividend levels had EASTERN BANKING TABLE 3 THE HONGKONG AND SHANGHAI I Cash Flow Analysis Operating Cash Flow Capital 35% 4' BANKING CORPORATION L865 to 1875 Issues Note Issues f% 18% Total 1 $10 [nf low 6m 1 Investments Divic 25% 3. 1 lends Increase in Cash 3% 42% Data source: Table 1; all percentages are of total inflow. to be sufficient to attract such capital. Much of the available cash was put in the form of realisable assets to provide cover for the increasing liability to depositors. The next twenty-five years: 1876 to 1900 The period from 1 January 1876 to 31 December 1900 represents the first major trading era of HSBC. Despite a continuing world depression and a slump in silver prices, the bank was aiding Chinese governmental finance and expanding its activities across the Pacific as well as into India and Europe. It therefore expanded its operations considerably although the resultant financial data continued to be reported in the very limited way of the previous decade. In fact, there were no major changes in reporting format or accounting procedures between 1876 and 1900. Operating cash flow totalled $76 million for the period—an annual average of $3.04 million and an annual increase of 794% over the previous period's average. This total flow constituted 79% of the total inflow of HSBC, the remainder coming from capital (10%) and notes (11%). 17% of the total inflow was spent on securities and properties (presumably covering new notes), with 34% being used for dividends (a similar proportion to the previous period). The remaining 49% increased cash or near cash assets. In other words, there was a considerable improvement on the cash flow situ. ation of the previous period. Much more cash had been generated from depositors and other account holders, and the net result was an improvement of $46.8 million in cash assets (the latter being 30% of the liabilities to depositors, etc at 31 December 1900). (These data are summarised in Table 4). FINANCIAL STATEMENTS TABLE 4 THE HONGKONG AND SHANGHAI BANKING CORPORATION Cash Flow Analysis 1876 to 1900 Operating Cash Flow 79% Capital Issues 10% Note Issues 11% Total Inflow $95.9m Investments 17% Dividends 34% Increase in Cash 49% Data source: Table 1; all percentages are of total inflow The profitability of the bank had also improved during the period. The average annual profit before dividend was $1.78 million, a 409% increase over the equivalent 1865 to 1975 figure. The adjusted earnings per share figure by 1900 had moved to $0.0131 from $0.0010 in 1875 (an increase of 1210%). Dividends per share had improved also over the period —by 800% to $0.0081 in 1900. The average annual dividend of the period was $1.32 million, having increased by 313% from the equivalent average of 1865 to 1875. The assets per share had expanded from $0.2057 in 1865 to $0.6280 (a 205% increase). In other words, during the twenty-five years covered in this analysis, cash flow, profits, dividends and assets had expanded in a considerable way (usually by several hundreds per cent and surely in excess of general price-level movements) and the relative frailties of the first ten years from 1865 to 1875 were nullified. By far the greatest improvement was in cash flow which in net terms resulted in a 1064% increase in cash assets. In the sense that profits had overstated the underlying cash flow situation between 1865 and 1875, it can be reason. ably said that profits between 1876 and 1900 understated it. Consolidating years: 1901 to 1925 The next period in the history of HSBC was one in which the efforts of the earlier periods were consolidated, particularly in China, despite trading uncertainty caused by the War Lord problem, the Japanese Russian War and the First World War. During the same period, several accounting and reporting changes took place. In 1911, acceptances and other contra liabilities appeared in the balance sheet for the first time, and in 1915 the statements were produced EASTERN BANKING on an annual basis (to 31 December) with all provisions and appropriations accounted for in the balance sheet. Figures were presented in both Pounds and Dollars in 1919 onwards and in 1922 the authorised share capital was disclosed. A year earlier in 1921, the auditor's report had a long-form content, stating that the balance sheet had been audited with head office records and branch returns; all necessary information and explanations had been received by the auditors, and that the balance sheet was full and fair, and gave a true and correct view of the bank's state of affairs. Thus, the audit was limited to the balance sheet, and the latter was described in undefined terms of fullness, fairness, truth and correctness. The published financial statements remained very sparse indeed in terms of disclosure, despite these assurances from the auditors (a situation not unusual at that time). A study of the available financial results for HSBC between the years 1901 and 1925 reveals considerable growth over the period as well as com. pared with the previous twenty-five year period. The average annual profit before dividend was $6.92 million, an increase of 289% over the equivalent datum for the previous period. Earnings per share had, by 1925, increased by only 29% when compared with a similar ratio for the year 1900. Thus, profitability, when adjusted by a 1980 share equivalent, did not rise as materially as the absolute profit figures indicate. Dividend data describe similar growth—the average annual dividend paid was $5.58 million, thus well covered by the average profit (1.24 times), and an increase of 323% compared with the previous period. But the dividend per share for 1925 had increased by only 100% from the 1900 equi. valent figure. Total assets of the bank grew, too, by 233% from $211.5 million in 1900 to $703.8 million by the end of 1925. The assets per share data for the same points of time were $0.6280 and $1.045—an increase of 66%. Therefore, the profit, dividend and asset increases of the period 1901 to 1925 inclusive reflect considerably less advance than was the case in the period 1876 to 1900 inclusive. In fact, when measured in 1980 share equivalent terms, the increases are small considering the twenty-five year length of period. This relative slowness in progress was presumably due to the war-influenced economic conditions of the time and is more accurately reflected in the cash flow results of HSBC for the period. The total operating cash flow for the twenty-five years was $204.4 million, representing 75% of the total inflow (13% came from new capital and the remaining 12% from notes issues). The average annual cash flow for the period was $8.18 million, an increase of 169% over the prior period equivalent. However, when outflows are examined, the picture changes. 40% of the total inflow of $273.1 million acquired necessary securities (for example, to cover the new notes), and premises and fittings. A very high 51% of inflow (68% of operating cash flow) was used to make dividend pay. ments of $139.5 million. This left funds available to produce an increase in total cash assets of $24.1 million—47% of such assets reported at the end of 1900. The cash assets available to cover depositors and other accounts dropped to 14% of the latter at the end of 1925 compared with 30% at the end of 1900. In other words, the cash generated from banking opera. tions did not appear sufficient to meet the need to pay for securities FINANCIAL STATEMENTS (other than to cover note issues), premises and dividends, and the receipt of new capital was inadequate to prevent the cash asset cover of immediate liabilities dropping drastically between 1900 and 1925. The main problem appeared to be the high level of dividend payments in relation to the total operational cash flow. (Table 5 summarises the foregoing situation.) TABLE 5 THE HONGKONG AND SHANGHAI I Cash Flow Analysis Operating Cash Flow Capital 75% l: 3ANKING CORPORATION 1901 to 1925 Issues Note Issues 3% 12% Total ] $27: inflow 1. lm 1 Investments Divic 40% 51 1 lends Increase in Cash % 9% Data source: Table 1; all percentages are of total inflow. The troubled years: 1926 to 1950 The years 1926 to 1950 presented further difficulties for HSBC. This was particularly the case between 1939 and 1946 due to the effects of the Second World War and the Japanese invasion and confiscation of Hong Kong. The published financial statements of the period reflect this. With most of the bank's assets in enemy hands in the early 1940s, it is not surpris. ing to see the disclosed profit statements, balance sheets and auditor's reports making full mention of the problem. For example, in the year of 1942, notes to the financial statements were produced for the first time, largely because of the war, and continued as an accounting practice there. after. In 1941, no financial statements were produced for a year in which the large majority of the bank's assets (and liabilities) fell into enemy hands. In 1942, a balance sheet only was produced from London, revealing that (at book value) 49% of HSBC assets suffered such a fate, and 58% of its liabilities were being similarly treated. The auditor's report (for the first time issued by a firm of professional accountants rather than by individuals) made a clear statement of the inevitable lack of verification of assets and liabilities and qualified the audit opinion on the financial statements accordingly. It was not until the financial statements of 1946 were produced that some semblance of accounting normality returned. EASTERN BANKING Other significant accounting changes during the period were limited. The financial statements continued throughout to be of a brief and simple kind. Summarised profit statements and balance sheets lacked detailed classification and explanation and had no comparative figures. In addition, although investments in subsidiary companies were introduced to the 1942 statements, it was not felt necessary to produce consolidated s tatements. The total operating cash flow of the period of $1,442.5 million con. stituted an increase of 606% over that of the previous twenty-five years. It also represented 67% of the total inflow, the remaining 33% coming in the form of notes issues (no new capital was issued). 55% of funds was utilised to acquire securities (much of which were to act as cover for the notes issues), premises and subsidiary investments. The security purchases formed 92% of all security investments made since 1865. Only 12% of the total inflow was used to meet dividend payments for the period of $264.6 million. In fact, dividends amounted to only 18% of operating cash flow; the high security purchases having diminished considerably the cash avail. ability for distribution. The average annual cash flow of the period was $5 7.7 million, an increase of 605% over the previous period's statistic, and this would have been sufficient to meet the average annual dividend payment of $10.58 million (an increase of only 90% from the previous period) but for the securities which were required to be purchased. Equally, the average annual profit figure of $11.98 million (73% increase) appears to have been sufficient to provide dividend cover. Generally speaking, however, the financial performance of HSBC was understandably static—earnings per share increased by only 25% between 1925 and 1950 (to $0.0212); dividends per share only increased by 19% during the same period (to $0.0192); although assets per share increased by 391% (largely in the form of securities and cash assets, and with the latter providing a 31% cover for immediate liabilities at the end of 1950, compared with 14% at the end of 1925). In other words, the financial position of the bank had improved considerably by 1950 although improvements in its profitability, distribution and cash flow during the previous twenty-five years had been at a lesser level. (Table 6 outlines the cash flow position.) The years of expansion: 1951 to 1980 Whereas each of the previous periods of analysis have indicated difficult economic and trading conditions for HSBC, the last period to the present date reflects the post Second World War boom which the bank has enjoyed by using the platform of financial position it had built by 1950. Indeed, it is only in the last thirty years that the bank has expanded to its present condition of size and importance. During the period a great many accounting and reporting changes took place in the published financial statements of HSBC, and the main ones are worthy of note. In 1951, comparative figures for the previous year were produced for the first time, and from 1955 onwards separate financial statements were disclosed for the main subsidiary companies. Only in 1959, FINANCIAL STATEMENTS TABLE 6 THE HONGKONG AND SHANGHAI BANKING CORPORATION Operating Cash Flow 67% Cash Flow Analysis 1926 to 1950 Capital Issues -% I- Inve s tments 55% Total Inflow $2,152.9m Dividends 12% Note Issues 33% Increase in Cash 33% Data Source: Table 1; all percentages are of total inflow. long after a similar change in other countries, was the practice of produc. ing consolidated financial statements introduced. In the same year, a vertical profit statement appeared, as did the curious (and unexplained) practice of providing two audit opinions--a 'true and correct' one for the holding company statements, and a 'true and fair' one for the consolidated statements (the subtle difference between 'correctness' and 'fairness' could have been confusing for the shareholder recipient). This practice continued until 1967 when a 'true and fair' opinion was given on the hold. ing company statements, and the consolidated statements were said to comply with the provisions of the Companies Acts. In 1975, the 'true and fair' opinion was given to cover all published financial statements. Finally, in relation to subsidiary companies, their reserves were included with holding company reserves (instead of being placed in undisclosed inner reserves) for the first time in 1966; and in 1971 onwards, subsidiary company invest. ments were revalued on the basis of their net asset values, thus continu. ously updating their consolidated reserves for reporting purposes. (Inner reserves were not and are not disclosed separately. Instead, they form part of the general liability heading including deposit and current accounts, and provisions.) Despite these changes, however, the published financial statements of HSBC remain relatively stark listings of assets and liabilities, supported by considerably more explanation and analysis of detail (wholly in line with generally accepted banking practice). They continue to be subject to inner reserve movements of an undisclosed nature and are relatively typical of all banks' financial statements. Thus, they required as much care to be applied in analysis in 1980 as was the case in 1865. The financial results of HSBC over the last thirty years have been spectacular by any standards. Annual profits before dividends increased EASTERN BANKING from $14.2 million in 1950 to $1,431.0 million, an increase of 998% (far in excess of general price-level changes). Average annual profits for the period increased by 1,559% to $215.67 million. Earnings per share were $0.0212 in 1950 but $1.2846 in 1980 (an increase of 5,962%). Dividends, too, grew out of all proportion--the average annual payment for the period was up by 858% over the previous period at $101.32 million, and the divi. dends per share increased by 3,285% between 1950 and 1980. The cash situa. tion of the bank mirrored this 'accounting' success--the total operating cash flow for the thirty years totalled $65,757.9 million (up by 4,459% on the previous period) and the annual average was $2,191.93 million (up by 3,699%). This huge influx of cash was more than adequate to cover the acquisition of securities (27%), premises and fittings (4%) and sub. sidiaries (4%). Total dividend payments of $3,039.5 million represented only 4% of the total inflow and only 5% of operating cash flow (in both cases, considerably below anything seen in earlier periods). 90% of the aggregate inflow of funds came from operations, 9% from notes, and the remainder from capital issues. The increase in cash assets of $46,810.4 million comprised a 5,940% increase in them, and provided at the end of 1980 a 22% cover for immediate liabilities (31% at the end of 1950). The growth of total assets over the period is reflected in the assets per share statistics—in 1950 it was $5.1326 and by 1980 it was $218.0447, an increase of 4,148%. (Cash flow developments are summarised in Table 7.) TABLE 7 THE HONGKONG AND SHANGHAI I Cash Flow Analysis Operating Cash Flow Capital 90% 1/ l_ BANKING CORPORATION L951 to 1980 Issues Note Issues 9% 1 Total ] $72, li [nf low 35.7m \ Investments Divic 32% 4) 1 lends Increase in Cash 64% Data source: Table 1; all percentages are of total inflow. In summary, therefore, the last thirty years of HSBC's history repre. sent the point at which it has 'taken off' and grown at an almost geometric rate. This is reflected in all its figures for profits, dividends, cash flow and assets, and of particular interest is the generation of cash which has been more than sufficient to meet the needs of management, shareholders FINANCIAL STATEMENTS and depositors. Overall summary Before closing this analysis of the financial reports of HSBC, it is useful to examine the overall position as reflected in the total columns of Tables 1 and 2, and in the summary Table 8. In total over the one hundred and sixteen years concerned, $75,318.2 million of inflow has been generated— 90% from banking operations, 9.8% from notes, and 0.2% from capital. 24% has been used to buy securities, 4% to purchase property and fittings, and 4% to acquire subsidiary and associated companies. 5% has met dividend payments, and 63% has increased cash assets. The average annual cash flow from operations over the entire one hundred and sixteen years has been $581.76 million, whereas the annual average profit before dividend has been $59.55 million. The average annual dividend payment was $30.0 million. Thus, overall, operating cash flow has vastly exceeded profits, and divi. dends have been more than adequately covered by both cash flow and profits. TABLE 8 THE HONGKONG AND SHANGHAI 1 Cash Flow Analysis Operating Cash Flow Capital 90% -5 BANKING CORPORATION 1865 to 1900 Issues Note Issues : io% Total ] $75,: inflow 318.2 1 Investments Divic 32% 5? lends Increase in Cash 63% Data source: Table 1; all percentages are of total inflow. The period from 1951 to 1980 has undoubtedly distorted these data. The extraordinary growth in banking activity and related financial results is to be witnessed in the following bare statistics relating to HSBC's cash flow--in the years 1951 to 1980 inclusive, the undernoted proportions of the one hundred and sixteen years totals were achieved: 97% of operating cash flow, 93% of securities purchased, 98% of property and fittings pur. chased, nearly 100% of subsidiary investments, 87% of dividends paid, 89% of new capital raised, 90% of new note issues, and 98% of cash assets. The EASTERN BANKING early years reflect merely the gradually evolving platform on which this financial success has been built. Interestingly, despite the lack of detail and disclosure in all the financial reports of the bank since 1865, this detailed analysis of cash flow and related results has been possible, and reflects well on past and present managers of HSBC. References R S Clair, 'Evolution of Corporate Reports', Journal of Accountancy (LXXIX, 1945), pp. 39-51. J R Edwards, Company Legislation and Changing Patterns of Disclosure in British Company Accounts: 1900-1940 (ICAEW, 1975). N K Hill, 'Accountancy Developments in a Public Utility Company in the Nineteenth Century', Accounting Research (VI, 1955), pp. 382-90. P Hodgkins, 'Unilever—The First 21 Years', Coopers' Journal (Sept 1975), pp. 15-19. T A Lee, 'Company Financial Statements: An Essay in Business History: 1830-1950,' in S Marriner, ed. Business and Businessmen (University of Liverpool Press, 1977), pp. 235-62. T A Lee, 'Cash Flow Accounting and Corporate Financial Reporting', in M Bromwich and A Hopwood, eds. Essays in British Accounting Research (Pitman, 1981), pp. 63-81. 6. COMPRADORES OF THE HONGKONG BANK by Carl T Smith The position of compradore in a foreign firm in China was an effort to come to terms with the language and business practices of a different culture. The compradore was responsible for the hiring, dismissal and conduct of all Chinese staff. He negotiated and secured the business of the firm with Chinese customers. He was expected to be loyal, trustworthy, honest and a man of financial standing. The first compradores were recruited from the areas surrounding Macao and Canton. This was the area for the earliest contacts between foreign traders and the Chinese. The Chinese in the neighbourhood of Macao had had several centuries of contact with the Portuguese before the merchants of other European nations set up their factories at Canton. There was a fundamental difference between western business practice and that of the east. The west relied heavily upon a signature on a docu. ment. If a contract between parties was breached, the matter was submitted for legal judgment. Behind a business transaction was the impersonal objectivity of the law. The Chinese system relied on delicate inter. personal relations, arbitration and group responsibility. As an assistant of the compradore was the shroff (a borrowed term from India—as compradore is a word from the Portuguese). The complexity of the different modes of exchange on the China coast—the tael and variously minted silver dollars—called for a specialist to evaluate it and pass on its worth. The compradore was ultimately responsible for "weight, touch, validity and quality of all bullion, sycee, gold, silver and other metals. The Ideal Compradore The business of a financial institution is somewhat different from a trad. ing firm. For both, however, the qualities looked for in a compradore would be similar. The ideal compradore was a man of substance with exten. sive business and social connections in the Chinese community. He must have a reputation of integrity. He must be able to provide safe security and reliable guarantors. In the course of his duties, he had under his immediate control large sums of money and was able to grant large facili. ties to those he guaranteed. While the type of transactions between a bank and a hong (trading firm) were somewhat different, it was common for a man to move from a position as compradore of a firm to that of a bank compradore. It was most important that the compradore have a full knowledge of the ^Archives of the Bank: Terms of compradore agreement, 4 Nov 1907, Kwok Chu Ching, Tientsin. EASTERN BANKING Chinese business community, the financial standing of the various firms, the state of the market, the relationship between local offices and their overseas branches and correspondents and the personal financial resources of the partners in the trading hongs. Duties as Set Forth in Compradore Agreements The Bank Archives has a file of compradore agreements. There is only one for a compradore of the Main Office. The others are for compradores in China, Japan, Malaya and Singapore. The wording and terms vary somewhat in the several agreements, but the general tenor and articles are the same. The following is an abstract of the more significant items in an agreement dated 23 September 1920: (1) Remuneration $150 per month and such commissions as time to time agreed on. (2) Termination of service may be on three months' notice, or without notice for misconduct. The compradore will give three months' notice. (3) The compradore will take charge of and be responsible for all monies, securities for money, treasure and other things and be responsible for safe custody and for touch of all gold and silver, etc. Expressly agreed that compradore's chop, signature or initials on any Native Bank note, order, bill, draft security or contract, the validity or performance of which is guaranteed by him shall be conclusive as evidence against the compradore of his liability as guarantor. (4) The compradore shall account to the Chief Manager and if required deliver all monies, etc, which ought to be in his possession. (5) The compradore shall employ and retain all Chinese staff, Chinese shroffs, assistants, clerks, office boys, coolies. He shall be responsible for their efficiency and honesty and for all losses through carelessness, negligence or dishonesty. (6) The compradore shall guarantee all business transactions, sales, purchases and contracts entered into by the Corporation with Chinese for cash or credit. The compradore shall be answerable for the sol. vency and reliability of all Chinese whose transactions shall be introduced by him to the Bank. He shall make good all losses. (7) The compradore shall produce on demand all accounts and any documents relating to the affairs of the Bank. (8) The compradore shall not embezzle. (9) The compradore shall perform all such acts and matters as are accord. ing to local custom and usage usually performed by Bank compradores. He shall keep the secrets of the Bank and promote its interests. (10) The Compradore shall devote his whole time to the Bank and is not to be concerned in any other business or any trade or concern without the consent of the Chief Manager in writing. (11) (Agreement with Compradores at Hankow.) Monthly salary of 175 Taels Hankow currency. Also to be paid commission at rate of 1/8 per cent of all Telegraphic Transfers and on all Bills of the Bank which shall be sold by him to Chinese under the Bank's instruction. The COMPRADORES compradore shall not receive any commission, deduction save as in the ordinary course of banking business which are recognised as usual or proper. Comments on Certain Terms of the Agreement The compradore was responsible for the Chinese staff of the Bank. He hired them, he could dismiss them; he paid them and he was financially respon. sible for any shortages caused by them. This staff was largely recruited by personal recommendation or by personal acquaintance. In this, family ties were very important. There was always a reservoir of candidates for a position in the home village of the compradore or in that of his wife, mother, brother-in-law, etc. The compradore system adapted itself to the clan responsibilities which formed such an important part of the traditional Chinese social system. If a member of a clan secured the position, he felt the responsi. bility to provide jobs for his relatives. If the employees under him were from his familial connections, the compradore should have been aware of their character and abilities. It also gave the compradore added control over such of those of his staff who were his relatives. This natural relation of clan responsibility with the compradore system was of mutual benefit. The introduction of family into the firm might extend to every position in the staff. The higher places would be given to nearer connections, the further removed could be placed in more menial positions. In the 1928 picture of the Compradore Staff there are thirten members of the Lau family. This was fourteen years after a Lau had been Compra. dore. The family structure in the Bank he and his predecessor, also a Lau, had built up still dominated the staff. This does not take into account other connections of the Lau family who do not bear the surname. Wei Long Shan had been an assistant compradore not long before the turn of the cen. tury. In 1928 there were five members of the staff with the surname Wei. The compradore received a monthly salary. This was not large in comparison with his financial responsibility to the Bank. In addition, however, he received a commission on the business which was under his con. trol. This was the main source of his income from the Bank. In 1885 the minutes of the Bank state that the Shanghai Compradore had not received a salary for over ten years and "that his services to the bank had been of the most important, especially during the late money crisis in Shanghai, when we escaped loss through his foresight and faithfulness to the bank's interest." It was agreed that a gift of $10,000 be made to him. It was proposed in 1893 that the same compradore's salary be in. creased by $50 to a total of $200 per month inasmuch as his commission had been falling off badly. The Hong Kong Compradore was receiving $125 a month in 1906. He found himself in financial trouble and asked that it be raised to $625, indeed a substantial increase. The Board agreed. The above evidence suggests that usually the salary was not regarded as of great significance. It was the commissions and other benefits which were the important part of the EASTERN BANKING compradore's income. The compradore was privy to certain secrets and had ready access to information about Chinese business activities. He could use this information for his own personal business activity. Often these outside activities were conducted in such a manner that the Bank had no knowledge of them. The attitude of the Bank toward its compradore's engaging in outside business on his own changed. There is definite evidence that the first compradore had such outside interest and presumably with the Bank's know. ledge. The next two compradores defaulted and this seems to have changed the Bank's position regarding its compradores doing business on their own. The third compradore had extended credit to firms in which he had a stake. When the compradore accepted their bills, he was aware that they did not have sufficient backing and were not good risks. The same compra. dore had shares in two native banks. This was hidden by use of a "tong" name. Such a name was usually used when several people, usually relatives, wished to invest as a group, though it might also be assumed by an indi. vidual, particularly if he didn't want his identity to be known generally. The connection of the compradore with the banks was revealed in the bank. ruptcy proceedings which followed their failure. At his own bankruptcy the compradore denied any connection with the banks. The following is extracted from the examination of Lau Wai Chuen during his bankruptcy hearing: Witness was never a partner in the Lai Hing Bank and never had any shares or interest in it. He knew that Ma Fa Ting had sworn that he was a partner in the Lai Hing Bank because he read the newspapers. Wakeman (the Examiner): Was that true? Witness: Well, he said so, but I was not a partner. ... As regards the Lai Fung firm, they sold goods to him; as did the Wing Sing Loong, but he was never a partner in either firm. Any statement that he was a partner in these firms or in the Lai Hing Bank were- untrue. He never used the name of Lau Mo Fun Tong, and held no shares in the Bank in that name. He knew a man of that name by sight, but did not remember if he had ever spoken to him. He knew Wong Sau Po, who was the manager of the Lai Fung firm; he used to buy goods from him, but if he said he was his partner, he said what was untrue.^ Considering the degree of duplicity connected with the complicated dealings which precipitated the compradore's bankruptcy, his testimony does not have, to me, the clear ring of truth. It was not easy to cut off the compradore's interest in other busi. ness. The family system worked against it. The compradore might share in certain family funds which were invested in various ways. His brothers, uncles, cousins, in-laws, and possibly father and sons, would have diversi. fied business interests. A compradore with wealthy family connections did not stand in financial isolation. ^Hong Kong Telegraph, 22 March 1906. COMPRADORES Security It was necessary for the compradore to provide sufficient security to protect the Bank against any misuse of its funds. A cash sum would be deposited with the Bank. This was supplemented by a lien against property, either owned by the compradore himself or a guarantor. It was not difficult to find a guarantor, because it would have been of advantage to be on close terms with the compradore as the latter had the facility to share information and offer special terms. The amount of security for the first compradore may have been set at a figure commensurate with the amount of business the Bank expected when it was first established, but by the time of his death in 1877, it was felt to be inadequate. The Board minuted on 23 February 1877 that "on the return of the late compradore's son the matter of securities is to be gone into and placed upon a satisfactory footing." The first defalcation of a compradore of the Bank may have been in 1889. Until that time arrangements appear to have been rather loose. A Board Minute of 12 December 1889 states "Following defalcation by bank's compradore at Saigon decided to obtain security from all the compradores. The Yokohama compradore was still unsecured while at the same time he was the guarantor for the Kobe compradore." In 1892 the Hong Kong Office Compradore absconded. In considering security terms for his successor it was thought that $300,000 security was insufficient—perhaps the amount provided by the late compradore. It was agreed that the new compradore give security for $500,000. Of this $50,000 cash was deposited on the day he assumed duties and an additional $50,000 the following week. By 1906 his security had been increased to $1,000,000. In addition to cover certain transactions he had placed title deeds for property in Canton--not his own--worth $500,000 to $600,000. The Bank's lien on this property was not complete and it was therefore a doubtful asset. It was at this time that this compradore had to declare bankruptcy. His security did not cover the amount he owed the Bank. After two successive compradores had ended their service in disgrace, applicants to succeed were few. The candidate considered the most suitable was only able to offer security to the extent of $300,000. This was consi. dered insufficient, but as there was no other person able to put up more security, the Bank appointed him. The agreement was that he was to put up $50,000 in cash immediately. He could offer $113,000 worth of property on mortgage. He was given six months to secure further security worth $200,000. This compradore left suddenly in 1912 without notice and with his affairs in disorder. He was succeeded by the adopted son of Hong Kong's wealthiest resi. dent. The father put up property to the amount of $360,000 as security. When Tong Tsung Po became joint compradore with Ho Wing in 1927, Sir Robert Ho Tung, the adopted father of Ho Wing, was security for the two compra. dores. Six years later Ho Tung informed the Bank he would no longer stand security. At the same time Mr Tong resigned. It was then decided that Ho Wing would be sole compradore without any surety whatsoever. Another arrangement was substituted. The Bank agreed to pay Ho Wing $1,000 a month, the amount he received on his first appointment in 1912, but all EASTERN BANKING commissions, instead of being paid to the compradore, would be paid into a special account to be known as "Ho Wing's Surety Account" until such time as this account reached $300,000. As long as Ho Wing remained compradore the account was to be maintained at $300,000; from it Ho Wing would receive interest at the current rate. The Compradore and the English language One of the essential requirements for the compradore was an ability to com. municate in two languages. I have not discovered where the first compradore learned his English. His son succeeded him. They were natives of Whampoa, the port on the Pearl River near Canton for European shipping, an area with a long association with foreigners. Pidgin English would have been in use at the port. In Canton, and perhaps at Whampoa, schools were set up by Chinese who had learned English in mission schools or overseas to teach ambitious young men English, particularly business English. Such schools were not of a very high standard, but they did provide basic instruction. The son of the first compradore may have gone to a missionary school or to Hong Kong Gov. ernment Central School (now Queen's College). The third compradore learned English in Vancouver, British Columbia, Canada. His family must have had business connections there and so sent him off to gain experience. He may have attended Chinese Sunday School classes conducted by the Churches to teach English to Chinese immigrants in the hope that it would result in their acceptance of Christianity. The other compradores of the Bank were probably educated in Hong Kong. Ho Wing and T P Tong were students of Queen's College and Peter Lee, the last compradore, received an English language education at King's Col. lege, Hong Kong. The Compradore: A Man Looking in Two Directions The compradore faced in two directions. He was a leader in the Chinese community in Hong Kong. It was a community that was organised around busi. ness. It did not have a literary tradition and few scholars made Hong Kong their home in the nineteenth century. The Chinese community in Hong Kong did wish to embody the traditional Chinese values and virtues. The Commit. tee of the Tung Wah Hospital (opened 1870) were the "mandarins" of the Hong Kong Chinese. The first compradore of the Bank was an organising Director of this important institution. On the other side the compradore was working for a foreign business. The organisation and practices of a foreign bank were different from those of a native bank. The compradore helped to promote the westernization of China. He was a part of the foreign imperialistic thrust into China. His capital was important in promoting railways, mining, industries and utili. ties in China. The first two compradores of the Bank had an interest in Chinese language newspapers published in Hong Kong. This type of journal. ism was inspired by western models. One of its purposes was to acquaint COMPRADORES readers with a wider world than the Middle Kingdom. The compradore was in between in several senses: the more effective the process of changing traditional China, the less he would be needed as a go-between. Modification of the System As the Bank expanded and business conditions altered, changes were made in the compradore system. These changes were most pronounced after the Second World War. Before the war, entries were still made in ledgers by using a Chinese brush. The abacus was still used. After the war, pen and ink and adding machines were used. As the staff was increasingly able to speak English, the need to have them in a special section became less. Originally one of the chief reasons for the compradore system was the barrier created by different languages. Once this barrier began to disappear, the system began to lose its reason for existence. The Jury lists provide evidence of the increasing English language ability of the compradore staff. In 1941 three of the staff were on the list, the head compradore, the second compradore and the first shroff. Ten years later there were ten on the list. As years passed, the gap between Chinese and western business methods narrowed. On both sides there was a better understanding of the two ways. There was less need for specialised knowledge of Chinese affairs. In time the Bank itself took over the payment of staff wages, thus removing it as a responsibility of the compradore. There had been complaints against the compradore system since the 1880s. Among the foreign traders there was a desire to eliminate it as much as possible. This meant that adjustments were always being made to the system. The Bank, however, while making changes, maintained the system for some time after many trading firms had abolished it. The title was abolished in 1960. The Manager circulated the following memo: "Peter Lee will be known as the Chinese Manager with effect from today [23 Nov 1960]. The term 'compradore' is regarded as an anachronism and will no longer be used." Advantages and Disadvantages From the compradore's standpoint, the system had many benefits. It allowed him to be ruler of his own kingdom. He had under him a staff which he could hire and dismiss. He had access to large sums of money which he could manage at his discretion. He was the centre for the receiving and transmission of much business information, some of it of a private nature. He was able to accumulate a large personal fortune. Respected as a pro. minent figure in the Chinese community, the Bank compradore was regarded as the leading compradore in Hong Kong. The advantages were far greater than any disadvantages. It is true that the compradore was open to temptation to misuse the large sums he had EASTERN BANKING under his control. By bending the rules he could use them to his own advantage. If he went undetected, for him it was all gain. If he became too deeply involved and could not extricate himself, he faced ruin and disgrace. The system could be of advantage to the Bank. If they had a good com- pradore, the Chinese side of the business would be well-managed. It would be conducted in a manner which few non-Chinese could have done. The Chi. nese compradore knew Chinese customs and practices. He was accepted by his compatriots in a different way than the foreigner. The compradore could be counted on to be more permanent than a European employee—his home was China and not some far distant place. The disadvantage to the Bank was that it had to surrender control over many important matters connected with the Chinese side of its business. It had to depend on its compradore's ability and integrity to promote the Bank's interest. In general the system worked well. In several instances it broke down, and in one case it involved the Bank in a substantial loss. The First Compradore 1865-1877: Lo Pak Sheung (al) Lo Chung Kong (al) Lo Yew Kee (al) Lo U Kee Lo Pak Sheung, the first compradore, was from the port of Whampoa on the Pearl River, not far from Canton. This placed him somewhat out of the usual Hong Kong compradore pattern, as the majority of them were from the District of Heung Shan (now Chung Shan) near Macao. At the time he became compradore he must have been well established in Hong Kong, otherwise he would not have had the business connections needed to be a successful bank compradore. There are no records to show what agreement he had with the Bank. He had interests in a number of firms in Hong Kong and perhaps else. where. Among these was a native bank, a gold dealer's shop, a trading firm and a ship chartering 'office. (See abstract of Will below.) In 1878 a court case raised questions whether he had used his position as compradore in favour of a firm he had an interest in. The Bank sued the manager of a Hong Kong trading firm to recover $24,455.80 which it claimed to be due to cover a dishonoured bill issued by a Hong Kong firm on one in Shanghai. The man sued by the Bank had been guarantor of the bill. The issuing firm was in bankruptcy. The Bank held promissory notes for $25,000 to cover certain bills. The guarantor being sued contended the notes held by the Bank were to secure the bill he had endorsed; the Bank, however, contended they were to secure the bills of another firm. That bill had been honoured and the notes were returned to the depositor. The Bank com. pradore was a partner in the firm to whom the security had been returned. The defendant charged that the compradore had wrongly diverted the security from the bill he had guaranteed to the bill of the firm in which the com. pradore had a share. The newspaper account reporting the court case remarked, "his conduct was to a certain degree under investigation."-^ The -^Daily Press, 10, 13 Sept 1878. COMPRADORES Bank, however, was awarded judgement and the compradore was presumably cleared of suspicion. The case indicates that private interests might tempt a compradore to use his position to his own advantage. Lo Pak Sheung died at Canton 5 February 1877. His Will is in the Public Records Office of Hong Kong, Probate File 1075 of 1877 (4/349). The following is an abstract of the document: Lo Pak Sheung otherwise Lo Chun Kong otherwise Lo U Kee, de. ceased. Being ill and uncertain of life. Business of Hang On Tai shop in Hong Kong; shares in Shi On shop, value 5,000 Taels; shares in Shang Cheong shop, 2,500 Taels; shares in Sheong Tai shop, value $15,000; shares Wing Tung Hing $10,000; one share in Hong Kong Fire Insurance Company; two shares China Traders Insurance Co; five shares in China Insurance Co; one share in the Universal Circulating Herald [a Chinese language newspaper published in Hong Kong] ... to my elder son Cho, my grandson Kan Ho, my third son Hok Pang, my fourth son Korn Po, my fifth son Ping Sak, five persons. Execution of all business to hands of Hok Pang my third son. Witnesses: Lee Man Koong, Loo Pew. (signed) Father Pak Sheong. 21 day 2 moon 2 year of Kwong Shui. 3 Feb 1877. Translator Chan Tai Kwong. The testator's shares in insurance companies and a Chinese newspaper are signs of one who has moved away from strictly Chinese business enter. prises. On the other hand, he still had large interests in traditional Chinese business activities. The Second Compradore 1877-1892: Lo Hok Pang (al) Lo Sau Ko Lo Hok Pang succeeded to the position of his father as compradore. This was in accord with customary practice. If a compradore's service had been satisfactory, his son or another close relative took his place on his retirement or death. This custom created compradore dynasties. In Hong Kong there were a number of families whose several generations were compra- dores in the same firm. Like his father, Hok Pang had interests outside the Bank. For a period these were managed on his behalf by U Lai Un, who not only acted in this capacity, but in a court case was described as "guiding philosopher and friend" in all general matters to Lo Hok Pang. The friend had been educated in Hong Kong Government Central School (Queen's College). In 1873 he received the school prize as best English speaker and writer and in the next year he was "best scholar." In 1885 Lo Hok Pang invested $30,000 to start a Chinese newspaper in Hong Kong entitled the Hong Kong Uet Po (The Hong Kong-Canton News). Through it a literary relative, Fung Hau Nin, would be enable to publish his essays. Hok Pang's friend U Lai Un was placed in charge of the paper. Within a year the capital invested had gone, and the paper was sold to Lo Ping Chi for $3,000. Under his patronage the paper continued until 1889. EASTERN BANKING At this time U Lai Un was becoming interested in the reformation of the Chinese government. He was of a new generation of Chinese who had begun to look at their native country with critical eyes, having been influenced by foreign ideas and institutions.^ Influenced by U Lai Un, Lo Hok Pang must have shared these views. Lo Hok Pang became involved in the fortunes and misfortunes of the Oriental Sugar Refinery in 1878 and 1879. From its organization in 1878, the venture was in difficulty. Lo Hok Pang acquired title to the property and plant in Wanchai under a mortgage for $34,329.62 at 12% interest. In May 1878, Ng Chock Chue, compradore to a German firm, Weiler and Company, and manager of one of Lo Hok Pang's Chinese trading firms, became mortgagee to the promoters of the refinery. The following month he transferred the mortgage to Lo. He entered into an agreement for sale of the property to Pang A Yim, lessee of the Hong Kong Hotel and a man who "had sugar on the brain", or so he was described by a barrister. A $20,000 down payment was made and the remaining $150,000 was due when the sale was completed. This was all subject to the mortgagee being able to exercise power of sale under the mortgage. Lo Hok Pang had previously entered into an agreement with Jardine, Matheson and Company for working the plant. Jardine's was already proprietor of the China Sugar Refinery at East Point. The Oriental Refin. ery stopped production at the end of 1878. Lo Hok Pang then pressed Pang A Yim to complete his agreement for sale and purchase. Pang endeavoured to enlist subscribers to underwrite his purchase, but the affairs of the Company were in such a complicated state that investors did not wish to risk their money. In February 1879, Lo Hok Pang had the property put up at auction, but there were no bidders. In June, Lo sued Pang "for the specific performance of a contract." A cross action was brought by Pang for the refund of the $20,000 deposit he had made and for another $20,000 as damages alleged to have been caused by the failure of Lo Hok Pang to carry out the contract. During the trial the Counsel for the defendant described the two parties in the case as "both very respectable men." The presiding judge remarked, "They are in fact super-respectable insofar as they both have plenty of money." After hearing the evidence the Chief Justice said it was a very diffi. cult case. He could make a good judgement for either side, but there would be holes in each. This would only lead to further litigation. He strongly recommended an amicable settlement. "It would be well if instead of indulging in sugar-on-the-brain ideas, they had some sugar in their hands, and went to work as friends, helping one another to make money in the Colony." He was "sorry to see a number of men who had been good friends, working together and helping one another in their ventures here, giving way to angry litigation".^ In April 1880, Lo Hok Pang brought suit against various sub-mortgagees of the plant and property of the Oriental Sugar Refinery to foreclose on ^See Jung-fang Tsai, "The Predicament of the Compradore Idealists, He Qi Ho (Ho Kai) (1859-1914) and Hu Liyuan (1847-1916)," Modern China, Vol 7 No 2, April 1981, pp. 191-225. ^China Mail, 7 June 1879. COMPRADORES equity of redemption. Several months later he sold the refinery for $200,000 to the China Sugar Refinery, a Jardine enterprise. The compradore may have had the practice of using his position at the Bank for the benefit of his own businesses. He began extending credit to firms on bills of exchange which were not backed by goods of sufficient value to cover the bill. In time knowledge of this came to the attention of the Bank. They began to check more carefully and exercise more caution in accepting the credit authorised by the compradore. In this way the Bank got in some of the credit which was at risk but not in a sufficient amount to save the compradore from his creditors. They kept pressing him and finally he absconded. He left in March 1892 owing the Bank $1,292,000. In addition to the loss, the Hong Kong Office placed the London Office in an invidious position. On first check the Bank figured the loss to be about 6 lakhs ($600,000) and so they informed London. On closer scrutiny, the amount appeared to be something around 12 lakhs ($1,200,000), but Hong Kong neglected to notify London by wire of the increased amount. London learned of it only when sea mail arrived some weeks later. In the mean. time, London had been informing inquirers that the loss was not excessive and was well covered by security. To compound the embarrassment of the Bank, the head shroff, a nephew of the absconded compradore, left, taking with him $12,000. The Hong Kong Telegraph reported the event in a light manner: A smart young Chinaman named Lo Yuk (al) Lo Wan Man, Chief Shroff and collector at the head office of the Hong Kong and Shanghai Bank—a quiet, inoffensive sort of youth whose suave manner and fluent speech at once marked him as a man of letters and good breeding, and so he was, for it is now known that he was none other than a nephew of that 'don' in select Chinese circles who under the name of Lo Hok Pang swayed the sceptre of authority in the Compradore's department of 'Lucky' Jackson's palatial money shop on Queen's Road Central, and in addition had to do with one or two Chinese 'banks' down Bonham Strand way. Inspector Quincy heard, 'the dandy shroff' had gone to Canton on the Powan on Thursday evening.^ Within less than a year after leaving Hong Kong, Lo Hok Pang, the compradore, died. At the time he was at a monastery in the Lo To Mountains near Canton. He left a widow and six children at Whampoa. The Third Compradore 1892-1906: Lau Wai Chun (al) Lau Sai (al) Lau Kwok Cheung The next compradore, Lau Wai Chun, was from the Heung Shan (now Chung Shan) District. His village was Tsing Shan, a town near Macao. There was another Lau family at Ku Hok, a village not far distant. The two families probably had a common ancestor. A Ku Hok Lau was a compradore for Anton, ^Hong Kong Telegraph, 28 May 1892. EASTERN BANKING Williams and Company in Hong Kong during the late 1840s and the 1850s. Another Lau, this one from Tsing Shan, was a compradore for E D Sassoon and Company in the 1880s. The family at Tsing Shan had business connections in Hong Kong and elsewhere. Lau Wai Chun was sent to Vancouver, British Columbia, as a youth to gain overseas business experience. By the time he became the Bank's compradore, he was well-established in Hong Kong. As security he deposited $100,000 cash and provided an addi. tional property on mortgage valued at $279,500. The widow of Choy Chan, a wealthy merchant of Hong Kong and Macao, later placed on mortgage property valued at $450,000. In 1906 when Lau Wai Chun became bankrupt, his secur. ity amounted to $1,000,000. Lau Wai Chun became a member of a syndicate which held the Wei Sing lottery monopoly from the Kwantung Provincial Government. The lottery was based on picking the successful candidates in the Chinese Government liter. ary examinations. When the examination content was changed in 1905 in an attempt to modernise it, the public lost confidence in their ability to pick successful winners, and sales of tickets dropped drastically. With the monopoly in such an unstable state, the Kwangtung authorities closed it. As the threats to its financial viability and its eventual extinction developed, the syndicate found itself forced to find large sums to prop itself up. It raised funds by manipulating bills of exchange drawn on overseas Chinese firms and sold to the banks in Hong Kong. The Hong Kong Bank compradore, as a member of the syndicate, was a party to these fraudu. lent transactions. The lottery syndicate was formed under the name Wang Fung Company. In 1890, Lau Hok Shun, a native of Ku Hok, became the successful bidder for the Wei Sing monopoly. He was a large capitalist as well as a literary graduate. He had passed the Kui Yan examination in 1879 and the Tsun Shi in 1896. In 1895, Lau Hok Shun organised the Wang Fung Company, composed of eight shareholders, to conduct the business of the lottery while he was absent in the north. The company was capitalised at 720,000 Taels divided into twenty shares. Lau Hok Shun held ten, three Chief Managers each had two shares and four Assistant Managers one each. One of the managers was from Canton; two were from Macao, one of whom was Lo Kau, who at various times held the opium and gambling monopolies in Macao; and four were resi. dent in Hong Kong. The Hong Kong members were Lau Wai Chun, compradore of the Hongkong and Shanghai Bank; Wei Yuk, compradore of the Mercantile Bank and member of the Legislative Council of Hong Kong; his brother Wei Long Shan, assistant compradore of the Hongkong Bank from 1885 to 1895 and then compradore of the Eastern Extension Telegraph Company; and Ma Fat Ting, manager of several native banks and export firms. When the Wang Fung Company found itself pressed for funds, it used bills of exchange on Chinese trading firms in Japan and Southeast Asia to raise money. Ma Fat Ting, one of the partners, set up a native bank which was a shadow organization to secure the bills of exchange of Hong Kong firms which he and the other partners of the Wang Fung Company controlled. He also took over an established native bank and began to manipulate it to secure funds for the troubled Wang Fung Company. In collusion with the COMPRADORES Bank compradore, the scheme was able to raise considerable funds. Several Hong Kong banks bought these bills of exchange, but when they were offered for collection overseas, they were dishonoured. The firms which had issued them in Hong Kong could not pay the security they had put up for them and were forced into bankruptcy. This eventually brought the whole scheme into the open. The compradore admitted to the Bank in January 1905 that he was being pressed by creditors and asked for his salary to be increased from $125 a month to $625. This was done. The situation of the compradore was placed before the Bank's Board in March 1905. The Chairman stated that he was being pressed for payment under some guarantees he had given outside the Bank's business. The Manager had been attempting to help him over his difficulties but the point had been reached where the compradore's liability to the Bank equalled his securities. A sub-committee was appointed to confer with the compradore and reported back in May. The compradore's security was valued at $1,000,000. In addition he had deposited title deeds to property owned by Lau Hok Sun, chief shareholder in the lottery syndicate, to the value of $500,000 to $600,000. This property, however, was in Canton and therefore outside Hong Kong legal jurisdiction. The liabilities of the compradore to the Bank were estimated at $1,150,000. Outside the Bank he owed creditors $221,000. Forty thousand of this amount was due to the Bank of Taiwan, which had taken legal proceedings to recover it. As to the remainder of the debts due to others, the compradore expected to arrive at a 50% com. promise. The some $90,000 required for the compromise he hoped to raise by loans from friends. The sub-committee recommended to the Board that the Bank support the compradore in his effort to extricate himself from this financial morass. The Bank offered to guarantee the $40,000 due the Bank of Taiwan, and if the compradore could not raise the $90,000 for a compromise arrangement with his other debtors, the Bank would extend this credit to him—on the condition, however, that no further claims against him appeared. To worsen the situation, a month after the Bank agreed to help out the compradore, a shroff absconded with $52,747.71. The compradore, of course, was responsible for this amount and already all his security was needed to cover his other liabilities to the Bank. A few days later irregularities in the cash balance were found. On 13 June 1905, the Board decided to replace the compradore as soon as a suitable person could be found for the position. Without the Bank's approval he had paid sums to his creditors. No acceptable candidates were received, so the Bank was forced to continue with Lau Wai Chun. In March 1906 the legal advisors of the Bank said Lau Wai Chun should file for bankruptcy and at the same time resign. The Bank had made every effort to save the compradore. Its reputation would suffer if the present compradore left it with a great loss some four. teen years after the previous compradore had absconded. Shareholders would not be happy. Chinese businessmen might lose confidence in the Bank and transfer their custom elsewhere. The only Hong Kong member of the syndicate holding the Wei Sing monopoly who did not go bankrupt was the Honourable Wei Yuk, member of the Legislative Council. His brother Wei Long-san, however, did not escape the debtor's noose. The two Wei's were sons of Wei Akwong, who until his death EASTERN BANKING in 1878 was compradore of the Mercantile Bank. In his Will he left valu. able real estate in a trust for his family until his youngest grandson reached the age of twenty-one. On 1952 this condition was fulfilled and the estate was divided among the heirs. Wei Akwong stipulated in his Will that the property could be used as security in compradore agreements for members of his family. The property was used to secure his son, Wei Yuk, at the Mercantile Bank, but some of Lau Wai Chun's security was provided by the Wei family. Along with the family property, Wei Long-san placed his own property under mortgage for security to the Bank. This the Bank took over in claim against outstanding liabilities. A suit was begun by the Wei family to recover their property held by the Bank. Upon the advice of the Bank's legal advisors, it was agreed to accept a compromise concerning the bond the Weis had deposited to secure Lau Wai Chun. There may have been a connection by marriage between the Lau and Wei families. As compradore families became established, they arranged mar. riages between their children. The more ties they could knot, the stronger their position. The compradore group was also developing its own life style in distinction from wealthy Chinese businessmen who conducted their affairs along traditional patterns. Sons were being educated abroad, Euro. pean style mansions were purchased in the Mid-Levels and an exclusive club patterned after the Hong Kong Club was organised. The compradores were financing and promoting industrial and commercial companies in Hong Kong and China, using methods borrowed from the west. After the bankruptcy of Lau Wai Chun, Lau Hok Shan brought action against the Bank to recover the title deeds the compradore had given the Bank to secure transactions for the Wang Fung Company. Lau Hok Shun had left these documents with the managers of the company when he left for Shanghai and the north in 1895. They were only to be used if the company badly needed funds. The deeds had been used for a loan from the French Bank at Canton. After they were redeemed, they were offered as security to the Hongkong and Shanghai Bank. When the question of their recovery was brought before the Hong Kong Court, judgement was given in favour of Lau Hok Shun.^ Addendum Abstract of testimony given by Lau Wai Chun at his examination for bank. ruptcy. From the report in the Hong Kong Telegraph, 27 April 1906: Head Compradore of the Hong Kong and Shanghai Bank, beside this he had other businesses. His liabilities amounted to $503,657. About $60,000 of that was money borrowed by him, but as for the rest he stood security jointly with others. Out of the $503,000 odd he only received $60,000. He did not remember when he first started borrowing money, but he did so from time to time. From the Yu Fat Bank he borrowed about $10,000 for his own use, and the balance was guaranteed. The Wang Fung firm borrowed the ^Hong Kong Law Reports, Vol 4, p. 20. COMPRADORES money, and he and others stood security. The $300,000 odd was not borrowed by him, he only stood security. He was a sleeping partner in the Wong Fuk firm. The $300,000 was due by the firm and not by him alone. Of the money borrowed from the Lai Hing Bank, $70,000 was raised on mortgage of certain houses he owned on Lyndhurst Terrace in connection with Ma Fa Ting. Of the monies advanced to the Wang Fung firm the money was sent up to Canton. Ma Fa Ting received all the money. ... Ma Fa Ting came often and saw him in his office in the Bank. As regards the Lai Fung firm they sold goods to him, as did the Wing Sing Loong, but he was never a partner in either firm. Any statement that he was a partner in those firms or in the Lai Hing Bank was un true. When he was compradore of the Hong Kong Bank he bought many bills for large amounts from the Lai Fung. The Lai Fung got the money from the Bank and the Bank had to collect the money in Penang, Singapore, Rangoon and other places from the Lai Fung's agents. He did not remember on whose names the bills were drawn. It was a fact that he asked Wong Sau Po to guarantee those bills, but he did not remember exactly. The bills were sold to the Bank under the names of Hong Sing Loong and others. As regards the money the Bank paid for these bills, they were handed over to the Wang Fung company of Canton, and a lottery company. Official Receiver: Of which you were a partner? Witness: Yes. Official Receiver: Then you were interested in the raising of these monies? Witness: Yes. The witness continuing said he did not say to Wong Sau Po that he had money at the Bank sufficient to meet his liabilities. Official Receiver: Do you keep any account books regarding these matters? Witness: No. I did not have the money, it all went on to Ma Fa Ting and others, and I never kept any account of my expenditure. Witness had no other property than his furniture and his share in the property in Lyndhurst Terrace. He first became aware that he was unable to meet his liabilities in January, February or March of this year. A year ago he was able to meet his liabilities if the debts due him had been paid, but all the people were hard up. The sum of $500,000 from the Wang Fung had not been paid, and the guarantor, Lo Chok Chi (al) Lo Kau, a rich man in Macao, was also one of the partners of the Wang Fung. Official Receiver: In your statement you have put down the Wang EASTERN BANKING Fung as owing you $150,000, but it is a bad debt? Witness: Yes. It is a bad debt. Examination by Mr Dixon on behalf of a creditor (Telegraph, 10 May 1906). The debt of $4,000 due from Loong Chi of Canton was a good one. He was a wealthy man. Dixon: Then if he was so wealthy how came he to borrow $4,000 from you? Witness: He was a shroff in the Bank and the $4,000 was over. drawn by him, and as he could not pay it, I asked him for the promissory note. Dixon before the Court: The witness said he had liabilities amounting to $2,160,725, and his assets only $166,160, of which $50,000 was due from a man who had owed it for the last eight years, had never attempted to pay the interest or any of the principal and he was, moreover, out of the jurisdiction. Another $4,000 was also in the same position, and the bankrupt had no security for these amounts, while he calculated that of the balance, about 10% only would be recovered, so that the creditors could get nothing practically. These bankruptcy proceedings have been brought to render this man immune from arrest and he would ask that the man be not adjudged a bankrupt, so that he might be at the mercy of his creditors who could take any action they liked. Though he could not at present prove it he believed he had considerable property in Canton, which he was concealing from his creditors, and which no doubt he could be made to disgorge if his creditors took action against him. Official Receiver: The $50,000 debtor is in Macao holding the monopoly in the fantan shops. His Honour, the Judge presiding: Oh! Not in Canton. Then there should be no difficulty in Macao, as the Portuguese law will recognise our claims. A receiving order for Bankruptcy was issued.R The Fourth Compradore 1906-1912: Lau Pun Chin (al) Lau Ting Cheong The compradore who followed Lau Wai Chun was also named Lau. They were both from the same village near Macao. They were undoubtedly related, though I have not established the degree of relationship. It might seem strange that as their former compradore had left with a bad record, the Bank should employ a relative as his successor. Lau Pun Chin had been for some years compradore for E D Sassoon and Company. There had been no question during this time about his reliability. Within the compradore RHong Kong Public Records Office, Bankruptcy File Record Series 62, No 2/312, No 8 of 1906, Lau Wai Chuen, debtor, ex parte Lau Young Shau, creditor. COMPRADORES department of the Bank there was a substantial number of relatives of the previous compradore. To have brought in someone who did not have the family ties and its accompanying controls would have weakened the system. It was to the advantage of the Bank to find a successor who could continue the network that had already been established. The Bank was not satisfied with the amount of security their new compradore said he could put up, but they had little alternative, for no one else had applied who offered more than the $300,000 of Lau Pun Chin. He was engaged with the understanding that more security should be given at some time in the future. Some of his security was provided by the Mok family, compradores for Butterfield and Swire. Lau Pun Chin, at some time during his period as compradore, began to grant overnight loans from the Bank's funds without the Bank's knowledge. This was a somewhat common practice among compradores when they were in a position to hide it from their employers. A cash shortage of $40,000 appeared in September 1912. When queried, the compradore admitted that it was to have been replaced the day the shortage was discovered, but the per. son from whom he was to receive the money had not appeared. This shortage placed the relation of the compradore to the Bank in question. The day following, a meeting was called of the compradore's sureties. They decided to continue their surety and that the compradore should be retained. The shortage could be made good from the compradore's cash deposit. The Bank agreed to this arrangement. It would give them time to look for a new compradore without seriously interfering with the business of the compradore department. Some days later another shortage, of $32,000, was discovered and Lau Pun Chin did not show up at his office that morning nor ever thereafter. He had left for Shanghai. His total defalcation amounted to about $152,000. This was covered by security amounting to $360,000. Between the departure of Lau Pun Chin and the engagement of a new com. pradore, somewhat over a month, the cash department was run with the old staff under the supervision of Mok Kon Sang, son of the compradore of Butterfield and Swire, who was one of the sureties. He was there not only because he was qualified as a compradore, but also to look after the inter. ests of the sureties. The Fifth Compradore 1912-1946: Ho Sai Wing (al) Ho Wing (al) Ho Lok Yue The next compradore was a member of what was probably Hong Kong's wealth. iest family. The family fortunes began when Ho Tung, the eldest of four brothers, joined Jardine, Matheson and Company as an assistant in the compradore department. He was then aged eighteen. Soon after, he became the local agent of Jardine's insurance department and in time Head Compradore of the company. About 1889 he resigned because of ill health, remaining, however, in an advisory capacity. He was succeeded by his brother Ho Fuk, whose place was taken upon his retirement by yet another brother, Ho Kom Tong. The family developed it varied interests in Hong Kong, including a native bank and trade in leather, sugar and other commodities. EASTERN BANKING Ho Sai Wing, the new compradore of the Bank, was the son of Ho Fuk, but as Ho Tung had had no children by his wife, he adopted his nephew. Some time after the adoption, Ho Tung took a second wife, by whom he had sons and daughters. After leaving Queen's College, Ho Sai Wing toured Europe. On his return in 1902 he became compradore of E D Sasson and Company. From there he became compradore of the Bank. Ho Sai Wing was secured by his father, Ho Tung, for $300,000. His monthly salary was $1,000. Ho Wing did not have the large family connections of the previous com- pradores. The Ho family was part of the Eurasian community of Hong Kong. It identified itself with the Chinese rather than with the Europeans. As Eurasians, the family did not have strong roots in the clan system of a traditional family. In Hong Kong, however, a network of inter. relationships was soon established between the various Eurasian families. The first generation of the Ho family in Hong Kong were compradores for Jardines. The second generation spread itself into other firms. Ho Sai Wing was at the Bank, his brother Ho Sai Iu was compradore of the Mer. cantile Bank, another brother Ho Sai Kwong, succeeded Ho Wing as compradore at E D Sassoon and Company, and yet another brother Ho Leung was a compra. dore at Jardines. These were all sons of Ho Fuk, though Ho Wing, of course, had been adopted by his uncle, Ho Tung. Ho Sai Ki, another son of Ho Fuk, became compradore for Arnhold and Company. Ho Sai Wa, a cousin, was an assistant compradore in the Mercantile Bank. For a brief period in the late 1920s, Edward Ho Sai Kim was on the Hongkong Bank's staff. Edward was the eldest natural son of Sir Robert Hotung. The second son of Ho Wing, Ho Hung Pong, otherwise known as Horace Ho, was shroff at the Bank until his death in 1965/66. For a time, T P Tong was joint compradore with Ho Wing. This seems an unusual arrangement. It was customary to have an assistant, but a joint compradore was not common. It may have been that Ho Wing did not wish to devote his time exclusively to his compradore post, and hence there was a sharing of responsibility. This arrangement ceased in 1933. Ho Wing died in 1946. He never completely recovered from the hardship and mistreatment he suffered during the Japanese occupation. For a time he was imprisoned. During the compradoreship of Ho Wing the Bank lost five members of the compradore staff in the Race Course fire in February 1918. Mr Fung Lok Yuen was an assistant compradore. He was seen to have escaped from the ruins of the mat shed stand which burned, but in finding that his wife was missing, he dashed back to rescue her and so perished. Leung Wai Sam and Lau Chan Sun, two of the shroffs, as well as a messenger and a coolie of the Bank perished in the disaster.^ The Sixth Compradore 1946-1953: Tong Tsung Po (al) Tong Sang Kee (al) Tong Tai Fook (al) Choy Fook Tong (al) Tong Chor Hang (al) T P Tong At the time of the death of Ho Wing, T P Tong was second compradore. He ^South China Morning Post, 28 Feb 1918. COMPRADORES moved up to head compradore. He was a native of Hong Kong, having been born there in 1885. He was educated at Queen's College. In 1906 he joined Government Service as a fifth grade clerk in the Sanitary Department. He resigned within a year to join the staff of Thomas Cook and Sons. He subsequently left Cooks for the Bank. T P Tong became a joint compradore with Ho Wing in January 1927. Both were secured by Ho Tung. In 1933 he withdrew as joint compradore. Later he was second compradore under Ho Wing. Mr Tong died in 1953 aged sixty-eight. The Last Compradore 1953-1965: Lee Shun Wah (al) Peter Lee The last compradore of the Bank was Peter Lee. His mother was a sister of Lau Pun Chin, the compradore who preceded Ho Wing. Mr Lee was raised in the home of Mr Lau. With Mr Lee taking over the position of compradore after the death of T P Tong, the post was returned to the Lau family connection. Peter Lee joined the Bank in 1917. His father was a member of the compradore staff. Under Ho Wing, Peter became third compradore and under T P Tong he was second compradore. After the Second World War it was increasingly evident that the com. pradore system was becoming outmoded. Various changes were made in the manner in which it operated to bring it into harmony with the economic, political and social changes that were occurring in Hong Kong and China. In 1960 the title Chinese Manager replaced the term Compradore. In 1965 when Peter Lee retired, the last vestiges of the system dis. appeared. Recruitment of staff is now the responsibility of the personnel section and terminal computers have changed the whole system of customer service. No distinction is made between Chinese and other business. The compradore system was useful in its day, but that day passed. Ill 7. FOUR MAJOR BUILDINGS IN THE ARCHITECTURAL HISTORY OF THE HONGKONG AND SHANGHAI BANKING CORPORATION by Christopher L Yip The architecture of the Hongkong and Shanghai Bank adapted continually to the changing conditions in which it found itself. The climate, the social context, the available technology and changing architectural attitudes all helped to form the character of the Bank's buildings as can be seen in the four major buildings examined in this paper: the Hong Kong Head Office of 1886, the Shanghai Branch of 1923, the Hong Kong Head Office of 1935 and the new Hong Kong Head Office to be completed in 1985. The Head Office of 1886 In 1881 the Board of Directors agreed that the Bank had outgrown its pre. mises and was in need of a new building. ^ At the time, the Bank occupied its first premises in Wardley House which, on 28 October 1864, it had resolved to take on a two-year lease from Messrs Sassoon for $500 per month. ^ As the end of the lease neared, the Bank had offered Sassoon O $60,000 for the property, which was accepted by 2 August 1866. Wardley House bordered Queen's Road on one side, the major east to west traffic artery, and the harbor on the other. Just to the west was the City Hall. So even though fifteen years of growth and change had made a new Head Office necessary, the Wardley House site was a good one. In fact, as early as 1867 a separate manager's house and go-down had been approved at a cost not to exceed $20,000, suggesting the early growth and separation of functions in the first years of the Bank's history.* * * 4 Later, in 1881, the Bank bought St John's Place for $45,000 as the residence for the Chief Manager, only two months after agreeing to rebuild the Head Office with provisions for a manager's residence within it.-* This separation of functions was reminiscent of the early development of banks in the City of London. As with most of the commercial establish. ments located in the City, business facilities had developed out of a late medieval pattern of doing business in the ground floor level of one's house. The upper floors contained residential quarters for the owner, his family and staff, along with storage space. Banks followed the same pat. tern, with business premises on the ground floor and the rest of the house devoted to the manager's residence. Only with the growth in the number of ^The Hongkong and Shanghai Banking Corporation, Board Minutes (BM), 27 Sept 1881. ‧^BM (Provisional Committee), 28 Oct 1864. ^BM, 2 Aug 1866. 4BM, 1 Jan 1867. ^BM, 27 Sept, 15 and 18 Nov 1881. 1 The Hong Kong Head Office of 1886 ("Jackson's Folly") from the southeas t 2 The north facade of the Hong Kong Head Office taken in about 1900 after the completion of the Praya reclamation 3 The Shanghai Branch of 1923, drawing by Palmer & Turner ti* r* 4 The Shanghai Branch on the Bund in the 1930s 5 The Shanghai Branch, construction of the ducting for the air conditioning under the main floor, September 1921 7 Hie Shanghai Branch ground floor plan, blueprint 8 The Shanghai Branch banking hall 9 The Shanghai Branch Chinese department 10 The Shanghai Branch Manager's Office 11 The Hong Kong Head Office of 1935 12 The Foochow Road elevation of the Shanghai Branch of 1923 13 The Hong Kong Head Office of 1935, east side PLAIN ’A. mm nm'Bl IHHI 14 The Hong Kong Head Office of 1935, Plan "A" 15 The Hong Kong Head Office of 19 35, Plan "B" 17 The Hong Kong Head Office of 1935, three lantern designs for the Des Voeux Road Entrance 16 The Hong Kong Head Office of 1935, main floor plan 18 The Hong Kong Head Office of 1935 banking hall 19 The Hong Kong Head Office of 1935 banking hall vault Hie Foster design for the Hong Kong Head Office of 1985 20 FOUR MAJOR BUILDINGS staff and customers did it become necessary to create larger ground floor spaces. The conscious separation of the banking premises and the manager's residence did not become a common policy until well into the nineteenth century. The Hongkong and Shanghai Bank was experiencing this process of development all within its first few decades of operation. The new Head Office occupied the Wardley House site plus the next-door site, which had been formerly occupied by the Mercantile Bank and which had been purchased for $80,000.^ With the two sites combined, the new building had a 125-foot frontage on Queen's Road and the Praya and a length of 225 feet along Wardley Street. The new Head Office was opened in 1886 at a cost of $300,000. Three architectural firms submitted designs for the new building: Alford Waters & Dale, Danby & Leigh, and Wilson & Bird. Wilson & Bird (later to become Palmer & Turner) were selected.^ Clement Palmer, born in 1857, had been articled to an architectural firm in Lancashire and had worked in Norwich and London before arriving in Hong Kong in February 1882, the year that he was elected Associate of the Royal Institute of British Architects. It may well be that Palmer came out to Hong Kong precisely because his design had won the closed competition for the Bank's building. Bird & Palmer's design merged two buildings into one. On the main Queen's Road side, one saw a domed structure wrapped in a screen of gigan. tic Corinthian columns. On the harbor side, one found a Victorianized "compradoric" building much like the other buildings that lined the water. front. In essence, part of the building reflected bank design as it had developed in England, while the other part responded to the local building tradition that had adapted European architecture to the climatic and social requirements of the South China coast. The design of the Queen's Road banking hall (see Fig 1) reflected the work of Sir John Soane for the Bank of England between 1788 and 1833. Soane had to confront the complex problem of containing a wide variety of halls, offices and circulation spaces within an irregularly shaped block, and at the same time present a regular, unified and Classical exterior. Soane designed a series of domed halls with indirect lighting effects to house the major banking activities. He then clustered the supporting offices and service spaces around the halls and connected them together with a series of hallways and corridors. Courtyards and lightwells brought light into the many rooms buried deep within the complex. The whole build. ing was wrapped in a stone wall screen which presented a uniform image on the exterior. By separating the exterior wall from the complexities within, Soane could create elaborate symmetrical entrances and corner deco. rations at the appropriate spots that suggested an overall symmetry and regularity that did not and could not in fact exist, given the complexity of the operations and the irregularity of the site. As Soane's work devel. oped, his designs for banking halls moved away from a repetition of the existing Classical language of architecture to a more abstract expression ^BM, 27 Jan 1881; China Mail, 9 Aug 1886. ^BM, 30 Nov 1882; China Mail, 9 Aug 1886. ^Unpublished notes from Palmer & Turner. Palmer became a partner by the end of 1882 and the firm changed its name to Bird & Palmer. EASTERN BANKING of the overall geometry of volumes and surfaces.^ Soane's work on the Bank of England had a profound impact on English bank design in particular and on English architecture in general for much of the nineteenth and twentieth centuries. It is most likely that Palmer's design for the domed banking hall in the Hongkong and Shanghai Bank's Head Office had its origins in Soane's work. The basement floor was done in native granite, while the floors above were of brick with granite facing and granite columns. The interior had teak woodwork and tiled passage and basement floors. Such modern conveni. ences as gas lighting and an electric bell system for communication were installed, along with fire extinguishers for safety. The bank furniture was designed by the architects and made in Hong Kong, while residential furnishings were turned over to the firm of Hall & Holtz in Shanghai.^ The China Mail described the banking hall in the year of its opening: We will pass in from Queen's Road entrance. The large main door is gained by ascending two small flights of steps, which land us on a level with the verandah formed by the colonnade that runs round the whole building. Passing in at the main door we find ourselves in the bank proper—an immense hall which might be considered as a building apart from the rest. It is roofed by a large octagonal dome, the apex of which is 100 feet above the floor. This dome rests on arches supported by eight massive Corinthian pillars of polished red Aberdeen granite, and is lighted by a series of circular windows filled with stained glass. The bank building is cut into two halves by a corridor which runs the whole length of the structure from Queen's Road to the Praya. On the right hand side is the general office for Europeans, while on the other side is the compradores' office, where the Chinese will do business. These offices have each broad counters in front of them, bending inwards at the centre of the passage so as to give more space for moving out and in to the Bank. They have doors opening on the verandah, and on the left or Chinese side the verandah will be utilised for the money-counting stalIs.^^ The other portion of the building that faced the harbor (see Fig 2) was designed in a Victorianized "compradoric" that better suited the social requirements of the European staff and the climatic conditions of the South China coast. "Compradoric" refers to the hybrid architecture that devel. oped on the South China coast during the nineteenth century to reconcile the desire for a proper western building in a radically different setting. These buildings had to retain a European character while adapting to the lifestyle of a predominantly male merchant culture. The buildings also had to respond to the worst weather conditions of the region without the use of 9 J Summerson, Architecture in Britain, 1530-1830 (Harmondsworth: Penguin, 1958), pp. 211, 212, 274, 285, 287. -^China Mail, 9 Aug 1886. nlbid. FOUR MAJOR BUILDINGS the elaborate mechanical systems common to buildings of the late twentieth century. The source for the compradoric was the colonial architecture of South. east Asia and India. This can be seen in a comparison of the Officers' Mess at Dum Dum near Calcutta built prior to 1800 and the Victoria Officers' Quarters in Hong Kong. Both buildings are basically simple rec. tangular structures with columnated verandahs wrapping around them done in a simple clean Classical language. Similarly, many of the merchants' houses in Calcutta were designed in the same simple Neo-Classical mode. In India European architecture had distinguished itself from Indian architec. ture as early as the end of the eighteenth century.^ The British in India "strove consciously not to be absorbed in the oriental mass. In architec. ture they had an instrument by means of which they could manifest their status and their ideals. . ."13 The desire to associate colonial building with the highest cultural achievements of the West, most notably Greek and Roman antiquity, happily coincided with the popularity of Classical Revival architecture in England.^ The Classical Revival, and Neo-Classicism in particular, made use of a simple language of architectural elements that the English military engineers in India could adapt to their building needs. Even the use of chunam (a white plaster made from lime, burnt shells, egg whites, milk and other materials) produced white surfaces that fitted in well with "the marble cult of Neo-Classicism. The major adaptation of this type of building was to climate, and the most serious condition was hot humid weather. Lacking sophisticated tech. nological aids, the buildings of India and later of Hong Kong "had to afford shade and ventilation, even if these had to be obtained at the expense of the accepted rules of Classicism."^ A hot humid climate is "characterized by heavy rainfall, high humidity, relatively moderate tem. peratures with little daily or seasonal variation, and intense radiation. The required responses are maximum shade and minimum heat capacity."^ In a hot humid climate there was little hope of lowering either the inside temperature or humidity below that of the outside. On the contrary, one of the most serious problems was to keep the inside from heating up. A build. ing oriented to the breezes with large windows and doors took advantage of the natural ventilation which enhanced the evaporative cooling of the body. The breezes also helped to keep the interior from becoming warmer than shaded outside spaces.^ High ceilings and various types of fans became common features. Window screens offered some privacy, and helped to cut down on the heating effect of diffuse sky radiation common to hot humid 12S Nilsson, European Architecture in India 1750-1850 (London: Faber & Faber, 1968), p. 62. ‧^Ibid, p. 165. ^Sumraerson, pp. 235-75. ^Nilsson, p. 171. 16Ibid, p. 120. 17A Rapaport, House Form and Culture (Englewood Cliffs, NJ: Prentice-Hall, 1969) p. 93. 1^0 Koensberger, T Ingersoll, A Mayhew and S Szokolay, Manual of Tropical Housing and Building (London: Longman, 1973), p. 216. EASTERN BANKING climates. The protection of the verandah was valuable on all sides since the glare and diffuse radiation was from all directions. Overhangs, eaves, verandahs and covered balconies shaded exterior walls from the sun, and protected them from water damage in the rainy season while allowing the windows and doors to remain open for ventilation. Balconies, porches and verandahs could also serve as protected outdoor living spaces when it was too hot inside. Living quarters on the upper floors could better catch the breezes which enhanced their liveability. While appearing as Western as possible, the building attempted to minimize heat gain and maximize air circulation. This sort of adaptation could not cope with all the condi. tions of a mixed climate, such as Hong Kong's, but at least the worst situ. ation was minimized. The Praya fagade of the Hong Kong Head Office revealed this sort of adaptation mingled with a desire to be in fashion. Three stacked loggias and a ground level arcade ran across the fagade, as with many compradoric buildings of nineteenth century Hong Kong, but there was a much greater effort to differentiate parts of the fagade to create a symmetrical compo. sition focused on the central vertical axis. The street level arcade was rusticated to form a base, and the corners were projected forward slightly and made more visually solid to bind the composition together. A central vertical emphasis was created by projecting forward the arched Praya entrance and stacking a flagpole on a dome over a curved pedimented loggia, over a temple fagade over the triumphal arch that formed the entrance. The ground floor was done in Doric, the first floor in Corinthian and the second floor in Composite; that is, the most elaborate order was at the top rather than at the bottom. Balustrades and high narrow pedimented openings completed the composition. The ground floor was bifurcated by a corridor that led from the bank. ing hall to the compradoric Praya side with its ground floor offices and strongrooms: Regaining the centre corridor, we will now pass from the bank proper to the adjoining offices, which form the ground floor of a three-storey building. The first rooms we come to are two large rooms, or safes, 28 feet by 20 feet, one on each side of the corridor. On the right hand side of the corridor the next room we come to is the Correspondents' room, 36 ft by 20 ft, which is connected with the General Office by a passage running along the back of the strongroom. From the Correspondents' room we enter the Sub-manager's room, which is of somewhat smaller dimensions, being only 24 feet by 26. It recedes from the line of the corridor, forming a small open passage, which can be utilised as an ante-room to the Manager's room. From the Sub. manager's room we pass to the Manager's room—a large room, 36 by 24, looking out on the Praya verandah. To the Manager's room there is also an entrance for brokers and merchants from the small passage just mentioned. Before passing from the ground floor we may visit the rooms on the other side of the corridor, the most of which are devoted to Chinese officials. Opposite to the Manager's room is a room FOUR MAJOR BUILDINGS of corresponding size, where will be held the meetings of the Directors and which is accordingly called the Board room. Facing the Sub-manager's room is the grand staircase leading to the mess rooms of the junior clerks on the second floor while at the back of this staircase are spacious lavatories for the Euro. pean clerks. Retracing our steps still further we come to the Stationery room, having behind it the Head Compradore's room, which communicates with the Chinese side of the General Office or Bank. The only other room on the left side is the strongroom previously mentioned which faces the one on the European side. On the Chinese side there is also a lift running from the kitchen on the basement floor to the topmost floor of the build. ing, also a back staircase leading to the upper floors and a staircase leading to the basement floor.^ The upper stories continued the tradition of residential quarters and dining facilities for the foreign staff of the Bank. We reach the grand staircase leading to the first floor, where are the mess rooms of the junior clerks. This floor is divided into two equal parts by a wide passage that runs from end to end. On the one side is a large dining room 33 feet by 24 ft 6 in, looking out on the Praya. There are also two storerooms, 18 feet by 10 feet, three bathrooms, and two bedrooms, 20 feet by 18 feet, looking out on the dome of the general office. On the other side of the passage there is, opposite the dining room, a drawing room of similar size, looking out on the Praya, with a billiard room adjoining, 36 feet 6 in by 24 feet. The centre of this side is taken up with a large bedroom, 24 feet 6 in by 20 feet, with a linen dressing room in front and three other bath. rooms, while at the further end are two other bedrooms, looking out on the dome of the Bank. Ascending now to the topmost or second floor we find this floor almost entirely taken up with bedrooms of various sizes, ranging from 21 ft by 18 ft to 25 ft by 24 ft and 27 ft by 18 ft. This part of the building is yet a good way from being complete, but judging from the plan, the rooms ought to be airy and comfortable. A wide corridor as on the other floors runs along the centre. There are also a number of bathrooms on this storey, which, like the others, are supplied with cold and hot water. The Shanghai Branch of 1923 If the Hong Kong Head Office of 1886 represented both a hybrid of the compradoric architecture that had developed on the South China coast and l^China Mail, 9 Aug 1886. 20lbid. EASTERN BANKING the desire to incorporate features of contemporary English design, the new Shanghai Branch of 1923 was a building in the "Grand Manner" shaped by English architectural fashion. It was made liveable by new building technology. In 1873 the Bank had acquired its property on the Shanghai Bund from Messrs Turner & Company for Tls60,000, and another Tls60,000 was approved to construct a new building. 2^ The site was extended in 1901 by the purchase of the site at the corner of the Bund and Foochow Road from the estate of the late David Brand for Tls231,000. 22 The addition of the property of MacKenzie & Company represented the third and final addition. In 1903 Mr Bevis, then manager of the Shanghai Branch, had urged the purchase of the site which comprised six mow of land. Bevis pointed out that "it has a right of way through the Bank's compound which has always been an objectionable feature and the business of hide pressing and feather cleaning was carried on there is decidedly a nuisance. "23 Bevis felt that he could get the property for about Tls300,000, and the Board decided to leave the purchase to Bevis' discretion. With the purchase of the MacKenzie & Company property, the Bank owned an L-shaped site with a long Bund frontage, the Bund and Foochow Road corner, and a go-down facing Szechwan Road. The Shanghai Branch's building became too small as the volume of busi. ness handled by the Branch increased, and the building was also in need of repairs which had to be deferred until the end of the First World War. With the end of the War, work could begin. On 7 October 1919, the Direc. tors selected Palmer & Turner over another architectural firm to do a new Shanghai Branch. The plans then were to be taken by G L Wilson of Palmer & Turner to get suggestions from the Bank's London management and to seek out a first-rate British contractor to construct the building. The London con. tracting firm of Trollope & Colls won the job and a "cost price plus fixed sum" contract. The building was estimated to cost Tlsl,850,000.24 Wilson designed the Shanghai building of 1923 in the "Grand Manner" (see Fig 3), a type of Classical design that had gained popularity in England before the turn of the century and remained popular up to the beginning of the Second World War.23 By the end of the nineteenth century many English architects had tired of the struggle to achieve a contemporary national style of building based upon various medieval styles, and the effort to create a meaningful "free style" had not worked out. Many turned back to Classical architecture. In particular English Baroque architecture seemed to offer a language of forms for modern buildings that would be rooted in the English tradition. As Alaister Service noted, "It was the year of Queen Victoria's Diamond Jubilee and as if in celebration, England was plunging into imperial baroque. "2^ Early efforts took the English 21BM, 13 Aug, 3 Sept 1873. 22BM, 21 Aug 1900, 15 Jan 1901. 23BM, 24 March 1903. 24BM, 7 Oct 1919. ZJD Watkins, English Architecture (London: Thames & Hudson, 24A Service, Edwardian Architecture (London: Architectural p. 303. 1979), Press P- 190. 1975), FOUR MAJOR BUILDINGS Baroque architecture of Christopher Wren and John Vanbrugh as models. Later architects tended to be more restrained while seeking a greater vari. ety of sources. Part of this development was due to the continuing shifts in taste as reflected in British architectural competitions which increas. ingly called for the design of less flamboyant public buildings. Also a larger portion of the architecture profession was being trained in schools of architecture rather than entering the profession by being articled to an existing firm. This led to a greater awareness of and interest in French Classicism and the ficole des Beaux-Arts. Since the ficole was the greatest architecture school on the Continent, this was to be expected. As students became aware of the Classical architecture of various periods and places, they sought to use their knowledge in their design work.2? Some architects did original compositions that broke through the traditional usages. Others turned in another direction and did stripped chasted designs more in the Neo-Classical tradition of architects such as Sir John Soane. One of the finest examples of the revived Baroque architecture was the Central Criminal Courts, the "Old Bailey", of 1900-1907 in London by Edward Mountford. The building was basically a block that presented a roughly symmetrical composition with its primary axis perpendicular to the line of the main faqade. Decoration was kept to a minimum befitting the solemnity of a law court. A slightly set back central dome and flanking pediments were the major features of the main faqade's composition. In a monumental building such as this there was the problem of making the grandeur and axial symmetry comprehensible from an odd angle, such as a sidewalk or street corner. In the great houses done by Vanbrugh, such as Blenheim Palace and Castle Howard, the building was seen and approached from a grand allde and the landscape was shaped to focus attention on the building. The buildings of the "Grand Manner" often had to cope with urban locations where the only view of the building was commonly from across the street or at the corner. Mountford dealt with the problem by pushing the central dome of the Criminal Courts forward over the main fagade. This made the whole faqade visible from the street. This compositional idea had origi. nated with Francesco Borromini in his (and the Rainaldis) design for the Church of S Agnese in Agone, Piazza Navona, Rome.^ Wilson of Palmer & Turner made use of this compositional idea in the Shanghai branch (see Fig 4). The Bund site made it necessary to have the Bank intelligible from acute angles as one moved towards it along the Bund. To achieve this legibility the dome was brought forward over the main entrance hall rather than being placed back over the banking hall at the center of the building. Work was carefully sequenced so that the Bank would have premises from which to carry on business throughout the building process. The go-down facing Szechwan Road was to be transformed into a temporary premises for the Bank when demolition began on the old Bank building. Palmer & Turner suggested three possible treatments for the outside of the go-down and in ■^^Watkins, pp. 183-84; Service, p. 425. 2RC Norberg-Schulz, Baroque Architecture (NY: Abrams, 1971), pp. 34-39; P Portoghese, Borromini (London: Thames & Hudson, 1968) pp. 167-72; A Blunt, Borromini (Cambridge, MA: Harvard University Press, 1979), pp. 156-60. EASTERN BANKING the end a renovation of the go-down into a Georgian structure was settled upon.29 While the go-down was being renovated, demolition could begin on the lot at the corner of the Bund and Foochow Road. When the operations of the Bank had been moved into the renovated go-down, demolition could begin on the Bank's old building on the north end of the site facing the Bund, and the task of installing the pilings could be started at the cleared south end of the site. The construction of the new building began sometime in 1920,^0 and by 21 November 1920 the corner lot had been cleared and two of the four seven-ton Scottish electric derricks were already being assembled. Each of the four derricks had a 90-foot long steel jib and served a different quad. rant of the construction site. Three legs, each composed of trussed wooden members supported the crane at the top, and the base of each of the legs was packed with bricks to add stability. "Steel stancheons, girders and material generally are brought alongside by motor lorries and lifted and placed in position by the cranes without noise or interference with the work on the site."^ The demolition of the Bank's old building was well underway with most of the second floor already removed by the time the first row of pilings were being pounded into place along Foochow Road. Palmer & Turner had been responsible for developing a piling system to give support to building foundations in the unstable subsoil conditions of Shanghai. The silt and mud often went down hundreds of feet. Their Yangtze Insurance Company Building was the first to use their newly devel. oped "floating" foundation. The new system involved pounding in a whole series of Douglas fir pilings to a depth of about 60 feet, and then capping the wood piling with a 20 foot long concrete piling that would not rot when subjected to alternating dry and wet periods in the way the wood would. A heavy reinforced concrete raft was then constructed on the system of piers. The main beams of the raft were 7 feet deep.^2 The building could then be constructed on the floating foundation, kept up by the surface friction on the surfaces of the pilings.^3 "The buildings used to settle in the mud as the construction advanced; we had to calculate this settle. ment so that the bottom-step at the entrance would start some six feet up in the air, but finally came down to sidewalk level when the full weight of the building was applied. The new Branch was rising on one of the choicest sites along the Bund and using nearby land for marshalling and preparing materials was out of the question. As a result, the materials and much of the preparation work was done at the Lay Road Yards of Trollope & Colls. There the needed timber for construction forms was stored along with the steel members and reinforcing bars. Blacksmiths and fitting shops carried out much of the basic preparation before materials were taken to the crowded and busy 29xhe Hongkong and Shanghai Bank Archives (HSBCA), 2^HSBCA, photographs collection. 2^North-China Daily News, 5-6 May 1921. 2 2jbid. a Ritchie, "China Reminiscences", typescript HSBCA. 3^Ritchie. drawings collection. from Palmer & Turner in FOUR MAJOR BUILDINGS construction site. By mid-January of 1921 the masons' sheds at the yard were busy preparing the numerous granite facing blocks for the building. The blocks had to be carefully prepared to the sizes and shapes specified on the granite facing plans, and then shipped to the site in the proper sequence for erection. The yard also had an inclined way for receiving granite chips and sand. A system of tracks made movement of materials around the yard easier, and materials could be received from ships and barges at the jetty and moved by rail around the yard for storage and prep. aration.-^ ^11 in an the management of such a large project must have been quite demanding. By 4 March 1921 the formwork for the reinforced concrete foundation covered the southern third of the site and a portion of the concrete raft had already been poured. On the northern end of the site pile-driving on the cleared old Bank site was underway, and the two derricks for the north. ern quadrants were being assembled. By April all four derricks were ready. By the time the concrete raft had been completed at the north end of the site, the steel frame already reached the mezzanine level along Foo. chow Road. During July scaffolding rose up as the installation of the brick infill walls and the granite facing began along Foochow Road. The steel frame went up rapidly and by the beginning of September granite fac. ing blocks were going into place all along the Bund. The new Shanghai Branch was one of the early buildings to make use of air conditioning. It was the use of this newly developing technology that made it possible to detach the design of the building from the tradition of modifying Western architectural fashions to better suit the requirements of the local climate. Not only was it possible to depart from passive clima. tic design principles, but a whole new level of comfort was achieved: The most up-to-date system of ventilation and warming has been adopted for these premises. Fresh air will be drawn in at suit. able ponts and washed by passing through a water stream. In winter this cleansed air will be warmed and pumped through a system of ducts into the rooms. The vitiated air will be drawn out through a separate system of ducts and discharged above roof level. The air in the building will be changed twice an hour during the winter and six times an hour during the summer. Ozone will be added to the air before it is pumped into the rooms. The offices on the upper floors will be warmed by a low pressure hot water system with the addition of exhaust ducts and fans which will ventilate the offices, the vitiated air being discharged above the roof level. ^ A report done in 1933 by the Shanghai Commissioner of Public Health gave a fuller description of the air-conditioning machinery employed: The Resident Engineer states that the reconditioning system is operated so as to give 6 complete circulations of air in 1 -^HSBCA, photographs collection. -^North-China Daily News, 5-6 May 1921. EASTERN BANKING hour. Also that the fresh air passed in should give a complete change of air in 3 hours, apart from any incidental renewal from opening of doors, etc. The treatment of the air consists in passing in over a refrigerated brine coil to remove moisture, then through a needle spray of water and then through a scrubber (made up of 6 depths of lattice work with water falling down--24 changes of direction in the lattice), and finally through an ozoniser and over another brine coil before passing to the air duct. The temperature of the washing water may vary from 32°F to 45°F. He states that about 10,000 gallons of water (of which 25 per cent is renewed every hour) is used in the washing sys. tem. In summer the temperature of the conditioned air is kept at 79°F (in winter at 68°F). Humidity at about 62 per cent. No brine cooling of the air is done in winter, washing with cooled water and ozonising being the only treatment.^ With the foundation done and much of the steel framing for the ground floor and first floor in place, work commenced on the ventilation ducts that ran underneath the ground floor (see Fig 5). There was a roughly sym. metrical disposition of air supply ducts laid under the ground floor.^8 The ducts were rectangular in section and built up of bricks laid on edge. More substantial brick walls were built on the concrete raft to carry the load of the ground floor. Apparently the ventilation system included ven. tilating chambers under the roof to take off the heat gain that normally built up there.^ By Christmas of 1921 work was well underway on the treasuries at the northwest corner of the new building, and portions of the steel frame had reached the fourth floor level on the Foochow Road end. The trusses for the banking hall skylight were in place by the end of April of the next year, and by June of 1922 the steel frame was completed and mat-covered scaffolding surrounded the exterior of the building. Finally in November the old treasuries were demolished. The official opening of the new Shanghai Branch building took place on 23 June 1923. The building was referred to as being in the "Neo-Grec, and to achieve the dignity with simplicity which that name implies the Architects have eschewed the use of carving or sculpture almost entirely and relied upon proportion and line."^ The selection of a Neo-Classical vocabulary weighted towards Greek Classicism was in the tradition of making bank buildings Greek, in the belief that this would better signify the solidity and seriousness of the business housed within. Favoring Greek for banks -^Shanghai, Commissioner of Public Health, "Air conditioning at the Hong. kong and Shanghai Bank premises", 12 May 1933. Apparently the humidity had been set originally at 30 per cent which had led to complaints of sore throats by the staff. O O J ->°Ibid; HSBCA, drawings collection, below ground floor ducting plan. ^North-China Daily News, 5-6 May 1921. ^0"The Hongkong and Shanghai Banking Corporation: The Official Opening of the New Building at Shanghai, 23rd June 1923", (00S), p. 49. FOUR MAJOR BUILDINGS went back to the early nineteenth century and continued as can be seen in the series of branch banks done for the Bank of England by C R Cockerall. Also dignity and simplicity did not mean unassertive and modest. On the contrary, when Palmer & Turner suggested making improvements that would add another million dollars to the cost of the building, the Head Office replied, "Spare no expense but dominate the Bund."4! Approaching the main Bund entrance one climbed the staircase and passed under one of the three arched entrances topped by a high loggia with paired columns. Two bronze lions designed by Henry Poole flanked the staircase, one roaring to symbolize protection and the other at rest to symbolize security. Upon entering one found oneself in a large octagonal entrance hall with a central dome supported by eight Siena marble columns. The idea of the Dome, the conception of Aspiration, is carried upward connecting with the dome above the roof of the building; and, so that there shall be no break in the continuity of thought, even the medium of the finish is the same throughout. The Dome ceiling of the Entrance Hall is of rich Venetian mosaic and the outside covering of the roof Dome one hundred and fifty feet above it is also mosaic, terminating in the golden mosaic of the finial.42 (See Fig 6.) The eight primary panels placed just above the cornice line represented the banking centers of the East and the West, each with a symbolic central fig. ure and heraldry: London: Central figure--"Britannia" with Trident and British lion. Left—Figure with arms of "London." Right—Symbolic figure of Thames with model ship,—compass and rule. Back. ground—Houses of Parliament and St Paul's Cathedral from over the river. Heraldry—England, Scotland, Ireland, Wales. Paris: Central figure--"The Republic" with tablet incribed Liberte, Egalite, Fraternite. Left—Figure of the Arts with the Victory of Samothrace on the prow of boat--Louvre. Right--with arms of the Republic. Heraldry—Paris Fleur de lis. Back. ground-^ view of the Seine and Paris, principally of the Cathedral of Notre Dame. Calcutta: Central figure—Symbolic of "Mysticism" with the Star of India on Forehead. Left — "Philosophy" with scroll. Right— With the arms of the City. Background—The Hugli River and the High Court of Justice. Heraldry—Crest of Calcutta, and the supporters of the arms of Calcutta. Bangkok: Central figure—Symbolic of "Fertility." Left— Representing hewers of timber. Right—Agriculture and Rice ^"Shanghai Premises", p. 3, in HSBCA. 42OOS, p. 32. EASTERN BANKING Cultivation. Background--Temple at the mouth of the Chao Phya Menam River—the Mother of Waters. Heraldry—The Trairanga— national flag. Old arms of Siam. New arms of Siam. The flag of the Royal Navy. Hongkong: Central figure—With Union Jack symbolic of its be. coming a British Crown Colony. Left--History with date of above MDCCCXII. Right—Suggestive of Canton River. Background—View of Hongkong and Peak from Harbour. Heraldry—Flag of the Diplo. matic Service. Chinese characters for Hongkong. Flag of the Admiralty. Shanghai: Central figure--of "Foresight" or "Sagacity" with steering wheel. Left—Symbolic figure of the Yangtzekiang. Right--Shipping. Background—Hongkong and Shanghai Bank and the Chinese Maritime Customs from the river. Heraldry—The flag of the Chinese Merchant Service. Chinese characters for Shanghai. The flag of the British Merchant Service. Tokyo: Central figure—"Learning." Left—Youth symbolic of "Progress" with national emblem on shield. Right--"Science" with scroll and instruments. Background—Enclosing wall of Imperial Palace. Court of Justice, Admiralty and Government Offices. In the distance separated by a band of clouds Mount Fuji. Heraldry—The flag of the Japanese Merchant Service. Japanese characters for Tokyo. The Imperial Flag. New York: Central figure—Bartholdi's well-known figure of "Liberty enlightening the world." Left--"Hermes" the promoter of social intercourse and of commerce among men, with his sym. bols the winged hat and caduceus. Right—Figure with arms of the United States. Background—A characteristic view of New York from the se'a. Heraldry—The flag of the Merchant Service. The arms of New York. The American Eagle.43 The composition of the entrance hall was completed by a circular panel at the top showing: Ceres, the Goddess of Plenty or Abundance. Helios, the God of the Sun, and the Horses and Chariot with which he traverses the Heavens. Artemis, the twin sister of Helios, the Goddess of the Moon, on her forehead the crescent. One half of background, Day; the other. Night.44 The basic plan expressed the desire to create a Classically symmetri. cal building facing the Bund, and to make good use of the circulation pos. sibilities offered by Foochow Road (see Fig 7). The building was focused 43OOS, pp. 53, 56-57. 4400S, p. 60. FOUR MAJOR BUILDINGS on Che skylit central banking hall (see Fig 8). The office and service spaces were wrapped around this core, and the dome was placed over the main Bund facade. On the ground floor the circulation space ran parallel to the Bund, and then turned on the Foochow Road side to make possible a second important entrance to the banking hall and provide an entrance for users of the Chinese Department located in the southwest corner of the ground floor. The Foochow Road entrance also became the entrance for the employ. ees of the Bank. The treasuries occupied an 80-foot by 35-foot portion of the northwest corner of the ground floor within easy access to the Chinese department and the main banking hall, but far away from the main entrances, the public hall and the public streets. An observation corridor wrapped around all four sides of the treasuries for added protection, and the con. crete walls had extra closely-spaced reinforcing bars, and the latest fire. proof doors were installed. Smaller strongrooms for ledgers and other items were clustered around that area. The rather conservative quality of the layout was suggested by the traditional placement of the Manager's rooms and the Accountant's department at either side of the main entrance on the ground floor. From this location these offices had access to the banking hall, but only by crossing the public hall. The privacy of these offices had to be maintained solely by doors rather than by the arrangement of the plan. The placement of the Manager's rooms near a major public entrance corresponded with what had been done earlier with the placement of the Manager's rooms in the Hong Kong Head Office of 1886. The other floors of the building housed either service areas for the staff and for the banking activities on the ground floor, or were rental office space. The mezzanine floor contained a series of services includ. ing: "the Stationery Rooms, Records Rooms, Manager's Changing Room, Tele. phone Exchange, Tiffin Room, Service Room, and the Staff Changing Rooms including five Lavatories with shower baths. The tiffin for the foreign staff was rather small given the size of the Branch; there were about thirty foreign staff, but it was common for many of them to eat out in one of the many restaurants within easy reach of the building. Similarly, no junior mess was provided due to the variety of accommodation available in Shanghai. There were separate lavatory facilities for the foreign, the Portuguese and Chinese staffs. The first, second and third floors were rental office space for businesses and professional offices, serviced by four staircases and six electric lifts.* 46 On the fourth floor two apart. ments were constructed, one on the northwest corner and the other on the southwest corner. Both of the apartments had trellised roof gardens. All the finishings and details of the new building were carefully worked out. Except for the Devonshire marble used in the Accountant's office, all the marble in the building was imported from Italy. This included four monolithic columns, two at either end of the banking hall. Each of these columns weighed seven tons. Various designs for the marble mosaic floors of the public space were considered before a final scheme with a marble slab border was selected and executed. A mosaic surface was chosen for the public space to make it less slippery than a marble slab 45OOS, p. 63 4^North-China Daily News, 5-6 May 1921. EASTERN BANKING surface in damp humid weather.47 The Chinese Department and the adjoining Compradore's rooms were done in Chinoiserie (see Fig 9). Decorative motifs derived from Chinese sources and the use of reds, greens and yellows enlivened the space: One is arrested on the threshold by the totally unexpected sight of a blaze of Chinese decoration. . . . While the design, both in the mass and in its details, is entirely new, one feels the influence of the best traditions of fourteenth century Chinese art in this gorgeous Oriental decoration of a hall of twentieth century Western construction. Those fortunates who have seen the palaces of Peking are immediately reminded of those wonder- halls.48 The Compradore's outer office was done with more restraint: "Passing to the Compradore's outer office to the South of the Bank one's joy sobers to smiles of appreciation of the intricacy of the gilded ornament of the beams, the gold and red and black."49 Finally one reached the Compradore's private room which exuded dignity and elegance: "Black and dark blue calm; the fit setting for the dignified office of the Compradore of the Hongkong and Shanghai Bank."* * * * 5^ By contrast, the Manager's rooms were done with elaborately coffered ceilings and teak wall panels with fluted pilasters crowned by a restrained entablature. Even the fireplace grill was specially designed to include the initials of the Bank (see Fig 10). The furniture for the banking hall and offices was specially designed by Palmer & Turner. 5^ "The desks and furniture generally of the General Offices and fittings of the Strong Rooms and Book Rooms are of steel, made in England and shipped to Shanghai in sections."52 sketches were used to study the color and the design of the counters and furniture which were followed by detail drawings. A monumental public bench was designed for the public hall to serve the waiting customers. Customers would submit their business at the appropriate counter and have to wait for the staff person to take the request and clear it through the ledgers. Then the cus. tomer might have to go over to the cashier's counter. Much of the day the public hall must have been full of people in various stages of completing their business. Palmer & Turner also designed a ledger cart. The ledgers were quite large and heavy. To move them from the strongroom to the desks in the banking hall, two coolies would mount the ledger on ropes attached to a carrying pole. It may be that the ledger carts were never employed, since the system of using coolies continued at least into the 1930s.58 Coolies 47OOS, p. 66. 48OOS, p. 72. 4900S, p. 76. 50OOS, p. 76. 5^HSBCA, drawings 52OOS, p. 68. -^Interview with collection. W A Stewart, sometime HSBC Shanghai Branch Manager. FOUR MAJOR BUILDINGS were also used to move silver back and forth between the Chinese Department and the treasuries. This may help to explain the large size of the Branch's staff which numbered about six hundred persons during the inter. war years. The need to carry out all of the banking transactions by hand was another reason for the large staff. During the day the banking hall was staffed mainly by Portuguese working under the direction of the foreign staff. At night a second shift of Chinese staff would come in to finish the accounting before the beginning of business the next day. The Head Office of 1935 Sir Vandeleur Grayburn decided that the Bank needed a new Head Office in Hong Kong sometime after the New York Stock Exchange Crash of 1929.-^ A number of possible reasons might explain this decision. The silver depo. sited with the Government as security for the Bank's note issues was reaching a point where more treasury space was required, and the old treas. ury was in sorry shape. The straw bags, in which much of the silver was stored, had rotted due to the lack of temperature and humidity controls, and silver coins had broken through many of the bags creating heaps of coins interspersed with rotting straw. ^5 -phe basement was also infested with cockroaches, and even though the tiffin was up on the first floor, the kitchens were in the basement. Another consideration was the state of the economy. The Depression had lowered the costs of construction in Hong Kong, making it a good time for an institution with available assets to build. In addition, building would indirectly benefit some of the impor. tant clients of the Bank, such as Jardines, Dodwells, Hutchison and Gilman, who were agents for building materials and equipment in the Colony. By 1931 a number of possible schemes had been examined and the most promising one involved purchasing Wardley Street and a portion of the City Hall. In private discussions with the Government it had been understood that these purchases could be made for about 12.5 lakhs. To help compen. sate for this expenditure, the Bank could sell its annex on Des Voeux Road which was not needed. Similarly, St John's Place, which was out of date, could be sold when a good opportunity arose. The Directors instructed the Chief Manager to look into the matter and come back for acceptance of what. ever arrangement was worked out.-*7 Negotiations began between the Bank and the Government over the trans. fer of land. Finally, after a series of offers and counter-offers, the Colonial Secretary's Office agreed to accept (a) $1,250,000 in payment less $250,000 for 10,000 square feet of vault space for storing silver needed for the Colony's note issues, and (b) lot #580 and the buildings thereon (St John's Place). In exchange, the Government would grant Wardley Street and a portion of the City Hall site constituting 24,743 square feet to the Bank on a 75-year lease with an option to renew the lease for another 5^*Ri tchie. ^Stewart; HSBCA, photographs collection. ^ ^Ritchie . 57BM, 25 Aug 1931. EASTERN BANKING University of lar in scale, did not begin seventy-five years. It also agreed to rent the remainder of the City Hall to the Bank for three years at a cost of $20,000 per year.^8 The Chartered Bank accepted an offer to purchase the Hongkong and Shanghai Bank's Annex #4 on Des Voeux Road. G L Wilson, a senior partner of the firm of Palmer & Turner, designed the new Head Office. Wilson was instructed by the Chief Manager, Sir Vandeleur Grayburn, "Please build us the best Bank in the world.The question was, what should such a bank look like? The answer was "Moderne." Although Wilson may have picked up his interest in the Moderne in England, the Moderne buildings from which he could draw ideas for the new Hong Kong Head Office were the New York highrises (see Fig 11). There were no comparable projects in England to draw upon. The Senate House for the London by Charles Holden of Adams, Holden & Pearson was simi- but the building was commissioned in 1931 and construction until 1933. u London was a comparatively low rise city until the rebuilding after World War II. As a result, much of the Moderne vocab. ulary used in the Head Office was derived from the New York experience. New Yorkers had begun to complain about the way the high rise build. ings of the city were beginning to turn the streets into dark gorges. In response to this situation, a movement developed, led by some of the more prominent members of the community, to do something to halt the unregulated assault on the streetscapes of the city. The result was the New York Zon. ing Ordinance of 1916. The Ordinance required setbacks at a certain height depending upon the length of the site's street frontage, and it allowed a tower of unlimited height over a certain portion of the site. The complex. ity of the law and the impact of World War I on building led to the slow emergence of an architectural response to the law. In 1923 the architectural firm of Helmle & Corbett published a zoning study suggesting a possible design response. The perspective drawings of possible buildings were done by a talented Tenderer named Hugh Ferriss, a graduate of Washington University, St Louis. Ferriss' perspectives became exceedingly popular and shaped high rise design for the next decade. The Moderne style drew from a wide variety of sources that ranged all the way from the Ecole des Beaux-Arts to science fiction. The Beaux-Arts contributed the basic approach to composition, which included having a higher central focus with lower supporting forms disposed in a symmetrical manner, and contributed the idea that grand monuments were meant to be public amenities. 8 ^ They should be both accessible and comprehensible to the public they served. The medieval, folkloric, handicraft, and vaguely Expressionist tendencies had their origins in national romanticism and Germany. The early vivid use of color may also have come from either German Expressionist architecture or from the Viennese Succession. The 58Letter from Colonial Secretary's Office to the Bank, 26 April 1933, in HSBCA. ^^Ritchie. j^G Stamp, "Introduction", Architectural Design, 49, No 10-11 (1979), 12. C Robinson & R Bletter, Skyscraper Style: Art Deco New York, (NY: Oxford University Press, 1975), p. 5. 62Ibid, p. 55. FOUR MAJOR BUILDINGS Moderne-ized Beaux-Arts of the 1925 Paris Exposition (L'Exposition des Arts Decoratifs et Industrial Modernes) had a major impact on the architectural world. While most of the buildings have the rich ornamental reliefs and decorative screens typical of Art Deco, the architectural group. ing and massing is, almost without exception. Neoclassical in spirit. The buildings are most commonly based on centralized plans, or they exhibit bilateral symmetry, with flanking wings and stepped roofs that ascend to a crowning pinnacle.63 Other designers drew ideas and images from Mezo-American and North American art and architecture. Whatever the combination of sources and elements employed in any particular building, generally the cube and the rectangle dominated form, and ornament became an applique to the interior and exter. ior surfaces of the building.64 The architects and designers, who worked in the Moderne style, wanted to create buildings that would be both familiar enough to be popular and new enough to be avant garde. As David Gebhard put it, "In the best public relations tradition the zigzag Moderns of the '20s were able to create a convincing image of their work as being progressive and contemporary. It remained though for the '30s to transmit this image into the futurism of a Buck Rogers world."65 Generally, "promoters did not want to upset the viewer—they wanted to find an acceptable modern style; one could call the Art Deco architect an avant-garde traditionalist."66 The 1925 Paris Exposition had a great impact on architects in Engl. and. After the Exposition, the Art Deco style "dominated English popular architecture and design for the following ten years . . . the Art Deco style was far more easily assimilated, and it became a substitute for mod. ern architecture, an easy tool for those architects (and there were many in England) who regarded the Modern Movement as only a stylistic revolu. tion. "67 The Head Office that Palmer & Turner designed cloaked a very tradi. tional plan and massing in a contemporary veneer (see Figs 12 & 13). The scheme was basically Neo-Classical in character. This can be seen in a quick comparison of the Foochow Road elevation and plan of the Shanghai Branch of 1923 and the east elevation and plan of the new Head Office. Both are centered on the central banking hall with a medium rise office building wrapped around it; directional emphasis is given in both cases by a higher element placed over an important entrance in the middle of a sym. metrically disposed faqade. Both elevations show a medium rise block with 6^lbid, p. 46. 6^D Gebhard, "The Moderne in the United States 1920-1941", Architectural Association Quarterly, 2, No 3 (July 1970), 7. 65lbid, P. 11.- Robinson & R Bletter, p. 41. 67j Gould, Modern Houses in Britain, 1919-1939, Architectural History Mono. graphs, No 1 (London: Society of Architectural Historians of Great Brit. ain, 1977), p. 11. EASTERN BANKING a high focal element over one end of the building mass. Whereas the Shang. hai Branch had a dome, the Hong Kong Head Office used a tower block. There were a number of site considerations with which the architects had to cope. First, the site was not a perfect rectangle; Queen's Road turned about half way along one side of the site. This was annoying for any architect whose design sense had been shaped by Classical training and practice. Second, the site sloped from Queen's Road down to Des Voeux Road making it a bit more complicated to have two major entrances—one on each street—to the banking hall. Finally, although the building's primary facade would face Statue Square and the harbor, Grayburn wanted to preserve the address, One Queen's Road Central, which meant somehow creating a major statement on the Queen's Road faqade as well as towards the harbor. Two preliminary plans showed the architects struggling to resolve the desire for a traditionally symmetrical scheme with the particularities of the site, and the wishes of the client. Plan "A" centers on a central cross axial banking hall with the main axis connecting the Des Voeux and Queen's Roads entrances (see Fig 14). This scheme's north entrance ignored the bend of Queen's Road and attempted to maintain a vestigial reminder of the traditional domed banking hall plan--as in Soane's Bank of England, the Head Office of 1886 and the Shanghai Branch of 1923—by molding the counters at the crossing into an oval. The traditional elements were employed without achieving a full integration of the parts into a working whole. Also the Chief Manager's and Accountan't' s rooms were awkardly related to the circulation patterns of the banking hall. Plan "B" was dominated by a wide uninterrupted allee connecting the Des Voeux Road and Queen's Road entrances which turned the banking hall into a pedestrian passageway (see Fig 15). Curving counters at the Queen's Road end of the hall suggested a symmetry in plan that would actually have created rather awkward unbalanced spaces. Plan "B" did a better job of relating the Chief Manager's and Accountant's rooms to the circulation pattern of the banking hall. The final plan created a comprehensible symmetry and order by reduc. ing the public area to a cruciform vaulted space with doors separating it from the entrances which oriented themselves to the streets (see Fig 16). The vestibule and passageway of the Queen's Road entrance made it possible to align the entrance to the bend in the road and then direct the customers around to the axis of the main public space. By bringing the entrance route on the Des Voeux Road side up a stairhall, the waiting lobby for the Chief Manager's and Accountant's rooms could be separated from the traffic of the public space while maintaining an ease of access to the banking hall staff areas. All three plans show the architects struggling to make a traditional banking hall layout fit into a Moderne shell, and respond to the need for a high rise tower block. The design of the roof to take a helicopter landing pad and extra con. duit space behind the marble wall of the Chief Manager's office expressed the desire to be contemporary by being futuristic.69 A squash court designed for the tower had to be made two feet narrower than the standard size to conform to the column spacing. Other aspects of the design were 68Ritchie. 69Ibid. FOUR MAJOR BUILDINGS mandated by the client. Grayburn firmly believed in personal contact. In response to his wishes, the brokers' lifts and small private offices directly adjoined his own office, and a personal telephone exchange was installed in the Chief Manager's desk.7^ The Moderne style allowed the architects to employ a wide variety of motifs drawn from an equally wide variety of sources. Sculpted heads of "Men of Vision" surmounted the buttresses of the tower flanked by lions' heads, symbolic of strength, each carved out of a five ton block of gran. ite. Bronze lions flanked the Des Voeux Road entrance. An attempt was made to find the designs and the Cornwall foundry used for the Shanghai Branch lions. Since the old designs were lost, W W Wagstaff was commis. sioned to design new lions modelled on the Shanghai ones. The lions were cast in Shanghai since no satisfactory Hong Kong firm could be found. 73 The Bank's coat of arms stood at the middle of five bronze panels over the Des Voeux Road entrance, flanked by panels representing China, Japan, India and the Federated Malay States (see Fig 17).73 A drawing for three alter. native entrance lanterns suggested the great flexibility the Moderne offered the designer. The first version modelled the lantern on geometric motifs derived from American Indian folk art, the second was in a Victorian Gothic reminiscent of Big Ben, and the third expressed a highly abstracted Classic ism.7^ The main staircase landing merged heraldic lions, stripped Neo-Classical details and lamp triads that could be interpreted both as medieval torches and science fiction rays in the parlance of the 1930s. At the Queen's Road entrance the "high entrance archway leads to the Portico and is protected by a pair of magnificent bronze gates; over this the grille with Norman figures in armor, the general design of the whole sug. gesting the ancient portcullis. "73 The interior of the banking hall was surfaced with various marbles, and given bronze fittings. The walls of Botticino marble contrasted with the dark Ashburton marble of the columns and the travertine and Swedish green marble of the public space floor. The counters were finished in Ashburton and Belgian black marble.7^ a combination of lighting fixtures provided the illumination for the banking hall. Large bronze lay-lights placed in the ceiling produced a diffuse shadowless light for the working surfaces. Extra indirect illumination was provided by bronze wall fixtures for those spaces not fully served by the ceiling lighting. Finally, indirect cornice lighting lit the public space and the huge mosaic that decorated the vault.77 70Ib id. 7l"The Official Opening of the New Building", The Hongkong and Shanghai Banking Corporation, Hong Kong, 10 Oct 1935 (00H), p. 19. 77Ibid, p. 23; Ritchie; letter from Wilson to Davies, 12 Nov 1934, HSBCA. 73OOH, p. 23. 7^HSBCA, drawings collection. 75OOH, p. 19. 7^Ibid , p. 21. 7 7Ibid, p. 23; "The Hongkong and Shanghai Bank Hong Kong", Journal, Royal Institute of British Architects (JRIBA), 3rd Ser, 43, No 10 (21 March 1936), 533. EASTERN BANKING The banking hall culminated in a mosaic vault containing approximately four million tesserae.^8 The Shanghai office of Palmer & Turner located a Russion emigre artist named Podgoursky to design the mosaic ceiling. The original sketch measured about thirty-four by eighteen inches; this drawing was then enlarged to full size and modified to take into account such things as perspective effects and shading. The full-size drawings were done on thick paper and colored.^ This work was done in Italy by Podgour. sky aided by a Professor Dal Zotto. Podgoursky was willing to go to Italy, "and the Bank paid for the expenses of the artist and his secretary. Raoul Bigazzi was hired as the contractor responsible for the design and installation of the mosaic. The large drawings were sent to the mosaic manufacturer where the tesserae were glued down to the paper in the color and pattern indicated. The paper was cut into pieces of about two to four square feet each, numbered according to a key plan, and packed for shipment to Hong Kong. A description of the mosaic was included in the brochure printed for the building's official opening: Looking up into the barrel vaulted ceiling over the public space one sees that it is finished in Venetian glass mosaics. On the one side of the vault is a composition representing the progress of Transport through the ages in the Western and Eastern hemis. pheres, and on the other side a composition representing the progress of Commerce and Industry in the two hemispheres. At the top of the vault in the centre is an allegorical group composed of Ceres, the Goddess of Abundance, and Helios, the Sun God, driving his chariot across the sky and shedding light on the figures below. The decoration is completed by two semicircular panels at either end of the vault, depicting East. ern and Western Banking; all the mosaics are in bright rich colours. It was certainly a happy conception of the architects when they decided to keep the interior of the building extremely simple save in the richly coloured mosaics of the barrel vault.81 (See Fig 19. ) The upper floors were designed as rental space for offices, with the exception of the ninth floor which contained a flat for the Manager. Under the main floor were located the vaults, including the safety deposit vault with its seven thousand steel boxes and its twenty-ton steel door by Chubb & Son. The question arose as to whether the new building should be air-condi. tioned. Grayburn was reluctant to put out money for what seemed like an unnecessary luxury. ^ in the ensuing debate, reference was made to the work on barrel vault ceiling in main banking hall", 78R Bigazzi, n. d. , n. p. 7*Ibid. 80Ritchie. 8100H, p. 21. 8^Ritchie. 'Mosa ic FOUR MAJOR BUILDINGS earlier Shanghai Branch which had been equipped with air conditioning, and the decision to install air conditioning was greatly influenced by a report issued by the Shanghai Commissioner of Public Health, J H Jordan, on the Shanghai Branch's system. In a letter to F B Winter of the Bank, Jordan s tated: My own impression is that air conditioning on the whole tends to diminish disease and certainly renders the staff very much more comfortable and more able to do work efficiently throughout their periods of duty. I am also of the opinion that the fact that air conditioning is growing all over the world indicates the need for some such procedure.88 It was decided to have air conditioning, and Dr Oscar Faber was hired to design the installation.84 After further consideration, an oil-powered system was selected over coal.88 Temporary premises had been rented in the City Hall and the architects arranged a rather elaborate system for moving the Bank's furnishings: The system we used was to measure all the old furniture and plot it on the plans to scale of both buildings. Each piece had a number, and we printed twelve stickers of each number, which were stuck on the desk, its chair or chairs, file tray, waste. basket, inkpots, and pencils, and any other object connected with that desk; on moving day we had a despatcher in the old building, and a receiver in the City Hall, each with a list of the order in which each desk would come so that once in place it ‧ Q A need not move again.00 Ritchie of Palmer & Turner came up against the problem of moving a seven- ton safe from one building to the other. Unable to come up with a solu. tion, he gave the problem to the Chinese foreman: I said the the Chinese foreman, "Take this safe and put it on the first floor over there." Well, as the door opening had barely a half inch of clearance, he pulled it through the door on flat steel skids, then put round steel pipes under the safe and dragged it through the street to the City Hall, where a gang of strong men pulled it up the stairs on the steel skids.87 Grayburn was pleased by the efficiency of the move. Although there were capable Chinese contractors in Hong Kong, none of them had done such a complex, steel-framed and air-conditioned building before. As a result, it was decided to hire two construction managers to 88Letter from J H Jordan to F B Winter, 13 May 1933, in HSBCA. 84JRIBA, p. 533. 88Various correspondence on the new Head Office, 1934, in HSBCA. 88Ritchie. 8 7Ibid. EASTERN BANKING select the construction materials, let out subcontracts for the work, over. see the construction, and design the foundation, steel frame and any other structural engineering required. Messrs Logan & Amps, both chartered engi. neers, were selected; Logan was a former partner at Palmer & Turner. C G Ripley of Waterhouse & Ripley was the agent for the work done in England. Ripley had the task of making sure that the materials prepared in England arrived in Hong Kong at the time they were needed, so as to neither clutter up the building site by arriving too soon nor stopping construction by arriving too late.RR There was a strong desire on the part of the Bank to use local mate. rials as much as possible.R* * * 9 This may have been related to their desire to use the expenditures for the building as a way of helping to stimulate the local economy in the face of the worldwide depression. This was matched by a desire to have the best quality materials available. A quarry and brick. yard were purchased to guarantee the necessary amount of granite and bricks; at the completion of the project these were sold. Much of the con. struction machinery was purchased in England, as was the tubular steel scaffolding that was used in place of the bamboo scaffolding commonly used in Hong Kong. Also a variance was gotten to use a system of hollow tile flooring. A special high tensil steel--Chromador—was used for the building's frame; it represented its first use in the British Empire out. side Canada. The building had to be designed to resist a wind loading caused by winds up to 130 mph due to the common occurrence of typhoons in the region.90 The demolition of the old building took three months. In excavating and preparing the site a number of large boulders were discovered which greatly inconvenienced the insertion of the six-foot diameter reinforced concrete caissons which had to be carried down to bedrock. A part of the site had been reclaimed land. Next a heavy concrete raft foundation was poured to take the heavy uneven loading of the building and the silver vaults which were designed to carry a live load of two-and-a-half tons per square foot. 1 When the basic building shell was ready, installation of the mosaic began. First a smooth finish coat of cement was applied to the vault and allowed to dry. Then a thin coating of white Portland cement was applied and the sections of mosaic still attached to the full size color drawing were gently pressed onto the vault in accordance with the key plan. The sketch was removed the next day with warm water and a brush. After a second washing, a solution of muriatic acid was applied to remove any remaining glue or cement and to bring out the brilliance of the colors.92 The Bank engaged Roneo, an English office furniture and equipment sup. plier. Roneo sent out a man who spent two months interviewing the staff of the Bank and analyzing the Bank's needs before returning to England and designing a special line of furniture for the Bank premises. The resulting RRIbid; JRIBA, p. 527. R9Letter from E G Davies to G L Wilson, 12 March 1923, in HSBCA. "JRIBA, pp. 527, 529, 531. 9-*-Ibid, p. 531; Ritchie. 92Bigazzi. FOUR MAJOR BUILDINGS furniture had an Art Deco-Bauhaus quality. By 1940, only five years after the opening, Palmer & Turner had pro. duced a scheme to add more office space to the building by constructing a series of T-shaped office floors over the banking hall. ^ Whether the Directors and Chief Manager agreed with the plan or not, the Japanese occu. pation of Hong Kong put a stop to any possible additions or alterations. The Head Office for 1985 The Hongkong and Shanghai Bank had grown into an international bank by the mid-1970s, and Hong Kong had been transformed into a major world banking and commercial center. There was a need for a new Head Office to meet the economic, spatial and symbolic requirements of a new era in the Bank's his. tory. In 1979 a limited competition was held for the design of a new buil. ding to occupy the Head Office site between Des Voeux and Queen's Roads. The participants had to consider two alternative schemes that would either incorporate the existing building or remove it and start with a cleared site. From the field of seven prominent architectural offices, Foster Associates was selected. Foster Associates could be viewed as a major proponent of the "high tech" approach in British Architecture. The popularity of this design approach can be traced back to the 1960s and the rise of a young group of architects who called themselves Archigram. Confronted by the many prob. lems of the postwar era, Archigram argued that the architectural solution was more flexibility and much more technology. The failure of the Modern Movement in architecture and planning was that it had not actually made full use of technology and had not fully accepted the continual change needed to keep up with contemporary life. As Peter Cook, a leading member of Archigram, put it: Recently, the real definition of what a building is, what a piece of material is, what is static, what is not static has been exploded by the total explosion of traditional concepts of matter and technology; as with everything else any absolute may well be questioned in the future, even though it still holds *■ Q f. good for the present. The only way architecture could be valuable in a world of continual transition was to rely on advanced technology. ^-^Ritchie. 9^HSBCA, drawings collection, remodelling plans by Palmer & Turner. 9^The other firms submitting designs were: Yorke Rosenberg Mardall (England and Hong Kong); Palmer & Turner (Hong Kong); Yuncken Freeman Pty Ltd (Australia); Harry Seidler & Associates Pty Ltd (Australia); Skidmore, Owings & Merrill (United States); and Hugh Stubbins & Associates Inc (United States). 96p Cook, Architecture: Action and Plan (London: Studio Vista, 1967), p. 10. EASTERN BANKING Standards of performance should not be static, and in this cen. tury an explosion of technological capacity means that we can build virtually anything we want. Every month there are a hun. dred new building materials available; every day the experience gained in space research, undersea exploration or dam building stretches the range of material further so that the choice of day-to-day environment can take advantage. The members of Archigram produced a series of comic books on architec. ture and did a large number of imaginary projects to demonstrate their ideas. Cook in his "Plug-in City" project of 1964 envisioned the city as a huge metal frame in which special alloy and plastic pods were continually being inserted or removed. When a new material or bit of housing or office technology became available, the new unit could be transported by rail to the appropriate parts of the city frame and plugged into the existing matrix of parts. When a pod became obsolete, it could be popped off and taken away, leaving space for a newer unit or an altogether different use. The city would be continually renewing itself and changing with social needs. The image of the city was drawn from science fiction and popular. ized aspects of the new technologies of the 1960s. Architecture would look like machines rather than static objects in space. It may not be too much to draw an analogy between the future of architecture and the near future' of automobiles—they will be. fore long be indistinguishable anyhow—both prefabricated, both mobile. Both highly controlled in areas of high intensity only less controlled in areas of low intensity. Both demand light. weight materials and interchangeable parts.98 In the 1970s Foster Associates became one of the leading exponents of the high tech approach to architecture. Norman Foster took seriously the call to fully exploit new developments in technology. Early in his career Foster had been influenced by Le Corbusier's notion that architectural beauty and the technology of modern transportation machines, such as the ocean liner, were intertwined. Le Corbusier also argued that it would be through the union of architecture and technology that a socially respon. sible architecture would arise. As Foster was to put it later, "The pro. spect of greater beauty, higher performance and more satisfaction offers, I believe, some lessons for the future in the art of architecture."99 Flexi. bility, new high performance materials, factory prefabrication, dry site construction, high performance solutions and efficient passive energy designs became the hallmarks of the firm's work. The building for Willis Faber in Ipswich, England, stressed modular design, internal flexibility and clean prefabricated contruction. The clean spare glass curtain wall amply expressed the firm's desire for a Spartan meticulous work. The 9^Ibid, p. 5. 98Ibid, pp. 80-81. 9 9 ,T Tape: Norman Foster, more with less", (London: Pidgeon Audio Visual, n. d .). FOUR MAJOR BUILDINGS Sainsbury Centre carried the same preoccupations further. The trusses that formed the roof and long walls made it possible to make the interior space totally flexible and independent of the building's structural system and exterior skin. The roof and wall surfaces were made up of modular, prefab. ricated, energy efficient, clear and opaque panels that each could be screwed into place in a matter of minutes. The thickness of the trusses contained service spaces and the mechanical equipment. The Hongkong and Shanghai Bank Head Office will be the first high rise building done by Foster Associates. The major prestige building done in the high tech mode was the Centre George Pompidou by Piano and Rogers com. pleted in 1977. The interior floors of the Centre Pompidou were clear spans with the live and dead loads carried by trusses that rested on pins. Then the loads were counterbalanced by exterior cables in tension. The piping was dramatically displayed on one side of the building and on the other side an escalator system was suspended out from the glass and steel exterior. Rogers' love of articulation and expression of the parts was in evidence everywhere (in contrast to Foster's more severe Neo-Classical sense of clarity and simplicity). Nonetheless, as the major example of high tech design, the Centre Pompidou must have influenced Foster's think. ing. (From 1962 to 1967 Norman Foster and Richard Rogers had been partners.) When the new Hongkong and Shanghai Bank's Head Office is finished (see Fig 20), it will be the largest example of the high tech approach and will compete with the Centre Pompidou and Rogers' project for the new Lloyd's Underwriting Room in London as the most important example. The Bank will have a building of international repute to match its position in the bank. ing world. List of Illustrations 1. The Hong Kong Head Office of 1886 ("Jackson's Folly") from the south. east. Note the domed and colonnaded banking hall section. (HSBCA PH 140.1.5). 2. The north faqade of the Hong Kong Head Office taken in about 1900 after the completion of the Praya reclamation. (HSBCA PH 140.1.11). 3. The Shanghai Branch of 1923, drawing by Palmer & Turner. (HSBCA PH 130.11.A.14). 4. The Shanghai Branch on the Bund in the 1930s. (HSBCA PH 130.11.D.14). 5. The Shanghai Branch, construction of the ducting for the air condition. ing under the main floor, Sept 1921. (HSBCA). 6. The Shanghai Branch octagonal hall. (HSBCA PH 130.11.A.12/13). 7. The Shanghai Branch ground floor plan, blue print. (HSBCA). 8. The Shanghai Branch banking hall. (HSBCA PH 130.11.A.12/13). 9. The Shanghai Branch Chinese department. (HSBCA PH 130.11.A.12/13). 10. The Shanghai Branch Manager's Office. (HSBCA PH 130.11.A.12/13). 11. The Hongkong Head Office of 1935. Drawing from Asia, Aug 1936. (HSBCA PH 140.2.8). EASTERN BANKING 12. The Foochow Road elevation of the Shanghai Branch of 1923. 13. The Hong Kong Head Office of 1935, east side. (HSBCA PH 140.2.22). 14. The Hong Kong Head Office of 1935, Plan "A". (HSBCA). 15. The Hong Kong Head Office of 1935, Plan "B". (HSBCA). 16. The Hong Kong Head Office of 1935, main floor plan. From JRIBA, 3rd Ser, 43, No 10 (21 March 1936), 530. 17. The Hong Kong Head Office of 1935, three lantern designs for the Des Voeux Road Entrance. (HSBCA). 18. The Hong Kong Head Office of 1935 banking hall. (HSBCA PH 140.2.3b). 19. The Hong Kong Head Office of 1935 banking hall vault. (HSBCA PH 140.2.15 #52). 20. The Foster design for the Hong Kong Head Office of 1985. (HSBCA PH 140.14.8). 8. VARIETY IN THE NOTE ISSUES OF THE HONGKONG AND SHANGHAI BANKING CORPORATION, 1865-1891 by Judith Sear Banknotes are more than a simple medium of exchange; they are also one of the means by which the Bank communicates its image to the public. While a note has to carry a minimum of practical information including its denomi. nation, where it is payable, and in what currency--factual content usually carried within the central printed legend—a note can also convey the Bank's idea of itself through the design and decoration which appears on each issue. It would be going too far to claim the same dramatic distinctions in note design as in Bank architecture, but broad similarities do exist re. flecting the style of the period. A thorough study of the archival mate. rial, and the perspective of history and economics, would be necessary to discover how much the banknote design was linked to the philosophy of the Bank at any particular time, but the following illustrations demonstrate the broad changes in design from the Bank's inception to the present day. ‧**■**‧ The variety of notes produced for the Hongkong and Shanghai Bank is probably greater than for any other private bank in the world. The designs of the earliest notes are relatively simple, but from 1900 onwards become increasingly complex, with printers probably relying on intricate detail to prevent forgery. In 1927 watermarks were incorporated into the notes to prevent copying, and more recently the advent of security printing with a metallic strip made counterfeiting difficult and once again permitted the use of simpler designs. Major changes in design are often, but not always, associated with a change in printer, but minor variations occasionally occur within a single series. The switch from handwritten to printed dates and from handsigned notes to printed signatures, for instance, brought about a slight change in layout, and the pattern of background engraving on the field of a note may be altered periodically. The Bank quickly established branches in China and Southeast Asia, some of which were granted note-issuing status. While the notes from these branches were usually modelled on those of the Bank's main office, a branch might occasionally use a different printer, and also contract its own design. The record of early issued notes is still incomplete. In some series only specimens have survived the passage of time, and in other cases, where only a black and white model or a cardboard pattern exists, there may be doubt as to whether the projected note ever materialised because of the lack of written evidence. Mr Arthur Morrish, Archivist for the note. printing firm of De La Rue, reports that many of his firm's early records, EASTERN BANKING for instance, were destroyed in the London blitz of World War II. Government-issued silver coins were used for the first single Hong Kong dollar, dated 1866, 1867 and 1868, and consequently the earliest paper money commissioned by the Bank was a five dollar note. Notes were for the most part printed in London, and there must have been a considerable time lag between the decision to issue notes, the choice of design, and the arrival of the shipment in Hong Kong or Shanghai. The Bank operated as a Company from March 1865 until its official incorporation in December 1867. One or two examples of specimen notes bearing the title "Hongkong and Shanghai Banking Company" instead of the designation "Corporation" are in the hands of private collectors, but issued notes are extremely rare. Plate 1. $25 Company note overprinted "Yokohama" The design of this note was used, with the alteration of the Company title, for the first series of the Bank's notes from the Hong Kong branch, and from several later branches. Although we cannot know for sure, it seems likely that the Company ordered a complete series of notes for use during 1866, because Plate 1 shows a $25 note dated 2 July of that year, originally printed for circula. tion in Hong Kong but adapted for use in the newly opened Yokohama branch. The second branch (after Shanghai in 1865) to be established after the founding of the Bank in 1865, Yokohama agents were appointed in May of that year, and by May 1866 Robert Brett was manager. His signature appears on the $25 note. A $5 note also exists, altered from Hong Kong to Yokohama in the same way, and with a higher serial number. The reverse of almost all the notes to 1900 carries the same design. In the centre is the Bank's coat-of-arms with the lion and the unicorn sur. mounting a wharf side scene. The banners carrying the Bank name usually alternate between two and four ribbons, with the later $1 bill using four banners, the $5 using two, the $10 four, the $25 two, and so on. The Bank's coat-of-arms appears on almost every issue of the notes, but not always in the same position. Minor changes in the design of the central engraving were introduced over the years, but the basic wharfside trading theme has persisted. One dollar notes seem to have been introduced during 1872 and an early example exists from October of that year with a low serial number. Printed by Ashby & Company of London, there is little difference in design between this $1 and the Company $25 shown in Plate 1. Although the Bank's principal branch outside Hong Kong was that in Shanghai, officially declared open for business on 3 April 1865, the first note issues from this branch do not seem to have appeared until 1875. Plate 2. 100 tael specimen note on Shanghai, cancelled 4 September 1877 Nineteenth century Bank paper money in China was redeemable in silver. Generally speaking, the ubiquitous "dollar" is the unit of value. NOTE ISSUES Preceding the dollar the tael was frequently used. The dollar, whether Chinese provincial dollar, Japanese yen, French, British, American or Japa. nese trade dollar, or any of the widely circulated Spanish-American eight reales pieces, had the same, or very nearly the same, silver content. The Mexican dollar may be understood as a generic term for these various crown-sized silver coins. This is best illustrated by the fact that there is no such coin as a Mexican dollar. Like the early notes of the Hong Kong branch, Shanghai notes were pro. duced by the firm of Ashby & Company. The similarity in design to the Hong Kong series is obvious, with the alteration in denomination, and the addi. tion of two vertical lozenges inside the obverse borders. It seems that the tael issues of Shanghai notes continued in circulation up to 1899, but from at least 1884 onwards the Bank was also using notes based on the Mexi. can dollar, printed by Barclay and Fry in London. When Barclay and Fry became the Bank's printers, they veered away from the perpendicular style of the earlier notes, and the 1884 issue shows an oval central panel. This design was repeated in other denominations with the addition of an orange overlay in the $100 note, but the reverse of these notes followed the design of the Hong Kong branch issues. Although denominations of five to one hundred Mexican dollars contin. ued to be produced in the large size, a small note, less than half the size of its predecessor, seems to have been approved for circulation in 1893. Though similar to the rest of the series, the note was not merely a scaled-down version of the larger bills, but was redesigned in keeping with its smaller proportions. Through the 1870s, the Bank opened branches in Yokohama, Hankow, Kobe (otherwise called Hiogo), Saigon, Amoy, Manila, Singapore and Foochow, but during this time, note series seem only to have been issued at Yokohama. Yokohama quickly moved on from using overprinted Company notes to a series of its own, of which only a single $50 note is known to exist. Very similar in design to the Hong Kong branch notes of this time, the 1870 Yokohama series is distinguished by the use of different colours on the reverse of each denomination. The signature which appears on a surviving $50 Yokohama note is not that of the then manager, John Grigor, but of an acting manager, Macleod. Apparently dissatisfied with Grigor's performance, the Board of Directors decided in 1871 to replace Grigor by Thomas Jackson. Only one issued note has so far been discovered, as far as we are aware, but the Bank's collec. tion contains a complete series of unissued notes. Possibly because the Hong Kong branch had always been able to use the dollar as a unit of currency, there was no need to make radical alterations in the basic note design during this period. The change from taels to Mexican dollars at the Shanghai branch, however, brought about some modifi. cations in their note issues. In the mid-1880s, branches such as Foochow, Amoy, Hankow, Kobe (Hiogo) and Singapore, which had been open for about ten years, evidently received permission to print their own notes, and a spate of paper money appeared. The first Foochow notes were 1884 Hong Kong branch notes overprinted "Foo. chow" in a similar manner to the Yokohama overprint illustrated by Plate 1. EASTERN BANKING Plate 3. Hankow 10 tael specimen from 1886 Like Shanghai, Hankow backed its notes by silver sycee. A sycee is an ingot of silver, measured by weight, and usually stamped. The Barclay and Fry design (Plate 3) was approved in proof in May 1886 and is more elabo. rate than the Hong Kong issues of the period. A bulbous overprint with shadowed denomination modified the Barclay design of a Hiogo $10 note from 1886, which was otherwise similar in layout to the Hong Kong series. As early as 1865, the Bank's Minutes record its intention to open a branch in Singapore, but it is not until February 1878 that the Minutes mention the appointment of a Special Agent there. It is not clear whether the establishment of a Special Agency automatically conferred note-issuing privileges, but at any rate, specimen notes in two designs were prepared for the Bank by Metchim and Son of London. An early Singapore note, which has yet to be reported in issued form, does not appear in any standard catalogue. Resembling the first Hong Kong branch notes in design, but adapted linguistically to the cultural diver. sity of the Straits Settlement, the note is probably the earlier of the two Singapore types. The title "Agent" appears over the signature space on this early design while "Manager" takes its place in the later, more elabo. rate issue. This later pattern includes the rounded panel for the legend, and a modified bulbous overprint, both features of other Hong Kong and Shanghai banknotes. Because of the variety of races making up the Straits Settlements, the Bank's name appears in Tamil and Arabic script as well as in Chinese and English. Dating of such specimens is difficult in the absence of branch Bank records and, unfortunately, the single issued note in this design so far reported is a ten dollar note on which the date is illegible, (Plate 4). Plate 4. Singapore $10 "radar" note The note probably only survived because of its "lucky" serial number, 33633. Such combinations of numbers are known as radar numbers to note collectors, and the fancied significance of the serial number occasionally causes such notes to be taken out of circulation and kept for luck, often by the public or bank employees, as well as serious collectors. Plate 5. Hong Kong $100 Bradbury, Wilkinson note, around 1886 This extraordinary note possibly exists only in unissued form. Bradbury, Wilkinson were not the usual Bank printers and engravers at this period— Ashby handled the earliest series and were succeeded by Barclay and Fry around 1880, and the first Bradbury, Wilkinson note for the Hong Kong branch does not appear until 1901. This note may have been a planned com. memorative issue to celebrate the fiftieth year of Queen Victoria's reign in 1887 or 1888, but so far no issues or other specimens have come to light. The same portrait of the Queen shown in Plate 5 was used by Bradbury, NOTE ISSUES Wilkinson in the design of an 1886 Foochow note. The engraving seems to reflect a younger Queen than Victoria in 1886, when she would have been sixty-seven. Similarly youthful portraits of the Queen appear on the reverse of the Hong Kong $100. Branches of the Bank had been established in the Philippines, Indo. nesia, Burma, Straits Settlements and Thailand by 1900, but note issues appear only from Bangkok, Singapore and Penang before the turn of the century. In Thailand, while keeping the standard Bank design of the period on the obverse, the Barclay and Fry notes omit the banner pattern of the reverse and substitute Thai script. Issued notes from the Bangkok branch are very scarce, and specimens in the Bank's collection show that the series of one, five, ten, forty, eighty, one hundred, and four hundred ticals was printed in jewel colours. Instead of the heavy boldface figures which appear overprinted on the early Hong Kong branch notes and on the Singapore issues of similar design, the Penang notes used the branch name in block letters beneath the legend. One or two issued notes have survived, dated 1892 and 1893, and a single design seems to comprise the Penang series. As with Singapore, printing of Penang branch notes by the Bank would have ceased when the Government of the Straits Settlements began issuing its own notes around 1899. Of the Chinese branches of the Bank, Tientsin had developed a tael series in the 1880s, with the legend in Chinese characters translated by a handwritten comment on one note. Tientsin also produced a Mexican dollar series, which is similar in design to the Mexican dollar series from Shanghai. Perhaps the turn of the century seemed to demand a new approach to the Bank's note designs, for in 1901 the Hong Kong branch issued a Bradbury, Wilkinson series with detailed engraving. The frame of this issue became more complex, and the background shows minute stump engraving beneath the legend. The Bank's notes from this time on become increasingly detailed, until the most recent issues' simplicity of style. Denominations from $5 to $500 held to an obverse design similar to that of the $100, but the reverse of this series differs dramatically from previous issues. Plate 6. Hong Kong $5 1st January 1901 reverse Gone is the banner design that decorated the Bank's notes from their incep. tion: the 1901 series swings towards the symbolism of classical figures and material goods. Three women, a lion, baled trade goods, a scythe and a bushel basket of fruit were possibly intended to symbolize the trade and colonial image of the Bank in 1901. Other denominations are equally attractive. The $10 note, for instance, shows winged Hermes or Mercury, with a figure of Bri. tannia. The helmeted head of Britannia flanking the design was a motif which reappeared on later issues. Perhaps this group was supposed to represent communications through Mercury as messenger of the gods. The whole series reflects the classical education of the designers and EASTERN BANKING engravers, and was perhaps puzzling to the local population. Some of the symbolism seems less than clear even to us today. The laurel-wreathed figure on the $50, for instance, may represent art, since she is surrounded by sculpture, painting materials and a lyre. This theme of painting and sculpture was continued in the $100 design, while the dis. taff, plough handles, a harvest festival of fruit and vegetables and naked cherubs of the $500 suggest abundant fruitfulness and were perhaps meant to recall the Bank's "Wayfoong"—"abundance of remittances." Such exuberant imagery was not to last long. The dignified portrait of the 1886 Bank building known originally as Jackson's Folly succeeded the classical imagery of the 1901 series and remained a standard reverse design for several years on most denominations. Classical mythology persisted on the $1 bill, however, and a 1904 Bradbury, Wilkinson design for a small $1 shows a helmeted Britannia head on the obverse and a woman playing a lyre on a windswept rock on the reverse. Like the notes of the Hong Kong branch, the issues from Shanghai also show a series of symbolic figures on the reverse from $5 upwards between 1904 and 1923. The reverse of a 1904 $5 specimen, for example, seems to illustrate the same theme of abundant fruitfulness depicted on the Hong Kong 1904 $500 note, but using a different image. On the $10 note, naked children surrounded by the artifacts of a trading port were perhaps in. tended to represent Hong Kong's potential. The $50 of this series shows a martial Britannia seated beside a globe. The obverse of this series is remarkable for the detailed geometric lathe work beneath the legend, while the $100 carries a singularly puzzling design showing cherubs supporting a book in which a woman appears to be about to make an entry. The designs of the early 1900s gave way to a straightforward represen. tation of the Bank's main office on the Hong Kong series after 1906, but the firm of Waterlow and Sons, which was engaged to produce a new issue, then engraved certainly the largest and probably the most extravagantly elaborate of all the Bank's note series. Plate 7. $5 Hong Kong specimen 1st January 1906 For this issue, several styles of printing were used for the legend and other obverse information, while the background engraving radiates from the central coat—of—arms in a sunray pattern, towards the highly decorative corner values. Probably the most attractive features of this series, which remained in circulation from 1906 until 1927, are the vignettes of Chinese life which appear on the obverse of each denomination. It is not known whether these engravings really represented scenes of Hong Kong life or whether they were taken from a portfolio of general Ori. ental backgrounds. Vignettes appear on each denomination in this series. On the $10, for instance, a wharfside scene appears on one side and pedes. trians and a horse and rider on the other. The $50 carries a single vignette of the Great Wall and the $100 shows two engravings of a fruit harvest with peasants carrying baskets on one side and a village scene on the other. The final note in the series is the $500, on which a rural scene of ploughing with a water buffalo appears on the left, and a great a? Ilf AAi, i.t tin' thttit tltt i'i'jiijlC' , /- -'v'^ r UneHIindred dollars y'W/j' t/Al/j/ r\> j(/?. /)‧ tjf '/#, . /.it?/},,/-?iVwS T?,'rrr7>r/{r/ 4 Singapore $10 "radar" note 5 Hong Kong $100 Bradbury, Wilkinson note, around 1886 6 Hong Kong $5 1st January 1901 reverse (imawtut tis( //h / ////> immsttn/u !/>< t f/it&w/i'Hf in U't f ttrrntrtf .■'! t/2. at order Or nir hoa.o Of directors A'J'Vt DOLLARS 10 rm* *■. isR* THE H0NCK0NC&SHANGHA1 BANKING CORPORATION Dooo.ooo DUO 0.1) (HI N\\W iht titan r< n u iht ( urn n> a )LUu t fit.-tut \tuut nit tuff CKONC l?T OCTOBER. 1927 3 i t .±ill . . Magnification of vignette on Peking $100 Chefoo $5 1st September 1922 11 Hong Kong $5 1st October 1927 NOTE ISSUES park on the right. Waterlow and Sons also produced a series for the Peking branch, which, though established in 1885, did not produce its own notes until 1907. There is a distinct resemblance in the elaborate style of the Peking notes to the Hong Kong branch series by the same printing firm. Plate 8. Magnification of vignette on Hong Kong $5 specimen Plate 8 shows a village street scene on the obverse of the Hong Kong $5 note and the same illustration as appears on the Peking $10 of 1922. The reverse of the Peking branch notes uses the same engraving of the 1886 Hong Kong branch building as on the Hong Kong notes. The righthand vignette of the Peking $10 of 1922 is that same as that on the Hong Kong 1906 $100. In the same way, the $50 of 1922 from Peking uses one of the vignettes from the Hong Kong 1915 $500 note and the other, the Great Wall engraving, from the Hong Kong $50 of 1921. The $100 uses half the note for an unusual engraving of a walled fortress, with a village outside (Plate 9). Plate 9. Magnification of vignette on Peking $100 There seems to have been no $500 issue for Peking and the total output of Peking notes began and ended with this Waterlow series in 1922. The Tientsin branch also used vignettes in the design of its Waterlow notes from 1907 on. On the $5 note, from June 1907, it is tantalizing not to know whether these scenes, different from those depicted on the Peking branch notes, were meant to represent actual life in the vicinity of Tien. tsin at this date. The reverse of the note shows the Hong Kong 1886 Bank building again. Denominations of $5 and $10 are the only notes in this Waterlow series to have appeared from Tientsin, and while the $5 note was printed first in 1907, the $10 note carries the single date 1 January 1920. The vignette on the $10 note is the same as on the Peking branch $100 in 1922, suggesting that the scenes of Chinese life did not necessarily illustrate features of the life of any particular branch location. Although Butterfield and Swire had been Agents for the Bank at Chefoo since 1903, it was only when the branch was established as a sub-agency of Shanghai in August 1922 that a note issue could be developed. Plate 10. Chefoo $5 1st September 1922 Specimen notes like the $5 illustrated by Plate 10, dated 1st September 1922, do exist, but issued notes are very rare. The Chefoo notes are par. ticularly interesting in their difference from the majority of the Bank's notes, which bear some relationship in design to one another. The printing firm of Thomas De La Rue was engaged to engrave these notes, and it seems to be the only time that the Bank employed this company. The 1886 Hong EASTERN BANKING Kong Bank building appears on the obverse of the note, and the reverse shows the Shanghai Bank building. The note is divided into three parts, framed by a Chinese building with a woman on the right who seems to be making lace. The reverse of this denomination, and the $10 in the series, show the two head offices of the Bank, side by side. Plate 11. Hong Kong $5 1st October 1927 In 1927, the Hong Kong branch turned to Bradbury, Wilkinson for a new bank. note issue and the design selected persisted until the mid 1960s. Smaller than the previous Waterlow note, the new issue seemed more compact and structured in design than the flowing, elaborate style of the Hong Kong series before. The helmeted head of a woman (possibly Britannia), which appeared on the earlier Bradbury notes, is contained within the watermark on this issue, and the woman's figure on this note is seated on a shore line, with a small sailing vessel in the distance. An issue dated 1st April 1941 of this design marked the end of the handsigned $5 notes for the Hong Kong branch; from this time on, both signatures on the $5 values are printed. When Hong Kong fell to the Japanese in December 1941, the Japanese authorities ordered liquidation of the Bank, and forced the Bank staff to comply. Around $7.5 million of unissued banknotes were found in the vaults and the Bank employees were forced to sign those as yet unsigned. Some $4.5 million worth of notes were signed in this way and the Japanese issued them all. These "duress" notes, as they were known, were all honoured by the Bank after the War even though they had not been officially issued by the Bank at all. Until the war years, handsigning of all banknotes was a regular chore of the Bank's junior staff. Joe Cautherley, a retired Hong Kong Bank exec. utive, described the procedure as follows: The notes were printed with a lithographic signature of the Chief Manager at the time and a blank unsigned space for the signature marked "Accountant." The notes were of course valueless without the second sig. nature so, for insurance purposes, they were shipped to Hongkong as "printed paper" and on arrival they were put into one of our Treasuries. The Head Cashier had the keys to all the locks and inside grills of the Treasuries except in the case of the inside grill of the Treasury in which the unsigned notes were kept. The key to this grill was kept by the Chief Accountant. When the occasion arose to handsign the notes, they were taken out of the Treasury and circulated by the Head Cashier to all those members of the Foreign staff who were not either man— agers or accountants and after signing they were, I believe, kept in the Security Department Safe under the control of the Chief Accountant until such time as they were required to be issued. NOTE ISSUES Handsigning of Notes Each packet of notes consisted of 500 notes of either HK$5, HK$10, HK$50, HK$100, or HK$500. When it was necessary to sign the notes, the staff were required to be in the office at 8:00 a.m. Two packets had to be signed each day, one in the morning and the other about 5:00 p.m. Those members of the staff with very short names, say 3-5 letters, could manage to get two packets signed in the morning but those with longer names like mine, had to sign one packet in the morning and one in the evening. The signatures had to be made in a special kind of black ink which had to be left to dry, not blotted, hence the assis. tance required from one's "office boy." He dealt with each note after it was signed and when the packet was completed, the notes were gathered up in the appropriate order of the numbers on each note, counted and then returned to the Head Cashier. On comple. tion of the signing of each day's packets the notes were kept in the Security Department Safe. When printing resumed after the war, both signatures were preprinted. There were problems associated with handsigning. An irate Arthur Morse, later to become Manager of the Bank in 1943, wrote to complain of "very poor and very careless workmanship" in a 1936 note issue. He pointed out that the pen caught in the paper while in the act of signing and there was evidently some obvious variation in the thickness of the paper in the shipment, too. The sunray design, which radiates from the Bank coat-of-arms on so many of the notes of this period, may have been symbolic of the Empire. Considerable stump engraving and geometric lathe work decorate the back. ground of the notes in this series, and the reverse shows the same angel and trumpet above the Bank building, as on the $5 in this issue. In keeping with the design of the lower denominations, the $50 shows a draped woman carrying a harvest of fruit. She is balanced somewhat precar. iously on a winged wheel, and perhaps is intended to symbolize the role of communications in the same way that Mercury or Hermes may have done on the previous Bradbury series. A helmeted head appears on the watermark. Oddly enough, the $50 note seems to have been unpopular. It was only issued on three dates, 1st October 1927 and 1930, and 1st January 1934, and then the next $50 issue did not appear until 1967. The Hong Kong bank, like others, would hold a dated issue and make the notes available over time, as demand for that denomination required. The 1930 printed date may have been issued uncirculated up to 1940. On the $100 note of 1927 a woman's figure is seated with a book, look. ing less classical and more like a figure from a medieval romance. The helmeted head of Britannia appears on the watermark, and the Bank building is on the reverse. Another seated female figure appears on the $500 note, holding a tablet in her hand and with a wheatsheaf at her feet. The sym. bolism of these designs recalls the earlier Bradbury, Wilkinson issues for the Bank in Hong Kong and Shanghai, around 1904. EASTERN BANKING In 1959 some modifications were made. Whle the basic design remained similar to the $5 of previous years, the new note was smaller and simpler, with geometric lathe work swirling in the central panel and the watermark no longer enclosed within an oval frame. On the reverse, the angel and trumpet still command the central position at the top of the note, but the Bank building has been changed to the new building, with scattered housing on the hills behind it. This note has recently been replaced by a $5 coin. On the 1959 $10 note, the coat-of arms assumes a less prominent posi. tion and the geometric lathe work under the central panel was executed in swirls. The background engraving changed, too, from stump engraving of circled tens to linked heart-shaped braids. As with the $5, the ten used the new Bank building on the reverse. In 1968, a totally new Bradbury, Wilkinson design superceded the apparently unpopular $50, which had been in circulation since 1927. While the note was much reduced in size overall, the coat-of-arms was reinstated to a prominant position on the obverse, and no puzzling mythological or symbolic figures appeared. The Bank building and foreground dominate the reverse of the note in massive simplicity. No human figures appear, unlike the detailed human activity of the Waterlow notes of the 1900s, but the Bank lions and the stone figures high above the main entrance are faintly visible. The $100 note underwent a metamorphosis similar to the $10 and $5 notes, becoming smaller and simpler, but retaining the same basic design with the addition of the new Bank building on the reverse up until 1972, when a new $100 bill was designed. In 1972, the coat-of-arms once again assumed a dominant position on the $100, with central geometric lathe work, and the attractive effect of raised Chinese characters on the right. On the reverse, the Bank's lions could be seen in close-up, a Chinese dragon on the right balancing the watermark of the left. Unlike the previous notes in this series, the $500 never underwent a change in size, but in 1935 a completely new design was commissioned and for the first time a personal portrait of someone other than a monarch, in this case Thomas Jackson, was used on an issued note. In 1973 another $500.issue appeared, smaller than the previous notes, with the coat-of-arms once again displayed prominently. The reverse of this note was more striking than the obverse, for here the benevolent lion of the Bank's main entrance is displayed over half the note, while the Bank building occupied the other half. On the 1977 $1,000 note, the relief effect of Chinese characters on the obverse is an attractive technique not used on the early notes and an interesting three-layer effect is achieved in the background by means of the spacing of interlocking lines. The reverse, however, is the more interesting side of this note as it was with the $500, for here the Bank's snarling lion dominates the lefthand half of the note, with the Bank's main entrance in close-up behind it, neatly establishing the design connection between this note and the $500 of the series. As the largest privately-owned note-issuing bank in the world, the Hongkong and Shanghai Bank is one of the few institutions authorised to design and distribute its own notes. With a striking new headquarters building underway, and the extension of the Bank's influence well outside Hong Kong and the Orient, the design of the next note issue will almost NOTE ISSUES certainly reflect the Bank's expanded role as it moves into the twenty- first century. References Collis, Maurice. Wayfoong: The Hongkong and Shanghai Banking Corporation. London: Faber & Faber, 1965. King, Frank H H. Asian Policy, History and Development: Collected Essays. Hong Kong: Centre of Asian Studies, Univ of Hong Kong, 1979. -. Money and Monetary Policy in China, 1845-1895. Cambridge, Mass: Harvard Univ Press, 1965. -. Money in British East Asia. London: Her Majesty's Stationery Office, 1957. Mao, King 0. History of Chinese Paper Currency, Volume 1. Hong Kong: Chap Yau Printing Company, 1968. Ng, Wing Tay. Hong Kong Catalogue of Stamps, Coins, and Currency Notes. Hong Kong: Wah Hing Stamps and Coins, 1980. Pick, Albert. Standard Catalogue of World Paper Money. Munich: Krause Publications, 1980. Smith, Ward D and Brian Matravers. Chinese Banknotes. Menlo Park, Cali. fornia: Shirjieh Publishers, 1970. Sten, George J. Banknotes of the World, Volume 2. Menlo Park, California: Shirjieh Publishers, n.d. Hongkong and Shanghai Banking Corporation. Minutes of the Board of Directors. Group Archives. Personal correspondence with Arthur Morrish of Thomas De la Rue, J H M Kennedy of the Hongkong and Shanghai Bank, and Joe Cautherley, Hongkong and Shanghai Bank, retired. Acknowledgements I should like to extend my grateful thanks to everyone who helped with the banknote project. Without Brian Ogden's initial encouragement and continu. ing support, the task of organising the notes would have been impossible. The constructive criticism and suggestions of Professor Frank King have been invaluable, and I depended on him especially heavily in the area of banking and economic history. In the later stages of the project, the assistance of Stuart Muirhead and his staff at the Bank's Archives Department—in particular Margaret Lee and Lily Sung, who painstakingly researched the Bank's collection of notes to find individual specimens for me was exceptional. The staff of the Bank's Training Department developed fine slides from these original notes at very short notice. Thank you. Amongst the many people who helped with the work, I particularly want to thank Kit Stocker for generously sharing his considerable knowledge of banknote engraving; J H M Kennedy for correspondene on disputed items, and EASTERN BANKING for the photocopying of unusual notes; Arthur Morrish of Thomas De La Rue for his extensive and time-consuming research in the De La Rue Archives and the National Postal Museum, and Joe Cautherley for his first-hand account of the handsigning process. Robert Lam of the Hong Kong Museum freely gave of his knowledge of Asian history and banknote issues, and Mel Steinberg and David Tang suggested points of numismatic interest. My final thanks to Ms Suzanne Green and Mrs Sonja Gallagher who patiently and cheerfully typed the manuscript at every stage, and to my husband for his constant encouragement, his practical assistance, and for the benefit of his extensive numismatic knowledge. APPENDIX: AN OUTLINE OF THE PROBLEMS OF THE HONGKONG AND SHANGHAI BANKING CORPORATION’S NOTE ISSUE by Frank H H King [These informal comments were presented at the conference as an introduc. tion to the illustrated lecture on the numismatic history of the Hongkong Bank's note issue.] Under the general banking legislation in effect when the Bank was founded, note issue by joint stock banks was permitted, but with unlimited lia. bility. Such notes would not, however, be eligible for acceptance by a colonial treasury since the Colonial Regulations required the bank of issue to be subject to colonial banking regulations and formed in accordance with them, usually but not necessarily by royal charter. A bank had no chance of keeping its notes in circulation if they were not accepted in payment of government dues and taxes, and thus a bank, if it wished to profit from a note issue, had to submit to the regulations. These included double lia. bility, but in the case of the Hongkong Bank, the intervention of Jardine's representative on the Hong Kong Legislative Council resulted in a provision whereby the Hongkong Bank shareholders, in addition to their double liabil. ity, also had unlimited liability with regard to the note issue. However, the Bank began issuing notes in anticipation of its ordinance on the understanding that it would procure one. A six months' 'in opera. tion' rule was interpreted to mean six months from the signing of the deed of settlement, and thus the Bank began issuing notes in April 1865 which were accepted by the Government in mid-1865, some eighteen months before incorporation. One distinction between a branch and an agency was that the former could, other things being equal, issue banknotes, while the latter could not. One reason for Indian government insistence on control of branch approvals was, in fact, the note-issuing rights which were included in imperial charters but which were contrary to Indian monetary policy. The Hongkong and Shanghai Banking Company Limited issued banknotes in its Yokohama Branch, in Shanghai and in Hong Kong, but, in accordance with the rules of its subsequent ordinance, it could not issue notes of less than NOTE ISSUES five dollars (or equivalent) except with permission of the Governor. This was granted in 1872; but the Governor consulted only the members of the Executive Council in Hong Kong and did not refer, as he should have done, to the Treasury through the Colonial Office. The consequences of this will be considered below. In the meantime, the Banking Company is reported to have issued a one-tael note in Shanghai before the ordinance limited its aut hority. By incorporating the Bank and accepting its notes the government could be seen as endorsing the Bank and/or the notes in some way. Thus the government in return for the privileges required the Bank, in addition to the shareholder liability requirement, to agree to certain rules. In the case of the Hongkong Bank, they had to be ready to redeem their outport notes both in the place of issue and in Hong Kong--this to avoid what Dr Wesley-Smith describes as danger of the Hong Kong legislature being ultra vires by requiring something outside the Colony; whatever the Bank did in Shanghai was possibly to the good, but the law required it to agree to redeem in Hong Kong as well. This was coupled for the same reason with a provision that the Bank keep its required specie reserve (of one-third of notes outstanding) in Hong Kong; but the Bank naturally needed reserves in the place of issue and could not afford reserves in both locations. Then despite the provisions of the ordinance, the Bank opted on its own for reserves in the place of issue, reporting only its Hong Kong issue to the Hong Kong government. When this was discovered in the 1870s, a long protracted correspondence resulted, the government pointing to the ordinance, the Bank to common sense. In the end the Bank won; it redeemed at the place of issue and also in Hong Kong at the rate of exchange of the day, but the reserves were apportioned among the places of issue, so that, as the Treasury observed, the Bank was many banks in several locations; which, one might argue, is precisely one's definition of a Bank with branches as then understood. The problem of security was to arise once more in dealing with the need for a 100% reserve, part in specie as before but part in approved and designated securities set aside as a note reserve. The problem here was that the imperial government believed the note-holders should have priority over general creditors in the case of the Bank being forced to wind up. The Treasury had forgotten that the Bank, unlike the others in this cate. gory, had unlimited liability as far as the notes were concerned, but even then, it was agreed, the note-holders lacked priority. So the Bank set aside securities, and files of correspondence exist on what should or should not be admitted as proper securities. Having finally agreed, the British government encouraged the Bank to make a political loan to the Hankow viceroy, a loan made financially feasible by cynically permitting the Bank to include the loan as a security for the note issue and thus releasing other securities for sale so that funds would be available for non-political and presumably more profitable loans on a commercial basis. The terms of redemption and the security were, then, two problems of the note issue. Another was the one-dollar note issue. From the first the British Treasury was concerned over the issue of small denomination notes, not only questioning their necessity, but also pointing out that the notes rested in the hands of the poor and ignorant and foreign etc people who EASTERN BANKING would panic in a time of crisis and thus harm the Bank or, alternatively, creditors for cash redemption with consequent political unrest—either way they were a menace. When the Oriental Bank failed and the Ceylon governor guaranteed the Oriental's note issue to prevent hardship, another argument was added—a one-dollar note issue which endangered a bank could become in the end a burden on the public purse. While this argument also led to advocacy of a government note issue, the need for a non-issue, if you will, of bank one-dollar notes was reinforced; there was always the possibility of a government issue limited to one-dollar notes, if that were the problem. The Hong Kong governor was faced with a problem, namely the pressure by all levels of the community for a one-dollar banknote issue due to the confusion of the one-dollar coinage. After consultation therefore he approved, under the ordinance, such an issue by the Hongkong Bank and they promptly took advantage of the same. This action compounded London's prob. lems because on top of the one-dollar banknote question there was now the monopoly question. Only the Hongkong Bank had the right of issuing low- denomination notes; why not extend the right to the other note-issuing banks? Here the Treasury had tied its own hands by insisting that newly reissued charters include an outright prohibition against such issues, and there was apparently no question of revising these charters. Naturally the other banks protested, but unfortunately for them the Treasury, while it approved of nothing in the whole matter, was able to show that the repre. sentations in Hong Kong not to disallow the Governor's action had been signed by, among others, the representatives of the now complaining banks. In any case the Hongkong Bank could now legally issue one-dollar notes and the Treasury had decided not to countermand the governor. The next step was to lie in wait for the Hongkong Bank to ask for permission to do something and then grant it only on condition that they limit the issue and agree to withdraw it unconditionally on the Hong Kong government's issuing its own one-dollar note issue, which the Hong Kong government did not in fact attempt until the 1930s. When the Hongkong Bank attempted to estab. lish in Singapore, the-Treasury was ready for them. We now move back to 1868 for another example of the government's posi. tion on monopoly privileges. One of the expectations imbedded in the Bank's initial prospectus was that they would be founded at a time of cur. rency reform through the Hong Kong mint; but the mint was failing as a fin. ancial venture and the Hongkong Bank offered to run the mint on the under. standing that it could have a monopoly of the Colony's note-issue for five years. This was out of the question; the government pointed out that the other note-issuing banks issued notes by right of charter, although, pre. sumably, this right could have been restricted. It could not however have been restricted in such a way as to give one institution a monopoly. The mint machinery was sold to Japan and the Hongkong Bank assisted in the international acceptance of the silver yen [Hamashita, essay No 16]. The rights established by charter and by extension available to the Hongkong Bank the extraterritorial issue aside—did, it is true, include the right to issue notes, but this right was hedged and restricted and eventually made conditional on the laws of the territory, including any new legislation by which the government might undertake its own issue. We have NOTE ISSUES seen these developments in Singapore [Nelson, essay No 9]; they might well have been a precedent for Hong Kong and, from time to time, London urged its consideration there. But Hong Kong was usually in the midst of some revenue crisis which took priority and in general governors were aware of the complexity of the problem in what was, some urged, but a suburb of Canton. The Hongkong Bank's Hong Kong note issue was not limited in its circu. lation to the Colony itself but was increasingly in use in South China. This and other factors in Singapore, Malaya and elsewhere, finally brought the authorities to the realization that the Hongkong Bank was nearing, or possibly had overstepped its overall limit, set by the amount of its paid- up capital. This would, of course, have been a convenient time to intro. duce a Hong Kong government issue, but the government was not anxious and the correspondence deals with the theoretical problems. The solution was to permit a so-called 'excess' note issue which was to be covered by 100% in specie, so that the Bank could issue additional banknotes but would not be tempted to do so at the risk of its own financial soundness since the full backing would be available and because the profit motive would appear to be lacking. This solved the problems of security and of permitting excessive profits to a privately owned institution, this last point also lessening the complaint of monopoly privileges, although other banks were subsequent. ly permitted an excess issue. But a new problem, not altogether under. stood, subsequently arose. This was the problem of the standard. Hong Kong was generally supposed to be on a silver standard, but at times in the period from roughly 1905 through 1920, the exchanges showed deviations which could not be explained by the relative prices of gold and silver; they were inconsistent with the assumption of a silver standard. There have been articles on the causes of the 'premium' on the Hong Kong dollar, but the explanation would seem connected with the terms of the excess note issue. Additional note issue was not, in itself, profitable to the bank of issue; and while it could obtain silver as backing for a new note issue on the same terms as under the silver standard, there was no requirement to issue notes. If for example the demand for notes increased at a time when the Bank chose not to import silver, the exchanges would rise and fluctuate independently of the gold value of silver. In an attempt to minimize these independent fluctuations, the govern. ment finally felt justified in accepting the arguments of the Mercantile Bank of India, which lost its right of note issue when it gave up its charter on reorganization; a special ordinance re-established its note. issuing privileges in Hong Kong. This could be seen, of course, as a dramatic change in imperial policy. In fact by 1907 when the ordinance was passed, a non-government note issue was so rare and chartered banks were no longer being established that there need be no imperial policy, and thus no deviation to cause grave debate in London. The problem was in Hong Kong only, and it was solved on Hong Kong terms. While the addition of the Mercantile to the list of note-issuing banks (the Hongkong and the Chartered Bank of India Australia and China) added to the potential note supply, the Hongkong Bank's issue so predominated that the policy of that Bank set, within a fairly limited range, the exchange value of the Hong EASTERN BANKING Kong dollar. In these notes we have considered the problem of convertibility, but the question might arise as to convertibility into what? The easy answer is 'into local currency', but that is not a particularly helpful answer since it was often the chaos of the local currency system which had popu. larized the note issue in the first place. If we step back one stage we can ask, how were the notes denominated? That is easier of answer: in the local unit of account. Thus the question of redemption can be answered by discovering in what form a debt expressed in the unit of account can be satisfied. Thus we have Hongkong banknotes denominated in taels of Shanghai sycee. 100 taels of Shanghai sycee or 100 Shanghai currency taels expressed a debt payable by tender of 98 taels of standard Shanghai silver--which didn't exist. Or put a little more clear. ly, the Shanghai currency tael was payable by tendering a weight (tael or liang) of silver, the so-called ts'ao-p'ing liang of 565.65 grains troy with a fineness of .9167. However standard silver in Shanghai was supposed to be .935 and so you would need only tender 98 ts'ao-p'ing liang of stand. ard Shanghai silver to meet a debt requiring tender of 100 ts'ao-p'ing 1 iang of .9167 silver. In fact the actual silver was better or worse than standard, a fact noted on the lump or 'shoe' of sycee which was currency; these shoes of approximately 50 liang (or taels) weight were packed in boxes of 60 weighing some 3000 liang or 242.5 pounds avoirdupois and re. quiring two coolies to move. The Singapore notes were denominated in ta-yin or 'big-silver', indicating coins of the fineness of the British dollar rather than that of the subsidiary coins and had the effective meaning of requiring payment in legal tender dollar coins and not in large amounts of subsidiary silver coinage which inevitably had a lower silver content and which was referred to, not surprisingly, as hsiao-yin or small silver. Denomination in a Dollar Mex would suggest that the debt could be repaid with tender of a Mexican dollar ... but not any Mexican dollar. Tender had to be made by a Mexican dollar which merchants, or perhaps shroffs, would accept at par with the unit of account, and it was possible that no such coin would exist. This naturally led to bargaining, minimized perhaps by the estab. lishment of a custom as to what coins were accepted and at what rates in relation to par. Some may find this confusing. Of course. Hence the use of banknotes. In fact, many used neither silver nor banknotes but wrote chits on their compradore or other source of funds. They did not need credit cards, a device only necessary when you are unknown, but the economic impact was similar. The main problem is, then as now, to minimize the use of cash, especially cash in the form of coins, be they round or shoes, which have an intrinsic value. 9. THE HONGKONG AND SHANGHAI BANKING CORPORATION FACTOR IN THE PROGRESS TOWARD A STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE, 1881-1889 by W Evan Nelson As a bank of issue, the Hongkong and Shanghai Banking Corporation was inti. mately engaged in the Government of the Straits Settlements' long struggle to establish a state currency note issue. An examination of this struggle, which spanned eighteen years of the latter nineteenth century, puts the Bank in the context of an historical process rather than presenting only a case of business development. Throughout, the Bank and the Government were antagonists for the most part. From their conflict emerged a parallel development in both, as each sought power with which to curb the other. There resulted on one hand the eventual and unequivocal success of the Straits currency note issue, which survives to this day in the Republic of Singapore. On the other hand, the retreat of the Bank before the Govern. ment's note issue can be more rightly termed a victory for the former than a defeat. It surfaced directly from the conflict a strong and legally secure international organization. That it still issues notes in the Col. ony of Hong Kong is not unrelated to its experience in the Straits. There is much in the literature on the Straits currency which mentions the opposition of "banking interests" to various currency reforms.^ The Hongkong and Shanghai Bank was certainly no exception in this respect, but it had a rather low profile when it came to articulated arguments, peti. tions and lobbying. Far more prominent in this were men like F C Bishop and G S Murray, both local managers of the Chartered Mercantile Bank and masters of satire whenever any measure threatening the banks was intro. duced. W H Frizell, Singapore manager of the Chartered Bank during the 1890s, shot off numerous memos to the Government on currency affairs, while his chief, G Howard Gwyther, the Chartered Bank's answer to Thomas Jackson, lobbied relentlessly at the Treasury and Colonial Office. Rather than dwelling on similarly eloquent, if more infrequent, testimony of the Hongkong and Shanghai Bank's sentiments, it is more my purpose to concen. trate on the Bank's actions. For one, certain privileges and restrictions *E W Kemmerer, Modern Currency Reform, New York, 1916, p. 397. Chai Hon- Chan, The Development of British Malaya 1896-1909, New York, 1964, p. 84. J 0 Anthoniz, Currency Reform in the Straits Settlements, London, n.d., p. 8. Frank H H King, Money in British East Asia, London, 1957, p. 7. Chiang Hai Ding, A History of Straits Settlements Foreign Trade, 1870- 1915, Singapore, 1978, pp. 235, 239. Abbreviations: CO-Colonial Office; PRO-Public Records Office, London; SCCAR-Singapore Chamber of Commerce Annual Reports; SNA-Singapore National Archives; SSLCP-Straits Settlements Legislative Council Proceedings; Ty-Treasury. EASTERN BANKING embodied in the Bank's ordinance of incorporation were unique compared to the other Eastern banks. Equipped with these anomolies, the very act of expansion by the Bank could raise hopes and difficulties, often of a more novel and significant nature concerning currency than did the behaviour of the other banks. The Bank's impact on currency policy will be examined in three phases. In the first, the Bank expanded to Singapore, thereby unwittingly provoking the local Government and, to a limited, if controversial extent, the Imperial Government, into a forward policy on government note issues. The second concerns its attempted entry into the Native States. Again it unknowingly incited Government policy initiatives and while in the attempt exposed itself to bank reform by the Imperial Authorities. The last phase occurred in the 1890s and is characterized by more open confrontation and concerted statagems to forestall the Government's strengthening will to implement a currency note issue. Each phase experienced a crisis which influenced events. The first and last witnessed severe currency shortages in the East, while the second began during the momentous failure of the Oriental Bank Corporation in May of 1884, one of the East's oldest and largest exchange banks. I If the Bank considered only the factor of note issue employment, its deci. sion in 1877 to expand to Singapore appears a little odd. The Straits and Hong Kong were under strain from a protracted and acute dearth of Mexican dollars which were the chief currency of the area. The note issue of the three chartered banks in the East were both limited to their paid up capi. tal and way below that amount. What is more, their issues were dissipated among the three colonies of Ceylon, the Straits and Hong Kong. The Hong. kong and Shanghai Bank, in theory at any rate, had no branches, so its notes were presumably more concentrated on Hong Kong. Its issue was limi. ted to a paid up capital of $5,000,000, but was actually only $1,380,780 at the close of 1877.3 The banks then were apparently either unwilling or unable to make good the currency shortage through their note issues. Since of all colonies Hong Kong complained the most about this short- age, it is interesting that the bank originating these should decide at this time to expand and employ its resources abroad, a move that might pos. sibly compromise its ability to ease urgent currency needs at home. In fact, the Bank's manager at Shanghai had protested the year before against any move to Singapore, so long as China fully occupied the Bank's funds.3 ^The three banks referred to and their paid up capital in 1877 were: the Oriental Bank Corporation, ￡1,500,000 = $7,500,000; the Chartered Bank of India, Australia and China, ￡800,000 = $4,000,000; the Chartered Mercan. tile Bank of India, London and China, ￡750,000 = $3,750,000. Their re. spective note issues as of 31 December 1877 were: $3,566,860 and $1,612,685. [I have no figures for the Chartered Mercantile Bank, but it would be comparable to the Chartered Bank's issue.] Banker's Magazine, 1878, vo 1 38. - - 3HSBC Archives, Board Minutes, 9 Nov 1876, 27 Aug 1877. The official reasons given for desiring to open the Singapore branch record little more than "numerous and important" transactions requiring such an establishment. The petition mentions that the three chartered banks established there for many years" no longer sufficed in a colony whose "banking requirements" had since greatly grown.^ True, but perhaps more compelling, these three banks were still weakened from the financial crisis of 1866. In Hong Kong their combined note issue had dwindled to almost half that of the Hongkong and Shanghai Bank. The latter's, mean. while, steadily increased. Because the Bank was dominant at home, the time was propitious from a competitive standpoint to challenge its ailing rivals abroad, currency shortage or not. The prospective manager of the proposed branch urged attempting a note issue in Singapore. Two years later the Board of Directors concurred with his advice.^ Surrounding the Bank's decision was a concatenation of events in Hong Kong. They were destined, through the circuitous agency of the Bank, to have unexpected repercussions on currency policy in Singapore. These events must be understood in the context of the principles then guiding colonial currency and the way the Imperial Authorities were attempting, within those principles, to cope with currency problems as they arose. Colonial currency policy in the mid-nineteenth century was, at most, one of benign neglect. The market provided the money supply while the only prominent guideline administrators had was the Treasury Minute of 1858 by James Wilson which merely fortified this neglect. His name invoked consi. derable prestige, for in addition to writing numerous economic works, Wil. son had founded the Economist in 1843. When a financial member of the Council of India, he established a government note issue for that vast country in 1860. On currency he was therefore the expert par excellence. His minute laid down that it was inappropriate for governments of small colonies to issue notes. That function was best left to the more profit. able and efficient agency of private banks.4 * 6 7 8 This principle formed the basis of "traditional policy" and, as it was based "upon information as skilled as can usually be commanded by a public department," the Treasury became extremely attached to it.7 The banks' note issues were subject to the Colonial Banking Regulations of 1846, but the one most pertinent to the present case specified that banks were not to issue notes under the value of ￡1.8 In Hong Kong two problems engaged the Imperial Government: the colony 4PR0 T.1/7641, bundle 19747/77, HSBC to Ty, 13 Dec 1877. ^In 1865 the note issues of all banks in Hong Kong were about equal. In 1866 the total issue of the [London] chartered banks in the colony was $483,024; that of the HSBC was $807,016. By 1880 none of the [London] chartered banks had achieved their 1865 level of issue in Hong Kong. HSBC Archives, Statistics file; Board Minutes, 11 Nov 1877 and 11 Sept 1879. 6Wilson's minute is reprinted in PRO T.1/8866C, bundle 1517/94, Correspon- dence Relative to Failure of the Oriental Bank Corporation, etc. He was financial secretary to the Treasury when he composed this minute. 7Ibid, Ty to CO, 28 Aug 1884. 8These regulations may be consulted in Robert Chalmers, A History of Cur. rency in the British Colonies, London, 1893, pp. 432—433. EASTERN BANKING had an endemic shortage of silver dollars and it had a bank that issued one dollar notes. Since 1872, the Governor of Hong Kong had authorized this issue, as he was empowered to do under the Bank's incorporating ordinance. The Treasury had repeatedly tried to terminate this anomaly, for it not only gave the Bank a monopoly of sorts, it clearly contravened the Colonial Banking Regulations. Unfortunately, the Colonial office and the local Gov. ernment were unenthusiastic in the Treasury's cause. The dollar notes were extremely popular in Hong Kong and legal under the Colony's law. 9 The Lords of the Treasury could only sulk. More pressing to the Secretary of State for the Colonies was the cry for silver dollars. After all, the Bank's controversial privilege diminished that problem if anything. By 1874, the Colonial Office had recognized that it ought to take action, but every effort to find another source of silver dollars, including a British dollar, proved fruitless.1R The Secretary of State's quandary appeared fortuitous to the Lords, for it at least offered them an opportunity to get out of their impasse and apply real pressure on the Colonial Office to end the offending small note issue. To that end, the Lords were willing at the close of 1875 to intrude their own solution to the dollar shortage, even if it hedged on Wilson's revered principles. They suggested, "that the Colonial Government should issue small notes--absolutely convertible of course, which would yield no profit and probably entail expense." To these cautious provisions the Lords added a sinister insinuation; "This special measure to meet the special emergency would mean of course the withdrawal of private Bank's issue. That a state issue must have a monopoly was another Treasury principle, but the Lords certainly were not going to compromise that one on this occasion.12 under the circumstances, the only bank affected would be the one issuing one dollar notes, ie, the Hongkong and Shanghai Banking Corporation. Upon a somewhat hesitant Colonial Office, the Treasury urged its scheme with pointed references to the Bank's "reprehensible" privilege, "obtained by oversight" and "inadvertently," which must "as a first step be withdrawn. "1Embarrassed and unable to find an alternative course, the Colonial Office eventually capitulated and declared itself in 1879 "pre. pared to recommend to the local Government the suggestion of the Lords Commissioners as to an issue of one dollar notes by that Government."!4 Although the Treasury's measure and the Secretary of State's assent were couched in terms of a special and unusual case, it was a departure from the principle formulated by James Wilson.1^ This departure also arose 9 PRO T.1/7457A, bundle 12,999/75, file 9862/74, CO to Ty, 16 June 1874 and enc losures. 10 PRO T. 1/16307, bundle 9862/79, file 15076, Hamilton's memo on CO to Ty, 13 Sept 1878. Hlbid. 12pR0 T.1/8647B, bundle 8122/92, reprint of G Arbuthnot's Memorandum of 1 March 1869, pp. 7-8. 1 3PR0 T.1/16307, bundle 9862/79, file 15076/78, Ty to CO, 26 Nov 1878, on CO to Ty, 13 Sept 1878. 14Ibid, file 888/79, CO to Ty, 13 Jan 1879. 1^Treasury admission of this breach is recorded in PRO T.1/8866C, bundle well before the failure of the Oriental Bank Corporation in 1884. On the occasion it is more generally argued that the Treasury first conceded the principle of government note issue, albeit bitterly and reluctantly at the time.16 When the Bank was proposing its move to Singapore, the Lords were in the midst of their high Imperial plot and therefore declared themselves, "somewhat indisposed to favour an extension of the operations of the Bank while it continues to enjoy a monopoly of small notes. The Treasury clearly intended to keep their sanction "in hand" pending the desired cur. rency reform in Hong Kong, upon the implementation of which the Bank would probably ask compensation against the withdrawal of its small notes.1-8 Since the Bank's expansion to Singapore was now dependent on the resolution of currency reforms in Hong Kong, and the Treasury was content to hold up the Bank while the colonial authorities made up their minds, the Secretary of State deemed it appropriate to make the Governor of the Straits privy to all correspondence on the Hong Kong currency. Imbedded in these masses of papers was the Secretary of State's and the Treasury's sanction for the issue of government one dollar notes in Hong Kong.19 The purpose of these papers was to guide the Straits Government in making a decision whether to admit the Bank or not, but on that question there was little controversy. The branch would be very welcome in Singa. pore. However, the Governor pounced upon the Imperial sanction of a gov. ernment one dollar note issue as though it were a glittering jewel among the rubbish. Here was the answer to Singapore's own shortage of dollars. The Straits Legislative Council forthwith passed a resolution "That . . . an issue by local Government of one-dollar notes, as recommended by Her Majesty's Government is advisable." Unavailing were the pungent objections of F C Bishop, ("Would not the issue of such a note caste a slur upon the notes at present issued by the Banks in the Colony?"), while the Governor shot off an enthusiastic covering dispatch to his uncomprehending superiors in London: The terms on which the sanction of Her Majesty's Treasury has been given to the issue are well known and have produced a feel. ing of entire confidence in such an issue. The Chinese communi. ty especially will be glad to get here a Bank note which is so popular among them in Hong Kong with the additional guarantee . . 20 that it is a Government note. 1517/94, Ty to CO, 28 Aug 1884, reprinted in Correspondence Relative to Failure of the Oriental Bank Corporation, etc and in T.1/8148A, bundle 20711/84, file 11503/84, Welby's minute on CO to Ty, 3 July 1884. 16PR0 T.1/8866C, bundle 1517/94, Ty to CO, 28 Aug 1884 reprinted in Corres. pondence Relative to Failure, etc. See Chiang, p. 237 for a brief discussion of the precedents for a state issue. 17PR0 T.1/7641, bundle 19747/77, Ty to CO, 3 Jan 1878 on CO to Ty, 13 Dec 1877. 18PR0 CO 273/106, Ty to CO, 30 July 1880 and Meade's minute. 19gNA SS264, S of S to Gov SS, 20 Nov 1879 and Enclosures. 20SSLCP 1881, Minutes 8 Nov, pp. 78-79. PRO CO 273/113, SS12 Gov SS to S EASTERN BANKING Governor Weld was responding exactly as it was hoped the Governor of Hong Kong would and never did. The Home Authorities were caught totally off guard, but one under. secretary finally figured out that "The Straits Govt appear to have taken the allusion to the Hong Kong one Dollar note issue ... as an invitation to undertake such a note issue in the Straits." However the cat, so to speak, was out of the bag. Another minister at the Colonial Office ob. served "As Treasury will not allow a Bank to issue $1 notes (from some inscrutable reasons not understandable without more knowledge of the Mystery?, of currency than I profess)—we must accept this scheme & recom. mend it to my Lords."2^ The Treasury of course wanted to quash the idea, but since it had originated with them they were in an awkward position. Though the Lords, as they put it, "thought in the very exceptional state of things existing, an exception might be made in the case of Hong Kong, they did not intend thereby to waive their general objection to state issue." There followed an argument that the need for dollar notes was not as pressing in the Straits as in Hong Kong, but in making this argument the Lords conceded that if proper necessity could be demonstrated they were prepared to commend the measure.22 The pivotal factor in the Treasury's reasoning was the Hongkong and Shanghai Banking Corporation. The Lords had threatened earlier that if Hong Kong refused a state issue they would assume the Colony was not really inconvenienced after all regarding dollars and would advise the Secretary of State to withdraw his attention.23 Yet, when Singapore espoused a state issue, the Lords asserted that that Colony was not inconvenienced enough to warrant the measure. The determinant was that in Hong Kong, the Bank issued one dollar notes. In Singapore, it did not. In the Straits, a departure from policy would serve no useful purpose whatsoever to the Treasury. Since the Straits Government had to confess that on closer examination public opinion was too divided to justify pressing a state issue for the moment, the Lords and the Colonial Office agreed that insufficient need was indeed present and there the matter dropped so far as the Imperial Government was concerned.2^ In the Straits, the question stayed alive. The local Government would repeatedly propose a state issue, even before the Oriental Bank Corporation disaster in 1884. In fact, Governor Weld suggested the Colonial Government issue notes of all denominations.23 Because it was the center of a 21 of S, 12 Jan PRO CO 273/113, ham's minutes. 1882. SS12 Gov SS to S of S, 12 Jan 1882, Johnson's and Gra- 22PRO T.1/13237, bundle 20308/82, file 1077/82, Ty to CO, 20 Sept 1882 on CO to Ty, 20 June 1882. 23PRO T.1/16307, bundle 9862/79, file 15076/78, Ty to CO, 26 Nov 1871 on CO to Ty, 13 Sept 1878. 24PRO CO 273/1 18, minutes on Ty to CO, 23 Sept 1882. SNA, SS26, Gov SS to S of S, 20 Jan 1883. The CO, getting an even more negative reaction from HK and no doubt tired of playing the Treasury's game, let the matter drop in HK as well. 25SNA, SS26, Gov SS to S of S, 20 Jan 1883. PRO T.1/15543, bundle 2136/83, Treasury attack on the eve of its expansion to Singapore at the time of currency difficulties, the Hongkong and Shanghai Bank was the catalyst that imported the precedent and aspiration for a state note issue into the Straits. Thereafter, all the Singapore banks would have to cope with this new threat. It remained only for the local Government to mobilize public opinion and show the Home Authorities due cause for such a measure. In its move to Singapore, there were also legal implications for the Bank's development. On numerous occasions it had petitioned for Treasury sanction to open branches outside Hong Kong. On each occasion, excepting the first which received no reply, the Treasury ruled that they could not consent to establishments outside the Colony which were authorized merely by "Ordinance of Colonial Legislature". In fact, the Lords concluded that the article of the Bank's incorporation ordinance requiring their sanction on these occasions was "a farce" and "a piece of waste paper so far as it implies that the Treasury could authorize the formation of Establts. out. side the Colony." Singapore opened a slight crack in this impasse. The Bank, as things stood, was legally able to open there, with Treasury per. mission, if the Straits Government passed a local ordinance enabling this.^ por reasons given earlier, the Lords withheld their permission, but the Colonial Office knowing full well it would never straighten out the currency mess in Hong Kong, prevailed upon the Treasury to relent by getting the Bank to promise to withdraw "unconditionally" its small note issue in the event of a government dollar note issue in Hong Kong.27 On granting their permission, the Treasury made a further observation: A Bank incorporated and possessing the necessary powers under the law of one colony may establish a Branch in another colony, if the law of the latter colony does not forbid it. If so,—in the absence of restrictive Banking legislation in the Sts. Setts, there wd. appear to be no absolute necessity in this case for a Straits ordinance.28 This liberalized slightly the conditions under which the Bank could expand to another colony. An impediment still remained with regard to its note issue outside Hong Kong, for by law it was required to keep its entire note security in that Colony. A Straits Ordinance therefore had to be passed allowing the Bank to keep a reserve locally of one-third its issue in Singapore. The following year the Bank's Hong Kong ordinance of incorporation was amended to enable the Bank to distribute a one-third cash reserve to any establish- ment wheresoever it might issue notes. 7 Needless to say, it was not file 11232/83, CO to Ty, 19 June 1883 and enclosure, SS132, Gov SS to S of S, 2 Nov 1883. 26pRO T.1/8504C, bundle 13168/90, General Memo for Record, by Robert Chal. mers on CO to Ty, 29 Aug 1890. CO 273/106, CO to Ty, 18 Aug 1880 on Ty to CO, 30 July 1880. SSLCP, 1881, Minutes, 22 Nov. 27PRO CO 273/106, Ty to CO, 27 Aug 1880. 28PRO T.1/8504C, bundle 13168/90, file 13168, Chalmer's memo. 29ss Ordinance No X of 1881, enclosed in PRO T.1/13237, bundle 20308/82, EASTERN BANKING empowered to issue one dollar notes outside Hong Kong. With the settlement of these legal questions, the Bank's position was improved. Obstacles had been removed from its expansion to, and note issue in, other colonies. The Straits community heartily welcomed the Bank and was especially impressed that its note issue was backed not only by a one- third specie reserve, but protected by unlimited liability, something no other bank offered. This latter provision even inspired one Straits Legis. lative Council Member to exclaim, "We now have an opportunity to make a good and sound banking law for the Colony," upon which he suggested that if all banks provided unlimited liability against their note issues, their one-third specie reserves could be released, providing some additional $1,000,000 to the economy and effecting a splendid solution to the dollar shortage. He was derided for his pains, but that very same gentleman's following resolution, advising a government dollar issue, was certainly not treated as the utterance of a crank. 30 This sort of vacillation between the Government and the banks would characterize the approach to currency reform in the Straits. In closing this episode on the Hongkong and Shanghai Bank's entry into Singapore, one last comment is in order. The Bank was either blissfully ignorant of the Treasury's agonized attack on its one dollar note issue in Hong Kong or else confident to a degree the Imperial Government might char. acterize as impudent. As soon as the Bank received intelligence "that the Colonial Government of Singapore had abandoned the idea of issuing one Dol. lar Notes," it sought permission from the Secretary of State to issue such notes itself in the Straits. Some ministers at the Colonial Office thought this a perfectly presentable idea since there "decidedly appears to be pub. lic want" for it. Apparently, they had forgotten the earlier agreement between their own department and the Treasury that no such "want" existed in the Straits. That agreement was precisely why the Colonial Government had had to "abandon" the idea in the first place. The Secretary for the Colonies, Lord Derby, simply followed the Treasury's precedent in Hong Kong and responded that any notes under $5 ought to be issued by the Govern. ment. ^l The Lorcjs Commissioners were of course not amused by either Lord Derby or the Bank. They felt obliged to hint strongly to Lord Derby that their refusal to the Bank's petition was on general grounds and not in anticipation of a government small note issue. ^ Though the Imperial Authorities were left in mild disarray over just exactly what their currency policy now was, the Bank's power and limita. tions were thus defined and it settled down to do business in the Straits. file 801/82, CO to Ty, 11 Jan 1882. Amendments to HK Ordi nance No V of 1866, enclosed in Ibid, file 13042/82, CO to Ty, 27 July 1882. See also Chalmer's memo. to JUSSLCP 1881, Minutes, 22 Nov, pp. 114-115 and 8 Nov, p. 78. ■^PRO CO 273/125, HSBC to CO, 23 July 1883 and minutes. SNA, SS26, Gov SS to S of S, 20 Jan 1883. 3 ^PRO T.1/14873, bundle 14283/83, minutes and draft reply on CO to TY, 6 Aug 1883. SNA, SS259, S of S to Gov SS, 18 Sept 1883, enclosure No 3 Ty to CO, 12 Sept 1883. II Although the Straits Government had taken to heart the idea of a state issue, the period of the 1880s proved frustrating. To be sure, the public was discontented with the currency shortage and even had been uneasy for some time over the safety of private note issues. Yet, even after the Oriental Bank Corporation stopped payment, most of the mercantile community did not want a government takeover of the currency. A state issue tied up a larger specie reserve than the banks were required to keep and would remove that amount of cash the banks' note issues made available to com. merce. The Straits community, therefore, felt both dependent on and extremely loyal to the banks. They did not want their valuable noteissuing privileges to fall before a governent monopoly. Instead, merchants asked that Government regulate the banks more thoroughly to ensure safety of the note issues. For its part, the Government did not think controls either effective or possible, neither did it relish assuming responsibility for the bank's losses and sharing in none of the profits. A situation existed where the public wanted something done, but not what the Government proposed and vice versa. The Treasury, whose views on a state issue had softened by 1887, agreed that a kind of stalemate existed in Singapore, but took a somewhat passive-aggressive position saying, "The community has been warned of the risk to which it is exposed by a currency system acting solely for the interest of the issuing Banks. A change to a sounder system can only be made with the concurrence of the community, and that concurrence has not as yet been obtained." The Lords then added their wish to have it put on record that in anticipation of a state note issue, it was "desirable that no measure should be sanctioned extending the present powers of the banks. In other words, the Straits mercantile community could stew in their own juice until they thought better of a government note issue. Even so, it appeared that the note-issuing privileges of the banks would go unchallenged and unreformed for quite a while. Because a breakthrough was so unlikely in the Straits Settlements, the focus of currency reform had shifted as early as 1884 to the Malay Native States. There, the authorities did not have to worry about inconveniences like public opinion. This shift also explains why the Hongkong and Shang. hai Bank determined to enter that rather unpromising area at an early date. The main impact of the Bank's attempted expansion there was on its own development, but it did exert an influence, albeit subtle, on the prog. ress of currency reform. It was able to do this, because, unlike the local Government, the Home Authorities were ambivalent—in the wake of the Oriental Bank failure—about wherein their priorities lay. Should currency be safeguarded through a state issue, or secured by reformed private note issues? The two were sadly incompatible, for a strong, reformed bank might deflect public opinion from a state issue. In the fight for public 33SSLCP 1888, App 3, especially Memorandum by the Colonial Secretary on Secretary of State's Despatch No 70 of 27th October, 1886, pp. C14-C17. -^Ibid, Ty to CO, 29 Nov 1887, enclosed in SS 287, S of S to Gov SS, 8 Dec 1887, p. C21. EASTERN BANKING opinion, the banks would have to be discredited, and re-reforming them was hardly the way to go about this. On the other hand, with public opinion so set against state interference, there seemed little choice but to reform the banks in the immediate interest of protecting that public. By the time the Hongkong and Shanghai Bank had emerged from the embarrassments it would undergo in trying to get established in Perak, it was in a position to intensify this ambivalence. Major John F A McNair was an old Malaya hand administering the Govern. ment at Penang in 1884. Apparently he was aware that elements in the Colo. nial Government were considering direct action in the Native States as a way of circumventing the hostility in the Straits to a government note issue. The subject of the Native States was also pressing in its own right. Due to increased British enterprise there, the Residents were anxious about the appalling lack of financial facilities. Therefore, McNair approached the Hongkong and Shanghai Bank early in 1884, presumably as a friend, and represented to the Singapore manager "that if some of the Banks did not give banking facilities to the people of Penang and Perak, the Straits Govt, would probably try to establish a bank of their own, giv. ing exclusive privileges of note issue etc." McNair was probably not privy to any particular plan, but did know that Frank Swettenham, who was one of the most outspoken officials for a state issue, had just become Acting- Resident of Perak.^5 Desirable as banks might be for Perak, it was not a brilliant banking prospect. In 1889, the Chartered Bank could only be induced to move there if the Government granted it a number of "compensations" for the losses it expected to sustain in the "public service". Six years later, the same bank decided that in Perak, "apart from the convenience to the Government, there is no field for banking operations," and closed down its agency ° The intentions of the Hongkong and Shanghai Bank were therefore probably predicated largely on McNair's advice which whetted the Bank's desire to defend its issue of private notes against government expansion into that field. The only thing that could conceivably make a bank profitable in Perak was the right of issuing notes there, and this the Bank may have hoped to gain. Certainly the Chartered Bank, when it opened in Taiping, -^HSBC Archives, Board Minutes, 21 Feb 1884. Major John Frederick Adolphus McNair (1828-1910) had served the Straits Government nearly thirty years by 1884. He had travelled extensively in Perak and was on the punitive force sent there following the assassina. tion of J W W Birch in 1875. In 1878 he published a book Perak and the Malays. This work is in a genre common to the period which inevitably gives fascinating descriptions of people, fauna, flora and places while making an unabashed call for their development. A typical sentiment from his book is: "What is really wanted to make the tin deposits of Larut highly profitable is the introduction of British capital and machinery, with British enterprise." Oxford Univ Press edition, Kuala Lumpur, 1972, p. 30. McNair may have had the idea that the HSBC would participate in this sort of development in his beloved Perak. ~^PR0 CO 273/157, Chtrd Bk to CO, 5 March 1888 and draft reply CO to Chtrd Bk, 27 Nov 1888. CO 273/210, Chtrd Bk to CO 14 Nov and 18 March 1895. began agitation immediately for this right. Initially it looked as though the Hongkong and Shanghai Bank's intend. ed move would prove successful. Cecil C Smith, who was the Officer admin. istering the Straits Government in Governor Weld's absence, regarded the Bank highly. He gave an enthusiastic endorsment to the proposed branch in Penang, citing in particular "The fact of there being unlimited liability as regards the note issue of the Corporation has brought it into special favour at the present time, while its sound position justifies the confi. dence which is liberally extended to it. "3R Expansion to Penang, however, was considered routine, for it was part of the Colony. The Chartered and Chartered Mercantile Banks already had branches there, issuing nearly $1,600,000 be tween them. Permission to open duly arrived from London in August, including the privilege of issuing notes.39 Requesting an agency in Perak was a different and unprecedented matter. Smith recognized that in so novel a case a hearty recommendation to the Secretary of State would be insufficient. He therefore proposed a policy initiative on the entire subject of currency in the Native States, by which means he hoped to pave the way successfully for the Bank's appli. cation. "The time has arrived," he announced, "for a decision to be given on a subject pressed by the Residents of the Native States, namely the means to be adopted for giving Banking facilities in those countries." He reiterated the hardship a total lack of these facilities caused European entrepreneurs, and then spoke of the uncertain situation in which perhaps some $1,500,000 in bank notes circulated without authority or regulation in the States. These unsound conditions made it, "worthy of consideration whether the Government of each Native State should establish a State Bank, or whether . . . Banks now established in the Colony should be authorized to open Branch Banks in the Native States." Though admitting that state banks would meet "with the favour of Sir F Weld", Smith argued that they would be expensive and useless. Depositors would still use the Singapore banks which could offer higher interest rates. Since opinion in the Straits remained unreconciled to a state note issue which might serve the Peninsula as well, he saw no reason why the Government should not facilitate the opening of a Branch of such a Bank as the Hong. kong and Shanghai Bank. It should refuse to allow a note issue from such a Branch, but it should continue to permit the circu. lation of notes from Banks in the Colony ... (I have particul. arized the Hongkong and Shanghai Bank solely because that Bank alone at present of the Eastern Banks has an unlimited liability 3?PRO CO 273/157 S in Alfred Dent to F Graham, 29 Nov 1888 and enclosures, included with Chtrd Bk to CO, 5 Nov 1888. 38SNA SS207 Act Gov SS to S of S, 28 May 1884. ‧^Although some of the records in the HSBC Archives are conflicting or unclear as to whether a note issue in Penang was permitted, Government records in Singapore unequivocably show that the Bank was issuing notes in Penang from December of 1884. HSBC Archives, Board Minutes, 21 Feb and 15 Aug 1884 and the Jones File 'A'. PRO CO 275/26, SS Exec Council Minutes, 29 July 1884. SNA SS Govt Gazette, December 1884 et seq. EASTERN BANKING as regards its note issue.)4R Such branches (Smith should have called them agencies) if not issuing notes could at least encash them. Though agencies were not obligated to cash notes, their general practice of doing so anyway would afford some stabili. ty to the de facto, if unregulated, note circulation in the Native States. Smith's initiative was meant to forward the interests of the Hongkong and Shanghai Bank. Instead, he opened up a veritable Pandora's box of con. troversy, during which government departments were at loggerheads and Imperial policy in utter confusion. When Smith flew his kite, it was June of 1884. On 3 May, the Oriental Bank Corporation had stopped payment. It was on that occasion that Governor Gordon of Ceylon decided, without consulting the Colonial Office, that the crisis warranted a government guarantee of the stricken Bank's note issue in the Colony. The only logi. cal step thereafter was for the Colonial Government to assume the currency note issue itself and this soon happened in Ceylon. Such a radical dis. regard for accepted policy had the Treasury in an uproar. Because he had refused to censure Governor Gordon, the Lords blamed the Secretary of State for admitting the dubious principle of state liabil. ity for private issues. The Colonial Office denied admitting anything of the sort, but it was Cecil Smith's pro-banking policy initiative for the Native States that provided the Treasury with a perfect occasion for expressing its wrath towards the Colonial Office and then punctuating it by striking at the banks. In a communication filled with sarcastic recrimi. nations, the Lords declared that in view of the proclivity of Colonial governors to yield with impunity to bankers at the first sign of a crisis, no Singapore banks could enter the Native States without first securing their note issues. At first unlimited liability was deemed a sufficient guarantee, but later a one-third reserve consisting of approved securities in addition to the usual one-third cash reserve was considered appro. priate. As the Treasury explained, "now that Lord Derby has admitted the principle of State liability for private issues . . . my Lords cannot be parties to any extension of that possible liability." They were further pleased to note that: Nothing in the HSBC Ordinance shall restrict the Company with the consent of the Treasury from establishing any Banks or Branch Banks at London or any port, town, city or place in India, Penang or Singapore. It does not appear to my Lords that the Native States can be described as in Penang or Singapore. Similar restrictions ruled the chartered banks as well, meaning that no bank could legally operate in the Native States at all.4* The Treasury's attitude seemed simply vindictive to the Colonial Office. It was highly unlikely that banks would secure their notes for the doubtful privilege of opening in such remote places. If the charters were restrictive, then they should be amended. One prominent under-secretary 40SNA, SS265 Act Gov SS to S of S, 18 June 1884. 41PRO 273/131 Ty to CO, 27 Sept 1884 and Luc as' minute. STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE observed: It is absurd to suppose that these States, as they become more settled and civilized, are not to have banking facilities, and the establishment of the branches or agencies of banks without the power of fresh note issue will really add little to the present liabilities, even supposing Lord Derby had approved instead of having disapproved the government guarantee. For the moment, a banking solution for the Native States was stymied as emotions replaced policy. In the Straits, the alternative solution of a government note issue was also lost in the shuffle. Although Governor Gordon's guarantee is usually considered the event which gave birth to the principle of state issues, the Lords made no mention in their harangues to the Colonial Office of applying this principle in the Straits.^ Understandably, the idea was still an anathema to them. The Treasury may have deemed the measure advis. able by 1887, but bank reform was its more immediate concern. State note issues for all Crown Colonies did not become an agreed policy of the Imper. ial Government until 1890.^ Until that time, like the proposed government small note issue in Hong Kong, or even the Colonial issue extant in Mauri. tius since 1847, the Imperial Authorities considered state issues on an individual basis and only under certain circumstances. A general principle may have evolved at Ceylon or at some other point, but policy was definite. ly applied on an ad hoc basis. For instance, following the Oriental Bank failure when the Straits Legislative Council decisively passed a resolution calling for a government issue of currency notes in all denominations, the Secretary of State declined to make the Ceylon incident a precedent. He was undoubtedly influenced by the Treasury's recent criticism and, even though the resolution had Acting Governor Smith's earnest endorsement, the Secretary of State still deemed the banks in Singapore sound enough to obviate state interference.^ On the other hand, there appeared to be no Imperial objection to a state issue in the Native States, but the idea was slow in getting serious attention because everyone agreed it was best, if government issued notes at all, for it to do so from the Straits.^ Besides enjoying a stalled policy regarding state issues, the most significant development for the Hongkong and Shanghai Bank to emerge from the events was precipitated by the Treasury's assertion that no banks were entitled to operate in the Native States. The pressing need to get banks there, urged again by Cecil Smith in 1887, led a sympathetic Colonial ^ibid, Lucas' minute. ^For a brief discussion of precedents for state issues, see Chiang Hai Ding, p. 237. ^PRO T.1/8866C, bundle 1517/94, file 13118/90, Draft Clauses for Govern. ment Note Issues, 26 June 1890, enclosed in Pari Counsel to Ty, 15 Aug 1890. See also Welby's Minute, dtd 21 Sept 1890 and other enclosures. 45SSLCP 1885, Minutes 9 April, pp. B19-B29. SSLCP 1888, App 3, SS70, S of S to Gov of SS, 27 Oct 1886, pp. C8-C9. ^PRO CO 273/156, SS538, Gov SS to S of S, 5 Dec 1888 and Graham's minute. EASTERN BANKING Office to examine more closely the incorporating instruments in question. It determined that since Taiping and Kuala Lumpur could be termed "chief ports or other places of trade in the East", the Chartered and later the Chartered Mercantile Bank could open there. The Chartered Bank immediately set up agencies at both places and though disconsolate, the Treasury did not interfere.4 * **7 When attention was turned to Hong Kong Ordinance V of 1866, it was clear that the Hongkong and Shanghai Bank could not operate in unspecified foreign territories, into which category the Native States fell. However, one of the examiners reported with momentous repercussions: That Bank has I believe agencies at Lyons, Manila, and San Francisco which places are beyond the limits laid down in the ordinance. The Hong Kong Bank therefore evidently think that they are not restricted as to agencies, and yet the language of their ordinance is much closer on the subject than the language of the Charters of the Chartered Banks.4R This revelation deserved a legal opinion and he suggested rather puckishly that it be gotten from the Treasury. Although it was the intention of the Colonial Office to embarrass the Treasury rather than the Bank, the latter was put in an awkward situation. Besides the agencies referred to, it had many others illegally placed throughout the world. In addition, there were full branches at London, Singapore, Shanghai and Yokohama, of which only Singapore had Treasury permission.4^ The Bank had long been frustrated with the Treasury's insis. tence that the Lords were incompetent to sanction the foreign expansion of a colonial corporation, although that sanction was required. It had simply expanded anyway. With exposure imminent, the Bank had to move quickly. Fortunately, the basis for a solution had been laid the preceding year. In 1887, the Bank had again routinely petitioned that the controversial section IV of its incorporating ordinance be amended to effectively permit expansion to foreign territories. At the time, the Treasury was concerned with reform. ing private note issues and probably to that end asked Parliamentary Counsel to come up with a more flexible decision on the Bank's request. Parliamentary Counsel obliged, and ruled that all past refusals had been based on a "misconception as to the bearing of International Law". Then he announced, "A Local Ordinance can, like an Imperial Act, confer on a Bank capacity to do business elsewhere, the authority being dependent on Local 4^PRO CO 273/157, Chtrd Bk to CO, 5 Nov 1888, Graham's minute and draft letter to Ty, 27 Nov 1888. CO 273/156, SS538, Gov SS to S of S, 5 Dec 1888, Graham's minute and enclosed letter, Hamilton to Meade, 15 Jan 1889. T.1/8414B, bundle 12431/89, file 20036/88, CO to Ty, ? Dec 1888, Further Memo by Hamilton. File 12431/89, CO to Ty, 22 July 1889, Ty memo thereon, dtd 8 Jan 1890. PRO CO 273/157, Chtrd Bk to CO, 5 Nov 1888, Graham's minute. 49PRO T.1/8504C, bundle 13168/90, file 7522/90, CO to Ty, 12 May 1890 and draft reply, Ty to CO, June 1890. File 11519/90, HSBC to CO, 22 July 1890 and enclosed in CO to Ty, 22 July 1890. STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE Law in the Host country." Armed with this opinion, the Treasury made its sanction conditional upon the Bank securing its note issue. In this respect, consent for expansion "became a question of policy not law". In 1887, the Bank refused this well-hooked bait, but in 1888, it was trapped. There was no alternative left but to immediately reapply to amend section IV "to obviate doubts as to the status of agencies already and mostly long established in Manila, Saigon, New York, San Francisco, Yloilo, Batavia, Bangkok and Lyons. "51 Because it was trapped, the Hongkong and Shanghai Bank became the first Eastern bank to fall before the Treasury's reforming zeal. The sub. sequent negotiations were characterized by much wrangling, during which the Lords described the Bank as "ubiquitous" and "a slippery customer," but at their conclusion the Bank had deposited the desired securities. Wrote one negotiator at the end, "I don't think this Bank can trouble us much again in the future."52 The Bank was actually strengthened by this reform and ironically so. In return for securing its notes, it was enabled to open branches of issue anywhere in the world and authorized to increase its paid up capital from $7,500,000 to $10,000,000.^3 The irony was that in 1890, when the reform was completed, the Treasury and Colonial Office had finally agreed that a local state issue was the only feasible alternative in the Native States. Now there appeared a bank with the power of note issue in those places. To protect their policy, the Straits Government had to quickly pass measures preventing this eventuality, while the Treasury began to hesitate in its agreement. The Lords wondered if it were not worthwhile, "before we commit ourselves further to a Govt, issue in the Protected States, to communicate with the Hongkong and Shanghai Bank and ask if they have any intention of taking the field in the Protected States with Notes." Were the Bank to do this, the Treasury hoped the other banks would submit to having their notes secured also, "in order not to be ousted out ... by the Hongkong and Shanghai Bank". The Hongkong and Shanghai Bank had thus introduced an element of suspense into an already long-delayed decision. It took the Colonial Office another year before they weaned the Lords away from their folly. As one under-secretary informed the Treasury, "I am afraid the Banks may be in the meantime gaining ground." Furthermore, had not the Treasury now sanctioned "measures . . . extending the powers" of the Banks ?5^ 50pro T.1/8504C, bundle 13168/90, file 7886, CO to Ty, 30 April 1889, Chal- mer's minute dtd 6 May 1889. File 13168/90, CO to Ty, 29 Aug 1890, Chal- mer's General Memo for the Record. 5^ibid, file 7886/89, Tel Gov HK to S of S, 24 April 1889 enclosed in CO to Ty, 30 April 1889. 52ibid, file 8634/90, CO to Ty, 4 June 1890, Hamilton's memo. File 13168/90, CO to Ty, 29 Aug 1890, enclosure: Meade to Crowley, ? Sept 1890. File 11540/90, CO to Ty, 26 July 1890, Hamilton's minute dtd 29 July 1890. 53hK Ord 29 of 1889 dtd 27 Nov 1889 in PRO Ibid, file 1998/90 CO to Ty, 4 Feb 1890. 5^PR0 CO 273/170, Ty to CO, 31 Jan 1890. T.1/8478A, file 5168/90, CO to EASTERN BANKING The Bank had intended to enter the Native States in order to discour. age a state issue there. Without ever getting near the place, it had suc. ceeded admirably in this course. The resulting delay was long enough to make a Government initiative in the States irrelevant to currency reform, for soon events in the Straits brought the focus of reform back to the Colony. The ghost of the Native States alternative was laid to rest. Ill The final period of progress toward a state note issue was characterized by more direct confrontation between the banks and the Colonial Government, as the latter sought with unrelenting singleness of purpose to put through its program. Yet the Hongkong and Shanghai Bank, in alliance, with the Char. tered Bank, was able to postpone the inevitable for another six years. This was made possible, in part, because the Home Authorities were still committed to the dual function of reforming both the currency system and the banks. This division of responsibility was something the banks did not hesitate to exploit. Their success often gave the impression, locally, that the Imperial Government was sacrificing the state issue on the altar of banking interests—a situation unconducive to smooth relations between the local and Imperial Authorities. Hence, it was not long before the Straits Government saw in the Hongkong and Shanghai Bank only a rival to its own ambition and wanted it out of the Colony as a note-issuing power. Public support for the status quo in currency depended largely on the ability of the banks to provide sufficient notes for the Colony's needs. They had managed this reasonably well throughout the 1880s. When in 1890 the Hongkong and Shanghai Bank increased its paid up capital to 10 million dollars, it was only issuing $6,000,000 in notes and did not expect to exceed that amount for some time to come.55 Given the general acceptance of notes at the time, there could be no clearer indication that the Bank was feeling but little pressure on its note-issuing capacity. The situation changed rapidly after 1892 when the Chartered Mercantile Bank ceased issuing notes. With the notes of the Oriental Bank long out of circulation, the Straits were left with only two banks of issue. Conse. quently, when the Chinese New Year arrived in 1893, the Colony found itself short of currency. The shortage was so aggravated that Cecil Smith, now governor, decided in March that the time was propitious for initiating a new drive in the Colony for a state issue. "Under the altered circum. stances," he reported, "there is no prospect of the Unofficial Members of the Legislative Council offering any objection to what I propose. "^6 This time it looked as though the long awaited moment would become a reality. Moreover, the Colonial Office showed itself wisely flexible about the banks' privileges. The Secretary of State, recognizing how much the Ty, 29 March 1890 and minutes and memo by Hamilton and enclosure: Meade to Welby, 3 March 1891. 55PRO T.1/8660B, bundle 12028/92, file 10964, CO to Ty, 16 July 1891, en. closure: HSBC to CO, 30 June 1891. 56SSLCP 1896, App 50, SS56, Gov SS to S of S, 3 March 1893, p. C357 . STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE mercantile community believed itself to be benefitted by the accommodation derived from the banks’ issues, did not propose this time that the privi. lege of private issues be withdrawn—at least not immediately.57 The old question of note issue by the Native States was now overshadowed by this new attack on the center of the problem in the Colony. The Chartered and Hongkong and Shanghai Banks moved quickly to dash the Government's hopes. The Chartered Bank's paid up capital of ￡800,000 had always been translated into dollars at the exchange rate of 4/- [￡0.4s . 0d ] to the dollar, thereby entitling it to a note issue of $4,000,000 which it was then employing to the full. It requested permission from the Treasury to compute its paid up capital at the more current rate of 2/9 [￡0.2 s.9 d] which would allow an issue of over $5,000,000. Though the Treasury would not countenance the change under the Bank's present charter, it invited the Bank to resubmit the request next year when renewal of its charter was due for review. The idea was that the Lords would then extort a one-third note security deposit in exchange for the favor. This is exactly what happened and the Chartered Bank emerged from the deal in 1894 able to issue $5,000,000 and "with due notice to the Treasury," $8,000,000 in notes. It also got its charter renewed for ten years.58 The Hongkong and Shanghai Bank, for its part, started to reduce its circulation else. where "very largely" in order to service the Straits. From what branches the Bank made these transfers, I am unprepared to say. It would be of interest to know if Hong Kong were short-changed during this defense of Singapore.59 At the same time the Bank made an effort to assure the doubt. ful in the Straits and on the Peninsula that it could satisfy all their currency needs. The Penang manager sent to the highly pro-state issue British Resident at Perak, who was none other than Frank Swettenham, a transparently solicitous letter in May of 1893: I am sorry to see in your report for 1892 that the supply of Bank notes in your State was short of the requirements of the traders. There must be some very special cause for this complaint and I trust it may by now have passed away. In any case let me assure you that this Bank is prepared to supply all that are needed, and though the Chartered have reached their limit of issue and the Mercantile have closed for 57ibid, SS52, S of S to Gov SS, 12 Feb 1896. For origins of a government monopoly in note issues previously adhered to, see PRO T.1/8647B, file 8122/91, Memorandum Communicated to Sir C Wood: Observations relating to—1, Proposals for Establishing a Government Note Circulation in the East Indies, by George Arbuthnot, dtd 1 March 1860, pp. 7-8. 58PRO T. 1/8771 A, bundle 16526/93 , file 5325/93 , Chtrd Bk to Ty, 28 March 1893. File 6850/93, Pari Counsel to Ty, 25 April 1893, Hamilton's memo, Welby's minute. File 16034/93, Ty to Chtrd Bk, 13 July 1893 on CO to Ty, 5 July 1893. T.1/8990B, bundle 17992/95, file 544/95, Chtrd Bk to Ty, 9 Jan 1895 and enclosures. 59PRO T.1/8771A, bundle 16526, file 14004/93, CO to Ty, ? Sept 1893, enclo. sure; SS Conf, Gov SS to S of S, 28 July 1893. EASTERN BANKING good, as far as the issue of Bank notes is concerned, we are still able to meet all demands. If you can suggest any method by which we can facilitate circulation in your State, I shall be only pleased to do my best to second your view.60 Significantly, between July 1892 and September 1893, the Penang branch increased its note issue by $1,000,000. These efforts paid off locally, for the banks were able to convince the public that their requirements would be met. By July the Governor had to admit that "it would be well to pause before dealing with the paper currency."61 The two banks, however, still had reason to feel uneasy. The Gover. nor's earlier and more enthusiastic letter had already aroused hopes in London, and there the administrative wheels had irrevocably begun to turn, unrestrained by his recent doubts. Fortunately, when Smith received instructions to canvass again for opinion, antagonism toward a state issue was not as serious as he feared.62 por instance, that perennial bulwark of the banks, the Singapore Chamber of Commerce, on being consulted, responded with suspicion of the Government's intent regarding the future of private note issues; but it finally adopted a cautiously favorable resolution in May of 1895: That this Chamber favors the proposal ... to enact a Govern. ment note issue to circulate concurrently with existing Bank note issues.63 This was enough to assure the Imperial Authorities that their policy had some basis in reality. The Treasury's recent grant of a supplemental charter to the Chartered Bank had done much to assuage the Chamber's fears.64 It had the contrary effect on the Strait's new Governor. Sir Charles Bullen Mitchell replaced Cecil Smith in December of 1894 and was not one bit assured. Mitchell shared none of his. predecessor's respect for the banks and his arrival injected an air of sternness and antagonism into the Government's relations with them. Since the smooth implementation and eventual success of a state issue depended on favorable public opinion, the new Governor opposed any measures which might raise the banks in the public's esteem. He even considered such measures a contravention of sanctioned colonial policy. Angered with the Treasury, which of course had a wide view of its responsi. bilities, he accused it of sabotaging the Colony's efforts: 60pRC) CO 273/188, HSBC, Penang to Br Res, Perak, 15 May 1893, enclosed in SS 90, Gov SS to S of S, 15 June 1893. 61PR0 T.1/8771A, bundle 1652/93, file 14004/93, SS conf, Gov SS to S of S, 28 July 1893, enclosed in CO to Ty, ? Sept 1893. SNA SS Govt Gazette, July 1892-Sept 1893. - 62sSLCP 1896, App 50, SS 52, S of S to Gov SS, 12 Feb 1895, p. C358. SCCAR 1895, App B, Government Note Issue, pp. 15-23. 64Ibid. -- STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE I hope your Lordships will pardon my expressing a feeling of disappointment that a step so serious as the extension of this Bank s Charter, involving as it does ... a large power of issuing Bank Notes exactly at a time when such an issue would be antagonistic to the interest of the Government Note issue now sanctioned for the Colony, should have been taken by Her Majes. ty s Treasury without giving the Colony any opportunity of being heard in the matter. He claimed that "the object of the Bank in obtaining the extension of its Charter was the advancement of the private interests of its shareholders," and believed it inconsistent with "the public interests of the Colony that those private interests should prevail."65 Mitchell's discomfort would have been particularly satisfying to the Hongkong and Shanghai Bank, for the Chartered Bank, just as soon as possible, intended to issue in the Straits three-fifths of its recently authorized issue of $5,000,000. With the Hongkong and Shanghai Bank already providing the Colony with over $4,000,000 in notes, the two banks would make a formidable showing.66 The Home Authorities never appreciated that this growing strength might encour. age opposition to the local Government's program.67 The two banks did not rest on their enhanced note issues. They kept up pressure by backing agitation to get a British silver dollar coined. The movement originated at Hong Kong in December 1893, when the Chamber of Commerce recommended it "on the ground of scarcity of Mexican dollars during the last twelve months, which . . . has seriously reduced 'the circulating medium in Hong Kong'." One might also ask if "the circulating medium" were not also "reduced" by the banks pouring their circulation into Singapore and Penang. This oft-mooted measure of a British dollar coin was currently made financially feasible by the recent idleness of the Bombay mint. The mint was willing to coin the dollar at a seigniorage of only one per cent.68 (The Indian mints were closed in 1893 as a first step in a measure to stabilize the rupee against sterling.) While their respective managers lobbied for the British dollar in Hong Kong, the Singapore managers of the Hongkong and Shanghai, the Chartered and the reconstituted but noteless Mercantile Bank all requested Governor Mitchell to favor the idea in the Straits. He vigorously declined. He then intimated to the alarmed managers a cold willingness to let the cur. rency situation reach a crisis, if it would, adding ominously, "then the Government would try to deal with it in their own way." In other words, he 65SNA SS 228, Gov SS to S of S, 8 June 1895. 66pRO T.1/8990B, bundle 17,992/95 , Chtrd Bk to Ty, 9 Jan 1895 and enclo. sures. SSLCP 1897, App 27, Report of the Sub-Committee appointed by the Chamber of Commerce to consider Bill to provide for the Issue of Govern. ment Paper Currency, p. C127. 67pro T.1/90698, file 14057/96, CO to Ty, 21 Sept 1896 and draft reply, Ty to CO, 7 Oct 1896. 68pRO CO 882/5, Eastern No 62, Colonial Currency Committee, App II, No 34, CO to Ty, 21 July 1894, Enclosure: Memorandum for the Consideration of the Colonial Currency Committee, dtd 4 July 1894, p. 50. EASTERN BANKING hoped a crisis might open the path to a state note issue.^9 The Governor, in fact, looked upon the managers' petition as a plot to forestall his own policy. It was "simply a bankers' question" concocted to take pressure off their notes, while the so-called scarcity of coin was "a good deal exaggerated". He mentioned to the Secretary of State "that if I were allowed to inform the banks . . . that your Lordship contemplated allowing the Straits Settlements to manage their own note issue but little further would be heard ... of the scarcity of currency or of the British Dollar."7(-* Though the interest of the banks in a British Dollar was obvious (they even guaranteed payment of the one per cent seigniorage), it was not "sim. ply a banking matter" as Governor Mitchell implied. A wide variety of groups backed the measure and attested to a real shortage of coin. Besides its recently acquired Imperial sentiment that "British coinage ought to run in British Colonies," the Colonial Office would mind its broader responsi. bilities. It decided to approve the new dollar. Fortified with frantic letters from the Chartered Bank reporting Governor Mitchell's "failure to grasp the situation", the Imperial Authorities dismissed the Governor's objections as "not of any moment".^ As soon as the dollar was sanctioned, the Hongkong and Shanghai Bank fretted impatiently over when it would actu. ally appear. * * * * * * 7^ These were apparently anxious times. What with the British silver dollar and the Chartered Bank's supple. mental charter, Governor Mitchell began to think the Imperial Government no longer intended a Straits government note issue.^ was mistaken, but when sanction arrived, it came in a form which only added to his aggrava. tions. The Governor had expected an ordinance modeled on that of Ceylon, requiring a cash reserve of only one-half. Enclosed with the Secretary of State's sanction arrived the Honduras Paper Currency Ordinance of 1894, which called for a two-thirds specie reserve.^ The banks kept a cash reserve of only one-third. Before introducing any legislation, therefore, the Governor had to pause and protest vigorously. He again reminded his superiors that the established policy of the Imperial Government since 1887 was that a government note issue must ultimately prevail and that this policy "was naturally regarded as precluding all future favours to Banks." Yet, he observed, since that time, the total note issue of the Hongkong and Shanghai Bank had increased from less than $4,500,000 to $9,326,092, while the Straits circulation of the Chartered Bank had increased by $1,000,000. 6^PR0 CO 273/200, Chtrd Bk, S'pore, to Chtrd Bk, London, 7 May 1894, en. closed in Chtrd Bk to CO, 11 June 1894. ^Ibid. PRO CO 273/195 SS 147, Gov SS to S of S, 22 May 1894. ' PRO CO 273/195 SS 147, Gov SS to S of S, 22 May 1894, enclosure: Memo for the Consideration of the Colonial Currency Committee, dtd 4 July and Meade's minute, CO 273/200, Chtrd Bk to CO, 11 June 1894, Lucas' minute and enclosures. SSLCP 1894, App 49, SS 351, S of S to Gov SS, 27 Oct 1894, p. 267. 7^pR0 273/199, HSBC to CO, 11 Dec 1894, enclosed with Ty to CO, 11 Dec 1894. 7^SNA SS 30, Gov SS to S of S, 22 Jan 1895. 7 SSLCP 1896, App 50, SS 290, S of S to Gov SS, 24 Sept 1895, p. C359. STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE As for the two-thirds cash reserve imposed on the Government, this was in sad contrast to the lighter conditions under which the banks operated. He ended saying darkly, "There is a feeling, on the part of some, that the interests of the Government note issue stand in peril of being unduly subordinated to the interests of the Banks."76 Dealing with Mitchell's unavailing recriminations took awhile, so that it was over a year, once the Imperial sanction was given, before the Straits Currency Note Bill was read for the first time.76 Such delays could only delight the banks, but Mitchell's contention that his policy was being subordinated to banking interests does not stand up. The British dollar, the Honduras Ordinance and the newly reformed position of the banks were merely matters of consistency, security and public convenience, so far as the Home Authorities were concerned. These measures were part of a wide and developing system of colonial currency reform, but because Mitchell saw them as the work of special interests and not neutral administrative acts, he slowed up his own program by fighting them every inch of the way. Furthermore, his own ominous bearing towards the banks probably did more to alienate what public support he had than anything the Imperial Government did. When the Straits Currency Note Bill was read, the Unofficial Members did indeed oppose it because, in their opinion, the British dollar and increased bank note circulation now made it unnecessary. The main objec. tions, however, were based on the fear created by Governor Mitchell himself, that the banks would lose, sooner or later, their issuing privi. leges. The Singapore Chamber of Commerce got cold feet also. It formed a sub-committee which reported that the Government failed to appreciate "the great value of the Bank's notes issue to the trade of the Colony" and recommended that no steps be taken to terminate it. On this committee, incidentally, was the Singapore Manager of the Hongkong and Shanghai Bank.76 The bill was also attacked, because the Government did not propose to guarantee encashment of its notes in Penang. Though only a technical. ity, it proved a very sore point and had repercussions for the banks' case . * 79 76SCCAR 1895 , App B, Col Sec SS to SCC, 3 May 1895, pp. 17-19, para 6. SSLCP 1896, App 50, SS 336, Gov SS to S of S, 22 July 1896, pp. C363-65. 76SSLCP 1896, Minutes, 3 Dec, p. B327. 77SSLCP 1897, Minutes, 22 July, pp. B73-B79. 76SSLCP 1897, App 27, SCC to Col Sec SS, 30 Jan 1897 and enclosures, espe. cially, Report of the Sub-Committee appointed by the Committee of the Chamber of Commerce to consider Bill to provide for the Issue of Govern. ment Paper Currency, pp. C126-C130. 7^The Government defended their policy in Penang by relating that the HSBC by its amending Ordinance No 21 of 1882 was required to encash its Penang-issued notes at Penang and Singapore, but in fact only guaranteed their encashment in Penang, "apparently preferring the law of finance to the law of Hong Kong". The Government was merely following the same economic logic. It could not afford to keep full specie reserves at both places. SSLCP 1897, App 27, Col Sec SS to SSC, 10 Feb 1897, p. C130. See also, Minutes, 22 July, p. B77. EASTERN BANKING All that Governor Mitchell had feared seemed to materialize. Public opinion was again thoroughly behind the banks. THe Government's issue would only be countenanced if it were merely auxiliary to private issues, but there was G S Murray of the Mercantile Bank declaring in the Legisla. tive Council, "The Government hopes, in time, to oust the Banks from their privilege of a note issue."80 Though public support was desirable, the bill now represented Imperial policy. A Government majority was sufficient to force it through and thus it passed in September of 1897. ^ From this point on, the banks did exert effective influence on the Imperial Government to delay actual implementations of the bill. However, it was not on policy that they based their attack, but on a technicality, one that was closely related to the objectionable provision regarding the non-encashment of government notes at Penang. Their complaint was against a clarifying amendment in the Government's bill which stated that although government notes were a legal tender, banks could not use them to encash their own notes.* * 8^ The question was complex, but basically the Government feared that if in the absence of a government specie reserve in Penang, the banks encashed notes there with government notes, they would dispense with their own cash reserves and leave Penang devoid of specie. The banks, on their part, felt they were being denied the right to deal in the legal tender of the Colony, a position they thought insufferable. The Chartered Bank and the Hongkong and Shanghai Bank therefore jointly petitioned the Colonial Government against this restriction. Since their incorporating instruments did specifically provide that they had to encash their notes with specie and could not use paper, legal tender or not, Government House turned them away.88 Thereafter, G Howard Gwyther, Managing Director of the Chartered Bank, did all the work. He argued and threatened in the Colonial Office and Treasury for two years. He almost won the Treasury over, but the Colonial Office and Parliamentary Counsel managed to bring the Lords to their senses.8^ Due to these efforts it was not until February 1899 that the Straits Currency Note Bill was re-issued and proclaimed law.88 This happy outcome for the Straits Government did not mean that the stonewalling efforts of the two banks were just a futile exercise in endur. ance or perversity. The Hongkong and Shanghai Bank gained valuable time in the process. The significance of this is best illustrated by following the course of an attack the Straits Government itself was launching against the Bank in 1896. The nature of this assault also reveals the Government's oft-denied wish to destroy the Bank's note-issuing power in the Colony. Just four days after the Straits Currency Note Bill was first read and 80SSLCP, 1897, Minutes, 22 July, p. B78 and 26 Aug, p. B94. 81Chiang Hai Ding, p. 239: SSLCP 1897, Minutes, 2 Sept. 8^SSLCP, 1897, Minutes, 26 Aug, p. B93. 83SSLCP 1897, App 42, S' pore Mgrs Chtrd Bk and HSBC to Act Col Sec SS, 15 Sept 1897 and Act Col Sec SS to Mgrs etc, 27 Sept 1897, pp. C181-C183. PRO T.1/9391, file 2576/98, Chtrd Bk to Ty, 13 Feb 1899 and enclosures; T.1/9260B, bundle 9737/98, file 8768/98, CO to Ty, 25 May 1898 and draft reply, Ty to CO, 8 June 1898; file 9737 CO to Ty, 13 June 1898 and draft reply, Ty to CO, 7 July 1898. 88Chiang Hai Ding, p. 239. STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE received a hostile reception, the Straits Government initiated inquiries in Hong Kong. Their object was to ascertain if any deviation had been sanc. tioned, regarding the Hongkong and Shanghai Bank, from the usual restric. tion that notes may not be issued in excess of the paid up capital.RR On receiving a negative reply from the Hong Kong Government, the Straits Authorities bided their time. Two years later they pounced. Thrusting statistics at the Secretary of State, the Straits Government reported that the Bank, since January of 1898, had issued $2,000,000 in notes over the authorized limit. The Governor could barely restrain his pleasure as he informed his superiors: "The penalty contemplated by the Hongkong law, sec. tion 27, seems to be the cancellation of the Incorporation of the Company." However, the Governor would not be greedy. "It will be sufficient," he suggested, "to deprive the Company of the privilege they have abused by withdrawing from them their note circulation in the Straits Settlements." He then requested authority to repeal "so much of the Straits Ordinance X of 1881 as favours a bank note circulation".R* * 7 8 Clearly the Government, despite its former assurances to the contrary, did not wish its own notes "to circulate concurrently with existing Bank note issues." Old G S Murray had read the weather correctly. However, the Hongkong and Shanghai Bank had stepped into the future while the Straits was still fighting the past. All the Governor received for his pains was a curt order, not to repeal the pertinent ordinance, but to amend it so as to allow the excess issue.RR Aware that it was in danger, the Bank had obtained, through the Governor of Hong Kong, Imperial permission to con. tinue its circulation over the authorized limit.89 This sanction might not have come were the Bank merely trying to get off the hook in Singapore. Instead, it ignored its plight in the Straits and predicated its argument on the broader demands of progress and changing times in general. R M Gray, Acting Chairman of the Bank explained: The trade of Hongkong has increased very much in late years, and we would draw your attention to the change which has been grad. ually going on in the appreciation in which Bank notes are held by the Chinese. * * * * Our over-issue has been forced upon us by economic changes which the progress of Western ideas amongst the Chinese render strong. er every day, and it will be a great blow to the whole trade of Southern China if we are compelled to inflict upon it as a per. manency the grave inconvenience of a contracted currency.9R* The situation was indeed altered. While the banks were delaying the Straits Currency Note Bill, they had developed markets for their notes R6SSLCP 1898, App 51, Col Sec SS to Col Sec HK, 7 Dec 1896. R7Ibid, Col Sec HK to Col Sec SS, 5 Feb 1897 and SS 136, Act Gov SS to S of S, 5 May 1898, pp. C547-C548. 8RIbid, Tel S of S to Act Gov SS, 16 July 1898, p. C549. R9Ibid, Tel Gov HK to S of S, 12 July 1898, p. C549. 90Ibid, HSBC to CO, 8 July 1898, p. C551. EASTERN BANKING elsewhere. One the eve of the bill becoming law, the Hongkong and Shanghai Bank recognized a reality that had probably been present to some degree all along. Its circulation in the Straits was hampering its ability to exploit new opportunities in China. For this reason, the Acting Chairman also announced, "When the Straits Government commence issuing their notes we will withdraw our circulation from Singapore and Penang, and the position here [Hong Kong] will be relieved.These words indicate a shift in focus from Singapore back to Hong Kong. Earlier, when the Bank was trying to defend its issue in the Straits, it had contracted its circulation else. where, but in 1898 it was ready to abandon Singapore altogether for Hong Kong. Governor Mitchell had wanted the Bank's notes out of the Straits. The Bank was now glad to oblige. By 1900, the Bank claimed that even if it withdrew its entire circulation in the Straits it could not meet demand in Hong Kong. Ironically, because the Straits Government had difficulty get. ting its own notes delivered, the Bank after 1899 was obliged to continue serving the Colony's needs for another nine years. During that time, it had to persist in the unprofitable practice of issuing in excess and back. ing the over-issue with a full cash reserve.^ In a sense, the Hongkong and Shanghai Bank had come full circle. In the 1870s, some of its management had opposed expansion to Singapore so long as funds could be fully employed in China. That opinion did not pre. vail, but by the 1890s it was relevant to the situation again. With a paid up capital of only $10,000,000, the currency needs of two extremely pros. perous colonies could not be met, especially when the failure rate among other banks of issue had been fifty per cent. The sporadic agitation for a government note issue and a silver dollar in the Straits was symptomatic of the various banks' inadequacy to meet currency shortages while their resources were spread over so wide an area. As for the persistence of the Hongkong and Shanghai Bank's note issue in Hong Kong, there are many reasons, but in the context of this study, it is logical that that colony which held out longest against a state issue could hold out indefinitely. Into such a colony the banks would concentrate their circulation, over. thrown elsewhere, and thus obviate government interference in the note supply. Before introducing a state note issue in Hong Kong, the Colonial Office wanted to see how the Singapore experiment worked. The experiment worked splendidly, but during the wait, the Bank was authorized to increase its paid up capital to $15,000,000, so that it could supply sufficient notes in the interim. Such a measure would have driven a Governor Mitchell to distraction. It in fact ensured that the new Imperial currency policy would make little headway in Hong Kong. ■*■&*‧*‧ Over the periods examined, we have seen the Hongkong and Shanghai Banking Corporation, both consciously and inadvertently, influencing the timing and manner in which one facet of currency reform occurred in the Straits. 91Ibid. 9^SSLCP 1900, App 55, CO to Ty, 28 May 1900 enclosed in SS 171, S of S to Act Gov SS, 8 June 1900, pp. C163-C164. STRAITS SETTLEMENTS GOVERNMENT NOTE ISSUE Rather than dismissing the difficult progress toward that reform with vague allusions to the "opposition of banking interests", I have attempted to show in some detail how those interests manifested themselves and then meshed into the complex process of decision-making on the Imperial and local level. The Bank as a note-issuing institution was a rival to the local Government's ambition, but as a bank of issue, it was also a responsibility of the Imperial Government. The complexity and friction inherent to this triangular relationship was one key to the Bank's successful resistance and puts it squarely in the midst of any history of the Straits Settlements Currency. 10. THE HONGKONG BANK GROUP’S ORAL HISTORY PROJECTS by Frank FI H King, Christopher Cook and Catherine E King Frank H H King: the Scope and Purpose of the Projects The tendency of Hongkong Bank Group retirees to select remote places in which to retire—glens of Scotland, Cape Town, St Helena, and assorted tax havens—suggests that an oral history of the Hongkong Bank Group is not a matter to be undertaken lightly. A bank historian, writing, I believe, of a Dallas Texas bank, described how he invited the retirees around to his office in the afternoons; an archivist from Denver recommended her plan of asking them around to a coffee [coffee?] to help identify old photographs; two approaches which, while not without merit, have proved impractical. Thus the oral history projects of the Hongkong Bank Group are expensive, time-consuming and, consequently, require rigorous justification. In commissioning a new history of The Hongkong and Shanghai Banking Corporation, the chairman, MGR Sandberg, stated as a requirement that the personalities who made the Bank successful be given adequate coverage. During the 1950s when material for the the Bank's centenary history was being collected by J R Jones the then retirees were appealed to for their written reminiscences; the response was naturally mixed. In the Group Archives are excellently written accounts of highly technical operations; there are also stories which, the authors themselves suggest, should be confined to the junior mess. Independently, one retiree wrote his mem. oirs, delightfully illustrated by marginal sketches and published posthu. mously with one unfortunate di sc ret ion--the name of the Bank is nowhere mentioned. But the response was nevertheless limited and the more elderly naturally found it difficult to contribute. Hence, building on this begin. ning, we decided to undertake formal, systemized interviews within certain budget constrictions. Given the tradition of confidentiality, we were not certain that retired bankers would be willing to discuss their careers and banking deci. sions, but we agreed from the first that our interviews should be directed at banking and not, as a primary focus, at the social life of the foreign businessman in the East. Next we were faced with deciding between a series of interviews directed at specific problems or at the whole banking career ^ Bruce Tytler, Here, There and (Nearly) Everywhere (London, 1979). P G Wodehouse described his junior years in HSBC in, 'My Banking Career', The Hongkong Bank Group Magazine, No 6 (Summer 1975), pp. 11-16. Several reminiscences have also been published in Group News. From the British Bank of the Middle East there is Denis Lun, A Land Called Lost (Salis. bury, 1980), while the Chartered Bank has had at least two book-length autobiographies by staff members: Walter H Young, A Merry Banker in the Far East (and South America) (London, 1916) and W H Evans Thomas, Vanish- ed China, Far Eastern Banking Memories (London, 1952?). ORAL HISTORY of the retiree himself. Given that the foreign staff of the Hongkong Bank retired after 30 years in the East, this indicated that those over, say, 83 might well have been retired for a longer period than they actually served with the Bank; the Bank could well be a distant memory not often talked of, and any attempt to move in and direct discussion to a particular incident was obviously impractical. This moved us from short, specific event inter. views an option which of course always remains available—to full auto. biographical sessions and accordingly modified the focus of the project from strict confinement to banking per se to the total experience relevant to an understanding of the individual's role in the work of the Bank. This was not, of course, a task to be performed by the inexperienced. And it was at this point that the project, undertaken as part of the over. all Hongkong Bank history program within the Centre of Asian Studies, Uni. versity of Hong Kong, came to be seen, possibly with some surprise--even reluctantly--as oral history. This hesitation was due, perhaps, to an awareness that oral history was expensive and that it had special rules and regulations causing some to see it as approximating a cult. The project director, therefore, sought the assistance of Christopher Cook, whose experience with the BBC and with the Swire Group in particular was to make the subsequent development of the oral history project contributory to the specific requirements of the Group's History Program. The lengthy and time-consuming but essential procedure was made palatable to the vast majority of those approached by the intermediation of Brian Ogden, then Controller of Group Archives, who, as a long-time banker and sometime Secretary of the Hongkong Bank was personally known to the majority of retirees and whose knowledge of China and India remains invaluable. The oral history approach developed then from necessity; it is in no way an ideal solution for the purpose, narrowly defined, and the textbook strictures on oral purity in procedure have little relevance; the spoken word has no sanctity in itself; the interviewee and the editors must remain free to alter, correct or otherwise improve the presentation. The retirees were speaking from memory, almost always without reference materials; the transcribers were working under technical strain and obviously without encyclopedic knowledge of places and events which were being brought alive on tape. Although beginning simply as a method of obtaining information for the new Hongkong Bank history, the oral history became an end in itself—the placing on record in the Group Archives the lives of those who made the Bank successful. This would provide material, if properly edited, for future research, in some cases after the lapse of years to satisfy embargo requirements set either by the interviewee or by the Bank. The oral his. tory program began then as an adjunct of the Hongkong Bank history project; it focussed first on retirees from what is now referred to as the inter. national staff—although in earlier times the title was first Eastern and then Foreign staff. With the commissioning of histories of the Mercantile Bank and the British Bank of the Middle East, the scope of the oral history program was expanded accordingly. To date about 50 foreign staff retirees have been interviewed, and in November 1982 retirees of the British Bank of the Middle East will be invited to participate. Every retiree made a unique contribution to the Bank's history, but EASTERN BANKING since there were unfortunately budget and time constraints, selection became a difficult task. The budget suggested that those in more remote places simply could not be included unless the reasons were overwhelming or, fortuitously, either Cook or King were in any case travelling in the area; hence, for example, we were able to interview retirees in Toronto, Canada, and San Francisco, California, while the importance of T J J Fen. wick justified a visit to Cape Town. Other criteria suggest themselves— age, health, position in the Bank--and the eventual solution was (i) to give absolute priority to former chief managers and executive chairmen, (ii) to attempt full geographical coverage of the Bank's activities, and (iii) only after that to attempt to assess 'general importance' in the Bank's development, but also (iv) to interview any other retiree in the area, especially if the cost of getting there had been significant. From the above must be subtracted those who were temporarily in poor health, absent from the area, or who wished not to be interviewed. In all cases we accepted the guidance of the Chairman, especially if he were willing to back his opinions with a supplementary budget. In the period relevant to the new history project, all executive offi. cers of the Hongkong Bank Group sufficiently senior to be important in decision-making were British. Nevertheless, the roles of local staff and of the compradores and guarantee shroffs are acknowledged to have been vital to the Bank's success, and we have undertaken interviews with local retirees on a limited basis, although not in the thorough way described below by Christopher Cook. In the process the first Indian executive offi. cer, a Philippine regional officer who began his career as the Manager's houseboy, the last chief compradore of the Hongkong Bank—and the equiva. lent in Sri Lanka and Malaysia, the oldest retiree from the Hamburg branch, and several retirees from Lyon have been interviewed either by myself or by associates who have contributed to these Proceedings. The next step might well be to interview key customers, but we have attempted this only in Iloilo, from where the Bank has this year withdrawn after nearly 100 years. As described in the following sections, the oral history project is obviously expensive. What then is the value of the product? First, an easy assessment: the Bank's history could not be written properly without the information which experience suggests can only be collected through taped interviews. Secondly, we have more information than can possibly be used in a formal history of the corporation, even one which includes the role of individuals; we hope, therefore, to develop a separate oral social history, of which two samples, one by Cook and the other edited by Catherine King, are included below. This decision was reinforced when we found it possible under favour. able circumstances to interview the wife while having the preliminary discussion with the retired Hongkong Bank or Mercantile Bank executive. These interviews were undertaken on a much more informal basis by Catherine King, and the early ones could be criticized for precisely this reason— they were too informal: the interviewee had not been warned sufficiently in advance and no clear definition of topics had been drawn up. But then no budget provisions had been made and there remained the lingering thought that perhaps one ought not to invade this last region of privacy. Improve. ments are underway. ORAL HISTORY the subsequent with all its We are some- As for the main interviews, there remain serious problems. Banking is an extremely complex profession and to accept oral testimony given in some cases 20 to 30 years after the event is unwise. An equally important part of the project is the collection of written material, photographs and diaries from the retirees. In several cases the imperfection of their own oral testimony dealing with some complex episode has inspired them to write an essay on the subject or to amplify, modify, or even reverse comments made during the interview. This is what we meant by saying earlier that there was no sanctity in the spoken word. An editor can correct certain errors, but there are more fundamental questions which would need to be checked against contemporary correspondence and government files to ensure that the figures stated are accurate or the names of the non-Bank partici. pants correctly remembered. These problems are minimized, however, (i) by the awareness of the interviewee and (ii) by the fact that certain stories are recalled, not just for the interview, but have been remembered and even told over the years so that the memory of the details has been constantly refreshed. Indeed the use of oral history transcripts, even when thoroughly edited, requires the same caution as the use of documents, including, of course, some knowledge of the author and his particular attitudes. Used with caution, the oral archives of the Hongkong Bank Group, besides being unique, are of vital historical significance. The process of interviewing involves an intrusion; request that the interviewee read a lengthy transcript unavoidable imperfections is both an intrusion and a burden, times more tolerant of memory lapses than the interviewee who, earlier in his life, had been noted for his precise mind and ability for quick and sound decisions. For these reasons we decided that the transcript as taken immediately from the tape could not in fairness be presented to the inter. viewee; too many of the problems arose from the difficulty of transcrip. tion. Accordingly, we have first edited and then submitted the typescript with the corrections clearly marked, so that the interviewee has the oppor. tunity of reversing or recorrecting the changes made. Since the oral history approach may be the only one feasible in the compilation of a business history, especially where we are concerned with the unwritten and perhaps hitherto unarticulated decision-making processes involved and with the development of corporate strategy, we have been anxious in this introductory paper to state in full the procedures we have chosen and the problems that have arisen, so that scholars subsequently granted access to the interviews, an access which must be consistent with the wishes of the interviewees and the policy of the Hongkong Bank Group, will be aware of the circumstances, both positive and negative, under which the documents were created. We may conclude by making two comments. First, having approached the oral history on a full-life basis, there is nothing to prevent one return. ing, as has already been stated, for a more specific interview on a parti. cular topic the memory of which has been revived by the former approach. Secondly, oral history is both expensive and time-consuming and should not be undertaken without full financial support. In the process certain expectations are aroused, a fully edited version becomes virtually a moral EASTERN BANKING commitment - and this should be recognized from the first. The retirees who have so generously donated their time and professional knowledge to the aid of the economic historian deserve this particular tribute for their own archives; they must be assured that when their name is quoted in conse. quence of their contribution what is attributed to them is stated as clearly and as accurately as possible. Christopher Cook: A Methodology The development of magnetic tape and the enormous proliferation of compact and easily operated portable tape recorders - reel to reel or cassettes - over the past twenty years has placed an enormously significant research tool in the hands of contemporary historians. At little expense and with few technical difficulties, it is now possible to interview and record for posterity key historical witnesses, a task that is all the more vital now so few people have the time or inclination to record a daily diary or write the lengthy letters so dear to our forefathers. But in their general excitement to capitalise on the technical fruits of the electronics revolu. tion, little attention has been paid to the methodology that ought to underpin the gathering of oral evidence for eventual interpretation and evaluation by historians. In this brief paper I should like to share the methods that I have developed over the past decade for my own use, and in particular as it applies to the programme of interviews with ex-members of the Hongkong and Shanghai Banking Corporation I have undertaken recently for the Bank's archives. I do not wish to comment, since that is well beyond the scope of this paper and indeed of the brief given to me by the Bank, on the value of the material that I have gathered as historical evidence. That is for the historians to do. But I think it as well to place the current upsurge in oral interviewing for historical purposes in some proper context. Paul Thompson of Essex University, and one of the founding fathers of Oral History in England today, has argued persuasively in The Voice of the Past; Oral History (Opus 1978), which is just about the only introduction to the subject published in Britain, that we should not be tempted to re. gard the present interest in this form of historical research as something wholly new. And in his second chapter he quotes the following passage from Jules Michelet's 'History of the French Revolution' (1847-53). Michelet has previously explained that for ten years he has been gathering oral evi. dence to set against what he has learnt of his period from documents: When I say oral tradition, I mean national tradition, which remained generally scattered in the mouths of the people, which everybody said and repeated, peasants, townsfolk, old men, women, even children which you can hear if you enter of an even. ing into a village tavern. Thompson argues that this established tradition which encouraged historians to rely on personal testimony was eclipsed by the general acceptance in the ORAL HISTORY second half of the nineteenth century of the historical method propounded by Leopold von Ranke with its assertion that documentary evidence should be the principal concern of the historian. Thus C V Langlois and Charles Seignebos opened their classic manual 'Introduction to the Study of His. tory' (1898), with the unqualified statement: The historian works with documents . . . There is no substitute for documents: no documents no history. That there is no alternative to an analysis of documents for the historian concerned with a period beyond his memory, say the medieval village, is of course obvious. But it is sad to discover A J P Taylor, that doyen of British twentieth century historians, pronouncing: In this matter [the interviewing of live witnesses] I am an almost total sceptic . . . old men drooling about their youth— no. It is apparent that oral interviewing by historians has a long honourable tradition and, I would add, a tradition deserving of revival. But who is the historian to interview; who are his legitimate subjects? In Britain historians like Paul Thompson, and many of his colleagues in the Oral His. tory Society too, would argue unequivocally that what the tape recorder can do is give tongue to men and women who do not in any traditional sense re. gard history as being their history, or for that matter a process in which their lives have played any significant part. The promise that magnetic tape offers to Thompson is nothing less than the laying of the foundation stone of a quite new kind of history, a people's history, with all the overtones of radical policies that that phrase suggests. As he writes: There is no point in replacing a conservative myth of upperclass wisdom with a lowerclass one. A history is required which leads to action, not to confirm but to change the world. It is beyond my brief to discuss whether the historian should be a social engineer or professional revolutionary, but this passage and the intellec. tual process that leads to its conclusion lies at the heart of the current vogue for oral history and the recording of interviews by oral historians in England. It would seem clear that what Thompson and many other foreign historians with a commitment to taped interviews as opposed to documents have done is to confuse means and ends, to be unable to distinguish between a useful research method and the propounding and writing of history itself. That the method is valuable cannot be doubted, but it is a method pure and simple. It is also a method that is capable of as many variations as there are practitioners of it. And in what follows it is my own methods in inter. viewing retired staff for the Hongkong and Shanghai Banking Corporation that I shall be describing. It is not, naturally, a scientific method, nor is it exclusive of any other modi operandi. It is simply a descripton of the way in which I have found it best and simplest to encourage men and EASTERN BANKING women to open their memories and commit random recollections of their work. ing lives onto tape. A first principle, and an obvious one too, is that before embarking on any recording one should prepare oneself extensively. This preparation generally takes two forms. First one reads as much of the published back. ground material to the career of a particular interviewee as is readily available. If his career in banking took him to Tokyo during the American occupation and the rule of SCAP at the end of the Second World War, then it is clearly essential to understand SCAP' s policies and practices with regard to both domestic and exchange banking, as well as social conditions in conquered Japan. Secondly, it is important and useful to know as much as possible of the Hongkong and Shanghai Banking Corporation's own activi. ties in the country both before and after the War. Such information may already exist in the Bank's own archives, or be drawn from previous inter. views undertaken for the project. Armed with all this information one is ready for a preliminary meeting with the subject of the interview. In the meantime he or she will have been approached by the Bank as to their willingness to give an interview and furnished with a brief general schedule of the areas likely to be dealt with in the preliminary and final interviews. Ideally this schedule should set the interviewee's memory working as well as allay any initial fears that he or she may have about the project. In other words, if they have some notion of our area of inquiries they are less likely to panic and take refuge in that stock response of old age, "but I can't remember anything of any use." The preliminary interview is essential, and in some ways the most sig. nificant part of the whole process. Professor Frank King and I have evolved over the past twenty-four months a standard approach during the first meeting. He will have a curriculum vitae for the interviewee and in the space of half a day will, by reference to this curriculum vitae, endeavour to bring out the highlights of the interviewee's career with the Bank, highlights that are a brand of personal decisions as a banker at various levels of seniority and his or her response to the major social, political and economic happenings in the part of the world where he or she was serving at a particular time—viz the end of the colonial era, the coming of independence, government pressure on foreign banks and so forth. This interview is little more than an informal conversation and my own part is not to contribute directly to the questioning, rather to take extensive notes of what is said to help me prepare for the final taping. It is essential that the interviewee be relaxed enough to talk with complete confidence and candour and to this end many of our most fruitful preliminary sessions have taken place over lunch, tea or dinner! And, indeed, while working on another project I found once that an hour spent walking in the garden, apparently admiring the roses but actually eliciting information was time extremely well spent. I have suggested that this preliminary interview is in some ways the most significant part of the whole interviewing process, and it might be as well to justify this claim. At one level it allows the interviewee to know what the parameters are to the eventual interview, and at another it allows the interviewer to unlock doors in a man's memory that may have lain closed ORAL HISTORY for half a century. But all that one need do is turn the key, for once the interviewer has departed, the interviewee will invariably open the door for himself, so that when one returns for the final interview, the whole room stands revealed for proper scrutiny. What really happens—or should happen at this time is that the interviewee allows you the interviewer to become a friend, and it is easier when it comes to the recording to talk to a friend than a stranger. The preliminary interview over, I have generally found it best to leave between six to eight weeks before returning with my tape recorder. This time lapse allows the interviewee to forget what he has already told you so that he will give a fresh and spontaneous account at the time of the recording of what you the interviewer already know. And it allows his or her subconscious mind to work on the suggestions and inferences you have initially made, rather like yeast in the dough. From the interviewer's point of view, it enables him to evaluate his notes and where necessary check them against other material for accuracy— always a time-consuming business, particularly if you are undertaking upwards of a dozen interviews and endeavour to cross-refer one interview. ee's recollections with another's. The detailed preparation for the recording must be scrupulous. I have long given up preparing and writing out individual questions, but now rather plan the whole interview on index cards. There is a card for each phase of the interviewee's career and in this way I try to impose some kind of structure on the recording before we begin. On every card, I write a list of the topics that I think should be discussed and make a note for myself if there is a particular piece of personal testimony that ought to be recorded, and indicate where I feel a witness' memory of a particular event will need challenging in that it does not accord with what I know of this incident or decision from other sources. This particularly refers to time scales, dates, names and other personnel involved. One should, I believe, set aside a whole day for the recording. It is of necessity a leisurely affair and one must be prepared to break off if the interviewee seems tired or distracted. On at least two occasions recently, Hongkong or Mercantile Bankers have felt the need for a post. prandial nap, seeing no reason why their daily routine should be unduly disturbed by an interviewer from the Archives! The first rule of interviewing with a tape recorder and microphones is to make them as inconspicuous as possible. Nothing is more likely to dis. concert an elderly man or woman than the interviewer constantly checking recording levels, adjusting microphones, making sure that the tape is run. ning and so forth. If possible, I keep the recorder itself out of sight and the microphones away from the interviewee's direct eyeline. The illu. sion that one is endeavouring to create is that of a conversation between old friends, indeed conspirators, which brings me to the psychology of interviewing. Conspirators is perhaps the most apt description of the ideal relationship between interviewer and interviewee. Together you are recalling and recording information that the interviewee may never have revealed before, and which if he considered carefully might be unwilling to vouchsafe you. Thus in an ideal sense, the interviewer should try to adapt himself to become his subject's alter ego, so in effect the man or woman EASTERN BANKING being recorded is talking to him or her self. This is, of course, perfectly obvious to anyone with even the most rudimentary grasp of psychology, but unless one has had a formal training in psychiatry, possibly even psycho-analysis, it is a technique that takes time and practice to perfect. But the essential starting point must be grasped from the outset; namely that you the interviewer have no clear opinions of your own and that it seems you hardly even know your way around the subjects that concern the interviewee. Studied ignorance and sham naivety coupled with a genuine thirst for information are the strongest weapons in the interviewer's arsenal; these and a relish for role-playing. When formulating questions there are a number of simple things to keep in mind. Never 'lead' the interviewee, never ask more than one question at a time, never interrupt an answer, let alone seek to advance your own opin. ions and do not be frightened to let the form of the interview be dictated by what the interviewee has to tell you, rather than the structure you have pre-planned on your index cards. But, equally, do not hesitate to chal. lenge an interviewee should you have reason to doubt his or her memory, though if you are doing this by virtue of information gleaned in confidence from another interview, you should never reveal your source. Journalists' ethics in this respect are not a bad example to follow. Finally, never accept generalisations at face value; always gently insist on examples. "Everyone dabbled in rubber shares in Singapore after the War" tells you nothing. Who 'dabbled,' how they 'dabbled,' in what quantities they 'dab. bled' could be of use to the historian. Inevitably the time comes when the tape or cassette must be changed. The interviewee will need constant reassurance at these times as to the value of his or her testimony. However, he or she should not be allowed to reach the simple conclusion that because the tape must be stopped every forty minutes or so it is equally easy to turn the recorder off during the interview. Regular switching off and on disturbs the flow of the interview and threatens both the relationship between interviewer and interviewee and complete candour. Once the subject has acquired the habit of asking you to stop recording so he can reveal some particularly confidential piece of information that may conceivably be of vital interest to the historian, it is extremely difficult to break him or her of it. Once the recording is over, the interview is transcribed. There then follows the time-consuming and painstaking business of checking the typed transcript against the master tape and copy editing out any obvious gramma. tical and syntactical solecisms and correcting the spelling of proper names. The typescript is then sent to the interviewee with instructions as to how he or she may care to correct or edit or amend or even add to the interview. This is then again edited by me and a definitive reading ver. sion prepared for deposition in the Archives of the Bank ready for use by the historians. Catherine E King: Problems of transcribing and editing An accurate transcription of an oral interview is considerably more ORAL HISTORY difficult to produce than one would imagine from reading a completed script. Such is the power of the printed word. Most of us 'know' that people do not speak as they write, but it still comes as a surprise to an interviewee to read a transcription of the oral interview that somehow he or she has not spoken 'written' English. The reaction may reflect an anti. cipation that the interview would read like direct speech in fiction which seeks to approximate what people say but usually in fairly straightforward sentence constructions. What specific problems then does transcribing present? First, the transcriber is facing a conversation held, as Christopher Cook explains, in very natural and relaxing surroundings. Unlike dictation, the speaker is not conscious of the requirements of the transcriber; were there to be a spelling of a difficult term, for example, the flow would be impeded. Secondly, it is unlikely that the transcriber will be familiar with the speakers or the specifics of the interview. Both problems foreshadow the need for an editor. As the tape recorder itself has been a technological improvement in recording oral history, the dictaphone machine equipped with a foot pedal for frequent stops and starts for the transcriber is essential. This facilitates being able to play again passages which are unclear without excessive loss of time. The equipment involved, however, has this dis. advantage—it pins the transcriber down, making it impractical to stop and undertake research on place names and terms which are unfamiliar. Perhaps the moral here is to select transcribers who have a command, as nearly as possible, of the same vocabulary as the interviewee. With Hongkong Bank Group retirees this is not a simple matter, since few transcribers will have had detailed experience of the many place names—street and district names as well as cities—foreign-language and special technical terms used in China, Japan, Malaysia, India and Ceylon that come so easily to the retirees. How often does 'demurrage' appear in your daily conversation, for instance? At this point the editor enters. Receiving a typescript straight from the transcriber has proved discouraging to many interviewees. However, the editor, by reference to guides, street plans, staff lists, dictionaries of the relevant languages, can make some improvements. In addition, she is fortunate in being able to consult retirees who are in Hong Kong for such hard-to-find information as the correct spelling of 'Simon Arzt', the fam. ous store in Port Said mentioned frequently in interviews. This spelling was provided by one retiree and confirmed in a picture of Port Said produc. ed by another. Another time there was what was transcribed as 'cous-cous tatti'. Was this something edible as it seemed on paper, or was the speak. er giving a value judgement as it sounded like 'cuss-cuss'? Happily, the administrative assistant at the Centre of Asian Studies is an unfailing source of Indian terms, and she said it was 'khhas-khhas tatti', the 'khhas-khhas' being the grass material of which the awning is made. Where the editor is checkmated, she asks the help of the interviewee. Another serious problem is how to represent the many false starts and hesitations with which oral communication is carried on. Many of the 'oral punctuation marks' of 'ah', 'urn', 'you know', 'I mean', and 'of course' are just that—pauses for emphasis or for an extra second or two to construct EASTERN BANKING the next phrase. Some people use more of these 'opm's than others. It is the task of the editor of the transcript to determine, on listening to the tape while reading the transcription, what role this extraneous matter is playing. For example: Interviewer: What year did you return to ...? Interviewee: Ah, well now, let's see, it was 1956, wasn't it? No, it must have been early 1957 because ... yes, it was 1957. It can be seen that the editor's pencil could well skim through all but the final '1957' to record an answer to the question. It would save paper, typewriter ribbon, typing time, reader's time and 'clean up' the copy. But would it be a fair representation of the answer? This example, though a typical one, is not wholly fair in itself—many of us cannot remember dates—but when a series of answers with 'oral punctuation' is built up, one can assess their function. They may be habit and have little to do with mental hesitation; they may represent caution in answering; they may represent hazy memories, etc. To eliminate all but the answer to the question would deprive the reader/historian of the chance to make his own assessment, especially where the answer may conflict with material gathered elsewhere. Let us take another look at the example above. The interviewer's question is incomplete. It can be assumed that the preceding discussion had named the place, and the answer was begun before the question was finished. The editor could insert the information, but it would not pro. vide an accurate transcription of what the person actually said, nor does leaving the question unfinished confuse the reader. We have elected to represent unfinished statements or questions with '...' as an indication that that speech dwindled off without completion. Similarly, in the answer given, the series of periods is used to indicate the breaking off of an incomplete sentence which carries on into a new sentence without a formal break and new capitalization. We hope that something of an oral flavor is maintained by this method. It also serves the function of reminding the reader that he is reading 'speech'. Representing conversations in the transcript of an oral interview offers another set of problems. For example: Well, I went from Shanghai on a Japanese ship, a Nipponusha Kasha, I don't know what the name of it was, and after we set sail, talking to some of the other passengers, they said, oh, where are we going to stay when we get to Dairen? And I said, oh, I expect to go straight on. And they said, oh, but we've been advised that it's a Russian holiday, and you won't be able to get into the Russian consulate and get a visa. We have chosen not to represent direct speech with quotation marks except where we feel that the narrator is really quoting someone else's words and in a situation where the exact phraseology is important. In the example above, the other passengers may well have said, 'Oh dear, I wonder where we are going to be able to find a place to stay tonight when we get to ORAL HISTORY Dairen.' To use the conventional punctuation of quotation marks and a new line for each new speech would drastically cut down on the pace of the narrator's story. To carry on with the example--the narrator obtained assistance from the Bank's Tsingtao Branch and got his visa. When we got to Harbin, there were only three people who had a visa for this particular trans-Siberian train, and myself; a funny little commercial traveller man, don't know what his name was, forgotten his name, Englishman; a Swedish doctor who had been in Japan at the League of Nations conference; and the head man of Louis Dreyfuss, a big international firm in Harbin, he was Swiss, and he knew the ropes. He'd been across umpteen times, you see, and he had a wonderful bunch of women come to see him off in Harbin, oh, all sorts of popsies, and he had a huge basket. You remember these great big laundry baskets that they used to have at one time? This damn thing was full of food. And when we got on the train we each got a coup￡ to our. selves, the whole thing ... there was nobody on it, you see, because of this visa thing. And ... Silburstein was his name, that's right ... and after about the first day or so we'd drunk the train out of booze and the food was very very very inferior, Silburstein fed us most of the way out of this hamper. You will note that the editor's punctuation of this example contains a ser. ies of run-on phrases and clauses which would raise eyebrows in a freshman English course, but the passage moves along with the freshness and oral immediacy when punctuated only by the narrators' pause for breath. We hope that the reader is enabled to read with his ear as well as his eye, and thereby get one step closer to the interviewee. Experience has shown that it is essential that the tape be listened to and checked with the typescript by the editor before the typescript is sent to the interviewee for correction and approval. In this way errors in transcription that the interviewee would find impossible to correct can sometimes be caught. The correction of 'the Chinese compradore, Sir Robert O'Toole' to 'Sir Robert Hotung' and 'transfer from the cellar to the buyer'—in the context of stocks and not whisky—which perhaps reflect a transcriber temporarily distracted, would probably not really stump the interviewee, but 'We had Stomple Kishu, Kennedy & Co' for 'We had stock. brokers, Kennedy & Co' would be harder. Or 'Malay was the sort of common language between yourself and an eight o'clock position' for '. . . between yourself and the native population' might really confuse. And then there was 'candy cheats' for 'Kandy chiefs.' Four ears are better than two! Contrary to pure oral history theory we have inserted where we have the information, and have asked the interviewee to do so if we cannot, essential clarifying information, especially the initials of persons named in the course of the interview. This addition to the spoken material is enclosed in square brackets to indicate that it is made by the editor. Our bankers usually refer to each other by surname or nickname, but there are a number of Stewarts/Stuarts/Steuarts, for example, and father/son, cousins EASTERN BANKING and related confusions. With the passage of time, much would become con. fusing were these ambiguities not cleared up. But what if we overedit or edit incorrectly? If one adds initials, for example, they must be correct, as the interviewee is likely to be influenced by the correction. I have established a card file of the full names of persons mentioned, with a brief indication where and when the incident being described by each interviewee took place. As the file grows, it becomes a more and more valuable source for making corrections. Finally, we correct so that the original transcript can be seen; the interviewee can state which version he prefers. The edited transcript is now ready to be sent back to the interviewee for his corrections, additions and, hopefully, approval and release of the material to the Archives. We hope that the editorial work done on the transcript before it is returned will facilitate the correction of remain. ing problems and that the interviewee can put his mind to questions we have not been able to solve. Facing the full editing of a 150-200 page tran. script would be overwhelming to many of the older interviewees. In one extreme case, a former manager whose interview was particularly valuable found it necessary to engage the services of a qualified graduate student in order to correct the transcript to his satisfaction. The final stage before the transcript is deposited in the Archives is the typing of a clear copy incorporating all the corrections. I am speak. ing theoretically--we are some 1,850,000 words behind! And this is the place to discuss yet another technological improvement which we wish we had had from the beginning of this project--the word processor. The trans. cription can be made directly onto diskettes which then can be passed to the editor, whose corrections--also made on the word processor—must remain distinct. A print-out is then sent to the interviewee and his returned corrections incorporated onto the diskette. The final 'clear copy' then can be printed out without retyping the whole manuscript, with all the time, money and potential errors that retyping entails. This final version, a copy of which is eventually sent to the inter. viewee, will have taken many more hours to prepare than the hours of inter. view recorded on the tape itself, but it will provide an easily accessible record of the interview. The tape will also be in the Archives as the final authority of what was actually spoken. But that may not, after all, be quite what historians will require. The combination of oral testimony with alterations on reflection may indeed serve the historian best. 11. THE HONGKONG AND SHANGHAI BANKING CORPORATION ON LOMBARD STREET by Christopher Cook The successful conjunction of art and commerce in English literature is a rare event, and that this conjunction should be spiced with humour as it is in P G Wodehouse's Psmith in the City little short of a miracle. That said, I suspect that what the great majority of readers remember from the book are the effortless superiority of Psmith and his besting of the pom. pous, self-pleased and utterly humourless manager at the New Asiatic Bank, Mr John Bickersdyke. And although in this centenary year of Wodehouse's birth, with its veritable flood of biographies, tributes and critical studies, there is little excuse for not knowing that this most superlative of comic writers himself spent two years in the City in the service of the Hongkong and Shanghai Bank, I doubt if the general reader is much concerned over whether the City background to the novel is accurate and authentic. Not so the social or business historian. And in this paper I propose to test Wodehouse's fiction against the recorded experience of a number of retirees from the HSBC whom I have interviewed on their careers in the Bank over the past two years, on behalf of the Bank's Oral History Project. And I should say that it is my contention that while Wodehouse may shape the individual details of his City experience in the Hongkong Bank to satisfy his comic muse, he triumphantly captures the spirit and the flavour of the London life of a Hongkong Bank junior before the Second World War. Before the Second World War is, of course, not before the First World War, and it has to be admitted at the outset that not only did P G Wode. house leave the Bank before those fatal pistol shots at Sarajevo set in train the events that led to the end of the old European order, but Psmith in the City was published in 1910, when the Austrian Archduke Ferdinand might reasonably have entertained the certain prospect of a ripe old age accompanied by troops of friends. It should also be said that we have not, in the two years of the Oral History Project's existence, been able to interview anyone who joined the Bank before the Great War; the nearest we have come to this is in talking with a handful of men who went East in the service of the Hongkong and Shanghai Banking Corporation in the years after the peace of 1919. By no stretch of any imagination could these men be called either a representative or a scientifically selected sample of Hong. kong Bankers from the period. Indeed, it was not so much a question of us selecting them to be interviewed as of they proposing themselves by virtue of their being the only survivors from over half a century ago. And yet I remain convinced from what we have learnt from them of their time in the London office of the HSBC in Gracechurch Street (in Wodehouse's time the Bank was in Lombard Street and it vacated these premises for others in Gracechurch Street in 1913) that while Wodehouse the literary craftsman may have embroidered on his City experience for comic effect, his creative imagination held faith with his actual experiences in Lombard Street. EASTERN BANKING It might be helpful to set out the broad outline of Wodehouses's novel. Psmith, you will remember, has a cricketing friend called Mike, whose father has fallen on financially hard times which preclude a univer. sity education for his son. Instead Mike is forthwith to join the New Asiatic Bank in the City of London. Psmith's father, on the other hand, has a super abundance of what Wodehouse calls 'doubloons,' but little com- monsense. The Varsity is all very well, but a career in the City is what Psmith needs to ginger him up, a view that is thoroughly endorsed by the self-pleased manager of the bank, John Bickersdyke. So Psmith and Mike find themselves in the Postage Department of the New Asiatic Bank all set for commercial careers. The book chronicles how Psmith and Mike, in a series of adventures, get the better of the odious Bickersdyke and trium. phantly leave the Bank once Psmith has persuaded his father that a career at the bar after a university degree in Law is more conducive to his future happiness and success than "lugging ledgers." As for Mike, who has in effect procured his certain dismissal from the Bank by leaving his desk and ledger without permission on Saturday, in order to play in a county cricket match, let Psmith's father—a late but convinced convert to the joys of cricket--have the final word: . . . the boy's [Mike] a wonderful bat ... he will be playing for England in another year or two. Fancy putting a cricketer like that into the City! It's a crime ... he ought to be at the university. So Mike and Psmith are to be funded at Cambridge by Smith Pere. So much for the overall development of the novel's plot. What con. cerns us is the middle between this beginning and this end; and it is a middle that can be divided into two quite separate parts. The greatest part of the book is taken up with Mike and Psmith's adventures, be it Psmith baiting Mr Bickersdyke at his club; winning over Rossiter, the self-important head of the Postage Department, by boning up on Association Football from the newspapers in order to pose as a life-long devotee of Manchester United AFC, or encouraging the hapless Mike to join him in attending a political meeting on Clapham Common where Waller, the mild- mannered Pay-In Cashier, reveals himself as a Socialist, and convinces himself that Psmith, the monocled old-Etonian, is a fellow revolutionary—a masterly exposition in the best Wodehouse manner of the comedy of misun. derstanding. These comic comings and goings are played out against the backcloth of everyday office life in the New Asiatic Bank, and it is these decriptive passages, the second ingredient in the novel's middle, that con. cern me in this paper. Perhaps we can now move P G Wodehouse and the exquisite Psmith and the loyal Mike away from stage-centre and bring on some of the men who actually experienced the London office of the Hongkong and Shanghai Banking Corpora. tion in Gracechurch Street between the two World Wars, and who have recorded interviews for the Archives of the Bank over the past two years. I should like to measure their experiences against Mike and Psmith's. The latter, it seems, got into their bank with no previous experience, with minimal personal references, and without any kind of formal interview. THE HONGKONG BANK ON LOMBARD STREET They were lucky, for the reality of entering the HSBC between the Wars was a good deal less carefree. The Hongkong Bank, it seems, never took on new recruits who had not had some previous commercial experience, preferably in banking. But before the Bank could even consider a candidate's application, it was essential that some person or persons of note and gravity in the world of commerce should have sponsored the would-be banker. Armed with these recommenda. tions, the aspiring candidate was called for an interview with the London Managers and the Accountant. On the first day you were interviewed ... there was nothing very much asked. I mean there were the usual formal things like, 'Where did you go to school?' and, 'Do you think you'll like banking?' You know the sort of things; and, 'What games do you play?' and of course I played golf and cricket and football; but they seemed to be more interested in that quite honestly, and it came very obvious when you came to sit the written examination. They seemed to be more interested in your manners than your intelligence. These preliminary interviews were followed by a written examination. They gave me--I don't know—a few papers on commercial geography and elementary economics and you know, that sort of thing. I suppose they wanted to see if I could speak English or not, or write it. And at four o'clock I went to the Bank and Sandy [Moncur, the London office accountant] said, 'Huh, man down there says what they can read is alright.' ... 'You've passed alright; that's alright. We'll let you know when to report.' I remember I was asked to write an article on Thomas Cromwell, and having written two pages, I found I'd written about Oliver Cromwell, so I had to cross that out and all I could think of was about two lines about Thomas. There were several of us there, and one fellow ... had to leave in the middle of the exam because he had a cab waiting, but he got through too. On this evidence it seems that neither the Bank nor their prospective jun. iors set great store by the examination. One is therefore bound to ask what purpose it served. Another interviewee provides the most plausible explanation: Really it was a sorting device. Some chaps there I know had taken it two or three times and failed but it was merely a means of keeping out those they didn't like to rule out on any other score. And by 'rule out on any other score' we may perhaps assume that important sponsors were allowed to retain professional face when the Bank had decided that the faces of the young men they had recommended did not fit. It seems EASTERN BANKING to me of great significance that virtually every one of these pre-war recruits into the Hongkong Bank destined for service in the East had enjoyed a Public School education; in other words, they came from the self. same mould as Psmith and Mike. But I shall return to this thought later. Once they had joined the Bank, juniors did the round of each depart. ment in the London office. There was not, according to most accounts, a Postage Department as such, of the kind experienced by Mike and Psmith, but the work was nonetheless fairly menial. One learnt a great deal about the day to day clerking side [of banking]. We knew what slips were passed, what accounts con. trolled what operations, what books were necessary, but we had only a very small insight into general banking policy. We could see occasionally operations by the Manager or accountant in for. eign exchange or overnight loans in the London market, and we could ask questions. People were most helpful, but the real object of our training was to give us a basic knowledge of what clerks had to do in virtually every department, and really what was the purpose of the work. The heads and seniors in each department at Gracechurch Street were members of the Home Staff; men and women whose careers would be spent entirely in London, and it seems reasonable, as is suggested in the above passage, that when necessary they would make themselves available to young juniors bound for the East to explain particular aspects of banking practice. But none of the interviewees we have met are able to provide specific examples of members of the Home Staff offering explanations of particular methods and systems employed by the Bank. One should perhaps not put too much weight on this, memory is notoriously fallible when it comes to detail, but it does lend support to the view that these young juniors--like Psmith and Mike--picked up their banking as they actually went about it. Mike and Psmith in Wodehouse's novel have little work to keep them thoroughly occupied. While Psmith devotes his energies to reforming the dress habits of Bristow, Mike's replacement in the postage department, the pace of Mike's days in the bank, particularly once the long winter evenings have set in, is one of gentlemanly leisure. He [Mike] would arrive in the morning just in time to sign his name in the attendance book before it was removed to the accoun. tant's room. That was at ten o'clock.^ From ten to eleven he would potter. There was nothing going on at that time in his department, and Mr Waller seemed to take it for granted that he should stroll off to the Postage Department and talk to Psmith, who had generally some fresh grievance against the ring-wearing Bristow to air. From eleven to half past twelve he would put in a little gentle work. Lunch, unless there was a rush of business or Mr Waller happened to suffer from a spasm of ^It is generally agreed that after the First World War, the working day started at nine forty not at ten o'clock. THE HONGKONG BANK ON LOMBARD STREET conscientiousness, could be spun out from half past twelve to two. More work from two to half past three. From half past three till half past four in the tea-room, with a novel. And from half past four till five either a little more work or more pottering, according to whether there was any work to do or not. It was by no means an unpleasant mode of spending a late January day.^ One can only echo Wodehouse's sentiments, 'certainly by no means an unplea. sant mode of spending a late January day' ! Before I set this passage against the evidence from our interviewees, it might be as well to point out that the tea-room is either a Wodehouse fiction or in the wake of the Great Peace, the Managers of the Hongkong Bank had been seized by a mood of generosity towards their juniors. There was no tea-room, but upstairs at Gracechurch Street a free lunch was provided each working day, much to the satisfaction of young juniors' pockets and the general envy of other would-be bankers in the City, who were compelled to part with their hard- earned pennies at the Mecca, Lyons or the Kardomah restaurants. But was day to day work so easy-going at Gracechurch Street? Earlier this year each of our interviewees who was in London before the 1939-45 World War was sent certain passages from Wodehouse's novel, including the paragraph I have just quoted. One replied that it 'seems to be over-egging the pudding;' another simply commented, 'Check,' and since he now resides in San Francisco, I presume his meaning to be that he confirms Wodehouse's account; a third wrote, 'life was not as easy as this;' and a fourth com. mented, on what is perhaps a slightly wistful note, 'I was never able to be idle for such long periods.' There is then little concrete evidence to support Wodehouse's description of the junior banker's day, but that, if I may change the drift of my argument, is not entirely to the point. Consi. der the image of Mike that this passage conjures up for the reader. Is it not that peculiarly English specimen, the gentleman amateur, whose studied dilettanteism is conceived to mask anything so declassd as a deeply held conviction, let alone a burning ambition, to breast the tape ahead of all others in life's great race? And is this not the legacy of the nineteenth century public schools great and small? Let me quote from another of our interviews: COOK: What was the P and M book? BLACK: Oh the P and M book, yes. Now that was a great gag, and I discovered afterwards, long afterwards, how the P and M book came into existence. Young juniors joining London were green and the greener they were the more often they fell for it. They were sent round to some other department and told 'go and get the P and M book.' It was usually one of the London Office Home Staff who would start it off, when a youngster would be asked, 'You might go along to Outward Bills and ask for the P and M book.' And Outward Bills would say, 'Oh we sent it down to Telegrams.' And you'd go down to Telegrams. I was never had on ^Penguin edition of Psmith in the City, p. 102. EASTERN BANKING this one because we had those tricks up in Aberdeen, too, so they never tried it on me. But long afterwards—I think it was when I was in Calcutta with Jock Caldwell--Jock Caldwell asked if the P and M book was still going round London Office, and I said, "Oh, no, that came to an unfortunate end, because somebody was a little too clever and they said to some junior, 'Oh we've sent it over to the Westminster Bank, you'd better go and see them. ' And he went over to the Lombard Street branch of the Westminster Bank, where we had our account, and of course there was confusion and phone calls back and the P and M book was put a stop to. But it was Jock Caldwell who started it off appar. ently and that was why he asked about it. He told me that the P and M book was 'Pay and Messing' book, which was something from his Army career in the First War. He started the thing off, and that's what P and M stood for. COOK: But there was no such book? BLACK: No such book, no, it was purely fictitious. A 'rag,' a jape;' call it what you will, this fun with the mythical 'P and M book' at the expense of inexperienced juniors who had only recently join. ed the Bank, seems just one other side of the English public school boy's sensibility; and maybe in its way it lends weight to the Wodehouse version of a day at Lombard Street. For finding time for this kind of elaborate practical joke does seem to suggest that Hongkong Bankers had time on their h and s. Twenty years after Psmith in the City was first published, when no doubt Mike was bemoaning the end of the golden days of English cricket in the Tavern at Lords, and Psmith, despite his Shropshire estates, facing the chill winds of the Depression with his customary facetiousness, Hongkong Bank juniors were required to possess more in the way of banking knowledge than Wodehouse' s couple ever possessed. The Bank now insisted that all juniors on the foreign staff, destined for service in the Far East, must have passed both the preliminary and first part of the Institute of Bankers exams, before they were eligible to take the P&O to the Orient. We had to take the first part of the Bankers Institute exams. It was a sort of thorn in the flesh, rather like the sort of superannuation exam you used to get at school. If you didn't get past it, they used to take it as being a bad thing. But strange though it may seem, thanks to a certain amount of work in the evening and doing a correspondence course in banking, I did manage to get enough passes. To assist examinees in preparing for the Institute's exams, there seems to have been a series of classes called the Gilbart lectures: I also one year took the Gilbart lectures—they used to be lec. tures in the Savoy Hotel and this time it was about bills of lading as a security for advances. Well, I'd never been in the bill department and didn't know what a bill of lading looked THE HONGKONG BANK ON LOMBARD STREET like. But you had to go to all the lectures and clock in. And they reported them all in the Financial Times next day. I don't know much what they were all about, but I spent twopence on the Financial Times, precised the articles, and the night before the exam I sat up till two o'clock learning all the precis off by heart and I came out number ten on the prize list and got ten quid from the Bank. Passing Part One of the Banker's Institute exames with distinction could mean more than a modest financial pat on the back. As is generally known, the Hongkong and Shanghai Banking Corporation maintained offices in Ham. burg, Lyons and New York, and the junior bankers for these offices were drawn from amongst those young men in the London office waiting to go East who had successfully passed their Institute of Bankers exams. In practice this often meant that the youngsters who were lucky enough to escape the London Office were Scots. The principal reason for this has to do with the rather different apprenticeship served by would-be bankers north of the border. A high premium seems to have been set amongst the Scottish clear. ing banks on their recruits working for and passing the Scottish Institute of Bankers exams as early as possible. And between the two World Wars those who were recruited into the HSBC from Scotland had invariably passed their exams by the time they reached Gracechurch Street, making them, as it were, more eligible for a trip to Lyons or Hamburg or New York. COOK: Was there a sense in which you, who' d passed all your banking exams before you joined the Bank, were sent [abroad] as a kind of reward? CARRUTHERS: Well, to the extent that I was eligible to go to the Far East, yes. And therefore if they could get me in on a trip to Hamburg or Lyons or New York, I was then free to go abroad as soon as they called for anybody. To that extent, yes. There were plenty who hadn't passed their exams and kept being passed over and were told, 'Until you pass your exams we can't send you to Hamburg, Lyons or New York.' The Hongkong Bank's Scottish connection is, of course, nothing if not rele. vant at present, and that this connection is a genuine one is evidenced in Psmith in the City: Most of the men in the bank, with the exception of certain hard-headed Scotch youths drafted in from other establishments in the City, were old public school men.^ Fifteen years or so after Wodehouse's departure from the Bank it was still recruiting Scots. My own recollection is that by the time I came in and through the Twenties and Thirties there were about fifty per cent ^Penguin edition of Psmith In The City, p. 71. EASTERN BANKING English, twenty-five per cent Scots and twenty-five per cent Irish. But the Irish contingent was shrinking and the English were rather tending to take over the Irish share. Psmith and Mike's Scottish confreres, whom Wodehouse, to use a cricketing metaphor, seems to regard as players rather than gentlemen on account of their misfortune in not being afforded the supposed advantages of an Eng. lish public school education, were apparently recruited from within the City of London. Our interviews indicate quite clearly that young Scots were recruited before they had moved South. Indeed much humour is made in conversation of something called the Porridge Trap, a mythical, almost Winnie-the-Pooh like device to catch not heffelumps but young bankers on their move South! It would be wrong on the available evidence to give credit to Wodehouse's implication in the passage quoted above, that the Scots in the Hongkong Bank were players rather than gentlemen. The Scot. tish education system—both in the private and public sectors—certainly does not produce Mikes or Psmiths by the yard, but those of its graduates who made their way South to Gracechurch Street seemed to have experienced little difficulty in achieving the status of honorary gentlemen! How did they do it? In a word, games. I am sure that there is no need to dwell on the near-worship of games and games players in the English public school system. And while the Battle of Waterloo was more likely won in the mean back streets of Bri. tain's growing industrial cities than on the playing fields of Eton, you have only to consider Tom Brown's Schooldays to understand how important games and team spirit were in producing Christian young men for Imperial service. And games were at the very heart of every young Hongkong Banker's experience, be it golf or swimming or cricket or rugger. COOK: The Bank obviously put considerable emphasis on sport. Now why would this have been? CARRUTHERS: Well, I think this was partly the Chief Manager out in the Far East. Particularly Grayburn, who always passed a message that he wanted a good centre three-quarter or he wanted a good full-back or he wanted a good scrum-half in the next posting if that were possible. Then that person was picked for Hong Kong and the other unfortunate went to Shanghai or Singa. pore or whatever. And so we were encouraged and in fact we were a very good sporting club. I mean we used to compete with the joint stock banks and didn't fare too badly with them. They used to beat us, but for a small concern like us with no more than twenty rugger-playing members we turned out a very good team. What, then, was the managerial logic behind their great enthusiasm for games playing, an enthusiasm on the part of the Hongkong Bank that led to the building and generous support of facilities--clubhouse, pavilion, rugger and cricket pitches—in South London at New Beckenham? Clearly at one level, senior members of the Bank had played games in their time and expected those who followed after to follow suit; while at another it seems THE HONGKONG BANK ON LOMBARD STREET that throughout the British Empire the playing of organised games was supposed to help ward off the dread dangers of inexplicable, and possibly fatal, tropical ailments. And, of course, the 'mens sana in corpore sano1 legacy of Dr Arnold's heirs was not something that was easily shuffled off. Psmith in the City offers little by way of explanation of the true significance of games playing, in that Wodehouse, like Mike a fervent cricketer, unconvinced that any other games known to organised man could offer the devout such a potent blend of poetry, place and action, took the whole business for granted. Our interviewees offer little more by way of a detailed rationale other than explaining that games encouraged team spirit and that it was a relatively cheap way of spending one's leisure time, though I cannot resist quoting this passage: The majority of people played something. I don't think it really mattered whether you played all games or whether you only played some, or whether you were in for swimming rather than ball games, but everybody was really expected to do something and there were one or two who didn't participate and they were looked on as something quite extraordinary. I would like now to leave aside the evidence that we do have and offer a hypothesis to explain this worship of games playing, an explanation that begins by acknowledging that just as at the British public school in the first half of the twentieth century a boy who did not play games ipso facto cast himself out from the centre of the charmed circle of would-be young gentlemen, so a junior banker who did not make an appearance on the rugger pitch, the cricket square or in the swimming baths was letting the side down. And nowhere more so than in the East where, as the social anthropo. logists might say, the spell by which Britain maintained her rule over vastly numerically superior populations drew its strength from the British habit of transferring wholesale home-based rituals and customs, like the Club and like organised games, which kept rulers and ruled apart. The British, be they ICS, Malayan planters or, dare I say it, exchange bankers, needed to reinforce each new generation's sense of their being an elite. It was, I would suggest, of overriding importance to them that within that elite every individual at each level of seniority knew his fellow elitists, so that as they progressed in age and career until the chosen few were at the top of their professions, they were building up experience in common, not just of having gone out East at the same time or met at the Club or at social functions, but because they had played cricket or rugger or hockey or tennis together. And let it be said that on a practical level—and this our interviewees do attest to—it is easier to do business with a man you have grown up with and met on the sports field than it is with someone who simply walks into your office with a commercial proposition whom you have never met before. Games in the East, I would suggest, are a continuance of games at home at New Beckenham, which are in their turn the carrying into adult life of the elitist loyalties and rights—to win, to inalienably rule—established out on the playing fields of Eton, Harrow, Rugby, Radley, Wellington, Marlborough, Haylebury and so on right down through the list of English public schools. And let it be said, Scottish public schools. EASTERN BANKING And this sensibility and this code of conduct--one might perhaps even say a way of life—is what underpins P G Wodehouse's Psmith in the City. Consider this passage from the novel: Whenever a number of people are working at the same thing, even though that thing is not perhaps what they would have chosen as an object in life, if left to themselves, there is bound to exist an atmosphere of good fellowship; something akin to, though a hundred times weaker than, the public school spirit. Such a community lacks the main motive of the public school, which is pride in the school and its achievements. Nobody can be proud of the achievements of a bank. When the business of arranging a new Japanese loan was given to the New Asiatic Bank, its employees did not stand on stools and cheer. On the con. trary they thought of the extra work it would involve; and they cursed a great deal, though there was no denying that it was a big thing for the bank—not unlike winning the Ashburton would be to a school. There is a cold impersonality about a bank. A school is a living thing. Setting aside this important difference, there was a good deal of the public school about the New Asiatic Bank. The heads of departments were not quite so autocratic as masters, and one was treated more on a grown-up scale, as man to man; but never. theless, there remained a distinct flavour of a school repub. lic. Most of the men in the bank . . . were old public school men. ^ In its essentials, this paragraph by Wodehouse seems to me to be as true of what we know of life in Gracechurch Street during the Twenties and Thir. ties, as it was for the toilers of the New Asiatic Bank before the First World War. And Wodehouse, despite the briefest of careers in the Hongkong Bank, seems to me to have caught the spirit of that institution in his fiction. I do not propose to argue the relative merits of fiction as historical evidence. Let the historian and sociologist grapple with that, but I would suggest that Wodehouse's imaginative perceptions are to a great extent validated by the oral testimony we have been gathering in the course of the past two years. It has not been possible in this paper to consider every aspect of a junior banker's life in Gracechurch Street at the point where it coincides or diverges from Wodehouse's novel Psmith in the City. Indeed, I have only been able to select a number of random examples to demonstrate my hypothe. sis. I should have liked to mention the prevalence of bizarre nicknames given to people--some, it seems to me, straight from the pages of Frank Richards! And there has been no opportunity to discuss life in landladies' digs, or the Pigtail Club, of which it is said no hostelry ever encouraged a second visit after once experiencing the club's annual dinner. But I have few doubts that if you put the oral evidence we have collected against Wodehouse then a similar set of general conclusions would emerge. I should ^Penguin edition of Psmith in the City, p. 71. THE HONGKONG BANK ON LOMBARD STREET perhaps add the following as a final footnote: Psmith in the City is glori. ously funny and I have invariably found that same profound good humour with its impish delight in puncturing pomposity, and wry self-deprecation to be the hallmark of our interviewees. If the Hongkong and Shanghai Banking Corporation were lucky to have Wodehouse, they were luckier still that he took leave of them and gave tongue to what one only hopes is a current and continuing attitude towards life. 12. THE FIRST TRIP EAST—P&O VIA SUEZ edited by Catherine E King [The following article is an experimental use of oral history interviews given by retired foreign staff officers of the Hongkong and Shanghai Bank and the Mercantile Bank, Limited, now both members of the Hongkong Bank Group. The young men who joined these banks in London in the years 1914 to 1948 had many experiences in common, among them the first trip East for a posting with their respective banks—a trip which most of them made via a P&O ship. Shipboard life during this period remained remarkably the same, and for this reason our excerpts are treated by subject rather than chrono. logically. The young men would have served in London for a period of time which varied according to the Bank's needs, but Life and tenure would only really begin once they got East. Imagine, if you will, a group of retirees tell. ing about that first trip East. To assist you in detecting a new speaker we have capitalized the first two words of each new speech and double. spaced between speakers. Listen!] Orders, Allowances, and Celebrations MUCH OF our attention was devoted to noting how rapidly, or rather how slowly, our names were creeping up on the seniority list and calculating how long it would be before the next order came in from Hong Kong to send out one or more juniors and that that order would mean that one's own turn had arrived. 'ORDERS' IS the terms used when the Accountant used to call you in and say, 'There are three orders from Hong Kong, and you're number one on the list, so you will go to Hong Kong.' So there was great elation. The word got round London Office that you had received your orders and would be sailing. You would be advised about your travel arrangements by the Accountant's Department and told you would be getting ￡70 paid into your account for the purpose of getting your tropical outfit and travel allow. ance, as it was called. As soon as it became known, it was quite an occasion. Your friends used to like to take you out for lunch and then in the evening after work, we usually would foregather at a pub at the back of the Bank in Gracechurch Street, Simpsons, and there was also The George and Vulture. Simpsons though was the place. I think it's been pulled down now, but everybody in the Hongkong Bank would have been there at one time or another from way back. You then got very excited and were told that you could have a little time off to get yourself ready, and you could have a few days' vacation. In fact, it's a kind of great elation. You really began to feel, 'Now I'm THE FIRST TRIP EAST going somewhere. I've joined the Bank. Now the day has come when I'm going to be somebody of importance. I'm going to go out to the East and the Bank's service, and I'm going to have a position of importance, and I'm really going to be something. I'm going to travel for the first time on an ocean liner. It's really going to be very exciting.' And it turned out to be very exciting. One felt that one would be able to do many more things than one had been able to do in England. You led a rather closed life in England. In the world beyond London though we had various branches, and you might be transferred from one to another. You knew there was a fairly good social life out East, that the pay would be better. Everything seemed to be more exciting and better. You didn't really think of it from a work angle. I mean, it soon became apparent that you were going to work very hard out there. It wasn't going to be all sitting behind a desk and signing your name all day. You weren't going to be a really big shot. That was very apparent when you put your foot on the soil of Hong Kong, but you did think it was going to be a gay life. I think I felt that I was going to have a good time. You were going to be able to save a little money, which you hadn't been able to do before; you were going to be able to see different people— different races and types of people. It was just going to be a completely new vista. It was going to be something really to look forward to. In those days it seemed to be the thing. What people liked to do was to get a job overseas. It seemed to carry more weight. You seemed to be more important. When you came home after working in the Orient and you said you'd been working in a bank or merchant house in the Orient, people thought, 'Well, he's somebody. I consider him an Empire builder' or whatever it was. No, it was exciting, that was all, and it turned out that it was very much that way, but, of course, one didn't know how very much routine work you had to do, say, for your first five years. YOU WERE always invited to lunch with the managers before you left. You had on your best bib and tucker. You had your tickets and everything else ready, you were probably off the very next day. It was probably on the Wednesday. Thursday was the day the [Hongkong Bank's] London Committee met, I think, the day the mail closed, and the P&O left Marseilles on the Saturday. The boat train must have left on Friday—I've forgotten. And anyway there you were and you went up, and you were given a glass of sherry, and there was wine with lunch, and you sat around and chatted to them. But I was particularly interested to meet Townsend when I lunched with the managers. He was Lady Stabb's father, and he had been the first man to go East for the Hongkong Bank. He later had been manager in New York and that was where Newton Stabb and his wife met. To meet him as I set out for the East made me feel I was helping to bridge a wide gap. IF I did [get lunch with the Mercantile's London managers], it must have been a damned good one because I don't remember it. I THINK I was very pleased [that my orders had come through and I was to go East] and then, of course, there's the usual farewell party in the Jamaica. Used to stand drinks all round. Oh yes, you got a kit allowance. EASTERN BANKING The great thing was you got ￡70 kit allowance, most of which I think went to pay for your party at the Jamaica. [You would ask] all your juniors and your home staff friends. Oh, generally anybody who wanted to turn up turned up ... we could get about thirty or forty people, I suppose. Of course, drinks were cheap in those days. THE JAMAICA'S a pub immediately behind the London Office. The Lon. don Office management looked at the Jamaica just off there, immediately cheek by jowl with the London Office manager's rooms, and sort of possessed by the Bank. There were others, of course, stockbrokers and people went to the Jamaica, but it was a sort of private preserve, all these private parties, celebrating people going abroad. That was a ritual. I don't ever remember anybody going on what was then the foreign staff, as opposed to the London Office training staff, not going to one of those celebrations. That was the ritual, then you went round and booked your ticket to wherever you were told to go. You were told to go to such and such a place and book your ticket. You went and did that. [You were given an allowance] of ￡100, I think, or ￡60, or something like that ... and, of course, you were released--you had two weeks' leave to spend with your people before you went abroad. You were told to come back, or be back, the day before your ship departed. [THE ALLOWANCE] was the thing that allowed you to pay off your debts and leave without going through the bankruptcy courts. You got the big sum of ￡75 of which you were supposed to spend ￡50 on equipping yourself with some clothing and what not. ￡25 to spend on the ship. Well, I imagine a lot of people, like myself, the ￡50 we were to have spent on clothes, we had to pay on a few things. But anyway, you left fairly well-presented. You had a suit or two to wear and a pair of reasonable shoes, and you had your black tie and boiled shirts. You can imagine the stiff boiled shirts you had to have with you. Unbelievable. Black tie for dinner at night ... I don't know. MY TRUNK was full of brand new clothes and effects purchased with the very generous kit allowance we were given on first posting--if I recall it correctly, almost a year's salary to spend on clothes, etc. Not till after I landed in India did I realize that I had been over-persuaded by certain London Office gentlemen to blow the whole allowance at some outfit. ting establishment near Leadenhall Market. The result was a lot of useless stuff—gauze underwear recommended for wear in the tropics. And a splendid white Harske's sola topee (in tin hat box, I presume) which was worn by nobody in India between the Viceroy on parade and an Anglo-Indian railway guard. The little durzi in Calcutta knocked all the white drill trousers, etc. I needed. And as regards headwear, the market supplied the universal cork topee that was lighter and more suited to the bashings it was to receive. LATE IN March 1909 I got my Eastern orders, 'Hong Kong for orders', two weeks' leave and an allowance of ￡50 for my outfit. With two other young expectant bankers, I entrained for Dover ... to the Channel steamer and THE FIRST TRIP EAST at Calais was the P&O mail train to Marseilles where the 11,500 tons mail steamer, pride of the P&O fleet was alongside waiting for us. My old life had ended, my new life began ... the 'glorious East' beckoned me. I HAD only a short time to get myself organized and say goodbye to all my girl friends. OH, WE were warned that we couldn't get married for ten years. As I say, that's how we came to be known as the Heart and Soul Breaking Corpora. tion, HSBC, because all the girls knew that and while they were quite happy for you to take them out and buy them dinners and entertain them, they knew that that's all it could be. YOU HAD to pass a medical. I DON'T remember much of the trip out. I had three wisdom teeth cut out by my dentist in Edinburgh, who thought I was going to the North Pole or somewhere like that and said, 'You can't possibly go with those wisdom teeth like that. I'm going to hack them out.' And he solemnly did so with a saw and left my mouth in the most appalling state. This was four days before I was due to sail, and I couldn't open my mouth more than about that. Everything had seized up down here, and so I lived on whisky most of the time on the way out and in quite considerable pain. A RETIRED manager from the East who was noted for his flow of language gave me the best advice before I left London for Bombay. He said, 'The clerks are trying, you have to work very hard, and the climate is bloody awful! Goodbye, my boy, you will enjoy yourself.' The Boat Train ON FIRST appointment to the East—not automatic afterwards—travel seemed to be purposely arranged on the most luxurious scale possible. I got the feeling of a doomed man having lavish care thrust on him before the morning execution! First-class sleeper on the Blue train to Marseilles, first class on the boat in a single cabin. My parents accompanied me when I went to Tilbury to put my trunk on board and see the cabin. All very thrilling and proud making. But we were all subdued when we said our real farewells at Victoria Station exactly one week afterwards and little did I know then that I was not to see them again for six years, and that our meeting would take place on the Hungarian/Romanian frontier where they had come to meet me from Bucharest. WE BEGAN at Southampton. My father went there with my sister. My mother didn't come, she was too upset, and she said, well, you know, we'll say goodbye before you leave home, that sort of thing. SO A FEW weeks later, one morning in autumn saw [us] on the boat train platform at Victoria Station saying goodbye to the many friends and EASTERN BANKING relatives who had come to see us off—many of them, no doubt, relieved to see the last of us for some time. In those days it was all part and parcel of, as well as the beginning of, a great adventure. This was accentuated by the atmosphere surrounding a trans-continental train—with all its huffing and puffing—pulling out of a terminus on the beginning of its long journey. One doesn't experience that atmosphere nowadays as electric trains have much less emotional effect. USUALLY YOU were popped on board at Tilbury, but at that moment they were anxious to get people out to Hong Kong as quickly as possible. I'd only had three weeks' notice (you were usually given a month's notice) so I was allowed to go overland and join the ship at Marseilles. And I can tell you I was jolly careful about the boat train this time. I wasn't taking any chances [after my experience going to New York as a 'London junior']. That time I had had leave up in Aberdeen, of course, embarkation leave, and I didn't get a grant to buy any clothes because I wasn't going East. New York would be near enough the same temperature, but it wasn't. Now what happened was that I had a week's holiday in Aberdeen and came back again, got all my ship and train tickets, said goodbyes, and Bill and I went out on the town that night, and we got the last train back to Black- heath. We'd ordered a cab to take me to Blackheath Station next morning. Bill and I went to bed. I was woken up with somebody shaking me and saying, 'Quick, the cab's at the door. Aren't you ready?' Well, I had everything packed except, of course, my overnight things, and I had no breakfast, I had to wash--well, I didn't really need to shave, I don't know whether I scraped my chin or not; it wouldn't have mattered. And we got downstairs, and the other chaps helped and chucked my trunk into the cab, and we went clip, clop, clip, clop. Being Blackheath in 1926, I mean, it wasn't a taxi. We got to the station, and I was getting very worried as I knew we weren't going to catch the train that I'd expected to. We just made the next train to London Bridge Station and the others grabbed my trunk, and I ran ahead ter try and get a taxi, and they came dashing up behind me. I got a taxi, and it was then half-past-nine or something like that, and I had to be at Euston at ten o'clock. To the taxi driver fellow I said, 'Quick, boat train at Euston at ten o'clock.' 'Oh, you're cutting it a bit fine, ain'tcher?' he replied. However off he went and zig-zagged around. I didn't know London well enough, but he was taking what I call taxi drivers' routes, never main roads. And, of course, there weren't so many traffic lights then, and as we got into Euston Square the clock was booming out ten, and he said, 'Oh I'm sorry, I'm afraid we've just missed it.' And I said, 'No, no, the train was 10:05. I just wanted to have a little up my sleeve.' And a porter came along and opened the door, and I said, 'Quick, boat train.' And he said, 'Oh cutting it a bit fine, ain'tcher, Guv?' And we rushed off. I've forgotten what the taxi fare was, but I gave the cabby a whole pound, I was so relieved. The fare was about eight shillings six. pence or twelve and six, I remember, but it was a lot of money to part with all at once. I got to the train, and the porter was trundling the barrow along, and I was looking along seeing which the reserved seat was, and whistles began THE FIRST TRIP EAST to blow, so I jumped in and tipped the porter through the window as the train was moving—he'd got as far as the luggage van and put the trunk in. I sat down and panted, and really it was as close a thing as that. WE TOOK a train from Liverpool Street, I think, and we got down to Tilbury at about one o'clock. We were awfully annoyed because we then sat out on the Thames on the Karmala for twelve hours while we loaded fifteen inch shells for Malta, and we missed the opening night of No, No, Nanette, I remember that. This resulted in a direct trip to Malta where the P&O did not normally call, instead of going via Marseilles. We got to Malta. It was pretty tricky going through the Bay of Biscay. It was very rough, and you could hear the things shifting below, but we got to Malta all right and unloaded the shells. I went ashore, and my only recollection of Malta was a lot of cross-eyed women and goats as far as I could see. IN THOSE days they kept you working an extra week because you could take the P&O special train to Marseilles. In fact, I think it probably ... by the time the P&O left, there was probably ten days after they left London. We went across and joined in Marseilles. ET NOUS sommes partis en 1935 & Londres. Nous sommes revenus trois mois apres A Lyon, et on est parti directement & Marseille, puis & Saigon, par bateau. AT MARSEILLES, where we arrived long before the Mongolia was due to sail, we decided to 'see the town'. I can't remember how much of it I saw as some time during the evening I was introduced to a drink called 'Pernod Fils' which until then I'd never heard of. The next morning, as I was recovering on board, I hoped I'd never hear of it again. Life on Board THE VOYAGE was wonderful. Port Said, the Canal, Colombo, Penang, Singa. pore, Hong Kong--all the fascination of the East seen through youthful eyes, for at each port we were able to go ashore. I often think how lucky we were (and how little we realized it at the time) not only for being able to make the journey by sea, but for having to make it by sea and not by air. A month of luxury and adventure on board—and being paid for it all the time. IT'S VERY thrilling, you know, that trip, that first voyage out. I CAME out in early 1920 in the P&O Nellore, about 150 first class passengers and probably 80 or so second class passengers. I enjoyed the voyage very much—all the places we called at were new to me, and there was a very cheery crowd on board. FOR US, life was one long holiday. I seem to remember the sea being calm and blue all the way, luxury, liberty, fun and games. Names on the EASTERN BANKING maps became beautiful realities--Straits of Messina and Vesuvius, the coast of Sicily, Port Said (wickedest port in the world, but only one of several so declared), Suez Canal, camels and desert sunsets, Aden--very ugly, coaling by gangs of almost naked men and coal dust everywhere. Aden was very hot, but the Red Sea had been hotter. I WENT out on the Kalyan which was about 7,000 tons, coal burner. Thirty to forty passengers, if that. We got on at Tilbury. We stopped at Malta for a day while they coaled ship, and we went ashore and had a look- around, and when we got back again, you went into your cabin and your sponge was black. All this stuff had come through, although they shut all the portholes. From there we went to Port Said, and from there we went straight to Colombo. MY ORDERS came that I was to sail, and it clashed with this exam [the remaining two papers of Part II of the Institute of Bankers' examina. tion] so I went in to Sandy Moncur, the Accountant, a very tough Scotch accountant, and said, 'Do you think there is any possibility of my being able to take this exam on the boat?' This had never been done before. I was thinking, 'Oh well, it doesn't matter if I don't pass it, but, if I do, I get ￡20.' And this was made rather a thing of, actually, because Sandy got onto the directors of the P&O and all kinds of high-powered people, and he called me in just before I was going, and he said, 'Well, I hope you've been working for this. We expect great things of you.' And I thought, well ... I mean, when you get your orders to go out East, a lot of jollity goes on in one way and another, and, of course, there was no question of doing any work at all, much less when I joined the boat down in Mar. seilles. I got on four days after sailing, and everything was completely strange—a young chap going out East on a boat for the first time. I was called up by the Captain, and he said he had arranged for two Australian bishops to supervise me on these subjects, and would I go to his cabin that afternoon and the next. Anyway, I took them, heard nothing more for some time, and then I got a letter to say I'd passed them. Quite crazy! TWO THINGS I'll always remember! First, the stern discipline of the P&O captains of those days. Lunch was a 1 p.m. and dinner at 7 p.m. If you were late for lunch, you could not go back on the menu. You had to start your lunch at whatever course the Captain was eating. If he was at the main course or a meat course, you had lost your chance for soup or fish. Similar conditions prevailed at dinner! This all stopped a few years later when the Lloyd Trestino started a service from Genoa to Bombay, Singapore and Shanghai with none of these restrictions. The P&O had to fall in line! P&O CAPTAINS derived their authority from God and the P&O Board, espe. cially the former; they were supreme beings, their word was law to all on board. Dinner was a full dress affair starting when the Captain took his seat at his table and finishing when he rose. At the end of each course a gong was struck if one was late for that course you'd had it—or rather, contrarywise, there were no repeats. THE FIRST TRIP EAST MEALS, YOU were expected to be punctual. No question of just drifting in and out as if it was a hotel. The ships were run in those days a little bit like an Army transport. You didn't have a nice little tinkling bell thing. Bugles were blown for meals as far as I can remember. YOU HAD to go into meals at the right time and sit in the right place, you know. I mean, you were very much graded according to . this was your first time out, you might possibly be at the doctor's table or way down somewhere. But some of these people, a bit senior, they were very upset if they weren't next the Captain. They can't all sit next to the Captain! And some of these old boys, some of these senior commercial travellers, the gentlemen dealing in booze, they thought themselves ter. ribly important. But oh, on the whole, very friendly really, I thought. THE FOOD was good because it was so different, and there was a great variety. THE FOOD on the whole was pretty good. I NEVER understood how P&O managed to teach all their cooks to cook the same way. It was the same standard of mediocrity throughout the line ... British style with French descriptions. YOU HAD to do as you were told, completely, by the P&O company who ran it like a boarding school almost, their ships in those days. And people accepted it. It was a good breaking in to what was lying ahead, and I think it was invaluable, really, the three weeks spent going to Colombo that way. You did have a chance of talking to people who knew the places, and that's where one learnt more about what you were going to do and see and what the country was like, than you did by any conversations in London at all, by the people on the boat who had been, who were returning for the second time or been there before. There you were warned what to do and what not to do by people. WE HAD very good cabins, I think, perhaps the Bank really got good cabins for us. I suppose they were entitled to them for the amount of money they paid. I SHARED a cabin, a small box with two bunks, room for one person only to dress at a time. I REMEMBER I had berth No. 1, cabin No. 1, in the bottom of the Rawal. pindi because we'd only got on at quite short notice. THEY HAD these Goanese stewards. Through tradition and long-standing arrangement, P&O always carried Goanese stewards who were very good actually. A GOOD cabin steward who sort of showed me the ropes sometimes. EASTERN BANKING THERE WAS the ship's barber, which was another great institution, where you arranged to get a haircut. The barber also had a 'shop' where prizes for competitions were bought. WE WERE horrified to hear from experienced well-heeled passengers the amount of tips the cabin and table steward would expect to receive. Then there was an unknown bar bill and the barman's tip! We had a good bunch of 'griffins' on board, and we had enthusiastically adopted the way of life forced on us. Cash got short with most of us. There was going to be an end-of-voyage sports competition, and somebody suggested that the Sports Committee should be persuaded to give the prizes in cash rather than in kind purchased at high cost from the barber. You have never seen the enthusiasm and dedication with which each event was fought out. But all to no avail. The missionaries on the Committee vetoed the suggestion out. right. I partially solved the problem by giving the cabin steward my over. coat for which it seemed unlikely I would have any further use. What made me hump it along, I don't know, but it saved the day. I THINK the most awkward thing on the P&O was there were only about two bathrooms per twenty-five passengers, and you had to arrange with the bath steward exactly when you had your bath, and you had exactly ten minutes. The bath, of course, was salt water, and there was a little wooden tray fitted across the bath and a little hand basin of fresh water on it so that you could actually use soap, get some lather in that and soap yourself down, and then you splashed down into the salt tub and washed it off, and then you splashed the bowl of fresh water over yourself to wash the salt water away. And then you had to get out and dried, and all in ten minutes. I like to linger in a bath. I mean, they were hammering on the door if you were a minute longer. So you just learnt to take your bath in ten minutes. THE SMOKING room was Men Only, definitely, which was really the main bar. One would s^y that the public rooms were really inadequate for the number because the ship was absolutely jammed. FIRST CLASS travel would seem pretty awful today, I should think. On the Kalyan we had bunks. The saloon ... you sat at a long table with everybody else. You didn't have private tables. It was a tiny ship. The swimming pool, for instance, was a canvas swimming pool between decks. It wasn t very big either, but one swam in that. We played deck cricket and all the other games, quoits, and so on. They had a small bar in the aft. WE PLAYED 'Where's Maginnis?'—or was it some other name? It is played by two men, both blindfolded and lying on the floor. Each has a rolled—up newspaper firmly gripped in one hand, the other extended more or less at arm's length and gripping the free hand of the other man. After a pause and some manoeuvering, No. 1 calls out 'Where's Maginnis?' A pause, then No. 2 replies Here I am and No. 1 rolls over and smacks his news. paper down as hard as he can where he thinks Maginnis is. The trick is for No. 2 to be 'collected' and ready to roll to one side or another the moment THE FIRST TRIP EAST after he says 'Here I am' and before No. 1 can judge where the sound came from. If No. 1 hits you over the head, it can be very painful. Fortunate. ly he often misses. It is then No. 2's turn, and the game is won by the first to score the best of three (or five) hits. The rest of the party are standing around shouting encouragement and enjoying the mayhem. I DID find it a bit strange that here we were travelling first class, and it was, as I say, very enjoyable, but I wonder whether it really was a good thing, because you travelled out first class, and you thought that you were really sahibs all right. You'd been given a sort of exagger. ated sense of your social standing and then get out, and you suddenly find that you're back to where you used to be, kind of thing. Came down with a thud. And I've heard it said, you know, these young fellows, they're tra. velling first class at their firms' expense and rather acting above their station. FIRST CLASS travel for juniors was an introduction to the life they were expected to lead and a form of education. A bank needed its young to circulate, play games, etc., and often the friends one made rose with you to high seniority. I WAS the only Hongkong Bank junior, but there were quite number of APC Shell people, young Shell people who were a very good crowd indeed. We had to change ships at Aden, and we had to go on to a smaller ship called the Kashmir which we turned our noses up at very much, and we made our. selves, I should think, thoroughly unpopular with all the rest, because we won all the games, and we used to sit around and have a few gins and things before dinner, and even came into dinner blowing a hunting horn and this kind of thing. We were a pretty boisterous crowd. It was an experience for a young chap of 20, 22, or 23, to go out under those conditions, really something, because the P&O first class was very good indeed. I THINK the younger people more or less kept themselves to themselves, had their own little clique. I mean, you played games and you swam, you just sat around and chatted. YOU KNOW, I had a passion for a girl and just enjoyed myself. THERE WEREN'T many girls, in fact, I don't think there were any girls at all worth speaking of. WE HAD a lot of fun. There were no young girls really, but still. There was one Bank wife with a couple of children and a couple of daugh. ters. She didn't give us hell; she merely complained afterwards that we hadn't paid enough attention to them at each port. CHAPS FROM tourist class were not allowed to come up to first and even girls from the tourist class were not encouraged to come up to first. EASTERN BANKING Ports of Call—Port Said and Aden PORT SAID was the first opportunity to leave the ship. That famous depart. ment store, Simon Arzt, was a 'must'. Not quite Aladdin's cave, but at least different from the big shops in England; quiet and cool and with far more reasonable prices. It was a favourite place to buy the then essential topee, which was de rigeur everywhere. The khaki Bombay bowler was gener. ally acceptable, but woe betide the novice who indulged in one of the more exotic shapes or colours. [SIMON ARZT] was where you bought a topee only to discover when you got to Penang (where I was going) that that type of topee had gone out with the Indian Mutiny or whatever it was, and if they wore any hat at all, it was something more of the kind or more of the pattern of a large soft felt hat or something like that. I REMEMBER one day, some time after my arrival in Hong Kong, stand. ing on the Mess verandah overlooking Statue Square, overhearing one of my seniors saying, my God, look at all these Port Said topees coming across, these must be our new men! WE WERE completely green. We all had topees, and we used to wear our topees in Hong Kong, playing golf and things like that. It wasn't until after the war that everybody threw their topees on the bonfire. It was a complete misunderstanding of what heat stroke can be. THE INITIAL impact of the East, even the Middle East, was sudden, exciting and memorable. It was not just a slap in the eye; all the senses were attacked. The sounds and smells were equally different and disturbing. The kaleidoscope of colours in one's surroundings, in people's clothes, in the goods in the shops. The mutilated beggars, the call of the muezzin, the open drains, the scavenging dogs, kites and vultures. Camels, strange fruits and vegetables, unusual boats and sails, unknown languages, pimps, sellers of 'feelthy pictures'. The list is endless, and it all took time to assimilate, and each new country added its own particular impression. On board came the 'gulli gulli' man. ... THE CONJURER chap who'll do the three card trick or make peanuts vanish, the shell game, anything. Their expression was 'gulli, gulli, gulli' as the trick was played. They were just known as the 'gulli gulli' men. MUCH OF the Suez Canal was traversed by night, and the ships rigged up powerful headlights. When two ships met, the one going southwards had to stop and tie up to the bank to let the other one pass. The lights of isolated villages, occasional groups of Arabs and camels or donkeys, Ismailia, the Bitter Lakes passed slowly in the darkness. A brief stop at Suez to drop the pilot, and then the heat of the Red Sea. I DON T think going out you had time to go to the pyramids, coming THE FIRST TRIP EAST back you could go up to the pyramids. You got off at Suez, the south side, Port Said, at the north. You can go out to Cairo and see the sights ... and take a car down to the other port. A BRIEF stop at Suez to drop the pilot, and then the heat of the Red Sea. It was never anything but hot, and one prayed not to have a following wind . DO YOU know how the word 'posh' originated? Port Out, Starboard Home, because the port side outwards was on the north and shady side, and the ship got very hot going down the Red Sea or across the Indian Ocean, especially on the starboard side. When you were coming back home, star. board was on the north side and that was the cool side of the ship. That's how 'posh' originated. COMING THROUGH the tropics when it was very hot, it was the practice to sleep on deck—this was long before the days of air conditioning. Females on one side of the ship and males on the other. Your steward brought up your mattress, pillows and sheets about 10:00 p.m., and when it suited you, you went down to your cabin and changed into your pyjamas and dressing gown. If I remember rightly you had to be off the deck by 6:00 a .m. I REMEMBER the ship coaling at Aden—streams of coolies, a never- ending stream. Full sacks of coal up this gangplank and empty bags on the other—like little ants. And that went on for quite a long ... probably about a full day—twelve hours at least—and, of course, the whole ship was covered with coal dust. It was filthy. It was very trying. It was very warm, but I don't suppose they noticed it so much, being natives. WHEN WE got to Aden, we had to 'coal ship' and the quality of the coal there was poor. Everything became covered in black, and the coal was more slag than anything else. So after Aden, we went very very slowly across the Indian Ocean until we got to Penang. ADEN, BARREN rocks and all, on the southern tip of Arabia. Few places appear less inviting at first sight, or prove more popular with people who stay there for a tour of duty. Nowhere were boats more heavily overcrowded. Every shop seemed to have one or more stuffed dugongs in the back room to be exhibited for a fee as 'Mermaids'. The old town of Crater was higher up in the hills and interesting to see. There was a fine swimming club with steel wire netting to keep out the sharks. Shipboard Life in the Tropics TROPICAL GEAR came out, and since everyone dressed for dinner, the sharp division between Bombay and Calcutta became immediately visibly evident. Black coat and white trousers for Bombay and white coat and black trousers for Calcutta and all points East. EASTERN BANKING I THINK we were wearing what they called 'monkey jackets', short white jackets. That was certainly the Hong Kong fashion. Singapore, I think it was the one that started white dinner jackets. India had black alpaca jackets, which were dreadful things, but they were thin, with white trousers, and Singapore had white drill jackets and black trousers. Hong Kong had black trousers, rather like the Army, Navy, you know. Hong Kong was very much influenced by that. That was the dress. Oh yes, one went out with a dozen dress shirts. I had them for years and years. You could wear soft on occasions. You didn't always have to have hard fronts. AND NO turned down collars and soft shirts either, it was boiled shirts and wing collars. But nobody thought anything about it. Every. body did, and I suppose it added a little something. YOU WERE expected to dress for dinner except on the days the ship called at a port. You could wear what you wished during the day. Most people wore what they were most comfortable in depending on where you were. Most of the way it was pretty hot, so you wore as little as you could. But, yes, it was formal. BUT YOU were left alone, and you could do what you liked. In the evening passengers used to get together and have cocktail parties on the ship, and there was all sorts of dancing. There was a fancy dress ball on the way, and there was horse racing. It was the purser's job on the ship to entertain the passengers. The Captain didn't want the passengers to come along and say, 'I'm not travelling on your ship again because there's nothing to do here in the evenings or during the day.' So sometimes this meant it was overdone. When you wanted to have a sleep, say in the long chair in the afternoon, you'd get some eager people coming along saying, 'Would you like to sign up for deck tennis or deck quoits?' Sometimes you didn't always feel like doing it then, but you eventually did. There were lots of things going on really. They had a good library on board. They used to get telegram- news which used to be sent down from the wireless office, the daily radio news. It wasn't a big thing, about three or four sheets of important items of news, so you kept fairly up to date. ONE OF the jobs I got was to run the Sweep on the ship's daily run! WE PLAYED cricket—at least I did—against the crew. I was in the team that played cricket against the crew. Yes, that was fun. No, we didn't get up to pranks on board the ship, no, not very much. There was a fancy dress ball, as usual. THERE WAS always a Captain's dinner at one stage on the voyage. Usually a fancy dress party. You had to think up some fancy dress. You got a free drink that night. Then, of course, there were deck games. There was always a committee organized as soon as ever the ship sailed from Marseilles. They got together and arranged competitions at deck billiards, shuffle board, quoits ... and so tournaments were organized and prizes and so much for entrance fees. THE FIRST TRIP EAST THE OTHER thing was that King George Vth died on the way out, and that cast a bit of a gloom on the proceedings. ON A eu un ennui, parce qu'il y a eu une fete supprim￡e sur le bateau, un bal masque. Parce qu'en premiere, on etait en deuil de la mort du roi. C'4tait au moment ... mon mari a porte le deuil, a Londres, de la mort du roi, parce qu'on etait h. Londres, h ce moment-lS. Sur le Ranchi, un bateau de la Peninsular and Oriental, en premiere, on etait en deuil, on ne faisait pas ... On n'a pas fait la bal masque & cause de ga. Ceux de seconde n'etaient pas en deuil. THE USUAL deck games—again it was a little bit crowded. You had, of course, deck tennis and deck quoits ... I don't think we had shuffleboard on that ship. I don't know, wasn't room probably. The usual competitions, of course, which you had, I suppose, the first before Aden, but Bombay where the Viceregal party got off and the ship half emptied—you had all your competitions up to then, and then you had another set of competitions probably to the Straits. A CANVAS swimming pool was rigged and filled. Competitive deck games began in earnest, and I do mean earnest! Deck tennis, quoits, shuffleboard and ping pong. WE PLAYED games of quoits and cricket, and there were some Austra. lians on board going back who ... the most dangerous form of cricket I've ever played was on this ship. They were very keen cricketers. The old Moldavia was more cargo ship than a passenger ship really ... and they fixed up nets round the decks in front where the cricket ball and bat were the ordinary gear, and the balls were flying about in the most ... why we all weren't killed, I don't know. I suppose one's eye was pretty good in those days. And we had a lot of fun. WHALE OF A time for a young man still not twenty-one and unworldly. Lots of friendly people, games organized and otherwise. For my sins, because I'd admitted to playing a little bridge--auction bridge, I think, was relatively new—I got caught up by a somewhat senior lady and made to play bridge every night after dinner. That curtailed romantic adventure, and since the stakes this virago insisted on were six pence a hundred, I really had to concentrate and behave, so I never knew if there was any opportunity not to, or if one really went berserk travelling through the Red Sea, which was a traveller's tale I seemed to have heard. Fellow Passengers IT GAVE you an opportunity of meeting people from a different walk of life, it's quite true. PRINCE GEORGE was going out to join a ship in Hong Kong. He took four and sixpence off me the night before we arrived in Hong Kong, playing EASTERN BANKING bridge. We used to play bridge quite regularly, particularly from about Colombo onwards. Prior to Colombo he kept himself very much to himself, but after that he thawed a bit. I LEFT London for Bombay in 1924 on the Narkunda and Rudyard Kipling was on board going to Port Said. I also travelled with him when returning from leave in 1931. He spoke exactly as he wrote. He smoked like a chim. ney, and he was very solicitous about looking after his wife. Naturally he was regarded with awe or interest by the rest of the passengers. He was a noted man. I mean, you didn't just barge up to him and talk to him. If he addressed a word to you as a junior, I replied, you see. He mistook me for an Army officer. I said, 'I'm a poor bank clerk.' He said, 'Oh, I wanted you on the sports committee.' I MET the Maharaja of Patiala, the Sikh Maharaja, who was returning from London to Bombay after the Round Table Conference of the principal Maharajas with the British Government at which Gandhi was also present. I had one of the bachelor cabins on the boat deck. Travelling with Patiala were some of his wives and his son, who eventually captained India's cricket team. Patiala did not allow his family to play the usual deck games with the other passengers, so they used to play on the boat deck, and when I was changing for dinner, Patiala used to fill the window of my cabin with his somewhat massive body so that his females could not see me while I was changing. He had arranged with the P&O to alter the cabins for all his family, and it had cost him ￡2,000, which was a good sum of money in those days. The wives left the ship under a purdah over the gangway of the ship. WHEN WE had the Rajah of Sarawak and his wife on board with their two children, his elder daughter was my partner at deck tennis. We did quite well, but we didn't win. We lost. She later became Lady Inchcape. And then you met people who ... I remember a man who was in the pilot service in Shanghai. I got to know him quite well. And it was interesting meeting these people from different walks of life. I don't know that it did much good ... at a later date, you know, you're out to represent the Bank, well, of course, you do what you can. But I don't remember anything transpiring as a result of an on-board ship friendship. AT MARSEILLES the Chief Manager-designate, [V M] Grayburn, came on board, and the wife of the Hong Kong Manager, Mrs [L N] Murphy, the wife of the Chief Accountant, Mrs [H G] Hegarty, the wife of the Bangkok Agent, Mrs [H C] Aspinall, all senior ladies, and we all, of course, were introduced, but I must say that Grayburn looked after them throughout the voyage. We did our duty dances. AMONGST THE passengers was the No. 2 of the Bank. His name was [D C] Edmondston, and he took a great interest in the three of us. Not a stupid interest, he just took a great interest. He used to ask us for drinks with him before lunch, two or three days a week, and we got very friendly with him and his wife. That is part of the greatness of the Bank. All the older members of the staff, they were always, in my experience, extremely THE FIRST TRIP EAST kind to the younger members of the staff. THERE WAS a man called [D] Benson on the ship who was going out to be manager of the Mercantile Bank in Hong Kong, and he took us in hand. He was an awfully nice man and really was a father to us in many ways at the various ports and things like that. He had endless stories. He'd been all over the Far East in various branches, mostly in India, I think. Anec. dotes, personalities and, as far as Hong Kong was concerned, one or two personalities that we'd heard of, he embellished on. He didn't talk bank. ing at all. THE OLD Karmala was about eight thousand tons with a maximum speed of eleven knots. Very comfortable, too, very nice, very friendly. There were a lot of young naval officers on board, submariners, most of them, and I got to know them in Hong Kong. I WENT out to Calcutta in 1924 on the P&O steamer known as 'The Rol. ling China'. Accommodation was full--it was 'the Season'—so in order to get me on the ship the Bank had to buy me a 'de luxe' passage. It consist. ed of a third berth in a three-berth cabin—the ' de luxe' part being that it was the single berth under the porthole! Accommodation would be consi. dered very primitive in these days of air conditioning. The China was one of the oldest P&O ships. She must have been built in the '80s at least. There was a small bar, a large dining room to which you descended down broad steps straight from the lounge which was the only reception room pro. vided and consisted of a small annexe from the top of the stairway and the 'surround' of the latter which ended in a mirror wall five yards from the back of the stairway. AT THAT time there would be a large number of people from India going home on leave every spring and returning in the autumn. That meant that the ship would be full as far as Bombay with those returning to India, leaving very few berths available for those bound for Singapore, Hong Kong, Shanghai and Japan. Those, therefore, who would normally embark either at Tilbury or Marseilles on the Far East run would have to take the one on the Australian run and, as both ships would call in at Colombo, trans-ship there. That is why the four of us—with orders for Hong Kong and Shanghai found ourselves first of all on the Mongolia, which was on the Australian run, as far as Colombo, where we trans-shipped to the older and smaller Macedonia. Ports of Call—Bombay and on to Calcutta THEN WHEN you got to Bombay, I think, was the first port where we were met, the junior there or somebody ... depended on the seniority of the people travelling because if there was a senior Mrs. So and So, probably the manager's wife came down with the car and all the rest of it. But people always looked after you, and if they were very busy in the office, they'd probably say, 'Well, I've got a car, and the syce will drive you out EASTERN BANKING to the swimming club or something like that. Sign my name, old boy, it will be all right for a drink. ' And then they try and fix up, if you are going to be there that evening, have a meal in the evening. But you never quite knew when the ships—it all depended on the tides and things like that and the amount of cargo, of course. I mean, the P&O—if there was a bit of cargo, they just waited for it, I mean, there is no nonsense. But I always remember when we got to Colombo, you got off, and all the policemen saluted you. Good God, what's all this, you know. You were white, you see, and you were off the P&O ship. In the docks, not when you got out, of course, but in the docks, they saluted. IN THE port you went to the office and saw anybody, if you knew them, and I remember going up to the good old No. 1 house [in Bombay], where I lived later, Victoria Lodge. I knew the then Bombay manager, and he said, 'If you go up to the house now, I think that senior party will have departed and khitmatgar will give you a cold beer.' Of course, you get a good view right over Bombay. I don't know whether we went to Breach Candy to bathe, which is the bathing place, I think we did. And that was the sort of pattern at the various ports. THE NEXT important call was Bombay. Now that really was exciting because we had a branch there with people you knew in the Bank who had gone out and who knew you were on board. So they came aboard at whatever time and greeted you. And you said, 'Come either have breakfast or lunch.' And they used to say, 'No, we'd like you to come off and have lunch with us.' So we used to give them one meal on the ship, usually either the first meal or the last meal, and they used to take us ashore and entertain us during the day if it was possible. Of course, if it happened that we arrived during the week, it wasn't quite so easy, but I think there were a couple of places we landed at the weekend, and it worked out very well because they came aboard early on a Saturday morning. And then we went from Bombay to Colombo. From then on we had branches at all ports of call, and it was very nice meeting all these fellows who had been in London with you and asking them what it was like working in the Bank and how they found cond i tions. AT BOMBAY nearly half the passengers left the ship. The Heaven Born (I.C.S.), Indian Army, and box wallahs like us. The day ashore was the first introduction to Bank hospitality. All the Bank staff on board were invited to lunch with the Agent, as the Manager was then called. The spacious surroundings, the smart servants, and, of course, the excellent meal were quite an eye-opener to a new junior and gave a glimpse of some of the rewards which the future might bring, if one was lucky. The evening was spent with men of my own age who showed me the town and saw me back on board . WHEN I landed [in Bombay], no one met me ... it was some mess up, the usual thing, the man hadn't come at the right time or something ... so I hired a gharry and found the drive to the Bank most interesting as I recognized the names of some of the shops and business houses known to me THE FIRST TRIP EAST in London. MEMORIES OF landing in Bombay and of boarding the train for Calcutta are hazy. I know I was met and entertained royally all day. It was part of the ritual to pour the new 'griffin' on the train in an almost incoher. ent state and, scaringly, at the very last moment, so how I got hold of a bed roll and organized myself for the two day journey I cannot remember. The thing I always shall remember was my first arrival at Howrah, the Calcutta railway station, and my first introduction to the teeming mass of Calcutta humanity, the stench and overwhelming heat. How was I to survive? But a warm greeting, a swift introduction to the chummery above the office, a bearer to deal with my effects and bath me—actually this implied only being towelled down, thank goodness. After breakfast, and already feeling cheerful and, shall I say, zealous, I reported with no further ado downstairs for duty only to be told that my first job was to proceed back to that same horrid station to collect a consignment of gold bars from London. The only escort given to me was one skinny clerk and two durwans armed only with staves. Transport was two ordinary open taxis driven by fierce looking Sikh drivers—one box of gold bars to each taxi—and so I faced the horrendous task of trying to keep my chariots wheel to wheel through the most enormous traffic jam one could conceive across the Howrah Bridge—the only link between the two parts of Cal cutta--and back to Clive Street. A nightmare of responsibility it seemed to me, but soon one was taking all these hazards and life in general in one's stride. I DON'T think [the Hongkong Bank] was unusual [in organizing juniors in the East to meet juniors coming out East at each port], but they made much more of thing out of it, I think, than most other people did. You're 'wired on' or whatever, that So and So is on such a ship or an aeroplane, and somebody is always there to meet you, which was a very helpful thing. We really felt we belonged when we got Bombay, you see. It hadn't really sunk in, but when we got to Bombay, the organization enveloped you and that was that. I THINK [the Hongkong Bank] was particularly friendly, yes. But there was a very strong family feeling in the Bank, and, I think we did look after each other and stick together probably more than most banks. IL Y avait une hierarchie moins visible que dans les banques fran- qaises, oui. Nous avons retrouve qa a Hong Kong. Mr. [F B] Winter, et le directeur, Mr. Edmondston, etaient extremement gentils. Ils nous ont requs avec beaucoup de sympathie a Repulse Bay, dans un grand hotel de Hong Kong. On a ete tres tres bien requs, par tous les directeurs, de Bombay, de Hong Kong. De partout. Et on mettait toujours une voiture avec un guide & notre disposition pour visiter le pays, l'endroit ... Bombay, Colombo. On a vraiment ￡t￡ tr&s gates. La banque etait une famille. Je ne sais pas ce qu'elle est & present, peut-etre que ce n'est pas la meme mentalite. EASTERN BANKING IT WAS part and parcel of the young raarrieds' job to help look after the people passing through. A WIRE would come through that So and So and family were on board, and the notice went round the office, 'Anybody know So and So?' It just depended on seniority. A junior would probably just meet a senior man and bring him back to the office. But then, of course, they were looked after for the day. Of course, wives proved a great asset in those conditions. Ports of Call—Colombo THREE MORE days and we were in Colombo, where again we were most hospita. bly wined and dined, taken for a swim at Mount Lavinia, and given time to see the sights and take innumerable photos. An impression of a fertile land, beautiful beaches, smart chuprassis, and bullock carts even in the busiest streets remains. COLOMBO—YOU could smell the scent of spices and flowers way out at sea. The E&O Hotel [actually in Penang] for our first long, cold lime squash—nectar! Then through the fascinating streets full of bullock carts and gaily clothed women to the Garden Club. Unusual orientals with large combs in their hair waited on us at lunch ('tiffin' was an unknown word to us). The table was loaded with silver sporting cups, food for the gods, and there was a lovely flower-decked garden beyond the verandah. This was Lif e! UNTIL I got to Hong Kong I hadn't really noticed what a totally different smell it had from Calcutta or Colombo. Your senses are more alert when you're young. There's a sort of cinnamony, spicy smell about Colombo. It's not just imagination; I mean, they are shipping spices and things, and there must be some of it in the air. AT COLOMBO at that time you landed and everything was very green, of course, and it was before they tarmacked the roads, and the roads were all just red cabook, and you drove along these red roads with the green coconut palms. It really was very pretty at that time. Before I left all the roads had been tarmacked, and it was rather a pity, but they had to do it, of course. I was met by one of the office peons, that's the office boys, a Tamil. He looked after me and took my luggage and took me along to the office, and I met the fellow I was relieving. He was just coming along to the jetty to see me. I went into the office and saw the manager and met the other people in the office. Then they took me up to the ... we had a flat on the top of the building where we had a canteen and where we used to have tiffin ... we went up there and had a drink, and we went with the accountant and a couple of others up to the Golf Club, and we had some more drinks, and we came down. They put me up in the G.O.H., Grand Oriental Hotel. It was just opposite the jetty. They came along, and we had dinner there ... in dinner jackets, the white man's burden ... and played bridge, and then I went to bed. THE FIRST TRIP EAST I WAS standing on deck talking to Grayburn as we were tying up or anchoring at Colombo ... in those days couldn't tie up alongside ... and the peon came on board and presented Grayburn with a note. Grayburn opened it and said, 'Oh, I thought this would be one of you getting off. It isn't, it's me.' And this was the big snag, the head shroff had abscon. ded. I've forgotten the details, although I was in Colombo later, and so we left Grayburn behind and proceeded on. [See Selvaratnam, essay No 19.] AT COLOMBO we left our grand mail ship and transferred to an 'interme. diate' P&O SS Arcadia—a very inferior vessel—indeed, as I recall it, a disgrace to any major line. The dining saloon was dark and dismal, access was by a steep stairway. I don't remember much about this ship except that it was dark, dirty and insect-ridden. There was only a handful of passen. gers, mainly rubber planters bound for Malaya, I think. We were the sole China-bound passengers. The planters were full to the brim of the glories of rubber and the fortunes to be made therefrom. Ports of Call—Penang and on to Bangkok AND THEN the next call, of course, was Penang where the same procedure went through. The great Penang story, of course, is about the PSO's. The PSO in Penang was the 'Professional See-er Off'. That was not on the outward voyage but for the homeward voyage. There were a number of people in Penang who would never let a P&O sail without going on board, homeward bound, to see which of their friends were leaving and shake their hands and have a drink with them and wish them a good time. And more than one PSO failed to get off and, of course, had to go all the way to Colombo and was usually sacked for this. But PSO's in Penang were quite a tradition. Out. ward bound there was somebody in the Bank, though I can't remember who it was, who actually missed the ship. He was being entertained ashore, and he actually missed the ship sailing from Penang. But fortunately it was going on to Singapore, and he was popped on the night train and managed to catch the ship at Singapore. I REMEMBER Penang because I missed the ship there. There was a chap on board who was getting married, and we went to his pre-wedding bachelor party and left it a bit late and by the time ... oh, I know what happened ... the wretched rickshaw coolie assumed that there was only one place a gentleman in evening dress coming out of a hotel wanted to go, and he took me off to the local brothel. By the time I'd sorted this out and said, 'I don't want a girl, I want a boat', the boat was just pulling away grace. fully from the quay, and there was I in full evening dress, boat going ... Penang is the only place you can catch the boat again. So I went back, and the groom-to-be put me up, lent me some kit and some shorts and things. Luckily, I had a cousin who was a planter and also a lawyer, so I sent them a telegram from the train, and they put me up at KL. The train stays there quite a bit, and then I was down to meet the boat coming in at Singapore. There was a lot of joking from the passengers. I was quite an innocent party in this particular case. I don't think the Bank knew. I don't think EASTERN BANKING don't think I told the Bank because ... any reason why they should know. WHEN I got to Penang the police launch came out and one of my friends told told me I was being taken off at Penang. I was a bit disappointed because I had read all about the high price of silver and how I might make my fortune because I was to go to Shanghai, but as it happened it probably was the best thing that happened to me because it was most interesting in Penang, and I got to know, through being the cashier there, a lot of rubber planters, and we used to go for weekends to the different rubber estates. I learnt a lot about the history etc. about Malaya. I WAS posted to Bangkok, and I thought in my innocence I would go to Singapore and then get the Straits Steamship and keep on a ship and go up to Bangkok, but when I got to Penang—it was the middle of the hot weather, the temperature was something over 100°—and one of the Penang staff came aboard and said, 'You've got to get off here. You're going on the train.' I remember very well packing my cabin trunks and things in that steaming heat and being hoiked off the boat and stuck on this train, which was a wood-burning train, and making the journey up to Bangkok on the Inter. national Express. And these large bumps of burning timber coming in, because you couldn't shut your windows as it was so hot. Red hot things used to come through the windows. It was, of course, a very impressive journey for me. We arrived in Bangkok at about four o'clock in the after. noon the following day, and I was met and taken in hand immediately, and shown around the town in a big way that evening. Yes, it was quite an experience, that arrival. Ports of Call—Singapore and on to Surabaya and Saigon SIX DAYS, I think, from Colombo to Singapore, where we were met by recent friends from London Office, drank gin slings, went bathing from Dudley's little bungalow some miles away on the coast, stayed overnight in the Bank Mess, marvelled at the very fine new Bank building, were introduced to Mr. (afterwards. Sir) John Peter, just come from Hong Kong--a brilliant banker who put the Bank right on the map in Malaya. WE WERE received in Singapore with considerable pomp and pageantry as we had brought out the new Governor, Sir Shenton Thomas, and his fam. ily. Planes dipped and guns fired in salutes, bands played on shore. The uniforms and brilliant colours of the gala dress of the Malayan officials together made an unforgettable scene. I REMEMBER when we got to Singapore and the launch came off for us, the rest of the people on board ship thought, 'Who on earth's is this?' It was for us the Bank s launch. We were taken ashore, and people looked after us. I stayed off because I went to Surabaya by Dutch ship. ON EST al1￡ par Bombay, Colombo, Singapour. Singapour, on est parti par un bateau anglais, le Ranchi, et ^ Singapour, le bateau qui devait nous THE FIRST TRIP EAST amener & Saigon partait une heure avant l'arrivee du Ranchi. II n'y avait pas correspondance, alors on est reste 1A une semaine, k attendre h. 1'hotel h Singapour, ou nous nous voyions tous les jours avec le directeur. II s'appelait ... voyons, j'ai oublie le nom. Nous avons etd tres gates. Un voyage raerveilleux, tout en premiere classe, avec des indemnites de frais de voyage, de frais de bagages et tout. THERE WAS a large junior Mess in Singapore, and consequently several people whom I had known in London. After dinner in the Mess we visited the Great World and no doubt several other places of interest. Fortunately the ship only stopped one day in each port until it reached Hong Kong, where it remained from Thursday until Saturday before going on to Shanghai and Yoko. hama. The strain of longer stops might have told on both hosts and guests. Arrival in Hong Kong THE FIRST thing I remember about Hong Kong is that as we entered via Green Island, instead of Lei Mun, we were met by at least three, if not four, gladiator fighters from Kai Tak because we had RAF personnel on board, and they practically removed our aerials—to the Captain's annoyance. WE ARRIVED in Hong Kong at about eight o'clock in the morning, and I was looking over the rail, and I saw down below three fellows who' d just been in Hong Kong a short while. They had been contemporaries of mine in London Office, but they were juniors, and they came across the harbour, and there they were waiting for me to walk off the ship to tell me that I was going to get their job, which was overseeing the weighing of silver bars. I remember it was very hot, and I didn't have exactly the tropical kit, although I had what I thought was tropical kit, but it wasn't the real thin stuff. Well, we had a happy reunion, and we eventually got our luggage onto the Bank launch, were taken across the harbour, up to the Bank, and introduced to the Accountant. I ARRIVED in Hong Kong first of all, I think, in the Rajputana, and I found myself detailed as soon as I arrived to watch the disembarkation of a load of silver bars. In those days China was on silver, and there were always shipments of silver bars going one way or another. My first job was to watch these silver bars being taken out of the Rajputana, put onto funny little trolleys, and then pushed into a junk which was towed across to Hong Kong and then unloaded. The bars were counted and popped into the Treas. ury. That was my first day's work. I REMEMBER being taken ashore in Hong Kong and told, 'The Chief Mana. ger can't see you yet, nor can the Chief Accountant. You'd better come and count some notes.' And we were shown into this big cage where there were about, I suppose, fifteen other juniors who had been in Hong Kong probably a year or more. Some of them you knew as having been in London with them, in fact, most of them you knew, and you sat down there, and you counted old EASTERN BANKING notes which were going to be destroyed, and as you counted them, the fleas and the bugs and other things like that jumped off and onto you. It was a very nice introduction to banking in Hong Kong! WE WERE due to reach Hong Kong in the early morning, and I was up on deck soon after dawn to see our entry through the Lyemoon Pass, which was so narrow that tigers would swim across the strait--actually one did while I was in Hong Kong later on--it looked as if one could throw a stone from the deck to the land on either side. Sentiments bubbled up in me as they do in youth—this was the start of what I vaingloriously considered my 'career'—the Golden East, the Head Office of Hongkong Bank—at once my refuge and my stepping stone to affluence—I hoped. Well, young men would be poor stuff unless sometimes their thoughts were rosily vague and their hopes exceeded reality. The gold turned out to be gilt, I grew to know my limitations, my weaknesses and follies, as did my superiors, but I never lost completely that anticipating delight, that 'third to the left and straight on till morning' Peter Pan glow. I might be sent anywhere--turn to the right and I'd be in Manila—what about Siam and the Frenchness of Indo China--straight north to Shanghai, the mart for all North China, even perhaps to Peking. 'PEKING'...there would be city for adventure and wonder. I ONLY got as far as Hong Kong. One of us had to on to Shanghai, and one of us had to stop in Hong Kong, and I thought the senior body usu. ally got the choice. In this case he didn't. I was told that I was going to stay in Hong Kong where I was immediately told by 'Sailor' Moncrieff, who was one of the two sub-Accountants in Hong Kong Office, that I had to enroll in the Volunteers. I said, 'Why?' The training season's finished. Nothing to do now.' He said, 'Oh, we want you as anchorman in that tug- of-war next week.' So I was brought up to Volunteer Headquarters and given a pair of corps boots and there I was in the Machine Gun and Armoured Car Corps. I couldn't drive a car and couldn't fire a machine gun! And on to Shanghai and Harbin AS THE Mongolia was on the Australian run, we trans-shipped at Colombo to the Macedonia, an older and smaller ship on the Hong Kong, Shanghai, Japan run. In due course we arrived in Shanghai where we were packed into a broken down taxi by whoever it was who met us, and on the way to the Bund, or to the lodgings to which we were assigned—I can't remember which—we stopped off for a few minutes at Hong Kew office. WHEN I left home, I was going to Hong Kong, and it was only when I got to Penang that I found a cable waiting for me telling me that my destina. tion was Harbin, which was exciting and new, but caused an immediate finan. cial problem. My meagre funds had been eked out to last five weeks, and now the trip had been extended to seven! So far as I can remember we were given a month's pay, or some similar sum, before leaving U.K., and that had to last until we reached our destination. I did ask in Hong Kong, but was THE FIRST TRIP EAST told to wait until I reached Harbin. The two day trip to Shanghai passed quickly. The weather became noticeably cooler and new problems arose. Manchuria had only recently been taken by the Japanese from the Chinese (1932), and the Chinese were still smarting and resented anyone going there. Duty was charged on every conceivable item; there was a great to-do over my shotgun, and the Sub-Accountant had a full time job placating and squaring the various officials. The Bank in Shanghai did help by paying the duty on my belongings, to the debit of my a/c in Harbin. At last I was free to board a small ship for Tsingtao and Dairen. Tsingtao was immediately recognizable as a former German possession by the hats and clothing of many coolies. I was met in Dairen by someone from the Bank and put on the night train for Harbin. Menus were in Russian and Japanese and nobody spoke English, so the need to learn a useful local language was quickly impressed on me. The journey took at least twenty- four hours and both time and railway gauge changed at Chang Chun. On arrival in Harbin in November, the most pressing problem was warm clothes, as the temperature was then 0°, but since the Bank had taken over Tschurin's department store as a bad debt, the solution was right to hand. I had come a long way. Harbin suited me rather well, because I'd been playing ice hockey at home, and I'd taken my skates and hockey sticks and so on, and I was able to play ice hockey in Harbin for a couple of seasons. WELL, I think it was a very pleasant experience. One met a lot of people who'd been in the East because, of course, in those days everybody more or less went out by P&O, and one was able to hear about various things. I rather supported Sir Arthur Morse's idea that juniors should be sent out by sea, which certainly in his day continued. He felt that not only was this a pleasant time, but it enabled you to come to the East more gradually. You went to Suez and Bombay and so on. You learned gradually about things instead of being whipped London to Hong Kong without seeing anything between. EASTERN BANKING RETIREES whose statements are included in the selections above as interviewed by Christopher Cook and Frank H H King The Hongkong and Shanghai Banking Corporation Adamson, Mrs J J Black, F C B, 1929-1960 Bradford, I H, 1932-1962 Burch, F R, 1929-1960 Caldwell, J, 1920-1952 Carruthers, M G, 1937-1967 Chambers, G S, 1929-1959 Clark, N E, 1936-1966 Davies, H C D, 1921-1952 Fenwick, T J J, 1919-1951 Ford, Neil, 1936-1964 Greig, H A, 1925-1954 Haymes, M F L, 1931-1961 Hutchison, E C, 1931-1963 Knightly, F J, 1937-1968 Mason, V A, 1919-1951 Moodie, R P, 1925-1958 Ogden, B J N, 1949-1978 Oliphant, R G L, 1934-1965 Perry-Aldworth, S W P, 1925- 1961 Sayer, G M, 1947-1977 Stabb, G W, 1930-1960 Stewart, G 0 W, 1933-1968 Stewart, Wm. Alex., 1933— 1966 Taylor, J McG, 1925-1955 Turner, Sir Michael, 1930- 1962 and Vincent, L (joined Lyons Branch, 1924, went East 1935, retired 1954). Interviewed with Mme Vincent by Claude Fivel-Demoret. The Mercantile Bank of India, Ltd Misselbrook, C C, 1920-1952 Pow, C F, 1925-1966 Anderson, D K, 1925-1955 Blanks, L C, 1924-1954 Brief extracts from written materials in the Group Archives have also been included. The first date is the year of the first trip East - not of joining the Bank as a London junior. P&O SHIPS MENTIONED Arcadia - 1888. 6,603 grt; 142.76m long, 15.89m broad, 10.56m deep; 15 knots consuming 110 tons of coal per day; 250 1st and 160 2nd class; prim. arily Bombay service; some to Australia. China - 1896. 7,899 grt; 152.54m long, 16.53m broad, 10.28m deep; 18 knots; Australian and Bombay mail runs. Macedonia - 1904. 10,512 grt; 177.4m long, 18.41m broad, 10.37m deep; 17 knots; 377 1st and 187 2nd class; primarily Australian run. Nellore - 1913. 6,853 grt; 137.08m long, 15.90m broad, 9.23m deep; 14 knots; 54 1st and 40 2nd class; 'intermediate' non-mail services between UK and India and from India to Far East. THE FIRST TRIP EAST Karmala - 1914. 8,983 grt; 146.19m long, 17.74m broad, 11.52m deep; 15 knots; 80 1st and 68 2nd class; Calcutta and Far East service. Narkunda - 1920. 16,572 grt; 177.24m long, 21.15m broad, 15.03m deep; 16 knots; 426 1st and 247 2nd class; both Australian and Eastern routes. Moldavia - 1922. 16,277 grt; 168.36m long, 21.85m broad, 15.76m deep; 16 knots; 214 1st and 180 2nd class; Australian 'intermediate' service. Mongolia - 1923. 16,385 grt; 168.12m long, 81.94m broad, 13.01m deep; 16 knots; 231 1st and 180 2nd class; Australian mail route. Ranchi - 1925. 16,974 grt; 173.64m long, 21.64m broad, 11.58m deep; 17 knots; 305 1st and 282 2nd class; built for Bombay mail, but ran to Far East when former service ceased. Rajputana - 1925. 16,644 grt; 173.67m long, 21.64m broad, 14.32m deep; 17 knots; 307 1st and 288 2nd class; Bombay mail route, later Japan run. Rawalpindi - 1925. 16,697 grt; 166.71m long, 21.64m broad, 14.32m deep; 17 knots; 307 1st and 288 2nd class; Bombay mail route, later Japan run. Sample schedules - 1931 Raj putana Karmala London . . . . Feb. 20 London . . . . Feb. 5 Southampton. . Feb. 21 Southampton. . Feb. 6 Marseilles . . Feb. 28 Port Said. . . Feb. 16 Port Said. . . Mar. 4 Port Sudan . . Feb. 19 Aden .... 8 Aden .... . Feb. 22 Bombay . . . . Mar. 13 Colombo. . . . Feb. 28-Mar.1 Colombo. . . . Mar. 15 Penang . . . . Mar. 5 Penang . . . . Mar. 19 Singapore. . . Mar. 7 Singapore. . . Mar. 21 Hong Kong. . . Mar. 13 Hong Kong. . . Mar. 26 Shanghai . . . Mar. 17 Shanghai . . . Mar. 30 Moji .... 21 Kobe .... . Apr. 3 Kobe .... 22 Yokohama . . . Apr. 6 Yokohama . . . Mar. 29 [The information on the P&O ships and the sample schedules were kindly provided by Stephen Rabson, Group Librarian, P&O Information & Public Relations. Ed.] 13. CHINA’S FIRST PUBLIC LOAN: THE HONGKONG BANK AND THE CHINESE IMPERIAL GOVERNMENT “FOOCHOW” LOAN OF 1874 by David J S King* The Hongkong and Shanghai Banking Corporation [HSBC] offered the Chinese Imperial Government Loan of 1874, the so-called "Foochow" Loan, to the public in two separate issues in January 1875 and March 1876. This was the Bank's first Imperial Government Loan; the "first issue" was also the first Chinese loan to be floated publicly in the form of transferable bonds; the "final issue", placed in London, was the first Chinese loan to be issued on a foreign market. As had already been the case in several earlier privately-subscribed loans to Chinese provincial authorities, revenues of the Imperial Maritime Customs were pledged as security for the 1874 Loan under the authority of an imperial rescript. In November 1874, the Bank signed the final agreement for the "first issue" after negotiations in Foochow with provincial authorities; a second agreement for the "second issue" on the same terms was signed in June 1875. It was a "sterling loan", meaning that it was denominated in sterling, however the Bank raised and advanced to the Chinese the equivalent of the sterling amounts in silver at an arbitrary exchange rate and the Chinese repaid their obligations denominated in sterling in silver at the rate of the day. The proceeds of the 1874 Loan were paid to the Chinese in Foochow, and were raised in Hong Kong, Shanghai and London. Although the Loan was denominated in sterling, the transactions were, as was normal, carried out in each place in the local currency or currencies at an agreed rate of ex. change. For the sake of convenience, these currencies and rates will be introduced here. As the Loan was made to the authorities in Foochow, all payments to them or repayments received from them were in silver taels or dollars of Foochow currency. The silver currency of Foochow was based on silver dollars, however the practice of "chopping" dollars had led to their only being accepted by weight and not at face value. ^ Dollars of Foochow currency were weighed in yang-p' ing taels at the rate of 717 taels = 1,000 Foochow dollars. In the Memorial proposing the Loan, the Tsungli Yamen specifies the amount as two million taels (unspecified, but understood to be yang-p1ing taels) of "foreign silver", i.e. 900 fine. In the final *This recently completed paper, although not presented at the history conference, is included to provide some indication of the role The Hongkong Bank played in its main area of operation, China. David King is currently undertaking research into "China's Early Loans, 1874-1895", a task rendered necessary because (i) new materials have been found in the HSBC Group Archives and elsewhere and (ii) a comprehensive study of the early loans in contrast to the more political ly-controversial later loans appears lacking. The completed study, containing a chapter on each loan, will include background explanations and general comments. Ed. Eduard Kann, The Currencies of China (Shanghai: Kelly & Walsh, Ltd, 1927), pp. 490 and 498. CHINA'S FIRST PUBLIC LOAN agreement the exchange rate of 4/6 [￡0.4s.6d] = $1 Foochow—which the Foo. chow negotiator had already approved in September—was set arbitrarily at the rate at which the proceeds of the Loan were to be paid, although the rate of the day was approximately 9% lower. The Chinese were to make re. payments at the rate of the day for demand drafts on London. The "first issue" was raised by the Bank in Hong Kong and Shanghai at an arranged rate close to the rate of the day for Hong Kong dollars (4/1 z = Hong Kong $1) and Shanghai taels (5/7 = Shanghai Ts 1) respectively. Hong Kong dollars and Foochow dollars both refer to an equivalent amount of silver and are of equal value. The "second issue" was raised in London in sterling and paid to China at the same agreed rate as the "first issue" of 4/6 = Foochow $1. The Loan was for a total of ￡627,615, equivalent at the agreed rate to two million [yang-p1ing] taels, and ran for ten years at 8%. As there was a delay in delivering some of the bonds which were to serve as security, a final agreement was signed in November for a first issue of ￡539,748.18.0, equivalent at the agreed rate to 1,720,000 [yang-p1ing] taels or 2,398,884 Foochow dollars. In January 1875 the Bank placed this "first issue" at 95 in Hong Kong and Shanghai (the Bank also accepted applications privately from "friends" in London on the Hong Kong market). The same parties signed an additional agreement for the "second issue" in June 1875 for the remain. ing ￡87,866.2.0, equivalent at the agreed rate to 280,000 [yang-p1ing] taels. In early 1876 the Bank floated this "second issue" along with bonds worth ￡187,048.18.0, which had not been allotted to the public from the "first issue", in London at par; this was known as the "final issue". The Chinese request for funds came in response to a crisis with Japan. In 1871 some Liuchiu sailors (over whom Japan claimed suzerainty) had been massacred by aborigines on Formosa. Japan demanded an indemnity which China refused to pay, disclaiming suzerainty over the aborigines on the island. When, in 1874, the Japanese sent a force of 3,000 men to For. mosa, the Foochow authorities sought to borrow funds from foreigners for the development of Chinese coastal defenses in case a full-scale war with Japan should develop. Formosa was at this time a dependency of Foochow, and therefore the Foochow authorities were primarily concerned with the Loan. Specifically Shen Pao-chen, the Imperial Commissioner in charge of maritime defenses in Foochow, requested six million [yang-p1ing] taels for the purchase of ironclads, rifles, cannon and ammunition. However, as the crisis subsided after the Chinese agreed to pay an indemnity of 500,000 taels to the Japanese on October 31, 1874, they did not in fact borrow more than the two million taels raised through the Hongkong Bank. Precis The 1874 Foochow Loan, like most of the loans in the period 1874 to 1895, was raised in response to a military crisis. As the Foochow authorities could not predict how serious the situation would become or how long it would continue, they had no basis on which to estimate their ultimate borrowing requirements. In addition, they could not be certain of a sym. pathetic response in Peking. Therefore, as in many subsequent loan nego. tiations, the Chinese mentioned several different figures in the early EASTERN BANKING negotiations for the Loan. Furthermore, Western negotiators often did not tailor their offers to the amounts actually requested by the Chinese, but offered loans corresponding to their own conceptions of what Chinese borrowing policy should be or reflecting figures which it would be con. venient to issue on the London market. In his original Memorial in late August, Shen Pao-chen estimated that he would need to borrow a total of six million taels. In September however he only requested permission to borrow two million taels on the basis of the preliminary agreement already reached with the HSBC, noting that he had an option to borrow more if needed. In parallel negotiations with Jardine, Matheson and Co, the figure of ten million taels appears to have been dis. cussed. However the Chinese may have been trying only to solicit a reac. tion to the maximum amount they might wish to borrow and may never have intended to raise the full amount at one time. Robert Hart, the Inspector General [IG] of Maritime Customs, in soliciting an offer from the Oriental Bank Corporation [OBC] in mid-September, named one million taels as the amount, and, when Albert F Heard, a partner in the American firm Augustine Heard and Co, later also made an offer, he mentioned between one and two million pounds (approximately three to six million taels). The Foochow authorities finally concluded a Loan for two million taels from the HSBC, but, when, as noted above, the situation with Japan subsided without open war, they did not borrow more. The Foochow authorities had tried to raise a "provincial" loan of one million taels from the HSBC in July 1874, but these negotiations appear to have been dropped in favor of the larger "imperial" Loan. Note however that concurrent with the negotiations for the 1874 Foochow Loan, several small "provincial" loans and advances were granted by the Bank to the Foo. chow authorities, which though not directly connected may have influenced the negotiations for the "imperial" Loan. In August 1874 the Chinese again put out feelers for a foreign loan and apparently approached the HSBC and a broker named Thomas Ide Bowler, who carried on negotiations with Jardine's, at about the same time. The negotiations with the HSBC reached a preliminary agreement for a loan of two million [yang-p1ing] taels in late August, which was sanctioned by an imperial rescript in September. As had by this time become usual practice, the Loan was to be secured on the Maritime Customs revenues. The Bank agreed to advance one million taels as soon as a final agreement for the Loan had been reached. On September 22, 1874 (i.e. after the HSBC had settled its pre. liminary agreement), Jardine's signed an agreement to lend ten million taels and advanced 600,000 taels on the strength of this agreement. How. ever the Jardine agreement was eventually annulled in a friendly arrange. ment with the HSBC and the Chinese. Hart saw a copy of the Hongkong Bank's preliminary agreement after the imperial rescript had been issued and disapproved of a clause it con. tained giving the Bank an effective monopoly in future Chinese loan busi. ness. He, on his own initiative and without any specific authority from the Chinese, solicited an offer from the OBC in London, hoping to get better terms even without a monopoly clause. However he was disappointed, as the OBC's offer was, if anything, not as good as the HSBC's even in his CHINA'S FIRST PUBLIC LOAN opinion and included a similar monopoly clause. The clause was not includ. ed in the Hongkong Bank's final agreement for the Loan. Note that both Hart and the OBC had plans for a comprehensive China loan program and dis. approved of small, isolated loans which might interfere with the security for such a comprehensive program. In most of the early loans, the Chinese required that the party arranging the loan deliver a large portion if not all of the funds before they would have had an opportunity to issue the loan to the public. A F Heard, who was also a member of the HSBC's Board of Directors, initially felt that this would mean that only those with sufficient capital to advance the funds would be in a position to make a bid for the Loan. Sub. sequently however he received the mistaken impression that the Chinese would prefer a loan which did not require them to pledge the Maritime Customs as security and under such circumstances would not insist on an advance. He therefore informed the Foochow authorities that he could raise a loan in Europe without the pledge of the Customs, though at a consider. ably higher rate than offered by the HSBC. However Heard soon found that he could not float a Chinese loan in Europe without the security of the Maritime Customs. He revised his offer to include a pledge of the Customs, but the terms were still less favorable to the Chinese than the HSBC offer and also failed to take into account China's requirements. When Heard learned in early November that the HSBC had come to an arrangement with the Chinese, he withdrew his offer, and, due to the failure of Augustine Heard and Company in April 1875, was never again in a position to offer a loan to the Chinese government. James Greig, the Chief Manager of the HSBC, went to Foochow in early October 1874 to finalize the preliminary agreement and came to an arrange. ment he considered acceptable by October 31. The signing of the final agreement was delayed to allow time for the Maritime Customs bonds, which were to serve as security, to arrive from Peking. The Board of Directors became active in the Loan question when (in the absence of the Chief Manager) they heard a report that the London and County Bank, the HSBC's correspondent bank in London, had stated that they would refuse to accept the bonds of the Loan as cover against the HSBC's liability for accept. ances. This news in addition to the impending threat of war with Japan led the Board to instruct Greig to break off the negotiations and to stop all advances to the Chinese. However their instructions arrived too late and Greig eventually signed a final agreement on November 28, which however, as not all the security had been delivered in time, was for only ￡539,748.18.0 (or 1,720,000 taels) and became known as the "first issue". The HSBC thereupon advanced, as agreed, not only the one million taels promised in the preliminary agreement, but the whole amount of the "first issue" on December 19. In January the "first issue" was offered to the public in Hong Kong and Shanghai. In addition some bonds from the Hong Kong market were offered privately to constituents and friends in London, and some were retained by the Bank as an investment. On June 5, 1875, an agreement was signed for the "second issue" of ￡87,866.2.0. This, along with unallotted portions of the "first issue" for a total of ￡274,915, was floated in London in early 1876 as the "final issue". Details of the technical aspects of the Loan will be dealt with EASTERN BANKING in a separate section below. The HSBC offer In the course of the negotiations for the 1874 Foochow Loan Shen Pao-chen's agent [wei-yuan] negotiated with the Hongkong Bank in Foochow, while at the same time an envoy of the viceroy of Fukien and Chekiang was apparently carrying on independent negotiations with Jardine, Matheson and Company in Hong Kong for the same loan (see next section). The HSBC had been in close touch with the Foochow authorities since 1871 and before the 1874 Loan had made at least one advance to the Foochow Arsenal and perhaps two further "provincial" loans. By late August the Bank had successfully negotiated a preliminary agreement with Shen Pao- chen. Shen and certain other Foochow authorities sent a memorial to Peking informing the Tsungli Yamen and the Board of Revenue of their estimated need for six million taels and requesting permission to raise a first loan of two million taels as specified in their preliminary agreement with the Hongkong Bank. In the memorial, Shen reported that he had ordered the Fukien Treasury to deputize a wei-yuan to discuss the Loan with the HSBC, to draw up and sign an agreement, and to arrange a first loan of two million taels, leaving In response to an Shen option to borrow more. ' s memorial, Prince Kung [I-hsin], who was in charge of the Tsungli Yamen, in turn memorialized the Throne and on Septem. ber 1 received a Vermillion rescript in reply instructing the Yamen to consider the matter and report.2 The Tsungli Yamen and the Board of Revenue made a report, which, according to the available translation (see note 2), followed Shen's memorial closely, naming the HSBC expressly as the lender and mentioning various details from the preliminary agreement. The Tsungli Yamen also specified that the Maritime Customs revenues should be pledged as security and noted the specific amounts to be pledged from each ^Prince Kung's memorial mentions as a precedent the 1868 loan of 1,200,000 taels raised from foreign merchants for Tso Tsung-t'ang in connection with his Campaign in the Northwest. This loan was arranged by the Chinese ne. gotiator, Hu Kwang-yung, with Jardine's, the OBC, and other firms in Shanghai, and was not issued to the public. Edward LeFevour, Western Enterprise in Late Ch'ing China, A Selective Survey of Jardine, Matheson & Company's Operations, 1842-1895 (Cambridge: Harvard East Asian Monographs, 1968), pp. 65-66. Extracts of the memorials with the imperial rescripts are found in a contemporary translation in the archives of the German Foreign Office [AA] , Abt IA/China I B 15, Vol 2, A 1520, Jan 25, 1875. However the translator has merged together extracts from two memorials, sanctioned on Sept 1 and on Sept 5, and has changed at least some items to make the memorial conform with the November final agreement (see section on "Security" below). I have had his translation checked with original Chinese in the case of the Sept 5 memorial (Chinese text is in the Ch'ou- pan i~wu shih-mo 96:48-50), however, as he does not label the source of each extract, it is difficult to ascertain how much of the rest of the translation was interpolated from other sources. CHINA'S FIRST PUBLIC LOAN port. On September 5 a second rescript was issued approving the report.^ The Peking Government did not come to the decision to allow the foreign loan without misgivings. In September the Tsungli Yamen memorial. ized the Throne expressing their opinion that raising a foreign loan was like "cutting flesh from one part of the body to mend an ulcer in another, as the proverb says", and added that there would come a time when there was no more flesh to cut. They proposed therefore that for the future, no matter what the nature of the requirements might be, no provincial govern. ment should be allowed to plunge into negotiations with foreigners for a loan expecting to be able to call on the Maritime Customs 40% accounts before obtaining the sanction of the Peking Government. Otherwise, it was feared, indiscriminate borrowing would lead to embarrassments in foreign relations. Even if a case for a loan were made, the administrator in question should be commanded to devise his own measures for its repayment. The memorial was sanctioned by an imperial rescript and was circulated.^ This suggests that, in theory at least, actual repayment of subsequent loans was not necessarily to be from the Maritime Customs accounts which were specified as the security. This can be confirmed in the case of certain of the later loans, however payments were apparently sometimes made by the Maritime Customs. An imperial "edict"? The preliminary agreement had stipulated that the Loan be authorized by an "imperial edict". In fact the imperial sanction received by the 1874 Foochow Loan was technically a "rescript". A distinction between "edicts" and "rescripts" had been made arbitrarily by scholars, reflecting the Chinese distinction between two forms of imperial command which were equally binding. As common English usage does not admit of such a distinction (except in equally scholarly contexts such as Roman or Papal law), it is both ethically proper and legally correct for either form of command to be referred to interchangeably by the more common English word "edict". The prospectus of the 1874 Loan did not mention the "imperial edict" in any way, and therefore the fact that the "edict" was a "rescript" caused no difficulties in the Loan. However the importance of the imperial "edict" for the security of the loans soon became more generally known, and therefore the Bank, very properly, advertised that the loans had received "edicts"--using the word in its looser sense, which in the context was perfectly acceptable. This practice was challenged however by some critics in the Foreign Office and the press, who knew of the scholarly distinction and wished to suggest that the loans might not have ^On Sept 10, 1874, five days after the second rescript was issued, Prince Rung was deprived of all his offices in the wake of the controversy over the restoration of the Yuan-ming Yuan [Summer Palace] which he opposed. However he was restored to power only the day after, because, it was said, he was needed to help handle the crisis between China and Japan. A W Hummel, ed , Eminent Chinese of the Ch'ing Period (1644-1912) (Washington: United States Government Printing Office, 1943), vol I, sub I-hsin. ^The memorial is discussed in a memorial by the Board of Revenue and the Tsungli Yamen about a proposed Loan for purposes of Tso Tsung-t'ang1s campaign against Kashgaria, dated Jan 30, 1876, translated by Mayers on March 27, 1876. In FO 233/73, ff. 23-37. EASTERN BANKING received full imperial sanction. I have found no response from the Bank to these criticisms. The Bank was in fact under no obligation to provide any particular form of guarantee for their loans, although as we have seen Chinese officials were not allowed to borrow from foreigners without imperial sanction. The purpose of the "edict" was to provide proof which would be accepted by the Maritime Customs authorities and Chinese officials that the Imperial Government had recognized and sanctioned the Loan. For this purpose an imperial rescript was clearly sufficient. The preliminary agreement stipulated that the Bank advance one million taels on the Loan as soon as the final agreement was reached. A F Heard commented that he doubted if anybody, except another bank, could pay down such an advance.^ Banks vs. merchant firms as lenders Before 1874 the Chinese foreign loans had been raised primarily from mer. chant firms. These loans were not issued to the public, but were arranged by the Chinese with one or more merchant firms, who held the bonds to maturity or placed them privately. As these earlier loans were relatively small and ran for periods seldom longer than a year, it was possible to handle them in this way. However it became more difficult to arrange for merchant firms to handle the larger amounts required in the later imperial loans. Tentative groups of merchants and banks were formed even in the early period, however they were primarily interested in industrial loans (which did not materialize until the 1880s) and were still too small to handle sizeable amounts. More enthusiasm would doubtless have been shown for loans raised for railway construction or other public works, however the early imperial loans were raised mainly for non-productive military purposes and there was no attempt to specify in the agreements where the funds were to be spent. Furthermore the imperial loans ran for longer periods of time and merchant firms could not afford to tie up their funds. This problem, which would have made the 'loans equally prohibitive for banks, was solved by issuing transferable bonds to the public in smaller denominations. Mer. chant firms had relatively limited access to the financial market and could only arrange to issue loans to the public in this way with the cooperation of an Eastern bank or a merchant bank like Baring Brothers which dealt with the issue of foreign loans on the London Market. Furthermore, as the Chi. nese usually required the party arranging a loan to make large advances before the funds could be raised from the public, only banks and firms with considerable available assets in China were in a position to grant major loans. Despite these difficulties, merchant firms were sometimes still able to arrange loans and make the necessary advances by borrowing funds from a bank.6 5Heard to Daly, Sept 10, 1874, in the Heard Collection, I.v. HL-32, Albert F Heard letters, 1874-75. The HSBC was willing to do this for Jardine's on several occasions. CHINA'S FIRST PUBLIC LOAN The Jardine Offer. As noted above, Jardine's, who had been involved in several of the earlier non-public loans to China, was approached in Hong Kong through a general broker and commercial analyst named T I Bowler at about the same time that the HSBC was negotiating for its preliminary agreement with Shen Pao-chen in Foochow. Apparently the Jardine deal was finally abandoned in an amicable three-way arrangement among Jardine's, the HSBC, and the Chinese, even though Jardine's had already advanced 600,000 taels against the agreement. Bowler gives a relatively complete if not entirely verifiable account of the negotiations which led up to the Jardine's agreement in two letters to the British legation.^ He states that a man named "Man Chui-wing" had come to Hong Kong in June 1874 to make inquiry about a loan. When he returned to Hong Kong again from Foochow in September, he brought offical documents bearing the seal of the Fukien "T'ung Shang Tsung Kuh" [Fukien Board of Foreign Affairs] authorizing him to make his best terms with Jardine, Matheson. Bowler and Jardine's accordingly signed an agreement on September 22, 1874. (Note that the HSBC's preliminary agreement had been sanctioned by imperial rescript on September 5.) Bowler then went to Foo. chow and saw "Po Hang", the provincial treasurer, who objected to the wording of the agreement. On October 5, 1874, Li Ho-nien, the viceroy of Fukien and Chekiang, and several other high ranking officials, who, Bowler claimed, had an edict to get a ten million tael loan at the best possible terms, agreed to close if Jardine's would advance 600,000 taels in the following two weeks. It was agreed at this point that Bowler receive a brokerage and Jardine's a 32% commission. The Chinese officials made up a new agreement, which they gave to Bowler to take back to Jardine's, which Bowler did, and James Whittal of Jardine's advanced the money in plenty of time in exchange for documentary authority to issue the loan. The new document was then to be signed (in Foochow?), but the viceroy was away, so the signing was delayed for three days. In the interim Japan and China signed a peace agreement [on October 31, 1874] in which the Chinese agreed to pay an indemnity, and "Po Hang" backed out of the agreement on the grounds that as there was no war with Japan the imperial sanction was with. drawn. Bowler then gave up his agreement to Jardine's, who reached the amicable triangular agreement with the HSBC and the Chinese, after which Jardine's gave up the Bowler agreement to the "Chinese ambassador" in London. This account gives an interesting insight into the confusing nature of the negotiations, in which no one could really be sure what the Chinese or even their own principals were intending. However some of the details are surprising and some cannot be accurate. The letters were written three and ten years after the event, and Bowler's intention was to demonstrate that ^In these two letters (note their separation in time) Bowler is trying to persuade the British Ministers to support his claim for a broker's commission for the agreement he arranged, but which was never carried through. Neither Minister appears to have attempted to pressure Jardine's or the HSBC to satisfy his claim. FO 228/601/15, f. 177: Bowler to Fraser, Jan 26, 1877, and FO 228/778/133, f. 54: Bowler to Parkes, Oct 26, 1884. EASTERN BANKING he had earned a commission. It seems unlikely that the Foochow authorities could have applied for and received a second imperial edict to sanction the same loan (though for a different amount) without cancelling the first agreement. The figure of ten million taels is itself surprising as we know that Shen Pao-chen had only requested six million altogether, and it is also surprising that Jardine's would be able to advance 600,000 taels on such short notice. There is no record of any arrangement with Jardine's in the HSBC archives, and, finally, there was no Chinese ambassador in London until 1877. From Bowler's evidence, his preliminary agreement with Jardine's was signed with the Chinese after the HSBC and Shen Pao-chen had already signed a preliminary agreement, which had been sanctioned by an imperial rescript. Note that this conflicts with the view expressed by Pelcovits, with reference to letters in the Jardine's archives, that Jardine's was the first to negotiate the Loan and that it was only when Jardine's refused to advance the first installment without guarantees that the HSBC was able to "slip [in?]" [sic].R Hart reports a rumor that the Loan had been "snapped up by Jardine's" after it had "slipped through the fingers of the H'Kong Bank", however it would appear most likely that the two sets of negotia. tions were being carried on at the same time.* * * 9 Jardine's did conclude a separate loan in Shanghai for one million taels with the Chinese to help finance Tso Tsung-t' ang' s campaign in the Northwest in April 1875, but these negotiations were not connected. The OBC and the Loan The OBC's attitude towards China loans. Hart disapproved of the terms of the HSBC's preliminary agreement when he saw a copy in September, after the imperial rescript had been granted. He asked his colleague in the Chinese Maritime Customs in London, James Duncan Campbell, to get the OBC's terms for a one million tael loan to be spent in Europe and repaid over ten years and for a loan to be spent in China and repaid over twenty years. Charles I F Stuart, Chief Manager of the OBC, replied that he felt that small loans would cause havoc with the Customs security. If in the end a small loan was considered necessary, he advised that provisions be made to allow for early repayment to leave the Customs free for a larger loan. He added that he believed that the demands for small loans were due to the pestering of arms merchants.^ Hart and the OBC nowhere stated definitely their proposals for the Chinese loan program they envisaged, however it is safe to assume that they were thinking in terms of a large floating debt at a relatively low rate of Nathan A Pelcovits, Old China Hands and the Foreign Office (New York: 134, refers to Jardine Co [London], Dec 3 and American Institute of Pacific Relations, 1948), p. & Co, Europe Letter Book, 1874-75: to Matheson & 9, 1874. 9 Hart to Campbell, Nov 21, 1874. 1 °Stuart to Campbell, Sept 13, 1874, in Stanley F Wright, Hart and the Chinese Customs (Belfast: Wm Mullan & Son, 1950), pp. 465-66. CHINA'S FIRST PUBLIC LOAN interest. The OBC's loan to Japan in 1873 had been for 25 years. Stuart stated to Campbell that he disapproved of small loans on principle—"It is bad banking!" and that he preferred to undertake a large loan of five to ten million [pounds? taels?] of which a million or so would be issued at a time as needed. This he felt would allow for greater supervision of the Maritime Customs security. However Stuart advised Campbell that, if the Inspector General [IG] had begun to deal with the HSBC already (he assumed incorrectly that Hart was negotiating the Loan for the Chinese), they should continue with them unless China was considering a large loan.At about this same time, according to Wright, in keeping with the principle of avoiding small loans to the Chinese Government, the OBC rejected a loan proposal of five million dollars for five years at 8% and a second proposed loan for the purchase of two ironclads also at 8%. However in March 1875 the OBC closed a loan for Tso Tsung-t'ang for two million taels (approx. imately ￡625,000) at 10.5% for three years. Organizations whose head office in Europe directed policy often found that their agents in China proposed and even acted on a different policy based on their different perspective on the situation. The manager of the OBC in Shanghai in this case had quite a different attitude towards the 1874 Loan than the one expressed by Stuart at the OBC's head office in London. Similarly, for example, Jardine's branches in the Far East often followed a different approach from the one advocated by their associates, Matheson and Co, in London; the Deutsch-Asiatische Bank founded in 1889 had similar disagreements with their executive Directors in Berlin (policy was decided in Berlin even though the DAB's head office was technically in Shanghai). Even, the British and German foreign offices often imposed policies which their diplomats out East disputed vehemently. One of the strengths of the HSBC was that its Head Office was always in Hong Kong in close touch with the conditions and opinions—and also the local capital market—in the Far East, while at the same time they had a responsible manager in London able to keep in touch with the requirements of the London Market and later the British Foreign Office. Of course the OBC's manager in Shanghai could not conclude any agreement for the Loan without authority from London, nevertheless he did pursue a preliminary agreement—and he did protest the terms of the HSBC's negotiations—on his own initiative. A "monopoly clause". Article 8 of the HSBC's preliminary agreement read as follows: "The Imperial Government grants to the Corporation the privilege of the refusal of all future loans required by them."-*-2 The OBC's Shanghai manager complained to Sir Thomas Wade, the British Minister, that this article would make the HSBC the agents for the Chinese Government "forever" and that the OBC did not think that the Chinese had intended this. "Perhaps," he suggested, "they do not fully understand that the Bank does not lend them money, but obtains a position to act as agents to borrow money from the general public on their behalf. For all such purposes we are in a better position to act and can float a loan in London on much 11 12 Campbell to Hart, Oct 15, 1874, in Wright, p. 466. Memo of the conditions of the Loan, in FO 228/546, ff. 76-82. Enclosed with the letter from the OBC (Shanghai branch) to Wade, Sept 18, 1874. EASTERN BANKING fairer terms for the Government."^ He went on to ask Wade to explain this to the Chinese and to urge them not to make their credit on the London market "worse than that of Japan". (In 1873 the OBC had floated a Japanese loan of ￡2.4 million at 7% and 92j for 25 years on the London market; the "final issue" of the 1874 Foochow Loan was issued in London at 8% and par.) Hart too felt that a first refusal clause was tantamount to monopoly, and he also questioned the wisdom of borrowing funds out East "which were to be spent in Europe". There is no indication however that Shen Pao-chen intended to spend the proceeds of the Loan directly in Europe. He had specified that he wished to purchase weapons, and, although these would ul. timately have to be imported from Europe, he probably intended to make his purchases through European merchants in China, who would accept payment in silver. Here again Hart appears to have been overrating his role as a middleman for the Chinese Government. He had at this time already made purchases for the Chinese in Europe through the London Office of the Mari. time Customs Service, however this did not mean that the Chinese intended to make all their purchases through him. In any case Hart's objections carried no weight in this Loan; the Chinese did not even ask his opinion. Hart had still further objections to the Hongkong Bank's arrangement of the 1874 Loan. On principle he did not approve of "local" loans (i.e. negotiated by and on behalf of provincial authorities--the 1874 Loan was authorized and guaranteed by the Imperial Government). Hart believed that foreign borrowing should be the preserve of the Imperial Government. But this was impractical, for how could the Imperial Government administer borrowing for provincial needs without assuming centralized administration of provincial affairs in general? This was in fact precisely what Hart hoped for. Finally Hart disapproved of all loans until the Imperial Government was prepared to use the funds for "productive" purposes. Hart and the OBC. Hart maintained a persistent prejudice in favor of the OBC, in which bank he kept his own accounts and those of the IG until the day before the OBC stopped payment in 1884. He apparently hoped that China would rationalize its foreign borrowing and entrust the negotiations to him.^ When this happened—which he was always confident that it soon would--he planned to deal with one foreign bank only, which would become a "Chinese Govt. Bank", and he hoped to be able to place loans domestically in China, thereby avoiding exchange and depreciation difficulties.^ Despite his confidence, Hart was not entrusted with the actual negotiation of loans until 1895. Given Hart's point of view, it is easy to see how the offer from the HSBC could offend him. The prospect of quick profits lured numerous "con. cession hunters" and maverick agents to China, who offered large loans at often fantastic rates, although they seldom had sufficient backing to make good their promises. The HSBC was a relatively new bank and in 1874 was suffering from the disastrous effects of the depression in Far Eastern trade the Bank had not been able to pay a dividend in the two preceding j^FO 228/546, f. 74: Manager of the OBC in Shanghai to Wade, Sept 18, 1874. 1,ifHart to Campbell, Nov 21, 1874. l^Hart to Campbell, Jan 3, 1878. CHINA'S FIRST PUBLIC LOAN half-years nor would it be able to the following half-year despite the profits from the Loan. Hart told the German Minister in Peking that he felt the Hongkong Bank was using the Loan as an easy way to recover at least partially from its very weak condition.^ The Head Office of the HSBC was in Hong Kong, which made it seem logical to suppose that the Bank would not be well-placed to float loans for China in London—Hart could not foresee that the HSBC would be able to win a very powerful position on the London Market. In addition Hart felt that, while the Bank was not offering China what Hart considered to be the best available terms, it was demanding a virtual monopoly on China's future loans. The OBC's terms. When Hart examined the terms the OBC was willing to offer, he had to confess that they were "not better than—perhaps not quite so good as—those of the Hongkong Bank." The OBC's proposal also included a demand for the "first refusal" on all future Chinese loans--the demand the OBC's own Shanghai manager had objected to in the HSBC's preliminary agreement. Hart was disappointed, as he had expected the OBC to give terms 2% better than the HSBC offer and without the "first refusal" clause.^ It is possible however that the OBC only made the offer under pressure from the IG and that their unfavorable terms reflect their unwillingness to become involved in "piecemeal" lending to China. The HSBC Board of Directors and the Loan The active, if not consistent, role played by the Hongkong Bank's Board of Directors in the 1874 Foochow Loan illustrates three levels at which the Board remained responsible for the running of the Bank at this time. The Board was not consulted formally until after the preliminary agreement had already been signed and the Chief Manager required the Board's approval to leave Hong Kong in order to finalize the negotiations in Foochow. It is clear however that at least one of the Directors, A F Heard, was already aware of the negotiations by September 10 (see next section), and it is possible that the Board had been kept informed of the developments infor. mally. At this first level we see that the Board was not necessarily con. sulted on even important matters, until for some reason the Chief Manager wished to take a step which required the authority of their approval. After the Chief Manager left for Foochow, the Board at first remained inactive and did not even meet during the whole month of October. However, when certain of the understood arrangements for the Loan appeared to have fallen through, the Board became active and instructed the Chief Manager to break off negotiations. This second level of the Board's activity shows that, even though they had not been directly involved in the negotiations up to that point, when they felt that something had gone wrong, they had an obligation to the shareholders to intervene. In the event their cable l^In the German Foreign Office [AA] archives, Abt la, Chin I.B.15, Schrift- wechsel mit der Mission zu Peking usw, Vol 3, A2310, Holleben to the AA, March 6, 1873. l^Hart to Campbell, Oct 2, 1874. EASTERN BANKING arrived too late and the Chief Manager had already committed the Bank. The Board soon realized that the Loan would be successful after all. Finally, on the third level, although the Board itself did not have an executive function, a standing sub-committee made up of Board members did at this time still regularly become involved in certain executive func. tions. One of these was the issue of the new Loan. The Board's judgement in intervening in this Loan was criticized by one of its members, A F Heard (see below). Their intervention was, as we shall see, based partly on misinformation and a general nervousness about the stability of the Bank. The Loan as presented to the Board of Directors. The first reference to the Loan in the minutes of the HSBC's Board of Directors comes on Sep. tember 30, 1874—i.e. after the Bank's preliminary agreement for a loan of two million taels had already been sanctioned by an imperial rescript, how. ever it is possible that the Board had been kept informed informally before this. The Chairman of the Board, W H Forbes, of the American firm of Russell & Co, reported to the Board that he had heard from Alexander Leith, the Bank's Foochow agent [i.e. manager], that a Loan of six million taels was required by the local officials on account of the Imperial Government and that the Bank could get the whole amount as a sterling loan with the exchange rate fixed at 4/6 = $1 for ten years, with semi-annual repayment and 8% interest. The Chairman reported that the HSBC's correspondent bank in London, the London and County Bank, had "approved" the idea of the HSBC's taking one million pounds at 8% and 90-92 and added that the London bank was being asked their opinion with regard to a larger amount (the HSBC still hoped to be able to arrange the full six million taels requested by Shen).-*-R It is not clear how the Chairman received this mistaken or at least misleading information concerning the London and County Bank, which, as we shall see below, became the cause of considerable problems. As mentioned above, the Bank at this time was not in a strong position and was unable to issue a dividend in three successive half-years (June 1874 to June 1875 inclusive). The Bank was clearly feeling the need to be very careful about any operations on a large scale involving exchange or bullion. In this same meeting, the Board passed a series of resolutions designed to help cope with the situation. The third resolution dealt with loans and is worth quoting in full: [Resolved. . .] That the business of the Bank shall continue to be strictly confined to General Banking transactions and that any operations on a large scale in exchange or bullion be first sanc. tioned by the Chief Manager. No loans to be granted by any of the Branches or Agencies except on approved tangible security— all others must be referred to Head Office for approval, and no advances of any magnitude to be made without the sanction of the Head Office being first obtained. 18Minutes of the HSBC Board of Directors, Sept 30, 1874. CHINA'S FIRST PUBLIC LOAN In these circumstances, the Board's changes of attitude towards the Loan— first approving it, then trying to cancel it, then again approving it — become more understandable. The Chief Manager in Foochow. The minutes of the meeting on September 30 record that the "advisability" of Greig going personally to Foochow to see about "such important business" was discussed by the Board. During the month of October, when Greig first went to Foochow, the Board did not meet at all. On November 3, the first of several special meetings was convened despite Greig's continued absence (note that as Chief Manager he was also the secretary at Board meetings). This first special meeting was convened "in consequence of some impor. tant communications from Greig", who had informed the Board that he was on the verge of concluding the negotiations. The Board however had just heard from London that the London and County Bank would not accept the bonds of the Loan as cover against the HSBC's liability for acceptances with that bank, as had been previously understood. There must have been a communi. cations problem between the London and County Bank and the HSBC, for, in the otherwise exhaustive London and County Bank Board and Committee minutes, I can find no reference to any formal discussion of the Foochow Loan, either in September, when they were first said to have accepted the bonds of the Loan as cover for the HSBC's liability for acceptances with them or in November when they were reported to have rejected them. In No. vember the Board noted further that the London and County Bank disapproved of the HSBC taking the Loan on its own account and recommended instead that the HSBC act as "agents on commission".^ The first references to the HSBC Loan in the London bank's minutes come when the HSBC applied for permission to use the bonds as cover in January 1875, when the Loan had already been successfully issued.^0 At this time the London bank agreed to accept the bonds as cover for up to ￡100,000. It seems unlikely that they would have been willing to commit themselves on such a matter before they could see how the issue had been received by the public, especially as this was China's first public loan. On November 3, the Board wired to Greig in Foochow that the news about the London and County Bank had greatly discouraged them from arriving at any conclusion favorable to the negotiations. They urged him either to close an agreement merely as "agents" for the Chinese Government (as the London bank had suggested) or to break off the negotiations altogether. While diplomatic questions between the Japanese and Chinese remained un. settled, the Board felt there was too great a risk involved in guaranteeing to place the full amount of the Loan under these conditions unless the London bankers would approve it and accept the bonds as cover. If however the Chinese concluded peace with Japan, the Board stated that it was pre- ‧^Minutes of the HSBC Board of Directors, Nov 3, 1874. Heard also mentions this information which he must have received at the Board meeting. Heard to Daly, Nov 4, 1874. 2^In the Committee Minute Book 2436, p. 231, 26/1/1875, and in the Board Meeting Book, Vol 16, 2361, p. 85, 24/1/1875 [sic]. EASTERN BANKING pared to accept responsibility for the Loan.21 The Board was not aware that a peace treaty had been signed with Japan on October 31 until several days later. In a meeting on the 6th, the Board read correspondence from Greig dated October 31 informing them that he had come to an agreement "on terms satisfactory to the Bank" pending verification by the British consul of the Foochow officials' authority to negotiate. He added that he had advanced 60,000 taels and had promised a further 240,000 whenever the Chinese should request it. He further requested that a lawyer be sent up to draw up the final contract. The Directors expressed their regret in the minutes that Greig had gone so far before receiving their wire concerning the London and County Bank. Even now they hoped to be able to withdraw from the agreement as they still feared that war with Japan was imminent and sent Greig a wire instructing him explicitly not to pay "any more money".22 When the Board heard of the peace treaty with Japan, they changed their attitude and again became interested in the Loan, waiting anxiously to see if their wire had upset the negotiations. In a letter to Daly on November 8, Heard wrote: "In all this I think the Directors play a sorry role, I must confess, but they were unanimous. I saw no object in oppos. ing." He added that if the Directors had by their vacillation disgusted the Chinese, this was an opportunity for Daly to press Heard's separate proposal for the Loan (see next section). However by the next day even Heard was convinced that the HSBC's pro. posal had succeeded. In a separate section below, we will deal with the way in which the sub-committee of the Board became involved in the mechanics of the issue of the Loan. Albert F Heard's independent offer Merchant firms whose Hong Kong managers joined the Board of Directors of the HSBC did not for that reason give up trying to become involved in Chinese Government loans for their own account. A F Heard, a partner of Augustine Heard and Company and a member of the HSBC's Board of Directors, freely used information gathered as a member of the Board to aid in his own independent negotiations for the Loan. On September 10, Heard wrote to Daly, his colleague in Foochow, about the Loan and the conditions the HSBC was offering, noting that, as the Loan involved an advance of one million taels, only another bank would be able to compete. Subsequently he became convinced, mistakenly, that the Chinese object. ed to the terms offered by the HSBC and principally to the Bank's demand that the Maritime Customs be pledged as security. Yet another set of 21Minutes of the HSBC Board of Directors, Nov 3, 1874. 22Minutes of the HSBC Board of Directors, Nov 6, 1874, see also Heard to Daly, Nov 8, 1874. Note that a draft of a final agreement for the full two million taels was sent to the British Minister in Peking for his in. formation (FO 233/73). The decision to sign an agreement for the reduced amount of the first issue must have been made later. CHINA'S FIRST PUBLIC LOAN independent negotiations for the Loan developed, as Heard pursued the idea of an alternative loan in Europe which would not require the security of the Customs. Instead he was willing to accept the "guarantee of the Peking Government". His loan, as he described it, would also run for a longer term at a considerably higher rate of interest but would include "no repay. ment of principal". Heard appears to have totally misunderstood the Chinese attitude towards loans, and his suggestions removed all that was acceptable in the HSBC proposal, while accentuating what was objectionable. By this time the preliminary agreement with the HSBC, which included the pledge of the Mari. time Customs, had already been sanctioned by an imperial rescript. If the Peking Government objected to pledging the Maritime Customs (which had been pledged before and were after all of foreign origin), it was because of the loss of revenue over the period of the loan and because Hart insisted that such a pledge be sanctioned by an imperial edict, thereby involving the Imperial Government in a transaction with foreigners. Heard in removing the pledge of the Customs proposed to involve the Government yet more directly in the Loan. The Chinese disapproved strongly on principle to the idea of the Government paying interest on loans. Thus Heard's proposal that the Loan be redeemed "without any repayment of principal" but at a correspondingly high rate of interest offended Chinese sensibilities. Furthermore he soon learned that he could only arrange the Loan in London if he could pledge the Maritime Customs as security. Heard's original proposal involved a sterling loan of one to two million pounds, "the more the better", repaid by an annuity of 15 to 16% of the nominal amount of the Loan running for eighteen to twenty years, but "without any repayment of principal". In hoping to tempt the Chinese with a loan which was to run up to twice again misunderstood the Chinese attitude, term obligations. On the basis of Heard's have had to repay a total of between ￡270 over the period of the Loan, whereas on taking into account the 9% discount implicit in the arbitrary exchange rate, the repayment of principal and interest payable on the outstanding principal only, the Chinese repaid a total of ￡156.7 for every ￡100 received. Although these figures represent the totals paid without taking into account when the payments were made, and are therefore not really comparable, there is evidence that the Chinese did calculate the total cost of a loan in this way. There was no tradition of government borrowing in China, and even non-go 'ernment borrowing was usually limited to periods of no more than a few months. Therefore the Chinese negotiators appear not to have always fully understood the technicalities involved in the early loans and often insisted on terms which a Western borrower would have considered less favorable. Through his correspondence with Daly, Heard kept in close touch with Greig during the HSBC's negotiations, and Greig was even a guest in Daly's house during his stay in Foochow. 4 Heard proposed at various times to as long as the HSBC loan, Heard as the Chinese preferred shorter original terms the Chinese would and ￡320 for every ￡100 received the terms offered by the HSBC, 2%eard to Daly. ^Heard to Daly, Oct 17, 1874. EASTERN BANKING share with the Bank half of the loan he was negotiating, however he appears not to have wished to inform the Bank of all the details of his negotia. tions with the Chinese. In the meantime, Heard corresponded with his brother in the firm's London office about the terms on which the Chinese could expect to borrow the money there. In his brother's proposal, the period of the loan was shortened to ten years—the same period offered by the Bank. Unlike the HSBC's offer, however, it was still to be redeemed by a fixed annuity and without any additional repayment of principal. Al. though the rate of the annuity was increased to 16^%, the reduction of the period of the loan meant that the cost to the Chinese per ￡100 was now only ￡165—which was still less favorable than the Bank's offer at ￡156.7. These terms for the sake of comparison are equivalent to a loan at approx. imately 11% p.a. with semi-annual repayment of principal and interest over the same period. The HSBC offered the loan at 8%. Unfortunately the terms cannot be compared too closely, as details concerning the discount and any additional charges to the Chinese had not been worked out for the Heard loan. Heard now offered $8,900,000 (approximately ￡1,800,000) at 16i%, re. payable in London in twenty half-yearly instalments of ￡150,000. However, not only were his terms less favorable, but he was unable to deliver the funds immediately as required by the Chinese. Only one quarter would be paid over on signing the agreement, with another quarter due every six months until the full amount was paid over. This would not have suited Shen Pao-chen's purposes. Like the HSBC, Heard offered a "sterling loan", meaning that repayments were denominated in sterling. Finally, as noted above, Heard's London associates also demanded the Customs as security. Daly was instructed to mention these terms to Greig, but to negotiate with the Chinese alone if Greig did not want to cooperate with him. Apparently the Chinese mentioned to Daly that they would prefer a "silver loan", with the payments denominated in silver. This would have meant that the lender would have had to bear the risk of any further decline in the exchange rate for silver. Heard considered it to be essential, given the risky exchange conditions, that the Loan be denominated in sterling. Even a "sterling loan" of the type proposed both by Heard and by the HSBC, i.e. one guaranteeing the delivery of a certain amount of silver as the proceeds of the issue of sterling bonds, involved an exchange risk, but, as the interval between the date the rate was fixed and the date for the delivery of the funds was only a few months, the risk was relatively acceptable. Both the HSBC and Heard considered the exchange risk involved in accepting repayment in fixed amounts of silver over ten years to be too great. When, as a member of the HSBC's Board of Directors, Heard learned that the London and County Bank objected to the HSBC taking the Loan on its own account, he hoped that Greig would have to back out of the HSBC agreement and participate in his own arrangement. Heard recognized that Greig would be annoyed at having to cancel the agreement he had negotiated and would see it as putting him in a false position, but Heard felt it was a great opportunity. When he heard that Greig had concluded the Loan on his own 25Heard to Daly, Oct 23, 1874. 2^Heard to Daly, Nov 4, 1874. CHINA'S FIRST PUBLIC LOAN terms despite the Board's cable, he wrote to Daly on November 9 not try to push the question any further, but to "watch out for any further chances". In December Heard joined the Board's ordinary standing committee to help with the extra work involved in issuing the Loan.^7 As Augustine Heard and Company failed in April 1875, Heard was not in a position to become in. volved in any of the later loans. The British Legation and the Loan The official notification from the Tsungli Yamen that the imperial re. script had been issued (the actual "rescripts" and "edicts" did not leave the palace) was apparently not transmitted to the HSBC through the British Legation, as became standard in the later loans. It was the policy of the Foreign Office not to become directly involved in the private negotiations of British businessmen. Therefore they also objected to the transmission of documents through the Legation, to the extent that, they claimed, this might give the impression that the Legation had examined the documents, supported the undertaking, and would intervene if the Chinese did not fulfill their obligations. However the Legation did allow the documents to pass through their hands on the grounds that there were no other channels by which a foreign bank could communicate directly with the Chinese Govern. ment . The consular service was willing to provide British businessmen with certain services in their private negotiations, as long as this did not in. volve the Foreign Office in any responsibility for the transaction. They were willing to verify the authority of the Chinese parties and provide other services such as witnessing the signature of agreements. According to the German Minister, Theodor von Holleben, before the final agreement was signed, Greig went to Peking and held 'numerous conferences' with Sir Thomas Wade, the British Minister. Wade later protested to Holleben that the Loan had been closed without his intervention, and that he had in fact tried to dissuade Greig from the business. However he admitted that when he heard that negotiations had been concluded, he had enquired officially into the authenticity of the documents and had received a satisfactory reply from the Chinese officials."7R HSBC: successful conclusion None of the rival offers proved successful. On November 28, Greig signed the final agreement for the "first issue" of ￡539,748.18.0, equivalent at the agreed rate to 1,720,000 [yang-p'ing] taels or 2,398,884 Foochow dollars; the balance of the two million taels agreed upon in the prelim. inary agreement was to be arranged on the same terms when the necessary 27Heard to Daly, Nov 9 and 11, 1874. 2RGerman Foreign Office archives, Abt la, China I B 15, Schriftwechsel mit der Mission zu Peking usw, Vol 2, A 1520, Holleben to the AA, Jan 25, 1875. See also Vol 3, A 2310, Holleben to the AA, March 6, 1875. EASTERN BANKING papers had been received from Peking. This was done on June 5, 1875. It had taken two months for an agreement to be reached after the preliminary agreement had been sanctioned—some of the delay may have been due to slow communications—and another month was needed before the final agreement could be signed due to delays in the delivery of the documents serving as security. The deed was finally settled and the full amount of the first issue advanced to the Chinese on December 19, 1874. On December 14 the Chairman reported to the Board that the HSBC was already receiving numerous applications for bonds and that the Bank expect. ed to be able to float the Loan successfully, and the Board expressed its satisfaction. When the agreement was signed, the ordinary standing committee of the Board became involved in making the arrangements for issuing the new Loan. It is not clear when the Chief Manager returned to Hong Kong, however he was still in Foochow on December 19 and may not have returned in time to assist in the preparations for the first issue. The Board's standing committee made up a draft prospectus and provisional cer. tificate and took the opinion of the Bank's legal counsel, C T Hayllar, who expressed his satisfaction with the documents attached to the Loan in a later meeting and stated that the Bank would not be liable in future to the public except as "agents" of the Chinese Imperial Government.3(3 On Decem. ber 28 the subcommittee submitted the drafts to the full Board, which approved the subcommittee's arrangements with minor alterations. The Board also played an active role in making decisions with regard to the adver. tisement of the Loan in the Hong Kong and Shanghai newspapers, the tech. nicalities of issue, the denomination of the bonds and the exchange rate at which the bonds would be offered to the public. The subscription lists for the Loan closed on January 16, 1875. In March 1875, Hart wrote to Campbell: The H.K.S. Bank loan is a real Govt. Loan: but whether the Bank lends its own money, or collects other people's I don't know. I consider it quite safe as far as China is concerned: it is an Im. perial Loan, and has all proper authorization: but the Bank is in such hot water now that I shall not be surprised to hear of difficulties some day or other for both borrowers and lenders. 33 The technical details of the Loan^ Dates of the Agreements. The preliminary agreement of the Chinese Imperial Government "Foochow" Loan of 1874 was reached in late August and sanctioned by an imperial rescript on September 5. We have seen that the imperial O Q . Minutes of the HSBC Board of Directors, Dec 21, 1874. 30Minutes of the HSBC Board of Directors, Dec 21 and 28, 1874. 33Hart to Campbell, March 13, 1875. 32A copy of a memorandum of the terms in the HSBC's preliminary agreement of Sept 1874 can be found in FO 228/546, ff. 76-78 (forwarded by the OBC to Wade). Copies of the Official Dispatch from the Tsungli Yamen to CHINA'S FIRST PUBLIC LOAN sanction was expressed in a "rescript" and not an "edict", and that, al. though there is a scholarly distinction between these two words in the Chi. nese context, both terms imply a binding imperial command and both can be (and were by the Bank) legitimately and legally translated using the more common English term "edict". On November 28 the Final Agreement for the "first issue" of ￡539,748.18.0 was signed in Foochow, however, as the Chinese did not offer sufficient security for the full amount agreed to in the preliminary agree. ment (for amounts see below), the Loan was divided into two separate issues to be covered by separate agreements. By December 19 the negotiations had been concluded and the full amount of the "first issue" was advanced to the Chinese. The bonds were offered to the public in January 1875. The Agreement for the so-called "second issue" of ￡87,866.2.0 was signed on June 5, 1875. Note that the bonds of the "second issue" were issued along with bonds retained by the Bank from the "first issue" as the so-called "final issue" in London in March 1876. Parties. The parties of the Loan were "His Majesty Tung Chih, Emperor of China", of the one part, and the Hongkong and Shanghai Banking Cor. poration of the other. The Tartar general in chief [who in Foochow also held a position similar to a Superintendent of Customs], the provincial treasurer (or Fantai), and the provincial governor (or Futai) of Fukien, the viceroy (or Chetai) of Fukien and Chekiang, and the commissioner of foreign customs at the port of Foochow signed "on behalf of" the T'ung-chih Emperor, Mu Tsung [Tsai-ch'un]; and James Greig, the Chief Manager, and Alexander Leith, the Bank's agent [i.e. manager] in Foochow, signed for the HSBC. Only one other HSBC loan (in 1885) involved the Emperor directly as a party in the Loan agreement in this way. In his report to the German Foreign Office, Holleben, the German Minister in Peking, noted that such 'direct contact' with the Emperor had not been possible only a few years ago, and even then was considered 'truly epochmaking'.^ Note however that no special authority was given by the imperial rescript or requested in the memorials for the Emperor's "name" to be used in this way. In the final agreement the officials expressly derived their authority to sign from the September 5 rescript. The Imperial Government tried not to become involved in direct liabilities to foreigners, and critics of the Chinese loans in the press and the Foreign Office often said that these agreements had no more authority than that of the Chinese officials who signed them. However the Chinese appear always to have understood an imperial rescript to involve the Imperial Government directly in the agreement, and the Peking the Foochow authorities, extracts of the memorial and the imperial re. script connected with the Loan, dated Sept 5, 1874, and a copy of the final agreement in the AA, Abt la, China I B 15, Vol 2, A 1520, Jan 25, 1875. The Sept memorial is published in Chinese in the Ch'ou-pan i-wu shih-mo 96:48-50. Prospectuses and other documents connected with the first and the final issues of the Loan can be found in the HSBC archives. 3^In the German Foreign Office [AA] archives, in Abt la, China I B 15, Schriftwechsel mit der Mission zu Peking usw, Vol 2, A 1520, Jan 25, 1875. EASTERN BANKING Government never repudiated a loan sanctioned in this way. "Sterling Loan". The 1874 Loan was a "sterling Loan", which meant that sterling was the unit of account in which amounts would be calculated, although the actual transactions were performed in the local currencies at an agreed rate of exchange. This also meant that, although the proceeds of the Loan were defined as a certain amount of sterling, they were payable to the Chinese in Foochow in taels or dollars of Foochow currency at an agreed rate of exchange. Similarly, amounts due for repayment, although defined in sterling, were repayable in Foochow in the local currency at the rate of the day for sterling drafts on London. Again, as the "first issue" was offered to the public in Hong Kong and Shanghai—both silver currency areas, although the bonds were denominated in sterling, they could only be purchased with local currency at a published rate close to the rate of day. Even subscribers to the "first issue" in England, because they were in fact applying for bonds on the Hong Kong market, had to buy Hong Kong dollars with their sterling at the rate of the day for telegraphic transfer to Hong Kong in order to buy the sterling bonds. Only in the "final issue" were the sterling obligations purchasable in sterling directly, as this issue was floated in London. This is not abnormal. Contracts between parties using different non-international currencies are regularly denom. inated in an international currency. By denominating the Loan in sterling, the HSBC arranged for a pre. dictable return on the bonds in terms of that currency. Contemporary sources refer to the "exchange risk" involved in the, at that time, pre. dominant decline in the value of silver in terms of gold. However contem. poraries could not predict whether silver would continue to decline. Therefore the purchase of bonds not denominated in the currency in which the bondholder's capital was denominated involved a speculation as to future trends in silver prices. What is interesting here is that the Hongkong Bank insisted on a sterling Loan, although its capital was denominated in a silver unit of account and at least a large portion of the Loan was to be offered to the public in silver currency areas. However, in addition to the capital raised in silver on the China coast, the Hongkong Bank had issued shares on the London Register nominally also in silver but at a fixed rate of exchange. Partly because the confidence of these sterling-based shareholders was important to the stability of the Bank, it was necessary for the Bank to maintain the value of its assets in terms of sterling. Similarly merchants trading predominantly in a silver—currency area might base their operating capital in silver, however they might still ultimately evaluate profits and longer term investments in terms of sterling. Thus, from the point of view of the Bank as a silver-based lender, the decision to denominate the Loan in sterling involved a clear speculation that silver would continue to depreciate, for, if it appreciated, a Loan denominated in sterling would to the extent that the Bank continued to hold bonds of the Loan have involved the Bank in losses in terms of the unit of account in which the Bank s accounts were stated. Moreover, as the Bank intended to issue roost of the bonds, the decision to issue them m sterling also reflects the belief that most of the potential subscribers, including CHINA'S FIRST PUBLIC LOAN those then based in a silver currency area, wished to maintain the value of their assets in terms of sterling. Amount. One of the most surprising facts about the various loan offers made to the Chinese in 1874 was the wide divergence in the amounts offered. The Hongkong Bank alone appears to have reacted directly to the figure requested by the Chinese, while the OBC, Hart, Jardine's and Heard all made offers reflecting their own conceptions of what the Chinese borrowing program should involve, but not taking into account their imme. diate needs or their prejudices and attitudes towards foreign borrowing. In the preliminary agreement with the HSBC the amount of the Loan was specified as the Sterling equivalent of two millions of taels presently, or for such further amount as the Imperial Government may require, the Sterling equivalent to be calculated at the current rate for the day to be hereafter agreed upon by the two contracting Parties. In a HSBC Board minute on September 30, the Chairman reported that the rate of exchange could be fixed at 4/6 to the dollar. This would mean that the total sterling amount implied in the preliminary agreement was ￡627,615— the total amount eventually issued. In his memorial to the Throne in September, Shen Pao-chen also mentioned two million taels, and security for the full amount was arranged by the Tsungli Yamen and sanctioned by the imperial rescript of September 5. In the months following the preliminary agreement, the Chinese apparently had some difficulty in gathering all the necessary documents for the security that had been specified in the memorial, and the November final agreement was reached for a "first issue" of only ￡539,748.18.0 (equivalent at the agreed exchange rate to 1,720,000 [yang-p1ing] taels or 2,398,884 Foochow dollars [see below]). It was understood that the balance would be lent on the same terms as soon as the necessary "papers" arrived (the documentation needed to pledge the additional Customs revenues), which had been delayed in coming from Peking. Accordingly the agreement for a "second issue" of ￡87,866.2.0, (equivalent to 280,000 taels) was reached in June 1875. Period. The Loan was to run for ten years. The final agreement allowed for the prepayment at par of any or all of the instalments (Art. 3), however, although the Chinese preferred shorter term to longer term loans as a rule, they did not take advantage of this provision. The inclusion of this article might suggest that the Bank shared to some extent the view held by Hart and the OBC that small "piecemeal" loans should only be made in such a way as to be easily redeemable in order to leave the Maritime Customs security free for a larger loan, but there is no authority for this in the sources. In September 1875 the Chief Manager proposed that, in order to enhance the value of the bonds, the HSBC should endeavor to persuade the Chinese EASTERN BANKING to delay the repayment of the principal for perhaps ten years. But the Board decided, as it was the Chinese Government's first loan [to be issued to the public], "that the most perfect faith should, if possible, be kept with the public, even in appearances, and that therefore nothing of this type should be attempted."-*^ Repayment. Repayment was to be made through the Fukien provincial treasurer (or Fantai) to the Bank's agency at Foochow "or at such other places as the Bank shall appoint" (Art. 6). The Chinese were to make their semi-annual interest payments on the "first issue" to the Bank in Foochow on June 19 and December 19 in local currency at the rate of the day for sterling demand drafts on London. The Bank paid bondholders in Hong Kong on June 30 and December 31 in Hong Kong dollars, and, although the issue was not officially floated there, in London on August 19 and February 19. In the 1874 agreement it is not specified, as it is in some later agree. ments, whether the Chinese were paying the funds to the Bank eleven days "early" or whether the Bank was being allowed to deliver the funds to bond. holders eleven days "late". Perhaps neither was the case. The date from which Chinese payments were calculated was established in the final agree. ment in relation to the date on which the full amount of the Loan was paid over to them by the Bank. The dates for payment to bondholders on the other hand were fixed arbitrarily in the prospectus. Thus, although according to the prospectus interest to the public began to accrue on December 31, 1874, the Chinese authorities were responsible for interest from December 19. Principal was repayable to the Bank in Foochow in twenty equal instal. ments of ￡26,987.8.11 in local currency at the rate of the day; the first three instalments were due after eighteen months on June 19, 1876, and followed by one instalment every six months. Repayment to bondholders occurred in semi-annual drawings by the Bank in London for redemption at par. None of the Bank's loans to China were of the annuity type offered by Heard. The decision to issue bonds redeemable by half-yearly drawings instead of serial bonds was apparently for the Bank to make alone, but no reasons are given why the Bank chose this type of bond in all the early loans. For bonds sold at a heavy discount—which was the case for many of the early foreign loans—the possibility that a bond might be drawn at par could increase its value on the market. However, as most of the early Chi. nese loans were issued with comparatively small discounts and then usually rose to a premium, the possibility that the bond might be drawn for re. demption at par would often involve a loss, as the bondholder would receive only 100 for a bond selling at perhaps 106 on the market.33 A contemporary 3ZfMinutes of the Board of Directors, Sept 14, 1875. 35This was mentioned in a letter by James MacDonald, "formerly of Shanghai, China" to the editor of the "Money Market Review" of The Times dated July 22, 1880, and reprinted by the HSBC as an advertisement for the 1881 Kansu Loan. The author's point was that China loans, despite this lia. bility, were still a good investment. A cursory examination of the quo. tations in The Times reveals that the Foochow Loan was quoted at 107.55/g for example in Dec 1879. CHINA'S FIRST PUBLIC LOAN critic of the terms of the 1874 Loan predicted that the system of repayment by lot would effectively mean that the quotation for the Loan could never rise above par.36 What he failed to realize was that most investors bought more than one bond and could therefore calculate what portion of their bonds would in probability be drawn and discount the rate of interest accordingly. Even with this discount and the discount involved in buying the bonds at a premium, the effective rate of interest of the bonds re. mained attractive. As the "final issue" was floated only in London, payments in London were made in sterling while those in Hong Kong were made in local currency at the rate of the day for drafts on London. Otherwise repayment followed the same pattern though on different dates as the first issue. Note that although the "second issue" was floated a year after the "first issue" the repayment schedules were kept parallel simply by making the initial repay. ment of a triple instalment come after six months rather than after eigh. teen as in the "first issue". Bonds. Until the 1890s the Chinese negotiators placed no restrictions on the Bank in the question of the denomination of the bonds. For both issues of this Loan the Bank decided to issue bonds to bearer for ￡100 each except for two bonds in the final issue, which were for ￡48.18.0 and ￡66.2.0 respectively. Monopoly clause. Article 8 in the preliminary agreement quoted above, which would have secured for the HSBC the first refusal on all future loans, was omitted in the Final Agreement. As we have seen, both Hart and the Shanghai manager of the OBC objected to this clause, but the manager of the OBC in London included a similar clause in his loan proposal. Advance. In the preliminary agreement the HSBC agreed to advance one million taels to the Chinese as soon as a final agreement was reached. On November 8, Heard wrote that the Bank had advanced 60,000 taels already and promised a further 240,000 whenever the Chinese should request them. No mention is made of the terms on which this advance was made, and it is not known if it was a separate loan or a part of the "first issue". The Bank advanced the full amount of the "first issue" on December 19. Note that this was before the Bank could have raised any of the funds on the market. As arranged in the final agreement, interest began from the date on which the full amount of the Loan was advanced to the Chinese. As interest to the bondholders began to accrue on December 31, bondholders were required to pay the Bank interest at the rate of 8% p.a. from that date until the full price of the bonds was paid up (see section on the "Rate to the Public" below). Rate to the Bank. The final agreement does not state specifically that the Bank will deliver the proceeds of the Loan in a silver currency to the Chinese. It states merely that the Bank agrees to obtain for China a certain amount of sterling, which is defined to be the equivalent of a cer- 36North China Herald [Shanghai], Jan 14, 1875, p. 24. EASTERN BANKING tain number of [yang-p1ing] taels or Foochow dollars at the arbitrary rate of 4/6 = $1 Foochow. Interest is set at 8%, but there is no mention of e "discount" to allow for expenses, commission or profit. It is possible Shen Pao-chen thought that he could borrow the full amount of the Loar without any discount or commission, paying only interest. This may have been the case in the earlier loans to Chinese officials, which, as we have seen, were not issued to the public, and in which therefore the whole cost of borrowing the funds could be included in the interest rate. Although the final agreement does not explicitly specify that the funds were to be delivered in silver, it is taken for granted that they were to be advanced in the currency of the place where payment was made. The equivalencies between the amounts specified in sterling and those actually payable in Foochow currency to the Chinese were calculated at ar fixed rate of exchange of 4/6 to the Foochow dollar which allowed for s margin in the Bank's favor to cover expenses and profit. This meant that the effective rate at which the Bank delivered the proceeds of the Loan was 91. As we have seen, in September--when these rates were fixed--the HSBC had understood the London and County Bank to approve their taking a loan at 90-92. However part of the reason for choosing the rate of 4/6 to the dollar may have been that this was the fixed rate at which the HSBC was legally required to quote its capital and dividends in London. When the HSBC first issued its shares on the London Register in 1867, the value of the shares, expressed nominally in Hong Kong dollars, had been converted to sterling at this rate of 4/6 to the dollar. Subsequently, when the ex. change rate changed, they were advised by counsel that they could not alter the rate at which the HSBC's dividends, expressed in dollars, were con. verted into sterling. This meant that shareholders in England would logi. cally receive larger dividends than shareholders in countries with silver currencies. The dividend problem was overcome after 1876 (in 1874 and the first half of 1875 the HSBC paid no dividends) by quoting dividends in sterling at the rate of 4/6. Announcements of the dividends in The Times regularly included the following disclaimer: "allowing for the difference in exchange between the rate at which the dividend is declared and the rate of the day". Shareholders had the option of converting "back" to dollars at the demand rate of the day for sterling. This meant, however, that the Bank's books still showed the dividends in "dollars" at the arbitrary rate; the difference was deducted from the trading profit. Discounts and commissions for expenses and a profit margin are ordi. narily the subject of precise definition and considerable negotiation, therefore it is surprising to find them covered in this arbitrary fashion. The Bank established the rate at which bonds would be issued to the public at 4/I4 = Hong Kong $1 and 5/7 = Shanghai Ts 1, making the Bank's margin approximately 9%. As this was apparently the only source of direct revenue to the Bank from the Loan, deductions must be made for the various expenses before an estimate of net profit can be reached (see below under "Profits"). The final agreement suggests that the rate at which the Bank arranged the Loan for the Chinese was 8% and par, but the effective rate, taking into account the margin in the exchange rate, was approximately 8% and 91 or approximately 8.8% p.a. on the amount actually paid to China. CHINA'S FIRST PUBLIC LOAN Delivery. Most of the agreements for the early loans are vague about the terms on which the Bank was to deliver the funds. The preliminary agreement to this Loan stipulated that, if the Chinese required the funds to be delivered anywhere other than Foochow, the Bank would transfer the funds at the current rate for such transactions. No mention is made in the final agreement of any arrangement for handing over the funds. Rate to the Public. The Bank was left considerable freedom in raising the funds, as long as it did not issue bonds for more than the amount specified in the agreement or offer the public a higher rate of interest. On the other hand the Bank could (and did in some later loans) issue loans at a lower rate of interest than they received from the Chinese, retaining the difference. As the Chinese became increasingly educated in loan ques. tions, they began placing more restrictions on the way the loans were issued, the denomination of the bonds, and other technical questions. In this Loan, however, the Bank had a totally free hand. The Bank offered the "first issue" of the Loan to the public in Hong Kong and Shanghai at 8% and 95. Bonds denominated in Sterling for ￡100 were sold against the payment of the equivalent of ￡95 in the local (silver) currencies, i.e. Hong Kong dollars and Shanghai taels respective. ly, at a fixed rate reflecting the rate of the day. (Applications from London were accepted on the Hong Kong market [see below] and a charge of ￡1.8.11 or approximately 1.5% was added to cover the cost of the tele. graphic transfer of the funds to Hong Kong.) On subscription 1% was due, 4% was due on allotment, and 90% ten days later. Interest to the public began to accrue on December 31, 1874, and the Bank charged the subscribers interest at the rate of 8% per annum on the full nomimal amount from that date until the last instalment was paid. However subscribers had the option of paying the full amount on allotment and saving the interest. This arrangement is very unusual and already in the "final issue" of the 1874 Loan the Bank adopted the more common practice of allowing a discount at the rate of, in this case, 4% per annum on instalments paid before they were due. The "final issue" was offered to the public in London at par (or, reckoning accrued interest from January 1, 1875, 99). For this issue 10% was due on application, 10% on allotment and 80% on April 5, 1876. The sources do not indicate how the amounts of these instalments were estab. lished . Security. The Tsungli Yamen in response to Shen's memorial in Sept. ember assigned the amounts from the 40% and 60% accounts of the Maritime Customs of the ports listed in column one below as security for the Loan. Their proposal was sanctioned by the imperial rescript of September 5. However when the final agreement was signed in November, the necessary "papers" had arrived from Peking to cover only the ports and amounts listed in column two below. ^ Therefore the Bank only agreed to lend the ■^A contemporary translation of extracts of the Yamen's memorial in the archives of the German Foreign Office [AA] (see footnote 2 above) gives the same list of Maritime Customs ports and amounts as were actually EASTERN BANKING 1,720,000 taels for which security had already been received at that time and agreed to lend the remainder as soon as the "papers" arrived. This, af we have seen was done in June 1875 (see third column). Maritime Customs as Security for the 1874 Loan Taels per quarter Agreed in Pledged for Pledged for Memorial First Issue Second Issue Canton 6,000 6,000 Foochow 6,000 6,000 Kiukiang 6,000 6,000 Ningpo 5,000 4,000 1,000 Chinkiang 5,000 4,000 1,000 Shanghai 5,000 4,000 1,000 Newchwang 3,000 3,000 Che foo 5,000 5,000 Tientsin 5,000 5,000 Hankow 4,000 4,000 Total 50,000 43,000 7,000 In addition, bonds from the Maritime Customs of the ports of Fukier Province were handed over to the Bank to cover interest payments in the case of both issues. Bonds for the amounts pledged by the Maritime Customs were to be handed in trust to the Bank as security for the repayment of principal foi the whole amount of the Loan. In an additional clause the Chinese guaran. teed that additional resources would be called on if these proved to be in- sufficient. Note that the security provided was valued in silver taels, but, as it was a sterling Loan, in the case of a decline in the rate of silver, the Chinese would have to supply silver in excess of the normal value of the security to cover the repayments in sterling. Furthermore, because of the arbitrary exchange rate of 4/6 at which the "full amount" of the sterling Loan was to be paid to the Chinese in silver, the security offered and accepted, while covering 100% of the silver received, covered only 91% of the sterling value of the Loan. This effective 9% deficiency, equivalent to the discount noted above, may have reflected an unwillingness on the part of the Chinese negotiators to accept or to admit to their superiors that they had had to pay "upfront money" in addition to the interest on the pledged in the final agreement (second column of the table). However the version of the memorial published in the Ch1ou-pan i-wu shih-mo (Complete documents on barbarian affairs; Peking, 1929-30), 96:48-50, mentioned also in C John Stanley, Late Ch'ing Finance: Hu Kuang-yung as an Innovator (Cambridge: East Asian Research Center, Harvard University, 1961), p. 50, gives the figures in the first column in the table. The translator may have copied the list from the final agreement. CHINA'S FIRST PUBLIC LOAN Loan. However it also means that the Bank was willing to issue the Loan although the security—even at the rates current when the final agreement was signed (and it was predicted that silver might decline still further) —only covered 91% of the Loan. The June 5 Agreement arranged additional security from the Maritime Customs of Ningpo, Chinkiang, Shanghai, and Hankow amounting to 7,000 taels per quarter to cover the ￡87,866.2.0 (or 280,000 taels) raised in the "second issue".38 This Loan differed from most subsequent loans in that additional bonds valid in the case of a Chinese default for payment of Customs dues were not issued. Also the clause common in later agreements establishing the lender's prior claim on the security over later loans is absent from this agreement. At this time, the Bank stated in its prospectus, China had no other foreign claims on its Maritime Customs revenues. Placement. As noted above, the London and County Bank advised the HSBC to issue the Loan as "agents on commission" for the Chinese Govern. ment; the alternative according to the practice of the London Market would be for the HSBC to take the Loan "firm", in effect buying the whole loan from the Chinese Government at a discount and retaining any premium over this amount that they could raise by reselling the bonds on the Market. Baring Brothers testified in the 1875 House of Commons investigation of foreign loans that foreign loans on the London Market were usually issued by firms in London as "agents" for the foreign government. The "agent" would prepare and issue the prospectus and arrange advertising in exchange for a 2% commission, but nothing more than that,39 The HSBC did issue this Loan as "agents" but in a somewhat different sense of the word. By using the word "agents", the HSBC wished to express the fact that they were not lending their own funds, but rather funds raised by selling bonds to the public in the name of the Chinese Govern. ment. Although the Bank advanced the full amount of the Loan before it was actually issued, it is made clear in the final agreement that the Bank only agreed to "obtain" the stated amount of sterling, and that the prepayment of the proceeds of the Loan by the Bank was only an "advance" (see below). On the other hand, the Bank wished to make it clear to the public that in issuing the bonds they acted merely as agents and accepted no legal lia. bility in the case of a Chinese default.This is not to say that the Bank took no further ex gratia responsibility for the Loan after it was issued. The Bank held the Customs bonds which formed the security for the Loan in trust for the bondholders and was willing under certain circum. stances to make punctual payments to bondholders for which they had not 3Rin the prospectus advertised in London for the final issue. 39E V Morgan and W A Thomas, The Stock Exchange. Its History and Functions (London: Elek Books, 1962), p. 89. Testimony of G H White to the Foreign Loan Committee of the House of Commons. ^^Minutes of the HSBC Board of Directors, Nov 21, 1874. The Bank's counsel informed the Board that he was satisfied that the Bank would not be liable in future to the public except as agents of the Chinese Imperial Government. EASTERN BANKING received funds from the Chinese, as soon as the Bank was assured that the Chinese would eventually make the payment. It was in the interests of a bank regularly involved in raising funds for a foreign government to safeguard that government's credit in order to keep the market open for possible future loans. Established creditors often had to compete with un. scrupulous financiers, however, who were willing to arrange a loan on apparently very liberal terms, but who were not sufficiently interested in the government's ability to repay. As such financiers had no interest in the government's credit beyond the profit from the issue of that one loan, they were not concerned if their generous lending caused the government to default, thereby ruining its credit for future loans. China's credit in London and the fact that she never defaulted on the payments of her loans in this period is partially due to the intervention of the HSBC. In article 5 of the preliminary agreement the Bank stipulated that they be given authority "to issue loan notes for any sum or sums ... to the Imperial Government". And in the final agreement the Bank was author. ized "as Agents" of the Imperial Government to issue the bonds to the pub. lic for any sums not exceeding the total amount of the loan. Note also that, as the Bank issued the Loan merely as "agents" for the Chinese, they had no legal obligation to deliver more than the public was willing to subscribe. On at least one occasion, a lender (not the HSBC) refused to deliver the full amount agreed upon, on the grounds that the public had not fully subscribed the loan.43 In the case of the 1874 Loan the HSBC advanced the full amount before they offered the bonds on the market, however as this was a separate transaction distinct from the actual Loan, the Bank could technically have insisted on repayment of any part of the advance not covered by public subscription to the Loan. In the event, the Bank chose to hold some of the bonds of the "first issue" as an investment (in effect purchasing them), thus supplying some of the funds itself. In some later loans the public proved unwilling to subscribe the issue initially, however the Bank invariably made up any shortfall from its own funds—presumably in order to keep up its reputation with the Chinese—and resold the bonds when there was a demand for them. Although the term was not used, the Bank was in effect "underwriting" the issue. Underwriting was not as common in the 1870s as it became a few years later, when certain of the later London issues of China loans were underwritten in a more formal way. The Board of Directors decided in November that the Bank should offer only 3,000 bonds at ￡100 each to the public in Hong Kong and Shanghai, in addition to bonds totalling ￡52,700 already promised to customs officials and others. The first issue, which closed on January 16, 1875, was seven times over-subscribed according to reports in The Times, so the Bank could presumably have allotted the remaining bonds if it had so wished.43 No 43This was true, for example, of Jardine's 1885 Loan, issued in London by Baring Brothers. 4ZMinutes of the Board of Directors, Nov 28, 1874. 43The Hong Kong correspondent writes on Jan 18 (published in The Times, Jan 19, p. 5b) that 20,131 bonds were applied for (only 3,000 were offered). The Shanghai correspondent gives the figure as 20,170 bonds on Jan 21 CHINA'S FIRST PUBLIC LOAN reason is given for retaining the bonds, however, as the Bank finally did offer them in the "final issue" placed in London, it seems possible that they wished to retain a sufficiently large number of bonds to make an issue on the London market feasible. It was also a period of depression in the Far East and the Bank may have welcomed this profitable investment tempo. rarily, especially as they could anticipate reselling the bonds at a premium. The China Mail [Hong Kong] first quoted the Loan on March 2, 1875, at ￡98, and the price moved up steadily until it reached par on April 5, and a premium of 5/- on April 17. On the June 18 the bonds were quoted at ￡100.10.0. When the bonds of the "final issue" were floated in London in 1877, the bonds of the earlier issue were quoted at 104 in Shanghai. Although the "first issue" was technically floated only in Hong Kong and Shanghai, the Bank was also prepared to receive applications from its shareholders and "friends" in London. London Office forwarded these applications by telegraph to Head Office in Hong Kong, where they were con. sidered part of the Hong Kong portion. Initially applicants in London were offered bonds at the same rate as out East, however this appears to have been an oversight, and before allotment London subscribers were informed that they would have to pay an additional ￡1.8.11 per cent to cover the cost of the telegraphic transfer to Hong Kong and were given the option to withdraw. The "final issue" of ￡274,915, which was placed in London in March 1876, was the first issue of a Chinese loan on a foreign market. It was made up of bonds the Bank had retained from the "first issue" and the new "second issue". The bonds were issued at par, or 99 reckoning the accrued interest. The Bank's brokers for the first China Loan were Messrs Walker and Lumsden (however, the Bank has worked with Panmure Gordon & Co, since the London issue of the 1877 Loan). Apparently the Board of Directors of the Bank had not been informed that the London manager was about to make this offer; they complained in the minutes that they felt he should have consulted Head Office.^ The following article describing the 1874 Loan was published in The Times on March 10 (i.e. during the issue): Subscriptions are asked by the [HSBC] for ￡274,915, being the un. issued balance of the Loan. The bonds bear interest at 8%, re. payable by yearly drawings [sic] over nine years so that if China really means to pay, it will be borrowing at a very high rate. After the experience which the public have had of such wonderful investments, it would be surprising if the money was subscribed here. We know hardly anything regarding China or its finances, except that missionary and official reports speak of a deficit as the normal condition of the latter. Besides the factual inaccuracy (reporting yearly instead of half-yearly drawings), this article cannot be said to have been enthusiastic about the (published in The Times on March 8). ^Minutes of the Board of Directors, March 16, 1876. EASTERN BANKING Loan. The public appear to have shared this pessimistic point of view at least initially. At the end of May, the London manager reported that he had only allotted bonds worth ￡73,500 of the total of ￡274,915.it is not known if the Bank was satisfied with the issue, which only received an official quotation on the London Stock Exchange in May 1877. As it was a prerequisite for an official quotation that the issue be fully subscribed (either by the public or by underwriters), it is possible that the "final issue" was not fully subscribed until this time. The bonds were quoted for the first time on May 4, 1877, at 100-103 and the first recorded transaction occurred on the 8th at 102. However later the quotation reached premia of 6 to 8% which would suggest that the investing public considered the high interest sufficient inducement despite the fact that China's credit was relatively unknown and that there was the risk of being drawn at par. Profit. As we have seen, no separate provision was explicitly made to account for the Bank's expenses and profit from handling the Loan. Instead an exchange rate was fixed, which allowed a margin of approximately 9%. In addition, as an exchange bank, the HSBC was also interested in the exchange transactions which would arise from the loan repayments. To determine the Bank's profit from the Loan transaction per se (i.e. not taking into account any additional business stimulated by the Loan, e.g. exchange transactions, which may have been given to the Bank), it is necessary to offset the amount the Bank retained due to this arbitrary exchange rate against discounts allowed to the public and the expenses involved in placing the Loan. The bonds of the "first issue" which the Bank decided to retain are here considered as having been allotted to the Bank at 95. The amounts received by the Bank in interest on these bonds and the profit made by reselling them later at par should not be counted as profit from the Loan transaction per se; they should rather be considered returns from investments of the Bank. From the margin allowed by the exchange rate the Bank must have retained approximately 8.8% of the total amount or approximately ￡47,500 on the "first issue", and a total of ￡55,230 from the full amount of the Loan. Bonds worth ￡352,700 were issued to the public at a discount of 5% amounting to a cost to the Bank of ￡17,635. In addition, as the bonds retained by the Bank should also be considered as having been issued at this rate and the profits from later resale of the bonds ascribed to the investments account, the total amount of this cost to the Bank was ￡26,887. The final issue was offered at par. The expenses incurred in issuing the Loan are more difficult to cal. culate, especially for the first issue, as there are no available estimates of the cost of issuing a loan in Hong Kong or Shanghai. It was presumably less expensive than in London, where the Bank had to act through a broker, and its expenses may have been limited to advertising, the printing of the bonds and postage. The "final issue" was placed on the London Market through a broker. Brokers charged a commission of approximately 4% on application (it is not clear if this commission was paid on the total 45Minutes of the Board of Directors, May 20, 1876. CHINA'S FIRST PUBLIC LOAN amount offered or only on the amount issued). This i% does not take into account underwriting fees, but, as the issue was not fully placed, it can be assumed that the Loan was not underwritten (except in the sense that the Bank itself held all the bonds which could not immediately be issued to the public). Finally deductions must still be allowed for brokers' fees, printing, and advertising for the final issue. With all these variables, no precise estimate can be made of the pro. fit from the Loan, however it must have been about ￡25,000 or $125,000 Hong Kong dollars. This figure can be compared with a net profit of the Bank for the second half of 1874 of $112,743, and for the first half of 1875 of $260,068. These were admittedly bad years for the Bank, in which no divi. dend was paid to shareholders, however the profit from the Loan was clearly significant to the Bank. In the first half of 1871, for example, the net profit had been $365,847.06, and this had been sufficient to allow a divi. dend of 12%. The examination by the Board of Directors of the half-yearly accounts in January 1875 showed that without the profits from the Loan, there would have been a loss for the half-year's operations. However, although the profit from the Loan could by itself have justified the declaration of a 2% dividend, the Board decided not to declare any dividend at all as the Bank had to meet some heavy losses. ^ Even before the decision not to issue a dividend was published, the news of the successful conclusion of the Loan was not enough to boost the price of the Bank's shares, which continued to be quoted at an increasing discount. The 1874 Loan and Chinese credit The Chinese Imperial Government "Foochow" Loan of 1874 was the first China loan to be issued to the public. Although the terms of the Loan were not as favorable as those which could be arranged for a European government at this time, they were much more favorable than those which had been offered in the smaller merchant loans to Chinese officials in the 1860s. There can be no comparison with interest rates inside China itself, as there was no tradition of domestic government borrowing. Instead funds to meet crises could sometimes be raised by soliciting "voluntary" contributions from pri. vate citizens in return for honorary titles. However this was not always possible, and, in the period between 1874 and 1895, it can be assumed that the Chinese officials had exhausted all internal sources of additional revenue before they resorted to a foreign loan. The Shanghai manager of the OBC claimed in September 1874 that the OBC could get better terms for the Chinese than the HSBC was offering and pointed to the loan they had placed in London for the Japanese in 1873. The 18 73 Japan Loan was the second loan issued for the Japanese on the London Market. The first loan, floated by Schroeders, a London merchant bank, was for ￡1,000,000 at 9% and 98 (an effective rate of 9.2% p.a.), and repayable over twelve years. The second, issued by the OBC was for 2,400,000 at 7% and 92i and was to run for 25 years. Note that these are the terms on which the bonds were sold in London—the Japanese must in ^Minutes of the Board of Directors, Jan 30, 1875. EASTERN BANKING addition have paid the issuing firm a commission or a discount. The final issue of the HSBC Loan was offered on the London Market for nine years at 8% and par (which is also the effective rate) and was subsequently quoted at a premium. Thus the terms offered by the HSBC appear to have been reasonable, given the Chinese preference for shorter term obligations.^7 Note that the terms of the OBC's 1873 Japan Loan do not appear significant. ly more favorable despite the longer period and the larger amount. As the Loan was denominated in sterling, the Chinese bore any exchange risk arising from the falling price of silver. The instability of silver prices naturally increased the effective cost to China of borrowing funds from foreigners based in gold currency countries. It is important to note in this context that the decline in the value of silver was not an ordinary case of inflation. Silver maintained its purchasing power to a great extent within China in relation to copper cash and local prices. On the world market however gold and silver were not treated as currencies but as commodities. As such they were subject to variations in supply (due for example to the discovery of new mines or to Germany's decision to abandon the silver standard and sell its silver reserves) and to variations in demand for the metals which had nothing to do with China. Thus the increased effective cost for China was real, and not, as would be the case in an inflation, merely perceived. Some of the later loans were denominated in silver—at a higher rate of interest reflecting the increased risk to the sterling-based lender—and in some the Chinese arranged with a third party to guarantee the rate of exchange against payment of a fixed percentage of the outstanding balance of the Loan. In the 1877 Loan, for example, the Chinese paid the German firm of Telge & Co 5% on the outstanding amount of the Loan to bear the exchange risk, which neither the HSBC nor China were willing to assume. The establishment of China's credit on the London Market in the period from 1874 to 1895 was complicated by the fact that the Chinese never accepted the idea of foreign loans as a regular source of additional financing. Each loan was contracted as a last resort to meet an urgent crisis, and the official requiring the funds had to carry his proposal through against the staunch resistance of conservative officials. The successful conclusion of a loan was often followed by a series of memorials urging that it not be taken as a precedent and that foreign loans in future be prohibited. Some Chinese officials gradually gained an understanding of foreign borrowing over this period, slowly accepting Western concepts of "produc. tive" and "non-productive" loans, and recognizing the potential benefits of longer term loans at lower rates of interest. However, many emotional issues were involved in the question of foreign borrowing, and the majority of the officials remained xenophobic and unwilling to accept the explana. tions of those who had learned to understand Western procedures. As a result, the Chinese could not be pressured into making changes 47The figures for the Japanese loans taken from Leland H Jenks, The Migra. tion of British Capital to 1875 (London: Thomas Nelson and Sons Ltd, 1963), pp. 421-25. CHINA'S FIRST PUBLIC LOAN which would have improved their credit. For example they did not publish any financial information which would have allowed an investor to form an educated opinion of the state of China's finances. In this period the Maritime Customs provided the only source of Chinese Government revenue which was audited by Western standards and which could be evaluated by a Western investor. Therefore the Customs constituted the security for most of the China loans in the early period, including all the loans issued on the London market. However even this security was not truly safe in the absence of other information, as in a crisis the Chinese could refuse to allow the Customs to make the promised payments. Furthermore the Chinese continued to borrow for non-productive pur. poses, which, especially in conjunction with the uncertain nature of their finances, made the China loans unattractive in London. The myth persisted that China would become a fantastic market—if only it were opened to West. ern commerce—and great enthusiasm could be generated for railways and for loans to finance other productive projects, but China remained reluctant to allow Western development, and it was not until after the Sino-Japanese War, under changed political conditions, that such projects became possible on a considerable scale. From the viewpoint of the London market, China was a land of un. questioned potential promise. Almost every year some event was seen as heralding the proximate opening of China, but the awaited contracts never materialized. Instead the investing public were presented from time to time with small, relatively short-term loans for non-productive purposes. In the absence of reliable information, these loans remained speculative and could only be placed successfully by offering enticing rates of interest. On the one hand dangerously little was known of China's finances, but on the other hand the "speculations" always proved success. ful, the Hongkong Bank's name had become established on the London Market, China was always punctual on the repayments (due, at times, to the intervention of the Hongkong Bank), and, it was assumed, must command vast resources. Thus China was in the anomolous position of always being able to borrow, but only on terms, which, in the case of almost any other country, would have suggested that it was unsafe to lend. China loans remained gambles, but apparently "safe" ones, while most other countries could be expected to provide the information to make their loans less speculative. Thus articles describing the China loans often began with the criticism that the terms were too harsh for a country of China's resources and standing, only to end by saying that, as China published no budget, it was unsafe to lend to her on any terms. On January 4, 1875, the following article entitled "A New Foreign Borrower" appeared in The Times describing the 1874 Loan. It could, with minor alterations, have been published following each of the China loans in the period between 1874 and 1895. China is to be added to the number of States having a public debt. [The terms at 8% and 95] make it resemble some of the worst issues of foreign loans which come on the market. [Very high interest for such a small amount for a country with such vast re. sources] and almost implies that the Chinese Government must be EASTERN BANKING wastefully using its home resources, since with proper economy and without the burden of a great funded debt, it ought to be able to borrow temporarily at a much lower rate of interest than 8% or do without loans altogether. . . Investors here . . . must keep in mind that although the amount is small, China is practically an unknown country under. going a tedious political and social revolution in consequence of its enforced contact with Western Powers, and that it is quite uncertain whether such a country can possess that kind of poli. tical stability which is essential to financial good faith. [The loan is a] good enough speculation for those who know something about it and can afford to take the risk. . . . China is a coun. try that you need to know a lot about to invest in [and the] risk, judging by the rate of interest, will presumably be appre- ciable. It is greatly to be feared that China, like Japan, and other new borrowers in recent years, will be demoralized by the cordiality of its welcome to the money-markets of the West and will be tempted to exceed the proper limits of its indebtedness even if it should now be keeping within them. Yet why should China be able to borrow sixpence without first producing its accounts of revenue and expenditure? The terms offered China in this Loan were clearly less favorable than would have been required from a government whose finances were better known, but, a study of the rates at which China loan bonds were traded in London shows that 8% was not much higher than the minimum rate the Market was willing to consider at this time. All the circumstances of the Chinese financial situation considered, the Chinese could not have raised the funds more cheaply anywhere else, either at home or abroad. Throughout this period foreigners lent—attracted by high interest—although they did not approve of the uses for which the Chinese sought the funds, and the Chinese borrowed only as a last resort, although they disliked incurring interest liabilities. The Hongkong Bank gradually acquired the quasi-monopoly posi. tion it had sought in the preliminary agreement of the 1874 Loan, not by binding the Chinese in an agreement or by making impossible promises in return for the concession (as was attempted by more than one concession- hunter in the early period), but by always offering the most attractive terms possible at the time, always fulfilling its promises, and always taking into account the sometimes bewildering requirements of the Chinese. Acknowledgements: I am grateful to A C R Chappell, HSBC Group Finances, and to Frank H H King, Centre of Asian Studies, for their instructive comments on drafts of this paper. This study is dependent upon archival sources and I am appreciative of the access granted to The Hongkong Bank Group Archives and to the assistance of the Controller, S W Muirhead, and his colleagues. I have to thank Roger J H King for researching the Augustine Heard Archives in the Baker Library, Harvard University, and Frau Dr Maria Keipert for guidance in using the German Foreign Office archives. 14. PROSPERITY AND COLLAPSE: BANKING AND THE MANCHURIAN ECONOMY IN THE 1920s AND 1930s by Felix Patrikeeff The principal area of interest for this study is the North Manchurian econ. omy, but not to the exclusion of its southern counterpart, for which a great deal of this analysis holds. It was, after all, the 'dagger pointing at the heart of Japan',^ the railway, which set the pattern of growth for these economies and, to an overwhelming extent, dictated the form of their major crises. With the artificial disas sociation of the blade from the handle of that dagger, the more firmly established capital, Harbin, and the chief port, Dairen, instead of functioning as complementary points in a single unified economy, became rival centres of trade, commerce and indus. try. Quite apart from the obvious inefficiencies created by this duplica. tion of function for the competing economic foci, and their respective catchment areas, each had its Achilles' heel: Harbin, although it served as a natural point of confluence, being the central 'knot' for railway and trade, was extremely weak as a port, having to employ the River Sungari, with its short and erratic navigation season, for the shipping of goods. Dairen, on the other hand, was an ideal port, but lacked the infrastruc. tural development and the agricultural basin of the north.^ Thus, the centres evolved and built up their respective 'spheres of influence' during the formative stage of the economies (roughly 1904-1914), but the evolution was close and, in many areas, overlapped in the process of competition. The creation of these parallel economies was particularly felt in the mid to late 1920s when, with the emergence of the Soviet Union as a trading force in the region and the subsequent attempt to built up Vladivostock as a transshipping centre, the sixty per cent share of freight handled by Dairen began to shrink.^ The appearance of vigorous Soviet trade activity contributed markedly to the North/South polarisation in an economy which was, by the mid 1920s, already taut.^ By the latter part of the decade, ^Mo Shen, Japan in Manchuria (An Analytical Study of Treaties), Grace Trading Co Inc, Manila, 1960, p. 87. ■^This is shown by (a) the competition with Harbin for freight and (b) the attempts by the South Manchurian Railway [SMR] to secure large loans, presumably for capital construction purposes. (The SMR initiated talks twice: once with American interests, and before that with the Yokohama Specie Bank and the HSBC in London. Ekonomicheskii Biuliten', [EB] 1928, No 20, p. 14. ^Bean shipments through Vladivostock increased as follows: 1924/5-625,000 tons, 1926-1,190,000 tons. EB, 1927, No 50, p. 18 (citing the British paper Commercial). ^Represented vividly by the progress of the Soviet carrier 'Transport' in the region: in early 1925 it opened an agency in Harbin; throughout that year it steadily expanded branches and divisions in N Manchuria; by 1 June it had opened a branch in Hailar; finally, by the end of 1926, it conclud- EASTERN BANKING this developed into a crucial issue: any slack which may have existed was fast disappearing, and a ceilng to further growth, without massive injec. tions of capital, equally rapidly bearing down. Any major input of capi. tal, however, would have had to come from the respective railway companies; an eventuality that was hardly likely in a situation where the South Man. churian Railway was conducting an undercutting policy in its freight rates, whilst the Chinese Eastern Railway maintained its rates at a higher level from 1923 onwards, seemingly to tap the upward trend in agricultural production while concomitantly devoting profits thereby derived to produc. tivity and experiment rather than capital accumulation. From 1925, the CER showed an increase in the sums allocated to maintenance of track and rolling stock to beyond the theoretical level of fifteen per cent of the overall budget. An economist observing the railway's fiscal policy during the first half of the decade concluded: . . . the economy of the CER must be handled most carefully and cautiously. The railway has to strive to obtain maximum profits and to limit to a minimum its expenses, because the demands of the coming years may absorb all its savings. ^ The warning was remarkably accurate: in the years 1930 and 1931 the railway was severely tested and found wanting in precisely this respect.^ The CER was at that time caught squarely in a trap: for its further development, and to allow a significant level of capital build-up, the company had to secure land concessions for the laying of leader lines, thereby expanding its operations. However, in an acutely labour-intensive agrarian economy such as Manchuria's, the expansion of operations would not tap existing pockets of population and agriculture; it would simply encourage the colo. nisation of uninhabited territory. Comprehensive development, therefore, would be a time and capital consuming process; neither of which the company could afford by 1930. Alternatively, the CER would have been saved through '. . . rapid colonisation of the country and by development of industry and trade'.^ Ironically, although it had attempted in earlier years to fulfil the latter part of the equation by embarking upon a scheme of enterprise- creation and experimental farming, the company's fate still hinged on rapid and extensive colonisation, for which a communications network was required so as to allow a market-orientated peasant economy to take root. The equation, therefore, still necessitated railway expansion. The sudden and complete collapse of a thriving Manchurian economy was symptomatic of a combination of factors, the more important of these being: an overheated rustic economy, external financial conditions, and local ed an agreement with the Rickmers Line of Hamburg to act as the latter's agent for the lucrative Vladivostock/European route. EB, 1925, No 6, pp. 13—14; 1926, No 22, pp. 15-16; 1926, No 48, p. 9. G K Gints, 'General Characteristics of the CER Economy', Vestnik Man- chzhurii [VM], 1927, No 2, p. 20. Ibid. Not only did the railway find itself without savings, but even the staff pension fund had been 'absorbed' by the company. 'Ibid, p. 21. BANKING AND THE MANCHURIAN ECONOMY political upheavals. The preceding excursus, which anticipates the sequence of events, attempts to add to the analysis the underlying dynamic responsible initially for spectacular growth and superficial prosperity, but which also accounts for the protracted severity of the collapse. This dynamic exists, however, in combination with the nature of banking and credit in the region. *■*■■**‧ The period of prosperity, from a historical perspective, may be seen as developing in two major stages. The first begins with the compression of legal and illegal colonisers who, together with the surge of settlers moving permanently to the north from the southern battlefields during the Sino-Japanese War, built up the CER Zone. By 1907, when the three North Eastern Provinces were formed, the region was undergoing a financial slump, the CER being in debt and the Russo-Chinese Bank having initiated a credit squeeze. Besides the numerous bankruptcies, it was also a period of polit. ical reorientation resulting from the loosening of the Russian grip on the local economy. During this period--roughly between 1906 and 1909—the cultivation of soya beans became a primary focus for Manchurian farmers, while foreign merchants learned and perfected their means and methods of bean export. From 1910 the cultivation of this 'useful bean', as the Hong. kong and Shanghai Banking Corporation's representative in Harbin described it, received great impetus from a 'fearful scramble' for its export, with crops being sold twice over in some cases.R The next period is character. ised by the change in trading conditions caused by the Russian Revolution of 1917, the latter further weakening Russian economic authority in the region. By 1920 the transition was complete and is vividly represented by the experience of the Bank in Harbin, as one of its employees remembers it: Here at last came the opportunity for [the] Harbin Office to come into prominence in [the] Harbin commercial world. This opportunity was not lost and in spite of the continued depreci. ation of the rouble Harbin Office developed such activities by about the year 1920 that it was soon decided to build the bank's own building . . .^ The growth in the economy initiated by this change in conditions was fired by the convergence of a number of other factors which ensured that it was rapid and sustained: six years of good harvests, beginning in 1922, which led to annual surpluses in beans and most cereals;^ a rapid rise in the prices of all bean products;^ the constant 'priming' of the labour market, with an annual population growth of three to five per cent;^ a R Letter from H C Sanford to J R Jones, 30 Nov 1960, HSBC Archives. ^ Letter from Ostrenko to Jones, 12 March 1955, HSBC Archives. ^See EB reports on agriculture. l^By 1925 prices for beans, bean-oil and bean cakes stood at 217%, 271% and 204% resp (1913 = 100%), VM, 1927, No 1, p. 41. I^e E Iashnov, 'Agricultural Development of Northern Manchuria', VM, 1925, EASTERN BANKING significant decline in banditry.13 These were augmented by a slight relax. ation of credit conditions in a situation where, at least before 1924, there was little competition between banks.1^ Not surprisingly, export returns soared and were complemented to an extent by falling prices in the consumer sector, particularly in essential goods such as kerosene.13 In 1927, when Chinese cities were in the throes of severe economic contraction as a result of raging political strife drastically affecting trade and industry,^ Northern Manchuria recorded progress 'more favourable than in the preceding two or three years',I7 with Harbin showing a fifteen per cent rise in trade.1R With the growth in trade and population—Harbin, for instance, had an increase of thirty-three per cent between 1923 and 1929—there appeared hundreds of small firms in both the trade and service sec tors . 19 These tendencies, and particularly the concomitant rise in imports,20 led a Harbin economist to surmise that what was occurring could be regarded as an improvement in the material condition of the peasant economy.21 However, the yardstick that he chose to employ measured not so much the material condition of Manchuria as a whole as that of the urban areas to the relative exclusion of the peasant economy. The latter had changed little, still being comprised of a great proportion of 'poor farmers'— peasants with holdings of ten to twenty shan—with over fifty per cent renting land under terms that were barely tolerable.22 Sales of grain were perforce conducted through an intricate system of middlemen, taxes, short- -term and high-interest loans, and advance purchases—the latter being the only way for a small holder or poor peasant to pay labourers and purchase seed or other requirements during the harvest—which, coupled with a strongly fluctuating currency (the tiao), left the seller with an actual return that had been reduced by over forty per cent. 23 The Manchurian Nos 1-2, p. 25. Absolute numbers = 500,000 p.a. plus a very high birth rate. Population growth in Siberia at this time was only 1.5% p.a. 13iashnov, 'North Manchuria for the Past Three Years', VM, 1927, No 10, p. 8. 3^0s trenko. 15VM, 1927, ^Shanghai, 1923, 1911 1928, No 4 17Ibid. No 2, p. 46. Hankow and Canton decline by 23%, 45% and 37% (the lowest since and 1920 resp). Cited in K P Kursel', 'Dal'bank in 1927', VM, , p. 18. i o , . °Ibid (according to local commercial organisations). The Chinese Chamber of Commerce, Futiatien recorded an increase of about 1/3 in registered firms alone. If unregistered companies are included, the figure would be much higher. Cited in V A Kormazov, 'Population Growth in Harbin and Futiatien', VM, 1930, No 7, p. 29. 201924-427,636 tons; 1926-514,381 tons; 1928-616,821 tons. 21Iashnov, 'North Manchuria . . .,' p. 8. 22y G Shishkanov, 'Means of Developing North Manchurian Agriculture', VM, 1929, No 3, p. 36. 23l E Liubimov, Crisis in the Soya Bean Trade and Losses Suffered by the Manchurian Peasantry', VM, 1930, No 6, p. 6. BANKING AND THE MANCHURIAN ECONOMY farmer was better off than his Chinese counterpart, but negligibly and perilously so, his economy being based on a market exchange of commodities and his fate increasingly at the mercy of market conditions.2Z* The degree to which the indices of prosperity were permeating the peasant economy is accurately represented by the curious phenomenon involving the sale of ploughs in the Harbin area: during the 1926/27 agricultural season, two and a half to three thousand were sold off from old stock, encouraging a group of enterprising persons to import seven to eight thousand more in 1928, but the expected sales did not materialise, with the result that Harbin found itself with an overstocked market in ploughs.* 2^ In short: progress, development and prosperity in North Manchuria rested on the shoulders of a handful of large companies dealing exclusively in the major settlements, and riding the crest of a wave of soya beans. ° Most banks, Chinese and foreign alike—and in their number the HSBC— refused as a matter of policy to finance indigenous industry. Chinese banks preferred to concentrate on currency emission as well as foreign currency and remittance operations, while foreign banks were involved more in foreign currency dealings and the handling of finance for the export of beans.22 The banks, largely through the strain of competition, did involve themselves in the financing of industrial concerns^ which were unable to provide the necessary support to boost local productivity, and in this respect suffered a similar fate to that of the CER. North Manchurian industry, in absolute terms and particularly by comparison with the export trade, turned in mediocre performances at best. The chronic shortage of capital was most telling in the hinterland, where entire settlements rose and fell on the basis of a key source of capital emerging, and, in the course of a sudden slump, being unable to endure the drain on their limited financial resources.^ Throughout Northern Manchuria, with agriculture 2^Tbid. 2^Shishkanov, p. 33. The reasons given for the difficulty in selling the ploughs: high costs and instability of the local dollar. ^By 1929 the soya bean export trade was monopolised by the following companies: The East Asiatic Co Ltd, The Siberian Co, Dal'gostorg, The Anglo-Chinese Eastern Trading Co, and Louis Dreyfus & Co. Of these the East Asiatic and the Siberian were by far the largest purchasers (Dal'gostorg, the Soviet concern, captured a significant proportion of the market very late in the 1920s). For a detailed study of this ques. tion (and particularly the collapse of the Siberian Co and its effects on the economy of Northern Manchuria) see F Patrikeeff, 'Continuity and Change in Russian Politics in Northern Manchuria, 1924-1931,' DPhil Thesis, Univ of Oxford (in progress). 22EB, 1929, Nos 15-16, pp. 1-4. 2RTbid. Not one bank of the 27 in operation in Northern Manchuria by 1929 was established specifically to finance industry. The most active in industry were National City Bank and Dal'bank. 2^Sakhalian is a good example, a centre for administration and trade/indus. trial life for its entire region. In the space of three years, 1926-28, from a 'key' industrial commercial centre the town has transformed com. pletely; it has died (population: 1926-25,000; 1928-less than 12,000). EASTERN BANKING making up over eighty-five per cent of the total value of production, industries—during the period of phenomenal growth—registered what was dubbed the 'darkest period in their history'. * * 3^ Not only did this apply to provincial enterprises involving timber, coal, minerals, furs and skins, but even cereal-based enterprises: flour milling began to exhibit signs of life only in 1927 after an initial slump in 1923; and the bean processing industry, although on the surface quite lively, registering over one hun. dred per cent increases in production in the years 1922 to 1926, was 'fraught with dangers' and suffering from a shortage of capital. 3^ In its impoverished state, North Manchurian industry as a whole was unable to gen. erate sufficient fat to see it through the protracted lean period of the early 1930s.3^ For most enterprises and businesses, especially those loca. ted in provincial towns, austerity had already left a familiar taste, with the effects of the Sino-Soviet conflict having reduced turnover to about forty per cent, and caused credit together with banking to almost complete. ly disappear at the height of the crisis in the summer and autumn of 1929. The crisis of confidence that the rapid collapse of industry and com. merce generated atop the bubble of soya bean prosperity was not only crip. pling in its own right: it helped to speed up the appearance of complete economic stagnation. In the early months of 1930 many firms were already unable to meet debts, which in turn led to a potent atmosphere of panic laced with rumours concerning 'a general inability to pay off debts in the near future'. 33 ^.s a consequence, most businessmen, and especially those with older and more reputable firms, tried to prevent a loss of credibility by pursuing a line of 'least resistance'. This invariably meant a reduc. tion in the work force and the payment of lower wages to those remaining. 34 The countryside, on the other hand, required nothing more than the prick. ing of the bubble to shatter any illusion of prosperity. Within six months of the crash prices, peasants were burning their stockpiles of worthless beans in place of the fuel they could no longer afford. 33 The only hope for the latter, following the collapse of the bean market, might have been an adjustment in the crop rotation practised, with a reduction in sowings of beans and a corresponding increase in so-called secondary cereals—siao mitsu and kaolian for instance—however here again the question of markets arose: until 1930 the marketable quantity of grain, with the exception of wheat, had been only thirty-three per cent, so the possibility of a Reason given: eradication of contraband trade. Kormazov, 'The Northern Periphery of Heilungchiang Province', VM, 1929, No 6, p. 72. 30Iashnov, 'North Manchuria . . . ' p. 8. 3^Ibid . 3 2 Eb reported 100 closures in one month of assorted Chinese firms in Harbin and Futiatien alone; others had to cut down the size of their work force, accounting for about 6,000 workers. A Chinese newspaper reported 460 bankruptcies for the year (not including grain firms around Harbin) with a total indebtedness of $6m. EIB, 1931, No 15, p. 20. ^3N M Dobrokhotov, 'Economic Hardship in Harbin', VM, 1930, No 6, p. 14. 34Ibid. 3 -’Chinese report on Tsitsihar Province (beans 2/3 cheaper than coal) EB, 1931, No 3, p. 21. — BANKING AND THE MANCHURIAN ECONOMY sufficiently expanded market to offset the losses in cultivation was remote even at that stage.38 By the following year this was a moot point as grain prices tumbled across the board. * * * The mantle of the incubus depression was as insidious as it was subtle in brushing against Manchurian prosperity: On the surface nothing appeared to have changed in the commer. cial life. The Chinese ER still remained under the joint man. agement of Soviet and Chinese Administration, its thousands of Russian and Chinese employees appeared to have the same purchas. ing capacity, import and export was at its height and yet the crisis was coming imperceptibly.* * 3^ The cataclysm in America and Europe had, indeed, passed virtually unnoticed in Manchuria, the events obscured by the Sino-Soviet dispute which at first smouldered for months on end and then erupted into open conflict. By the time the initial shocks from the markets of Germany and England had reached Harbin, the conflict had laid the groundwork for collapse. The disruption of trade caused by the crisis had reminded the major banks of the dangers inherent in maintaining too casual a credit policy and they acted to (over)correct it. The conflict also broke the delicate trade link, maintained through the years of prosperity, between province and centre: provincial buyers, for example, did not reappear after the hostilities had ceased between China and the Soviet Union;38 the periphery was by then already overstocked with goods and there seemed little likelihood of a sufficient volume of sales to meet maturing bills. Provincial centres such as Hailar were still suffering from the recession instigated by the conflict when the major tremors shook the region. y Finally, one of the chief areas of growth in Northern Manchuria dried up at its most important source: resettlement in the region fell by almost half in 1929 and its decline accelerated in 1930.^R The final collapse of the Manchurian economies, after the growth and interweaving of the underlying weaknesses, came in a crowded sequence of events that as was intense as it was brief. Following the months of retardation, caused by the Sino-Soviet conflict, the economy in Northern Manchuria appeared to be returning to its previous footing: banks resumed normal operation in February 1930;^ grain prices began to creep up; 3^Liubimov, p. 11. 3?0strenko. 38EB, 1931, No 2, pp. 1-5. 3^Hailar, an agricultural centre, in 1930: only 68% of wool supply (com. pared with previous year's figures) and 50% fall in the price of hay. EB, 1930, No 5, pp. 19-20. ^Figures for those despatched from Dairen, eg: 1928-73,983; 1929-48,724; 1930 (first 5 months)-9,717. EB, 1930, No 7, p. 7. 41EB, 1930, No 3, p. 27. EASTERN BANKING bankruptcies which had occurred in the past months, the most notable being the Siberian Company in Harbin, were at least counterbalanced by reports of potential renewed investment in the region.42 Despite a prolonged slack. ness in the Harbin market—as late as May 1930—business circles remained fairly optimistic of the condition lasting no more than a few weeks, or a few months at the most, irrespective of continued import shrinkage and fluctuations in currency.4^ Their predictions seemed to have been verified when, a few weeks later, London prices for beans began to rise. The improvement, however, was but momentary: on 16 June London prices fell to levels unheard of in the post-1910 period; with them hurtled the Manchurian grain market, closely followed by the local import/export trade.44 The decline continued virtually unabated in the remaining months of 1930, and by early 1931 bean prices were down by one hundred and thirty-five per cent from those of September 1929.* * * 4-^ Conditions in the countryside were by then critical: wealthier farmers had begun to use up their capital stock, while for the poorer sectors calamity had already been spelt by plummeting earn- * 6 * ‧ ‧ ings* Compounding the effect of the decrease in prices and export trade was the collapse of silver: its fall by sixty per cent brought with it an equivalent reduction in local capital, savings and the value of sales of goods made to foreigners prior to the collapse.42 In other Manchurian centres the effect of the trade crisis verged on the spectacular, with the population of Manchuria Station, for instance, being halved as a result.4R By August 1931, the price quoted in London for Manchurian beans was twenty per cent lower than that of 1908/1909.4^ The role of banking in the growth and collapse of the economy has already been touched upon in the preceding discussion of the patterns of the development in trade, agriculture and history. It remains, however, to deal at this point with the character of banking specifically. * * * * The initial position of banking in Northern Manchuria was characterised, at least in the case of foreign banks, by a lack of competition-^ and limited operations, with a representative of the HSBC noting that prior to 1910 Harbin Office had shown no interest in purely local operations unless they involved foreign exchange transactions [while]. . . all the imports came from Russia and with the Russian Rouble 42EB, 1929, Nos 15-16, p. 20. 4^See, e.g. Harbin Market Review, EB, 1930, No 7, pp. 14-18. 44Dobrokhotov, p. 12. 4\,iubimov, p. 6. 4oBetween 30 Sept 1929 and May 1931 prices in Harbin fell from 104 to 82 Sen per pood. Cited in Liubimov, p. 7. ^Dobrokhotov, p. 13. 4^EB, 1931, No 5, p. 14. On 1929 figure (1924 population = 92,000). Eli, 1931, No 16, pp. 10-12. In late Nov-Dec, London prices were not quoted at all. (See KB, No 22, pp. 7-9.) -^Ostrenko. BANKING AND THE MANCHURIAN ECONOMY prevailing ... as a currency in circulation there was no room for the ordinary commercial transactions in foreign currency.^ By 1910, with the sharp rise in demand for beans, the situation had altered slightly. In that year, the HSBC annual report stated in very optimistic terms that 'the recent phenomenal growth in the bean trade furnishes a striking illustration of the development of a hitherto unrealised re. source. Such bright prospects notwithstanding, the attitude of the Bank, which had emerged as the largest source of finance for the bean trade, remained quite conservative, a trait most obvious in the person of E M Knox, the Bank's representative in Harbin until 1925. Knox, who had a penchant for hookrugs, often spent his time at the office making them; business, if it came after he had fixed his daily ￡10,000, and even if the transaction was completed before 10 a.m., would receive a curt 'nothing doing' from him.53 Yet, it was observed that 'he used the exceptional position of the Harbin office as fully as it was possible to do. His quotations for bills were sometimes called fanciful, but were accepted without dispute'.5^ So strong was the Bank's position by 1924 that its chief rival, the International Banking Corporation, later known as National City Bank, was rumoured to have sent a representative from New York to liquidate their Harbin branch. 55 The representative, Mr Curtis, a most perspicacious individual, discovered the further possibilities of the North Manchurian market and instead of liquidating '. . . started very brisk activities and very acute and sometimes unfair competition with Harbin Office. He went to such an extent that he offered a refund of Yen 50 or 100 or more against desirable exchange contracts'.56 By then there were two major elements aiding the expansion of foreign banks' activities in the region: the onset of the second and most signifi. cant stage in the decline of Russian economic influence in the area, and the region's chaotic currency situation which, aside from keeping foreign banks out of direct negotiation with the countryside, allowed a host of traditional forms of credit operations to flourish. These credit opera. tions formed an informal network and provided for the role of foreign banks as middlemen to the middlemen in the bean trade. The foreign banks, although they did offer cheaper credit, conducted a restrictive policy in accepting customers.57 Moreover, the terms governing the handling of import/export payments were quite strict, involving demand drafts or tele. graphic transfers on London and New York, with currencies being viewed strictly as commodi ties. 58 The Chinese credit operations, on the other 5libid . 52hSBC Annual Report, 1910. c "5 J J0strenko. 54Ibid. 55jbid . 56Ibid. 570nly in 1930 did the Bank of China begin to compete seriously with European and Japanese banks for the financing of local exports. EB, 1932, No 8, p. 9. 58VM, 1925, Nos 5-7. This article, written in 1925, marks the transition EASTERN BANKING hand, indulged in every form of credit and currency dealings, profiting in the process from rural loans, purchases and local currency fluctuations. In 1927 provincial authorities were forced to acknowledge the rampant forms of development in this area when they introduced rules for the operation of money-changers to 'prevent speculative tendencies'-^ The period from 1924 to 1929 is marked by intense competition, as well as the elaboration of the bubble of prosperity, as banks vied for and created custom in an expanding market situation. The years 1927 to 1929 were particularly representative of vigorous financial activity as M W Wood, who replaced Knox in 1925, observed: In these three years we financed the greater part of the large soya bean export business [mostly with the East Asiatic Co] and the National City Bank took second place. Our purchases averaged ￡100,000 a week throughout the year and at least once the Agency was credited with having earned enough to pay the dividend. Wood, whose intention it was to raise the tempo of the Bank's activities in the region after the years of Knox's conservative attitude to local busi. ness, found that he was able to achieve a good deal of improvement, despite the continued forays by the National City Bank,^ but refused to involve the Agency in any exports other than beans, although a share of the local to growing competition; at that time 'exchange' was still at the head of foreign banks' list of priorities. 5^EB, 1927, Nos 23-24, pp. 16-17. (Kirin Province.) 60]_,etter from M W Wood to J R Jones, 16 Nov 1954; HSBC Archives. ^^Ostrenko. The question of management and business technique is a complex one and obviously the length and scope of this paper will not allow a full discussion. It is undeniable that Knox's attitudes were innately conservative, while Wood did display a far more imaginative approach, possibly being the result of the latter's experience in the Vladivostock Agency (which survived as long as it did almost wholly through his enter. prise, tenacity and ability to find business just as Head Office's axe was about to fall on the entire operation) where opportunity had to be recognised, seized and exploited quickly and fully. In this respect, Ostrenko's comments above concerning Wood and Knox are superficially borne out. Yet it would be wrong to conclude, as Ostrenko does, that Knox was a safer banker than Wood. The latter undoubtedly wished to see the HSBC base in Northern Manchuria broadened and the Harbin Office made more competitive. However, it was Wood who sensed very early on that increased involvement with the Siberian Company was a perilous undertaking; Knox, on the other hand, had been instru. mental in drawing the Bank into deeper water with the latter concern because he regarded highly its management in Harbin, and because it was a European-based firm. As it transpired, Wood's misgivings were well- founded and it was, to some extent, through his early warnings and efforts that the Bank suffered a remarkably small share of the losses incurred by the company. See Patrikeeff. BANKING AND THE MANCHURIAN ECONOMY import trade was undertaken.62 These were years of particularly acute competition for another reason: the return of Russian business interests, and specifically that of bank. ing. The Soviet government had shown a very strong inclination to claim a share in Manchurian growth, this being most strongly evident in its lively action to prevent the liquidation of the Russo-Asiatic Bank: . . . from the beginning the opposition of the Soviet Government has been continuous and severe. They have made and it would appear are still making every effort to gain control of the Bank. Their main efforts seem to have been directed to the attempt to buy over a Mr Puteloff, who held controlling balance of shares in his hands.63 The controversy over the bank revealed further the nature of banking during this period when, in 1932, Russian businessmen who had lost money through the liquidation of the bank complained to the Lytton Commission of favouritism shown by the bank to Soviet subjects, with debtors of that nationality escaping without forfeiting fifty per cent of their businesses although the bank's regulations contained strict provision for this. 64- While the liquidation of the Russo-Asiatic was being contested, Dal'bank's activities showed a pronounced keenness. By employing distinctly Chinese methods of banking--allowing loans on the basis of personal references from well-known members of the business community rather than collateral, for instance--Dal'bank secured an active financial role in over half of Harbin's bean-oil refineries and bean mills by the end of 1926;^ by 1929 all the refineries and mills processing beans in the entire region had at some stage received its credit.66 Between 1927 and 1928 Dal'bank eased its credit requirements—by not tying loans to overall plans of operations; loans are therefore granted without reservation so as to prevent delays in the despatch of consignments—and as a result was financing virtually all large European firms involved in the bean trade; moreover, this was done on a regular basis.6? As a consequence, the bank's turnover in 1927/28 was Yen 2.5 million as opposed to Yen 1.9 million in the previous financial year; its active current accounts rose by a similar margin in that year.6$ 1927/28 saw competition increased further with the entry of the Stand. ard Chartered Bank^^ and the expanded operations of the Thrift Corporation Bank. The latter, an American bank, announced the opening of a branch in 6^Wood. ^Comments from a translation of an article from Russkoe Slovo, written by Assistant in charge of Sub-port, Lahasusu, 25 Aug 1927 (?). ^Petition to the Commission of Enquiry of the League of Nations, 1932. ^Kursel' , p. 36. 66EB, 1929, Nos 15-16, pp. 1-4. Information comes from Mr Ishiga, Assistant Director of the Bank of Chosen. ^A V M, 'The Export of Manchurian Soya Beans and Its Financing', VM, 1928, No 3, p. 10. 6%ursel' , p. 20. 69EB, 1927, No 46, p. 19. EASTERN BANKING Hailar with capital of ￡100,000. The new branch, as with the office in Harbin, was to be managed by the senior members of staff of the defunct Russo-Asiatic Bank. As part of its strategy, the American bank sent its officers to Hailar where they were to visit clients of the late bank.7*-* *‧■*■** The market slump and crash, introducing the initial phase of economic regression to the region, rapidly revealed the gaping chasm created by the interlude of inter-bank competition. With the onset of the financial crisis in China proper, commercial and banking organisations there had formulated projects to counter its effects. 7^ No such measures were con. ceivable in Northern Manchuria; the credit and currency systems were too disparate to allow any immediate, formal unified action. 'Unified' action, if it can be regarded as such, in the case of Northern Manchuria is very clearly exemplified by the bank's response to the Sino-Soviet conflict. When the crisis matured into an open conflict, and Dal'bank ceased its operations altogether, the remaining banks adopted the informal policy of restricting or withdrawing credit, with the result that bank credit dis. appeared completely, thereby leaving the business community at the mercy of money-lenders and usurers. With the worsening of the financial situation at the very start of 1930, foreign banks realised that the Manchurian bean exporter was in dire straits and so intervened 'collectively' in the hope that trade might be resuscitate in the process.72 Consolidative activity, beyond day-to-day transactions, involving the foreign banks was minimal. In this last respect there was, for example, the instance of the Managing Director of the HSBC visiting Manchuria to discuss the formation of a central bank of the Three Eastern Provinces to stabilise or regularise the currencies in circulation there;73 the HSBC also served the function, together with the Yokohama Specie Bank, of maintaining silver quotations.74 Thus, when the Chinese Commercial Organisation of Harbin and Futiatien made an appeal to the Main Administration of the Three Eastern Provinces in 1931, making an offer to circulate a new currency to the sum of $50 million which was to be earmarked for use in grain sales only,73 the soil was already too barren for such a measure to take root. Due to the absence of a unified currency policy and any form of check on currency emission, pro. vincial banks were able to use unlimited issue of banknotes to manoeuvre in 7°Ibid. 71The meeting was held in mid-January 1930. Present were: Bank of China, Chinese Chamber of Commerce, Federation of Banks and the Chinese Stock Exchange. Directive issued for the abolition of the Tael as from 1 July 1930; Chinese dollar to be used as the only currency. Pogrebetskii, 'On the Way to the Gold Standard', VM, 1930, No 2, p. 8. 72VM, 1930, No 2, p. 83. Banks taking part: Chosen, Yokohama Specie, HSBC, Dal'bank (Harbin office), National City, and, of late, the Standard Chartered (on a small scale). 73EB, 1928, No 32, p. 17. 74VM, 1930, No 8, p. 20. 75KB, 1931, No 3, p. 21. BANKING AND THE MANCHURIAN ECONOMY the grain market and thereby partly monopolise the purchase of grain from producers.By artificially boosting the prices in a buyer's market, these banks further damaged an already crippled sector of the economy. Moreover, with the shrinkage of credit in the cities, the very face of competition in the banking sector was altered: minor banks entered the fray to fill the need for credit, and in this respect began to compete with usurers; both groups issuing short-term loans at high interest rates.77 ■****‧ In 1931 Manchuria finally emerged on the path towards unification, under Japanese guidance. By the mid-1930s the local market was at last showing signs of revival, but by then the region had transformed from an essentially export-orientated zone to one with an excess of imports. Banks in the process had suffered great losses, although those that had invested heavily in local industry, amongst their number the National City Bank and Dal'bank, bore losses 'several times larger' than those of the more cau. tious institutions and, by comparison with the National City Bank's perfor. mance alone, the HSBC must be classed in the latter group. The banks that had survived the initial convulsions of the early 1930s were forced to adopt new methods of finance, including regular perusal of the books of client-companies by bank representatives, a procedure virtually unknown in the period of growth.* * 7R Investment policy had in some cases altered also: the HSBC, for instance, through the instrumentality of one of its Chinese directors, began to invest in a variety of enterprises, although princi. pally in bankers' officers, goldfields and railway construction.. The diversification was, to some extent, supplemented by the forced realisation of loans through appropriation of goods or, by default, the companies them. selves. This process led to new spheres of activity for the banks and, to an extent, amelioration of their situation. Thus it is not altogether a fair appraisal when Ostrenko, of the HSBC Harbin Agency, concludes: It is easy to be wise in the light of subsequent events but had it been possible to foresee the approaching crisis of 1929 and the great losses suffered by Harbin Office through the failure of its clients in the years following 1929 it might be said that the old conservative policy of Mr Knox would have been more safe, more secure and in the long run more profitable to the Bank as a whole than temporary success in gaining new busi. ness . 80 The Bank had, in the process, acquired large firms such as Tchurin & Company, the latter with numerous branches scattered across Manchuria and interests in retail trade, agriculture and light and heavy industry. It ^Dobrokhotov, p. 14. 77The average interest was 8% p.m. 78()strenko. (Refers to the HSBC in Harbin.) 79EB, 1931, No 19, p. 21. 80qs trenko. EASTERN BANKING owned enterprises producing tobacco, sausage, paint and enamel; distiller. ies, vodka, vinegar; leather and soapworks; brewery, wine cellar; tea hand. ling; bakery; wholesale and export department; automobile department; tech. nical divisions with large workshops; agricultural department. Later the company purchased a timber mill and Sungari mill.R-*- The closing years of the decade saw signs of promise appearing in these areas of investment, with Tchurin & Company showing a steady yield by that time.82 were it not for the changing political fortunes of the region, the Bank might have found itself planted that much more firmly in a region of great economic potential. 81 Information 82()strenko. from Politekhnik, 1979, No 10, Sydney, p. 22. 15. DEFENDING THE CHINESE CURRENCY: THE ROLE OF THE HONGKONG AND SHANGHAI BANKING CORPORATION, 1938-1941* by Frank H H King This essay deals primarily with the role of the Hongkong and Shanghai Banking Corporation in the defense of the external value of the Chinese national dollar [CNC] through the Currency Stabilization Fund of 1939. The Bank's position relative to the establishment of and transition to the Stabilization Board which was negotiated under the Washington Agreement of 1941 is also considered. In the narrative general banking and currency problems in which the Hongkong Bank played a role are touched on, but no attempt is made in this short essay to present a comprehensive statement of the complex history of the Fund and Board much less of all related matters in the period 1938-1941. Authoritative accounts of the Currency War already exist (and are listed in the bibliographical note below); there the focus has naturally been on the broader political and economic issues at stake, while the role of the Hongkong Bank—and, indeed, of the other British and Chinese banks involved, has tended to receive but passing acknowledgement. The purpose here is simply to redress the balance and place the Hongkong Bank's contribution in context. At the end of December 1981 The Hongkong and Shanghai Banking Corpora. tion was, of those banks whose shares are traded, the largest, figured by market valuation of assets. Calculated on the basis of market value of equity, the Hongkong Bank ranked seventh among the world's publicly traded financial intermediaries. Shareholders' Funds stood at HK$14,060 million [￡1,296 million] and total assets at HK$304,206 million [￡28,032 million]. These figures relate in fact to what is referred to as The Hongkong Bank Group, because they include the Hongkong and Shanghai Banking Corporation's own operations and, since it is also a holding company, those of its subsidiaries, including the Mercantile Bank Limited. When the history recounted in this essay begins, the Hongkong and Shanghai Banking Corporation was a major factor in world finance and domin. ated foreign banking operations in China. At the end of 1938, Share. holders' Funds were HK$135 million [￡8.3 million] and total assets HK$1,254 *This essay was originally prepared for presentation at the 1982 Interna. tional Economic History Conference, Budapest, Hungary. As with David J S King's essay on the first China loan (No. 13), it is included in this collection to redress the balance. Under the terms of the Hongkong Bank History Project the collection of materials from public archives and private collections has been authorized so that papers in the Bank's newly centralized historical archives could be consulted in Hong Kong together with documents from other sources—and this essay is an example of the concurrent use of materials collected from these differing origins. In addition in the oral history project 0 P Edwards, who was on the staff of the Bank in Chungking has provided background information. EASTERN BANKING million [￡77.7 million]. In Shanghai its foreign exchange operations were greater than the total of all other foreign banks combined. The Bank had been founded in 1865 by a group of leading Hong Kong merchants, including American, German, Indian, Parsee and, of course, British interests. Throughout, the Bank retained an international outlook; equally important, it retained its Hong Kong headquarters, with its Shang. hai and London branches operated by managers of a status virtually equi. valent to that of the Chief Manager in Hong Kong. The Bank nevertheless considered itself 'British', and, with one or two exceptions, its executive staff were British subjects. Although it was on many occasions the chosen instrument of British financial policy in the East, the Bank retained its independence of decision and could not be taken for granted, especially when the interests of its non-British constituents were involved. The Bank's concept of 'British' differed from that of an institution based on London; China was its base and the focus of its inter. ests, and this duality was not seen as involving an inconsistency. But in all that follows, the Bank's Hong Kong headquarters and its China focus set it aside from competitors; only in this context can its policies, actions and comments on the passing events be understood. As the notes to this essay will indicate, much of the material for this essay comes from public records where selected correspondence to and from the Hongkong Bank is available. But this is now supplemented by letters in the Hongkong Bank Group Archives. Good schemes, it is said, have many originators. Assessment of the importance of the contributions made by various participants in this history is a matter of judgement. While it is simplistic to suppose that history is determined largely by personal ambitions and rivalries, it is less controversial to point out that government officials in correspondence with superiors will attempt to portray their own efforts in the best light and take credit, without neces. sarily intending to be unfair, for ideas and actions which in fact origi. nated in the private sector. If added to this we have a personal fac. tor—the rivalry of Cyril Rogers and Sir Frederick Leith-Ross, for example—or prejudice--the concern of Leith-Ross for the success of his currency recommendations in China and his controversial assessment of the role of the British banks, especially of the Hongkong Bank--then there is special need for caution in interpretation. Leith-Ross, for example, criticized the Hongkong Bank for failing to provide sufficient financial assistance to British investment in China (as opposed to finance of trade); J A MacKay of National City Bank criticized the Hongkong Bank for unsound banking practices, that is, for indulging in precisely those activities Leith-Ross complained it failed to attempt. Both parties were reacting to their own problems. This essay depends to a greater extent then previous accounts of the same events, therefore, on the correspondence among Sir Vandeleur Grayburn, Chief Manager of the Hongkong and Shanghai Banking Corporation stationed at its head office in Hong Kong, A S Henchman, the manager of the Bank's Shanghai Branch, and 0 J Barnes, senior manager of the Bank's London Branch. For 'manager* read 'senior executive vice-president'; for 'chief manager read chief executive officer'. All three were within a few years of retirement; they had reached the top three positions in the Bank, had DEFENDING THE CHINESE CURRENCY played on the same sports teams as juniors, and knew each other. In their own branch they operated alone, and discussion was only possible with their peers by letter. There were no internal committees, no second-level staff available for policy discussion; the Board of Directors were involved only on very top policy and prudential matters. These three men, Grayburn, Henchman and Barnes, in the three key positions, ran the Hongkong Bank. It is their correspondence which provides the basis for a reinterpretation of, or, more modestly, a new balance in the interpretation of the history of efforts to defend the Chinese currency. The correspondence provides a frank account of the facts, options, and policies adopted as seen by the three top managers at the time of writing each letter. Thus they too need interpretation for much the same reasons that Scrooge felt hesitant in accepting the reality of Marlow's ghost. Opinions given at the end of a long day with exchange brokers may not be lasting ones. Henchman's verdict of the rival Mercantile Bank manager— Huxter by name and huckster by nature—may not be the final judgement of history. Henchman's views of American banks in Shanghai may or may not be fair, but they are important because he believed them at the time to be true and therefore are guides to the reasons for his decisions. Grayburn in Hong Kong could be more detached; Barnes in London was under British Government pressure and, from time to time, was spoken to by Sir Montagu Norman, Governor of the Bank of England. It is with these thoughts and this background that this essay is presented. The Hongkong Bank's role in China During the 1930s the management of the Hongkong and Shanghai Banking Corporation [HSBC] was becoming increasingly aware of the changing balance of political power in the East. Although they could hardly be expected to foresee the establishment of many independent countries following a world war which was not itself foreseen, the Bank recognized the long-run signi. ficance of the diminution of its role in Japan, the severe limitations of its role in Manchuria, the balance between foreign banking and domestic monetary control being developed in Siam, and the threats against foreign banking made in the Philippine legislature. There is correspondence to support the view that both Sir Vandeleur Grayburn, the Chief Manager based in Hong Kong, and A S Henchman, the Bank's Shanghai manager, accepted that, with the establishment of the National Government, similar developments could be expected in China, existing extraterritoriality and other privi. leges notwithstanding. There were moments indeed when, exasperated by some new government intervention, a manager would give vent to the feeling that if the Japanese gained hegemony in China the position of the Hongkong Bank would be no worse. But these were fits of annoyance which did not reflect the motivation behind the Bank's actual policy. This is perhaps best summarized in a statement made by Henchman during an interview with A Manuel Fox, the U.S. Treasury representative on China's Currency Stabiliza. tion Board: EASTERN BANKING Our bank is a true friend of China. Whatever makes China strong aids us, for our business is entirely Chinese ... It is our pol. icy to keep Shanghai strong, for a strong Shanghai can aid Free China materially. Earlier, Grayburn, countering hearsay that had been given some credibility by Sir Frederick Leith-Ross, no admirer of the Hongkong Bank, informed the British Embassy in China (i) that he recognized peace on the terms offered by Japan would be disastrous to China, (ii) the Bank was ready to do busi. ness with the Chinese Government ... Grayburn added that he was alive to the fact that the Bank's interests were mainly Chinese, that he was not giving financial assistance to the Japanese except in course of ordinary business nor was he contemplating doing so. ^ These and other similar declarations should, one might reasonably assume, be interpreted as being subject to normal business criteria, for the corporation recognized its responsibilities to shareholders and the management received its mandate from the Board of Directors presumably to run a banking business. Such an assumption, however, requires significant modi fic at ion. In August 1937, the Bank's Board of Directors had approved the author. ization given by the Chief Manager to the Shanghai Manager to use all his efforts to carry on and uphold the prestige of the Hongkong Bank even if it involved him in a loss due to the collapse of the currency.-^ The extra. ordinary nature of this resolution is better appreciated if it is under. stood that the Board of Directors normally only (i) examined the accounts, (ii) approved personnel matters, and (iii) considered non-business affairs, e.g. donations to charity. Bringing this authorization before the Board was of the utmost significance for that fact alone. As an exchange bank the Hongkong Bank did not, in declared principle at least, waiver from its fundamental belief that its commercial prosperity should be based on the finance of the China trade and that it had a proper function in actively promoting such trade. Indeed Sir Charles Addis, the Hongkong Bank's former London manager and then chairman of the British Group of the China Consortium, claimed to be but following his predecessor, Sir Ewen Cameron—formerly Hongkong Bank manager in Shanghai and London—in supporting the China loans, in developing the China consortium, and in general actively supporting the finance of industrial development; it was all designed to encourage the growth of trade and the Hongkong Bank's role therein. Obviously a sound monetary system was seen as a basic factor in these developments, and the Hongkong Bank had supported, inter alia, cur. rency reform, the abandonment of the tael, and the maintenance of the Report of an interview with A S Henchman, July 4, 1941, in U.S. Treasury Archives, Box 65, File G-6, with letter of July 15. ^Leith-Ross papers, T.188/205, Sir A Clerk Kerr to FO, Feb 19, 1938. The hearsay has been repeated by Ann Trotter, 'British Perceptions of China, 1933—1939', in Ian Nish, ed. Some Foreign Attitudes to Republican China (International Centre for Economics and Related Disciplines, London School of Economics, n.d. but post May 1980), p. 61. %SBC Board of Directors, Minutes, August 24, 1937. silver standard. The Hongkong Bank's policies were shaped by its history and by its commitment to Far Eastern development especially in China. The Bank felt a responsibility to the communities from which its profits were derived and to its constituents, many of whom had established themselves first in China and dealt with the Bank throughout its history. As National City Bank's Shanghai regional manager, J A MacKay, was reported as describing it, Many of the loans made by British Banks, especially the Hongkong Bank, were not in accord with sound banking principles. The Hongkong Bank carried along many business concerns even when they were technically insolvent ... . ^ But A Manuel Fox, the American appointee on the Stabilization Board stated, The real difficulty in the Far East [as far as American banks competing is concerned] is that the officials of the Hongkong and Shanghai Bank are in the position to take immediate advantage of opportunities whereas the officials of the American banks seem obligated to refer all matters to the home office.^ Involvement with currency matters, mid-1930s The Hongkong Bank had, from its foundation, been involved in advising on currency matters—in Hong Kong, Japan, Thailand, and China—but perhaps the relevant point for this essay is that A S Henchman had been involved in the aftermath of the 1934 Shanghai real estate boom and the raid on the currency which followed. As Henchman remembered it, he was called in by Dr H H Kung, Minister of Finance, to be told that T V Soong was now in complete control of the Bank of China and Bank of Communications and asked whether he, Henchman, would cooperate with Soong in saving the currency. I agreed, and to my amazement T V left the operation of the cur. rency entirely in my hands. This suited me down to the ground as during the ensuing months it was all the time a matter of touch and go. We had little behind us to support the currency and the rest had to be made up of finesse and bluff. Any interference would have certainly wrecked things. T V behaved excellently but I cannot say the same for the other gentleman who was timid and unreliable. I well remember the week-end when he was strongly ^U.S. Treasury Archives, A Manuel Fox to Secretary of the Treasury, July 16, 1941, and memorandum of Aug 30, 1941, in Box 65, files G-6 and G-7. For the totally opposing criticism of the Hongkong Bank (referred to in the introduction to this essay), viz. that the Bank was interested only in exchange profits, see, 'Notes by Sir F. Leith-Ross on his mission to China', in T160/620/14233/03, pp. 22-23. The Bank did not accept either criticism as valid. ^Fox to Secretary of Treasury, cited. EASTERN BANKING inclined to throw in his hand whereas I was fairly confident that the other side was cracking. T V to whom I appealed must have put up a great argument with his relative and rang up on the Sunday morning to say I could sell a further ￡200,000. (The last [addition to the funds] I imagine that we could expect.) On the Monday morning, when I opened the market as an apparently willing seller it was the turning point for some of the more nervous speculators. After an hour or so they started to sell, thereby taking pressure off me, hitherto playing a lone hand. A movement such as this soon spreads and, as the rate moves up, more come in as sellers, fearing a loss on their previous transactions.... I was able to liquidate this partnership ... later in the year and handed over to the Chinese as their share of the profit in the operation ￡60,000 and a small amount in Chinese dollars.^ Henchman reported he received a gold wristwatch and later the Order of the Brilliant Jade. These experiences were to influence his later role and judgements. Henchman had outwitted speculators with a minimum of funds by outbluffing them, that is, by the simple but nerve-racking technique of appearing to be a willing seller. For this to have a chance of working, the underlying economic conditions must be such that there is a limit to the potential demand for foreign exchange, and operations would be facilitated if the country is on, as China then was, a metallic standard rather than a managed currency. The political situation was also simpler, with full-scale Japanese aggression still two years away. The experience may have led Henchman to minimize the problems. But in 1935 China, already de facto off silver, changed officially to a managed currency, and the Bank was induced, along with all others--the Japanese institutions excepted--to surrender its silver to the Chinese authorities. The period which followed was one apparently characterized by a stable currency, and the Hongkong Bank agreed, for example, to waive the silver clauses in key Shanghai debentures for a premium of 3%, thus showing in practical terms an expectation of exchange rate stability. But recent research confirms what was reported at the time: underlying economic condi. tions were unsound and, with the commencement of the Sino-Japanese War in 1937, unlikely to improve. Nevertheless, the Chinese held the foreign exchange value of the Chinese dollar, in part by the sale of silver to the United States under a 1936 Agreement and in part by the allocation of ex. change at an official rate. As these allocations became increasingly inadequate, an open market rate developed, and the maintenance and stabil. ity of this rate became a preoccupation of Chinese officials, Chinese and foreign bankers and, indeed, of foreign governments. Rightly or wrongly, and the subject was a matter of considerable debate, the Shanghai open market rate became, or was claimed to have become, a gauge of the ability of China to resist and of its economy to support the war effort. As such, it was a matter of primary concern to the Hongkong Bank; the Board's 1937 minute affirmed that the Bank staked its future on the future of China and Henchman to J R Jones, HSBC, Hong Kong, acknowledging an enquiry dated Feb 18, 1952. HSBC Archives, biographical files. its prestige on its ability to assist China in maintaining an orderly and reasonably stable open market in Shanghai for its currency. Despite Henchman's success in countering small raids on the currency, with the beginning of the full-scale Japanese invasion it was recognized that external assistance would be necessary both because of the magnitude of the potential requirements of China and for psychological reasons—China was not to be seen as countering aggression alone. There were, however, difficulties both in considering Japan's likely reaction and in a purely Chinese context.^ There had been discussions in London during 1937 concerning a possible ￡2 million currency loan.R The Hongkong Bank was involved in the negotiations and, aware of growing Chinese nationalism, had insisted that the Bank of China should be brought into the affair as early as possible. Henchman asked if one could imagine a Japanese loan being floated in London without participation by the Yokohama Specie Bank.^ But Brazil had just defaulted on its foreign debt and the market was cautious. Priority was in fact given to the ￡3 million Canton-Meihsien Railway Loan—China Development Corporation and the HSBC's joint subsidiary with Jardine Matheson, the British and Chinese Corporation—and the adequacy of any remaining security offered was questioned.^ Then too the British government, although discussing the value of continuing the China Consor. tium itself, were in the meantime apparently committed to support of its policies. A waiver had been granted by the Consortium in the matter of the Meihsien loan, but the Consortium were still officially committed to a policy of coordinated lending involving all Consortium members, including Japan. And, in any case, a currency loan of the type envisaged was basi. cally a general support of China's credit at a time when her fiscal and monetary policies were under critical review. If 1937 did not, as a consequence of these attitudes, develop into an emergency year, this was partly due to China's use of her silver reserves and partly to the cooperation of non-Japanese foreign banks in the Shanghai International Settlement in adhering to a 'gentleman's agreement', inter alia, restricting their Chinese business. To avoid Japanese interference, ^ Henchman in Shanghai always maintained that the Japanese would not object to a loan solely for support of the currency. See, e.g. Henchman to Barnes, July 19, 1938. This view is consistent with the analysis below. R See, e.g. 'Memorandum of Conversation on June 1 [1937] between Mr T K Tseng, Mr 0 J Barnes, Mr E J Davies being present', FO 371/20946, ff. 209-10. Davies was a junior manager in the Hongkong Bank's London office. See also, ff. 26-27 and 132-33, summarized in a letter from R E N Padfield, another London junior manager, to Finance Minister H H Rung, then in London, July 30, 1937, ff. 175-76, and Rung's reply of August 3, ff. 198-99. 9 Henchman to Barnes, July 9, 1937, HSBC Archives, 'Hutchison Letters' file. ^Notes of Conversation between T R Tseng, P W Ruo, and 0 J Barnes and R E N Padfield of HSBC's London Office, May 14, 1937, in FO 371/20945, ff. 138-41; memo of May 25, 1937, ff. 151-53; and memo of June 1 Conversation between T R Tseng, Vice-Minister of Railways, and Barnes, with E J Davies of the HSBC present, FO 371/20946, ff. 209-10; and related material. EASTERN BANKING the Hongkong Bank took over the clearing from August; writing in 194C Henchman, describing the amount of unremunerated work his branch was doing, stated that total clearings for the month of February had totalled CNC$1,292 million.11 The Hongkong Bank's role prior to the 1939 Currency Agreement In 1938, however, the situation deteriorated and the Hongkong Bank became more directly involved. The key contribution at this stage would appear to have been the technical skill of the Bank's Shanghai manager, A S Henchman, as an exchange operator and the willingness of the Bank to authorize risks in support of China (or for the Bank's prestige in China) not defensible on narrow commercial grounds. Until March 1938 the CNC had been maintained at a rate of 14^d, but the Chinese dollar was under pressure on the open market. Official exchange allocations were reported to be little more than one percent of amounts requested, although a specific example indicates greater generosity: for the week ending April 14, 1938, the Hongkong Bank applied for ￡356,000 total for Shanghai (￡250,000), Hankow, Swatow and Foo. chow. and they were allocated ￡86,000 of which ￡75,000 was for Shang. hai. ^ But the amount was clearly inadequate as cover if Henchman were to continue to operate at government-approved support levels. Grayburn in. formed Hsi Te-mou of the Central Bank of China that the Hongkong Bank could no longer cooperate in maintaining the rate, but he offered to assist in the future in other ways. Hsi noted the offer in his reply; it was later taken up.* 1-1 This, indeed, seemed to be the expectation of the Foreign Office, which, while considering a direct loan out of the question, assumed that the Hongkong Bank would, of course, assist China.14 The Bank's two main contributions in 1938 were (i) a ￡2 million loan against sales of silver and (ii) the secret handling of a ￡1 million fund to stabilize the exchanges in Shanghai. Although sales of silver to the United States continued at the rate of 10 million ounces fortnightly, the rate was too slow to cover the increas. ing demand for foreign exchange—estimated at ￡2.5 million a month--on the open market. The Hongkong Bank, accordingly, lent the Central Bank of China ￡2 million to cover the period between sales of foreign exchange and sales of silver of 100 million ounces of .999 silver under the 1936 1 ^The Hongkong Bank was able to continue operating the clearing after the outbreak of World War II despite the necessity of 'trading with the enemy', i.e. Germany and Italy, which such a task naturally involved. The Bank was granted an appropriate licence by the British Embassy on instructions from London. See FO 371/24684 and 27632. It was considered that the interests of China made it essential the Hongkong Bank continue its role in the International Settlement. 1 Hoover Institution Archives, Hoover Institution for War, Revolution and Peace, Stanford, California. T V Soong papers, Box 24. Copy of letter dated March 28, 1938, in A N Young papers, Box 70, Hoover Institution Archives. 14F0 436/2, f. 29. 13 Morgenthau-Kung Agreement; the loan was fully repaid by December 14.^ The silver security itself had been deposited with the Hongkong Bank in London, and Barnes commented, 'I hope the proceeds ... are being held for currency requirements and not being spent on munitions.China had made other attempts to borrow on its silver, but the proposals had been consid. ered speculative. The Hongkong Bank's decision, later communicated to the Bank of England, was however approved by Sir Montagu Norman with the comment that in future all such loans should be made by the Hongkong Bank on the assumption that, in case of default, the Hongkong Bank could be depended on not to dump the silver on the market at short notice.In fact in 1937 the Hongkong Bank was also selling Chinese silver under instruc. tions from H H Kung, the Minister of Finance, not to disturb the market. As has been noted, Henchman did not expect the Japanese to object--they did not wish to see the collapse of Chinese currency at that time; this is a point to be considered below.^ In July of 1938 the Bank of China made ￡500,000 available to the Hong. kong Bank, which added an equal sum, and under the management of Henchman, who was authorized by the Chinese authorities to sell up to ￡1.7 million on his own responsibility, this proved sufficient to maintain the exchanges at 8^-d; indeed, by November 22 the market had recovered from the shocks caused by the fall of Hankow and Canton in October and Henchman was able to buy back the foreign exchange he had sold and at the end of the year turned over profits on exchange to the Bank of China.as operations were to be kept secret, Henchman on occasion disguised his interventions through the cooperation of the Chartered Bank of India, Australia and China, which operated in the. market on behalf of the fund—but always, the sources suggest, on Henchman's instructions. Negotiations for the Currency Agreement But since the underlying causes were not corrected, the pressures on the rate continued. As this was apparent both in Hong Kong and London, efforts continued to find a more formal way of defending the currency, and there is considerable discussion on the right formula for such currency support. A currency loan was one obvious solution, but it had two drawbacks: if granted by the British government (especially if granted without parallel Can confirm authorization to repay Hongkong Bank credit and sell pledged silver.' H H Kung to F B Lynch, HSBC, Shanghai, in A N Young papers, Box 112. Lynch was assistant manager of the Hongkong Bank in Shanghai; it may be assumed that Henchman was on leave. 16Henchman to Barnes, March 11, 1938; Barnes to Henchman March 14, 1938, in HSBC London Office Archives, Box 5, item 77, on the loan. l^Barnes to Grayburn, April 8, 1938. 18H H Kung to Henchman, March 22, 1937, in A N Young papers, Box 38. ^Henchman to Barnes, July 19, 1938. 20T V Soong and A N Young, 'Memorandum on the Chinese Currency Situation', p. 2, dated July 27, 1940, in the A N Young papers, Box 69, supported b> correspondence in the Hongkong Bank Archives. EASTERN BANKING American support) the act might antagonize the 'other party' (i.e. the Jap. anese); if made by the Hongkong Bank it would constitute an unwarranted in. crease in the sovereign risk, since the Bank had recently lent ￡1.2 million for airplane purchases on the general credit of the Chinese Government. The formula eventually agreed was in fact an extension of the exchange fund type activity which the Hongkong Bank had previously undertaken at the request of the Bank of China--only this time the support was to be publicly heralded—although secretly operated—and on a larger scale.2 There were two agreements signed in March 1939; one was among the four banks-- Hongkong, Chartered, Bank of China, and Bank of Communications—calling for the establishment of a sterling fund to which the several banks would contribute specified amounts: the British banks (as they were officially designated in the agreement) ￡5 million, of which the Hongkong Bank ￡3 million and the Chartered Bank ￡2 million; the Chinese banks ￡5 million of which the Bank of China ￡3.5 million and the Bank of Communications ￡1.5 million; the second agreement was between the British Treasury and the two British banks to the effect that, if they dutifully carried out the inter-bank agreement, their contribution to the Fund and the promised 2f per cent interest would be guaranteed by the British Treasury.22 This was a solution which met previous objections: no loan was being made; the British banks were making contributions to a fund in the operation of which they would be involved and the British government was merely guaranteeing the British banks against loss of principal in the unlikely event that there should be any. Indeed, there had been much discussion on the disposal of profits; past experience suggested, incorrectly as it turned out, that this would be necessary. Meanwhile Sir R Craigie, British Ambassador to Japan, cabled that the managing director of the Central China Development Company [Japanese] showed every sympathy with the project, while commenting that the first reaction of the press and public opinion in Japan would be bad. The establishment of the Fund was governed by a non-governmental 'inter-bank' agreement, and under its provisions interest at the rate of 2f per cent was to be paid to the British banks from the income of the Fund; as this was guaranteed by the Chinese banks, they became liable should sterling resources prove inadequate to earn the interest due, and they remained liable until the winding-up of the Fund—a provision which was to cause problems under wartime conditions later. The Hongkong Bank had expected a rate of 4 per cent, or 3 per cent at least. The rate had, how. ever, been carefully calculated: since the Hongkong Bank was taking no risk on the principal sum (see below), and since payment of interest was also guaranteed by the British Treasury, the Agreement rate was based on the London money market rate, say l￡ per cent, to which add 1 per cent in consideration for the fact that the funds were locked up for the duration of the Agreement (initially one year), and add 2 per cent for expenses. This, despite strong arguments from the British banks for at least 3 per A 1 FO 436/4, ff. 39-40, and passim. On the airplane loan see 0 J Barnes, Feb 21, 1939, in his letter file for 1933-45. 22Extracts from the agreeements are given below. 23T.188/234, f. 277. DEFENDING THE CHINESE CURRENCY cent, had been determined by Sir Montagu Norman, who was not likely to change his views. The Bank's London manager, 0 J Barnes, writing Grayburn after an interview with the Bank of England's Governor, noted the iron fist within the velvet glove. Grayburn, a determined character himself, in Norman had met his match.24 The arrangements for the establishment of the Fund had been subject to other discussions and negotiations. The British Treasury, for example, wanted to limit the government's guarantee to 90 per cent of the principal so that the participating banks would have a stake--at a higher rate of interest—in the success of the operations.25 Henchman resented the implications of this line of reasoning, but Grayburn did, of course, agree that the Bank would undertake not to benefit itself in the operation of the Fund.26 Now the Treasury was involved, so naturally was British government participation in the form of the chairman of the Fund's operating and policy committee—he was to be a British subject, appointed by the Chinese government and acceptable to the British government; it was assumed from the first that it would be Cyril Rogers, seconded from the Bank of England as adviser to the Central Bank of China. This was agreed by the Hongkong Bank provided, as Henchman insisted, Henchman alone would operate in the market without interference, subject, of course to policy directives from the Fund's committee, the so-called 'Hongkong Committee', chaired by Rogers, with Grayburn representing the Hongkong Bank. The Chartered Bank could not, of course, be excluded from operating for the Fund in Shanghai, but after an initial misunderstanding on the part of Henchman, who thought the Agreement had laid down perfect equality between the two banks, the point was taken that Henchman was the operator with the Chartered Bank assisting to disguise operations as before.27 If this appears surprising, two points may be made: (i) in discussions of exchange expertise in Shang. hai only three names are usually mentioned—Henchman of the Hongkong Bank, Huxter of the Mercantile and Reed of National City Bank.28 The second point was more relevant; Henchman asked if there were ever a case of two operators handling the same 'book'; it was simply impractical and presumably Rogers, who was himself knowledgeable in exchange, accepted this. The Agreements became effective on March 29, 1939, after Parliament 2^The correspondence on this subject is considerable, but see especially Barnes to Grayburn, Feb 21 and March 7 and 21, 1939. 25Barnes to Grayburn, Feb 21, 1939. 26nenchman to Grayburn, Feb 14, 1939. 27Minutes of the Hongkong Committee of the Stabilization Fund, hereafter referred to as 'HKC', June 15, 1939, K P Chen papers. Rare Book and Manu. script Collection, Butler Library, Columbia University, New York. 2RA Manuel Fox, U.S. representative on the 1941 Stabilization Board, states that Reed, next to Huxter, is reportedly the 'slickest exchange operator' in Shanghai, but Fox's severe judgements on both are inadequately supported, cannot be used as evidence and are not, therefore, quoted. Fox to Secretary of the Treasury, July 15, 1941, U.S. Treasury Archives, Box 65, file G-6. EASTERN BANKING passed the China (Currency Stabilisation) Act, 1939, without division; this authorized the Treasury guarantee. There were apparently no serious adverse reactions from the Japanese, who were again reported not to be interested in the full collapse of the Chinese currency.^ By April the members of the Fund's 'Hongkong Committee' had assembled, and the first international effort to support China's currency began. Background to the Agreement China's initial success in stabilizing the foreign exchange value of her managed currency had been threatened by Japanese military action in North China and by the establishment there of a Japanese-sponsored Federal Reserve Bank; this was followed by the establishment in Shanghai of the Hua Hsing Commercial Bank and later, by the Nanking regime, of the Central Reserve Bank. These banks issued notes which the Japanese authorities attempted to force into currency in the regions they controlled, thus displacing the Chinese legal tender, fapi. In the interests of the yen bloc, the Japanese sought to control the foreign exchange assets of the region; one way of achieving this end would be to divert export earnings, take over the foreign customs revenues (which were denominated in a gold unit of account), and draw on China's reserves to finance imports. This provoked what has become known as the currency war, and it is sometimes assumed that its purpose was to destroy the fapi—to which the answer is, perhaps eventually but not while fapi is backed by foreign exchange obtain. able through an open market supported by an exchange fund. The problem therefore was to maintain the value of the fapi through an open market which would somehow exclude certain but not all Japanese attempts to obtain foreign exchange. Since imports were required for China's industries—many of them Japanese-owned—and for the needs of China's people—many of them living in Japanese or puppet controlled areas, and since too China and Japan were not formally at war and there were 'legitimate' Japanese merchants and requirements, success of Fund operations depended, inter alia, on careful analysis of applications for foreign exchange without the formal mechanism of exchange control. This required the cooperation of all foreign banks, and although the task appeared formidable, Henchman was to claim to the last that the Japanese did not, with one exception, raid the Fund.30 The Fund, however, had other problems—speculators, those seeking to export their capital, and high ranking officials who, the Fund's Hongkong Committee and Henchman insisted, were receiving inside information. It also had support in the form of general import credits granted by the United Kingdom and the United States from time to time and subject to various conditions. But whatever the conditions these credits cut the demand for exchange on the open market and thus supported, indirectly perhaps, the purposes of the Fund. 9 Q z^Soong and Young, 'Memorandum ...', cited. See also notes 7 and 23. 30Report of an interview with A S Henchman by A Manuel Fox, July 4, 1941, in a letter to the U.S. Treasury Secretary, July 15, U.S. Treasury. DEFENDING THE CHINESE CURRENCY The Currency Stabilization Agreements did not imply that the term 'stabilization' at the then current rate could be maintained; there had already been a depreciation of the CNC and there was price inflation. The expectation was, however, that the Fund would prevent wild fluctuations which would endanger trade and destroy any chance for economic stability; that speculators would be deterred, and that an orderly market, perhaps involving further depreciation, would be possible. Indeed many at the time thought the Fund generously provided with sterling; Arthur Young writing after the event thought that if only a little more had been available, Henchman would have managed ... .31 The goals were not seen as wild or hopeless; all those involved were confident of success—as indeed the concern with the problem of profit allocation would suggest. By currency stabilization the Chinese indicated a policy of fapi convertibility; if one possessed fapi legal tender notes, one should be able to sell them for foreign exchange at stable rates. One of the sup. porting policies must be then, to limit the supply of fapi. At its simplest this meant limiting the currency supply and, through such limita. tion, to restrict the expansion of bank credits and so the money supply. Thus the withdrawal of fapi from banks for the purchase of foreign exchange was a cash drain which should have caused credit tightness, not only limiting the demand for foreign exchange but limiting also the ability of the banking system to create money. However, tight credit suggested a sound fiscal policy, a limitation of government overseas expenditures, and total cooperation. As these conditions could not be fulfilled in the circumstances, other measures, most requiring the cooperation of the foreign banks, were undertaken. The most obvious was perhaps to limit inward remittances to Shanghai and to encourage the transfer of funds for investment in the interior.32 a second policy was to limit the right of withdrawal of funds from banks. To avoid the consequent domestic payment problem the Shanghai banking system formalized the wei-wah [hui-hua] system whereby funds could be transferred within the system in order to make payments, but wei-wah funds could not normally be withdrawn in cash, i.e. in f api. 3-* Under the 1937 Gentleman's Agreement, the Hongkong Bank had agreed not to accept any new Chinese customers and to limit the extension of credit to new customers. As has already been stated, all banks were expected to limit sales of exchange to legitimate requirements, i.e. not to provide funds to speculators or to 31see note 29. 32see, e.g. Kuo Min News Agency release, datelined Chungking, December 22, 1939, regarding the amount of legal tender notes, fapi, which might be taken from Ningpo and Foochow to Shanghai: maximum CNC 100 per person, any additional had to be remitted through banks where, of course, they could be scrutinized and subjected to the wei-wah system [see below]. HSBC Archives, clipping file F2.8/2. 33There are several contemporary descriptions of the wei-wah system, especially by Edward Kann; for a later summary, see my 'Essays in China's Recent Monetary History, (ii) Hui Hua', reprinted in my Asian Policy, History and Development (Centre of Asian Studies, University of Hong Kong, 1979), pp. 88-92. EASTERN BANKING those fronting for the Japanese. Meanwhile, in support of this complex of policies—all short of ex. change control, which was considered impractical — the Chinese government had formally undertaken in a letter to the British Foreign Office, to de. velop economic policies consistent with the policy of stable exchanges. 4 Under such conditions the economic well-being of China was to be expected, trade would flow with minimal interruption, China's credit would remain unimpaired, and she would be in a position to command the sympathy of the conservative world in the prosecution of her conflict with Japan. Initial policies, 1939 Assuming the cooperation of the foreign and Chinese banking community, and best endeavours of the government, and the restraint of the Japanese, all then rested on Henchman in Shanghai and the Fund's Hongkong Committee. The Chinese, with the assistance of the Hongkong Bank had alone been able to maintain a level of 8^d to the Chinese dollar with their own resources, the market was thought to have absorbed the impact of Chinese defeats, and there was good reason to be bullish. The Bank of China and the Hongkong Bank were oversold by only US$6 million equivalent as compared to US$15 million in October, 1938, and A N Young, the highly-qualified—and suc. cess ful--Americ an financial adviser to China, states initial thinking was to allow the rate to move down to 6^-d, but the sudden adverse action of the Japanese in Tientsin gave rise to concern that permitting the rate to fall would create panic, and an attempt was made to maintain the 8^d rate. The fact is, however, Henchman was bullish, and there is no record in the Hong. kong Committee's minutes of a debate on the level of support as between these rates at this time. in June, however, the Fund was forced to withdraw support from the market and by August the rate had fallen to an average 3id for the CNC; the Fund's ￡10 million was rumoured exhausted and the days of the Fund appeared numbered. The story is not, of course, that simple, for the Fund continued operations, reappearing in the market and the rate was maintained above three pence until a new Sino-British/American Stabilization Board with its additional funds began tentative operations prior to the outbreak of the Pacific War. The Fund's policy was not, of course, determined solely by the Hong. kong Bank, but it is fair to say that the policy was consistent with the principles the Bank felt essential for the maintenance of China's economy. This assumed that exchange control was impractical, that it was possible to support successfully—as had been done throughout 1938 with more limited resources the exchanges without recourse to rationing, that Shanghai's import needs must be met, and that it was possible to prevent the Fund's resources from being used by the Japanese or to provide cover either to speculators or in support of a flight of capital from China. Other expec. tations, and those of the Fund's Committee, were to be dashed. 34See Chinese Ambassador Quo Tai-chi to Halifax, received March 3, 1939, in FO 436/4, No. 104, p. 53. T V Soong and A N Young, 'Memorandum ... ', cited. The existence of the Fund did not provide the Chinese the assurance generally anticipated; rather it appeared more as a challenge, or, to be less provocative, as a known source of exchange which it would be wise to take advantage of immediately. Those who hesitated were rebuked by the course of events: the founding of the Japanese Hua Hsing Bank in Shanghai, the Nanking regime's Central Reserve Bank (whose notes the foreign banks were to treat in the same way as FRB notes), the failure to control the wei-wah system, and above all, the impossibility of preventing the inflow of fapi into Shanghai or to achieve the oft-expected 'credit squeeze', which Henchman thought would force speculators to unload at unfavourable rates. Even change-overs could not be controlled, and forward rates were under virtually constant pressure during key speculative periods. The declared purpose of the Chinese Currency Stabilization Fund was to stabilize the CNC/sterling rate; operations were therefore to be in both currencies, buying and selling as required to achieve the purpose. The Hongkong Committee accordingly opened Chinese dollar accounts in the Char. tered Bank and Hongkong Bank--so-called Hongkong No 7 accounts, in Hong Kong and Shanghai. Chinese dollars, fapi, sold for sterling were steril. ized, i.e. held in the vaults of the two British banks unavailable, as a base for any credit expansion. The sterling accounts were kept in the Bank of England; while the Fund had adequate sterling assets, a part were inves. ted in Treasury bills, the income being set aside to pay the interest due the British banks; when this proved insufficient, the deficiency was a liability of the Chinese banks and, until 1943, promptly paid. The Fund was to operate in the Shanghai and Hong Kong markets, but the main operations were in Shanghai. In Hong Kong purchases of CNC against sterling were made to prevent the development of an adverse cross-rate and to maintain over-all confidence in fapi. In Shanghai sales of sterling resulted in an accumulation of CNC notes (that is, of fapi). At the time of the Japanese invasion, both CNC note holdings were to fall into enemy hands as there had been insufficient time (and possibly insufficient acid) to achieve the necessary speedy destruction. The history of operations: March to July, 19393^ The first meeting of the Hongkong Committee was on April 10, 1939; in the preceding weeks the Hongkong Bank had been supporting the market with its own funds, and an attempt to have these charged against the Stabilization Fund was frustrated by a Treasury ruling that, as stated in the Agreement, the presence of the Chairman was essential to a quorum, and thus any action taken before his arrival was invalid.37 Grayburn expressed his regret that H M Treasury should base this decision upon a fortuitous techni. cality which disregards the spirit of the Agreement and the underlying 36The hi story is based primarily on the minutes of the Hongkong Committee [HKC] in F0233/233, ff. 1053-337; a useful abstract of which is in ibid, ff. 1337-76 and the K P Chen papers. 37T.188/234, f. 328. EASTERN BANKING Foreign Exchange Rates, 1938- 1941 (TT, pence per CNC$) High Low High Low High Low High Low 1938 1939 1940 1941 January 14.25 14.20 8.50 8.29 5.03 4.64 3.52 3.36 February 14.25 14.20 8.31 8.13 4.63 4.11 3.61 3.33 March 14.25 11.75 8.34 8.09 4.17 4.10 3.42 3.20 April 13.31 12.44 8.25 8.23 4.25 4. 25 3.28 3.16 May 12.78 10.37 8.24 8. 19 4.25 3.06 3.34 3.19 June 10.25 8.10 8.24 6.22 4.13 3.69 3.33 3.28 July 9.02 8.37 6.41 4.06 4.03 3.84 3.27 3.03 Augus t 8.53 7.97 4.50 3.22 3.86 3.55 3.13 2.80 September 8.88 8.50 4.88 3.75 3.63 3.44 2.91 2.81 October 8.29 8.00 5.31 4.38 4.00 3.50 2.81 2.19 November 8.25 8.00 5.88 4.72 3.97 3.66 2.19 2.00 December 8.58 8.22 4.81 4.34 n. a. n. a. n. a. n. a. Source: A N Young, China's Wartime Finance, Table 59, p. 360. circumstances of the proposed transfer.38 By the third meeting, on April 27, the Fund had sold ￡1,542,000 and the strain was beginning to be felt.^ in this atmosphere and under these pressures the feud between Henchman and J R Huxter of the Mercantile Bank of India broke out into the open. The latter was accused of assisting the Japanese through exchange operations, thus acting contrary to the expressed policy of the British government in cooperating to maintain the stability of the Chinese currency. The Hongkong Committee informed London, where the Mercantile's head office submitted an explanation from their Shanghai manager, J R Huxter, which Grayburn found unsatisfactory. Huxter refused to leave the East since such a move might be interpreted as admission of guilt; instead he and his compradore, who had been accused of a close rela. tionship with the Japanese-sponsored Hua Hsing Bank, came separately to Hong Kong to be interviewed. Although Grayburn remained sceptical, he acknowledged that an examination of the Mercantile's books was impractical, and the Committee officially exhonerated Huxter while remaining unsatisfied with certain of the bank's Chinese accounts and the testimony of the com. pradore. The mutual suspicions remaining would not assist the execution of a stabilization policy at a critical time. Recent reports by those who 38HKC, minutes, May 9, 1939. 39 T.188/234, f. 347 and for all references to sales through June. 40Grayburn to Henchman, April 24, 1939, K130, SHG 1/3. HKC Minutes, April 27, May 1, 9, 10, 18, and June 6, 1939. MBLD file on Stabilization Fund. DEFENDING THE CHINESE CURRENCY kept his books confirm that Huxter was in fact operating within the gener. ally accepted stabilization policy.^ In the week ending May 4, the Fund sold ￡2,355,000--pr ac t ic al ly half the Fund's sterling resources would be gone by May 11, and the Hongkong Committee undertook a reassessment. First there appeared to be a leakage of information, but this was ascribed by Grayburn to the fact that exchange brokers pooled information contrary to accepted conduct. Secondly, for the first but certainly not the last time, the question of additional resources for the Fund was raised.42 On a more immediate issue, the point was made that the Japanese were diverting exchange cover arising from North China exports and thus sterling for ordinary imports into Tientsin had to be obtained in the Shanghai market, a fact supported by the premium of percent of the Shanghai over the Tientsin fapi; in consequence the Chinese government was restricting the volume of remittances to Shanghai from Tien- t sin.43 Pressure on the Fund's resources continued with end of the week ster. ling balances limited to ￡3,111,000 on June 8, 1939. But the previous day the fateful decision had been made: After discussion, it is agreed to send instructions to the Fund's operators in Shanghai to maintain a level between 6fd and 6-g-d, if the market conditions permit of flexibility between these 1imits.44 And this was done without warning, creating what has been described as panic on the market—and leading some to suppose that this marked the end of the Fund's resources and operations. Apparently Shanghai dealers had expected the Fund's operators to signal their intention to change the rate and American banks in particular felt they should have been informed on the close of business the previous evening. They lodged a protest, claiming that the Hongkong Bank, as operator of the Fund, had sold itself exchange. Grayburn reported Henchman's explanation: ... the small buying put through by him soon after the opening of the market on 7th June was solely in preparation for the demand from his merchants which was bound to come later in the day. The operations had not been for Hongkong Bank's account.4 The Fund, both the Hongkong Committee and the operators, have been criticized in retrospect for wasting the Fund's resources in maintaining an impossible exchange rate and for being slow to react to obvious market pressures. This criticism cannot be sustained, provided, of course, one 41HSBC Archives, oral history records. 4^HKC, minutes, May 2, 4, 1939. 43hkC, minutes, May 9, 1939. ^^HKC, minutes, June 7, 1939. 45hkC, minutes, June 15, 1939. See also, Division of Monetary Research, U.S. Treasury, 'Chinese Currency Situation', May 29, 1940, in U.S. Treasury Archives, Box 53, file B-4. EASTERN BANKING accepts the basic premise that an attempt should be made at all to support the free market in Shanghai under the very inflationary conditions which a stable rate was supposed to avoid. An average rate of approximately 8^d had been maintained, as previously noted, since June 1938, and there were reasonable expectations that the new rate of 6jd could also be successfully supported. Henchman reported the market 'getting tight', but the fact is that exogenous factors, including a drain of cash caused by fears for the safety of deposits in Chinese banks in the Treaty Ports—and foreign banks had agreed not to take new Chinese accounts--caused by Japanese blockading of Tientsin, June 13, were to increase the 'tightness' to the point of crisis.By August the rate had been forced down to 3^d, and there were fluctuations which gave an average monthly high of 4id in November 1939 and a low of 3.2d in May 1941, when arrangements for a new Fund changed the situation significantly. Temporary exhaustion of the Fund's sterling resources, August 1939 With the success of the Fund's stabilization efforts no longer to be taken for granted, the events between the June 7th withdrawal of support and the temporary exhaustion of the Fund's available sterling resources in August take on particular interest. There had been some discussion in the sources as to whether there was a division of opinion between Chinese and British members of the Hongkong Committee on the policy to be adopted. The minutes at times reflect initial differences, but Henchman's discussions with Pei Tsu-yee apparently wholly convinced the latter—and he was a highly regar. ded banker, technically skilled. The decisions were adopted without 'national' disagreements.^ 'For your guidance', the Hongkong Committee cabled Henchman on June 21, 1939, 'remaining resources of Fund are ￡320,000 beyond which you cannot sell.'^8 Japanese demands for the surrender of Tientsin's silver currency reserves and other actions had caused withdrawals from Shanghai banks and led the Government to declare a banking holiday for the remainder of the week.^ These withdrawals would on the one hand restrict the growth of credit and so limit demand for the Fund's sterling resources, but on the other hand would bring into question- the solvency of the banking system. This was the contradiction which was to hamper all exchange stabilization policy. In fact, the Bank of China and the Central Bank of China both sold sterling to the Fund during June to improve their liquidity, and the Fund released fapi from the Hongkong Bank's Shanghai No. 7 account in return for an equal deposit of fapi in Hong Kong. Meanwhile provisions were made in Shanghai by the Ministry of Finance for (i) a CNC500 a week per depositor V Soong and A N Young, 'Memorandum 'See especially HKC minutes for June 15, 4 47 memorandum cited ^^KC, minutes, June 21, 1939. ’For a last dramatic cable on these events the Hongkong Committee, to 367. , cited. 1939. Cf the Soong and Young 49t Treasury, , see Cyril Rogers, Chairman of June 21, 1939, in T.188/234, f. withdrawal of wei-wah funds, thus increasing the potential threat to the Fund, but (ii) revised the wei-wah regulations to permit a more flexible system and hopefully eliminate the need for such releases in the future.-^ To the extent that these events led to speculators taking an over. bought position, Henchman again hoped that he could 'squeeze' them, and meanwhile a further ￡500,000 was bought from the Bank of China. In addi. tion the Bank of China agreed that sales of sterling over ￡80,000 on July 15 could be recovered from their reserves and, accordingly, the Fund pur. chased a further ￡35,000. But these bits and pieces, as it were, could not resolve the fundamental problem, i.e. that the Fund had insufficient resources to stay in the market even in the hope that a squeeze would materialize as expected at the end of July and that underlying conditions failed to improve. Indeed on July 17 the Committee were informed that, as was to be expected given the premium on Shanghai over Tientsin fapi of up to 30 per cent, northern CNC notes were being presented in Shanghai--by mid-September remittances by the Bank of China were to total CNC$5.6 mil lion.Furthermore the new wei-wah regulations permitting staged with. drawals of CNC$23 million posed a new threat to the Fund were protested by Henchman and were a source of disagreement within Chinese government and banking circles. Pei Tsu-yee of the Bank of China threatened to resign.^2 On July 17 the Fund withdrew from the market with this message to Henchman: Fund cannot sell further and Bank of China does not wish to sell in the meantime. Committee suggest that you inform market as early as possible you are not selling 6 9/16d. Thereafter market must find its own level. ^ That level proved, after considerable fluctuations, to be approximately 3id. In the debate before reaching the decision, the Committee forced it. self to consider fully what had previously been hinted at, viz, that the main threat to the Fund came not from the Japanese but from Chinese banks and individuals deliberately seeking to depreciate their own currency. On this subject Cyril Rogers as Chairman spoke frankly, and he undertook to inform Finance Minister H H Rung of a resolution proposed by Grayburn and seconded by R A Camidge of the Chartered Bank that the Minister be informed of the impossible position in which the Committee had been placed by the unauthorized disclosure of vital information about the operations of the Fund which had previously gravely prejudiced its operations. The Bank of Communications was specifically referred to; Henchman reported persistent sales to the American Express Bank which could not be traced since it -^These measures were effective July 4, 1939, and are described in the regulations published by the Joint Reserve Board of the Shanghai Bankers Association, in HSBC Archives, file F2.8/2. See also North China Daily News [NCDN], 28 June and 5 July, 1939. -^HKC, minutes, July 17, 1939. 52HKC, minutes, July 12, 1939, and U.S. Treasury report, cited. 5%KC, minutes, July 17, 1939. EASTERN BANKING cleared through another American bank, Chase Manhattan, and not directly through the Hongkong Bank's general clearing operations.-5^ Cyril Rogers undoubtedly conveyed the Committee's critical comments to H H Kung in a direct and forceful manner; it was Kung who was later to insure Rogers was not accepted as British representative on the new Stabil. ization Board in 1941. But the critical judgements are hardly surprising in a Committee dominated by Rogers and Grayburn, both of whom had consider. ably more confidence in the Bank of China's T V Soong than in his brother- in-law, H H Kung, and this rivalry was one of the personal factors which was subsequently to plague the stabilization efforts. The Chinese banks in response to criticism from the Ministry of Finance defended themselves against the charge that change-overs, that is buying spot against sales for future delivery, was responsible for the pressure on forward rates which, it was said, was encouraging speculation and a flight from the currency. The Banks stated that the danger came from individuals making change-overs, a practice which certain foreign banks continued to permit despite requests by Henchman as chairman of the banking association that they cease. Li Ming also informed Hsu Kan, Vice-Minister of Finance, that since the withdrawal of the Fund from the market on July 18, 'the Hongkong Bank has done its best to maintain the market on its own initiative.' Reviewing the situation Arthur Young gave his opinion that Henchman had misjudged the problems created by a managed currency and mistook the fall in interbank deposits with the Hongkong Bank as a sign of illiquidity which would in itself force a sale of sterling to the Fund. But an increase in bank balances could also give rise to a demand for foreign exchange; there were flaws in the analysis of exchange demand under a managed currency which were fatal to the Fund, and yet, as already noted, Young believed that Henchman almost made it; with a little more he would have maintained the rate. This line of reasoning would, it is fair to note, support Young's arguments for further currency support which he and T V Soong were about to submit to the U.S. government.^ Montagu Norman had earlier predicted the need for a 'much larger fund' than the original ￡3 million proposed—a sum which was, in any case, only to be the British contribution. Norman was thinking in terms of the ￡20 million requested by the Chinese as a currency loan.-57 The Hongkong Bank and its neighbors in Shanghai From the Shanghai Municipal Council down there were many associations at which foreigners of all nationalities could mix, and the dangerous position in which many of the leading Chinese found themselves forced increased responsibilities on those members of the foreign community who had the stature or authorization to meet them. Those who were agents of overseas 5ZfIbid . 55Cable dated Aug 26, 1939; copy in HSBC Archives. 56soong and Young, 'Memorandum ... ', cited. 57Norman to Leith-Ross, Feb 20, 1939, in T.188/234, ff. 159-62. companies, e.g. managers of American banks—if A Manuel Fox's reports are correct—might have insufficient authority to act quickly and independently of specific head office authorization; there were others, locally based, who lived on the financial fringe. But the manager of the Hongkong and Shanghai Banking Corporation had both the stature and the authority to act in the interests of Shanghai. This he did, but from time to time he reflected on the primary business nature of his position and the lack of cooperation he was receiving from fellow-businessmen, and, sometimes, the criticism his Bank was still receiving in public from the Chinese Government on other matters. And in letters to his head office, to his 'chief' and friend, Grayburn, he gave vent to his feelings. While these are not to be taken as reflecting his actual policy position, Henchman's complaints give some insight to the problems the Currency Stabilization Fund faced in operating the Shanghai market. First, there were the other British exchange banks--the Chartered Bank of India, Australia and China and the Mercantile Bank of India, Ltd. With the former Henchman had good working relations, and they had joined together in the currency agreement. But, Henchman complained, the Hongkong Bank did the work; although both banks were supposed to store CNC notes purchased for sterling, the bulk of the processing of the millions of dollars fell on the Hongkong Bank. By Henchman's own choice, the burden of the exchange operations was his, but he had to be concerned with the Chartered's misunderstanding concerning an early use of the dollars in the Hongkong No. 7 accounts which they had failed to sterilize. But these were working disagreements only. Henchman retained his major criticisms for the Mercantile Bank and for J R Huxter, who, would in his opinion do anything for l/32nd of a penny. Huxter on the other hand saw only that he was offering highly competitive rates and drawing the fire of the larger bank because of his inroads into their business. The Mercantile, for example, did not agree with Henchman in the wisdom of banning change-overs by private individuals (as opposed to banks). Henchman, of course, admitted the effectiveness of the competition but claimed that his hands were tied by his responsibilities to the Fund and by the requirement that he maintain an orderly market.^8 There is some evidence that Huxter cut back his activities after his Hong Kong trip, and although marked as 'difficult' to deal with, he is not again accused of passing exchange to the Japanese. As Henchman saw it, the Mercantile was simply a 'bucket shop' whose exchange operations were suspect while the Hongkong Bank saw its business lost due to the need to meet its obligations to China. He noted however that the Bank of China was out of gratitude giving the Hongkong Bank valuable transfer business as a partial offset. ^9 Not that Henchman himself had not been accused of dealing with the Japanese, a charge which had been made even by British officials. Specifi. cally the Hongkong Bank was charged with providing the Japanese call money; -^Henchman summarizes his complaints and the restrictions on the Hongkong Bank's ability to manoeuvre because of its responsibilities as manager of the Fund and Shanghai's leading foreign bank in a letter to Grayburn dated May 19, 1939. HSBC Archives. 59Ibid. EASTERN BANKING Henchman was able to show that this had been undertaken with the under. standing of the Central Bank as part of a policy of non-provocation, i.e. providing normal facilities for recognized trade requirements, but coupled with a policy of non-recognition of Japanese financial institutions which were undermining China's sovereignty and/or her monetary system.^R Thus the Hongkong Bank--with most other foreign banks—refused to accept the notes of the Federal Reserve Bank in Tientsin, the Central Reserve Bank of Nanking or the Hua Hsing Commercial Bank of Shanghai except on a storage and pay-out on demand basis. But the banks existed in areas proximate to Japanese military control, and there were questions concerning the customs revenues, municipal revenues, payments for utilities etc beyond the scope of this essay. Henchman's approach to the Japanese was non-provocation and provision of normal facilities, consistent with requests and representa. tions from the Central Bank of China and from other competent Chinese authorities. This in turn was consistent with the Bank's policy as stated by Grayburn; thus Grayburn would disapprove of an anti-Japanese speech by the Chairman of the Hankow Chamber of Commerce, V A Mason, the Bank's Hankow manager, on the grounds that it was provocative and could result in retaliation which would cause most suffering to the Chinese; but Grayburn at the same time sympathized with his views and directed a wholly pro-China policy for the Hongkong Bank. As an aside, it is interesting to note that when the Japanese aban. doned their Hankow concession in August 1937, the Yokohama Specie Bank had asked the Hongkong Bank to take over its current operations. The Hongkong Bank felt that, to prevent dislocation of trade following so important a withdrawal, they should accept the offer, but subject to their being no objections. The available files indicate no objections from T V Soong and the Bank of China. From time to time Henchman was asked to cooperate with the American banks. This he found most difficult. There was some expectation in 1939 that the Americans would participate in some way in the support of the currency; Henchman saw 'cooperation' if, as expected, the U.S. dollar support would be separately operated. ^ The speculative attacks on the Fund came, Henchman claimed, from Chinese speculators dealing through American brokers, who in turn dealt through an American bank not in the clearing. Thus the Chinese origin of the transaction was disguised but could not have taken place without the knowledge or at least the suspicion of the American banks. When asked officially by the British Embassy to cooperate, Henchman stated his problems: I reply [to the British Ambassador] with extreme regret that whilst I very readily perceive the desirability of such coopera- 60 61 62 HSBC to FO, cable No. 675 of April 27, Hutchison, British Commercial Counsellor Archives, 'Hutchison letters file'. The Shanghai HSBC branch manager, now retired, ically important letters at the request of FO 371/20946, ff. 208-09. Henchman to Grayburn, January 9, 1939. 1938. See also Henchman to , Sept 24, 1941, in the HSBC second Hutchison is a post-war who compiled a file of histor- J R Jones. tion the tactics, from time to time, of the American banks, makes it practically impossible for me to comply with our Government's request. Meanwhile Henchman and the Hongkong Bank were involved in the finan. cial problems of the Shanghai Municipal Council, in the storage problems faced by the Central Bank of China, which had to evacuate its main Shanghai offices and set up in the French Concession. Major policy decisions by the Shanghai manager had, of course, to be implemented by the staff--the general clearing, the Stock Exchange clearing, the China loan routine, the handling of the CNC fapi notes, and the finance, as always, of Shanghai's trade. These were the circumstances under which A S Henchman operated as he faced the continuing task of maintaining an orderly exchange market through the Currency Stabilization Fund. Nothing of course was static, and in considering the Hongkong Bank's problems, one must remember that files reveal day-to-day crises. In con. trast therefore consider Henchman's claim that We are so concerned with the welfare of China, we let Mercantile Bank cut into our merchant business and we have only just been able to oust him.64 But he was, so Henchman states, ousted. Aftermath and the repurchase of sterling The July 17 meeting of the Hongkong Committee also reviewed efforts to secure further resources. The British government had declined, the Chinese banks were not in a position to contribute, and the Hongkong Bank at this point was overcommitted.65 Negotiations with the French had been going on for several months but without resolution, partly at least because the French were insisting that they be permitted two representatives on the Hongkong Committee—presumably because the British and Chinese banks had two representatives each, but which the British, quite correctly, saw as disproportionate to the expected French contribution to the Fund.6° The Fund was not, of course, without resources—it had Chinese national dollars. Thus when war broke out in Europe and imperial exchange control made the holding of foreign currencies less attractive, the Fund was able to begin replenishing its sterling holdings; the problem before 63Henchman to Grayburn, Sept 7, 1939, reporting British government was putting pressure on him to cooperate, and explaining non-cooperation with the Mercantile Bank, Chase and American Express. A memo on the complaints of U.S. banks and the replies of the British banks, including Henchman's, is in FO 371/23447, ff. 251-53. ^^Henchman to Grayburn, April 12, 1940. k-^For the debate in England see T. 188/234, ff. 385-86 and 394-98. 66por the early negotiations see correspondence in Leith-Ross papers, T.188/234, ff. 194-95, 209-15. EASTERN BANKING the Hongkong Committee's meeting of September 14, 1939, was in fact how to invest the ￡2 million it had purchased on the open market in Shanghai.^ In all the Fund brought back ￡4.3 million, or approximately half of what it had sold from April to July.*^ But British exchange control was to create new problems by provoking sales of sterling in Shanghai against U.S. dollars, thus affecting the cross-rate, and again calling on the Fund's sterling resources, while the the soundness of the Chinese Government's basic economic policies remained under question. The actions of American banks continued to attract atten. tion and pressure was brought to bear on them both directly in Shanghai and indirectly through Washington and New York, although given the complexity of operations in Shanghai—with inside leaks, gangster speculation, Japanese operations, and import requirements for the occupied areas, there is no conclusive evidence on the accuracy of charges against the over-all operations of any British or American bank. Yet despite these problems exchange remained firm through April 1940, apparently without the need for the Fund's constant intervention.*^ The 1939 Agreement was renewed by mutual consent, automatically extending the guarantees by the British Treasury. The European war had presented problems to the Hongkong Bank's London Office which was short of sterling, and Grayburn, forced to buy-in, informed his Board of Directors that in renegotiating the rate of interest on the Bank's sterling contribu. tion to the Currency Stabilization Fund, he wanted 4 per cent, or the Bank might withdraw a portion of its contribution to the Stabilization Fund.^0 Renegotiation had been foreseen as a possiblity and was specifically men. tioned in the Parliamentary debate on the China (Currency Stabilisation) Bill. 'If the agreement were continued beyond one year a higher or lower rate of interest might be appropriate.'^ The rate, however, remained at 2f per cent and the Bank did not withdraw its basic contribution, indeed, as will be described below, it planned to contribute to a 'Fund B'. Despite a series of favourable developments, the Hongkong Committee recognized the need for additional resources. Various Chinese government economic policies had been depriving the market of exchange from export receipts and overseas Chinese remittances were at least temporarily diver. ted directly to the government's reserves.^ These developments were *^HKC, minutes, 24th meeting. k^Soong and Young, 'Memorandum ...', cited, p. 5. 69see especially HKC, minutes, April 5, 11, and 18, 1940. ^HSBC Board minutes, Sept 12, 1939. Renewal was formally agreed every six months until the Fund became subordinated to the Board in late 1941. See, e.g. Ambassador Quo Tai-chi to the Hongkong Bank acknowledging renewal of the Agreement, March 29, 1940, in HSBC Archives. See also exchange betweeen the Chinese Embassy in London and the FO dated Sept 27 and 30, 1940, in FO 371/24691, ff. 243-44, 254-58. ^Captain E Wallace, MP, Financial Secretary to the Treasury, stated in the Parliamentary debate that the rate of 2f per cent was 'for the present'. The source consulted was the HSBC clipping file, NCDN (March 22, 1939). ^^HKC, minutes, April 18, 1940. DEFENDING THE CHINESE CURRENCY partly offset by the granting of British and American export credits, nevertheless the Shanghai market problem remained. New Resources—Fund B ['Fund B' refers to the abortive supplementary fund which was essentially an extension of the 1939 Fund; as Fund B never became operational, the term 'Fund B' is sometimes used to refer to the S ino-Ang 1 o-Amer ic an Fund established under the terms of the April 1941 Washington Agreement. This is both erroneous and confusing. The Washington Agreement fund, operated by the Stabilization Board, is usually referred to as such, but it has also been termed 'Fund C', which is, of course, consistent with the historical developments. See the Appendix for a summary of the agreement for Fund B.] The Hongkong Committee's general concern was brought to a focus at its May 1, 1940, meeting when the Fund's resources stood reduced to ￡178,000 as the result of heavy sales on April 30 of ￡180,000 for cash and ￡178,000 for May delivery. The Hongkong Bank had been buying fapi in Hong Kong to steady the local market; the Shanghai Municipal Council had been a heavy buyer. The Fund withdrew from the market; there was, however, no immediate panic.^ Then, on May 2, Cyril Rogers announced success: the Chinese government were to contribute US$3 million towards the support of the exchange by transfer to the Bank of China's New York branch.^ This encouraging news was followed by negotiations, completed July 6, 1940, for a Fund B (in contradistinction to the Fund operated under the 1939 Agreement, which was henceforth known as Fund A), which would not receive a British Government guarantee, but to which nevertheless the Hong. kong Bank eventually agreed to subscribe a net ￡600,000 on a Bank of China and Chinese Government guarantee. The Central Bank of China agreed to put up US$3 million, presumably the sum referred to by Rogers, the Bank of Communications US$2 million and the Bank of China ￡600,000. In an exchange of letters the Bank of China also agreed to contribute ￡400,000 of the 7 r ^ Hongkong Bank's nominal ￡1 million. 7 o # ..... . . JThis summary of official British financial aid to China is taken from a letter of the Treasury to A N Young, Aug 15, 1962, in his papers, Box 88: (i) credit agreement of Aug 1939, ￡2.859 million; (ii) currency stabil. ization loan, April 1941, ￡5 million; (iii) credit agreement of June 1941, ￡5 million; (iv) lend lease, April 1942, ￡11 million; (v) credit agreement, May 1944, ￡50 million; (vi) grants to British Fund for relief, ￡181,000. And, of course, the guarantee against loss by the Hongkong and Chartered banks of ￡5 million under provisions of the China (Currency Stabilisation) Act, 1939. ^HKC, minutes, May 1, 1940. ^HKC, minutes, May 2, 1940. ^Copy of a letter from Grayburn, May 14, 1940, in 'Business file', com. piled by J R Jones. Grayburn mentions ￡600,000, but the final figure was ￡1 million; see Governor of Hong Kong to Halifax, received July 8, in FO 436/8, No. 133, p. 101, and Young's report on Fund B in his papers, Boxes EASTERN BANKING The sterling funds were to be kept in the Hongkong Bank's London branch rather than with the Bank of England. 77 The new Fund was to be operated by a sub-committee of the Hongkong Committee, so organized that while it virtually guaranteed the exclusion of the Bank of Communications representative, it did not violate the definition of a 'quorum' under the original Fund A Agreement.7R Suspicions remained that leaks were occur. ring, that the Finance Minister's wife or those close to her had been in the market, and that the Hongkong Bank's confidence in and preference for dealing with the Bank of China should be quietly recognized.79 The sub. committee could also make decisions for the whole Hongkong Committee. The Agreement was signed July 6, 1940, and although receiving Treasury approval, Fund B was never operative and the Hongkong Bank's agreed contri. bution remained uncalled. Events overtook it; a new Sino-Anglo-American cooperative venture was in the negotiation stage by the end of the year, and while it would take over operations of Fund A, the expectation was that any funds in Fund B would be subordinated and that it would be therefore unreasonable to expect the Hongkong Bank to go through with its contri. bution . 80 The Hongkong Committee's sterling resources were in the meantime sup. plemented by a ￡600,000 contribution in July 1940 from the Bank of China to Fund A, rather than, as expected, to Fund B.R1 The exchange rate declined at intermittant periods during which the intervention of the Fund was with. held; in January 1940 the average rate, a high, was just under 4id but by January 1941 it had dropped to 3id and required support. Sales on January 13, 1941, totalled ￡165,000 at 3^d and the Committee urged the operators not to appear to be pegging the rate at this level. 82 Henchman preferred to maintain the rate through January 15, the date for gold bar settlements, and this was authorized.88 Then on January 16 sales of sterling totalled ￡435,000 plus a further ￡150,000 to the Hongkong Bank and ￡100,000 to the Chartered, which Henchman insisted, although Grayburn was skeptical, was 45 and 69. The discrepancy is due to the fact Pei Tsu-yee and Grayburn had agreed that the Bank of China would contribute 40 per cent of the Hongkong Bank's ￡1 million contribution. Grayburn to Pei, July 6, 1940, HSBC Group Archives. 77Rogers to Treasury, June 7, 1949, in FO 371/246711 , f. 200. 78soong and Young, 'Memorandum p. 22, specifically refer to the failure of the Bank of Communications to maintain secrecy and that their representative's effective elimination from the deliberations through the device of the sub-committee was deliberate—this despite the fact that the Bank was a contributor to Fund B. 79HKC, minutes, July 17, 1939. 80a N Young papers, Box 71, memo of Feb 20, 1941. 81Japanese report of 1942 on the Currency Stabilization Fund; an incom. plete translation in HSBC Archives; Soong and Young, 'Memorandum p. 6. 82HKC, minutes, Jan 16, 1940, and cable from Pei to Young [?], January 13, 1941, in A N Young paper, Box 72. A series of cables confirm the accuracy of the Committee minutes. 88hkC, minutes, Jan 13, 1940. for legitimate merchant demands.8^ The rate was allowed to fall a id further. The Stabilization Board: negotiations, personalities and operations, 1941 But already the operations directed by the Hongkong Committee were oversha. dowed by the expectations of a new fund of ￡5 million and US$50 million. Negotiations for a new agreement, which began at least by December 1940, were to confront, but not necessarily resolve, certain of the objections arising both from the concept and from the operations of the 1939 Currency Stabilization Fund. As has been previously explained, the 1939 Agreement was seen as giving British support to a Chinese Government policy already apparently successfully operated by the Hongkong Bank with the assistance of the Chartered Bank on behalf of the Bank of China; furthermore as the British in 1939 were reluctant to be alone in providing China with a cur. rency loan, the eventual form of the assistance offered a further degree of continuity—it was offered by the same two British banks. Thus there was a considerable 'British' element in the arrangement--a British chairman for the Fund's operating committee, two British banks with British operators and a committee operating out of the British Crown Colony of Hong Kong directing operations in the British dominated International Settlement of Shanghai. The point was made that the basic policy had been set by the Chinese government, that currency and exchange was an issue of sovereignty, and recognized as such in the agreements; furthermore currency support had been specifically requested by the Chinese. Nevertheless, it was hard to disguise the Fund, in appearance at least, as other than a British-dominated operation. But it was also a Hongkong Bank operation; they were consulted from the first, they tied up their funds, took a minimal interest rate, operated the Fund, and played a key role in providing a source of stability in an economy which was beyond the power of any single institution, even when supported internationally, to control. The Fund's operational principles were also consistent with traditional currency and exchange policies typical of the exchange banks, of which the Hongkong Bank was the most important in China and, in many ways, the leader. In contrast to the organization and philosophy of the Currency Stabilization Fund, the new agreement was inter-governmental, i.e. between the United Kingdom Treasury and the Chinese Government and the Central Bank of China as opposed to being 'inter-bank', and should be noted for a greater Chinese element, for an attempt to minimize the Shanghai focus, for the usual American British conflict at the personal level, and for official as opposed to Hongkong Bank leadership. As a memorandum from the Chinese Embassy explained the official attitude, Our fiscal authorities have consistently advocated the abandon. ment of the Shanghai Free market, substituting for it a system of exchange control requiring permits in all exchange transactions, 8^HKC, minutes, and in A N Young papers, Box 72. EASTERN BANKING as in other countries 85 The Hongkong Bank might still be called on to show exemplary cooperation with the Board, but its influence on policy, of which it was highly criti. cal, would be limited. Nevertheless, the Board's operations did remain based in Hong Kong and Shanghai was not altogether abandoned. To emphasize this last point, on March 2 and 3, 1941, the Bank of China sold small amounts of foreign exchange through the Hongkong Bank and National City Bank as if from the Fund to suppress the idea then encouraging speculators that Shanghai was being abandoned.86 Henchman and Grayburn still made a significant policy input. The new agreement was negotiated in Washington by T V Soong.8? This might suggest that continuity would be insured; in fact H H Kung considered himself facing a fait accompli with the possibility that his objections to a 'Shanghai policy' and to currency support devoid of full provisions for exchange control which he had from time to time sought to impose—would not be sympathetically handled. Kung' s response was to establish in August 1941 a Foreign Exchange Control Committee [FECC], whose functions seemingly overlapped those of the Stabilization Board, but was totally under the control of the Ministry of Finance. Indeed such a committee was within the framework of the Washington Agreement, and there is evidence that Finance Minister H H Kung was unaware of this until informed by the Stabilization Board in August, but it was a potentially unsound duplication and the conflict implied here was to continue throughout the life of the Agreement and result, eventually, in the the Stabilization Board giving up its duties to the FECC at the end of 1943 prior to dissolution in 1944. R It would be wrong, however, to ascribe failure to the Board, without defining 'success', and certainly the events subsequent to December 8 (or 7th in some areas) changed the entire foreign exchange position: Shanghai as an International Settlement and symbol of China's defiance no longer existed. Nevertheless, the Board might have been redirected to meet new needs had 'Memorandum on the Chinese Currency Equalization [Stabilization] Fund', received at the FO, Jan 1, 1941, in FO 436/9, ff. 37-38. In early March Rogers provided the Treasury with information on the proposed American agreement, which would take all authority from the Ministry of Finance relative to foreign exchange assets and control, much to the apparent approval of the British Treasury. See T.160/1083/F15194.028. For H H Kung ' s countermoves, see below. 86 87 88 A N Young, cable of March 4, 1941, in Box 72. :opy of the Sterling Fund agreement, signed by T V Soong, Kan Lee of the Central Bank of China and F Phillips of the U.K. Treasury, is in FO 436/9, ff. 43-45, and FO 371/27594, ff. 77-79. See also letter of U.S. Secretary of the Treasury Morgenthau, April 25, 1941, agreeing that the Stabilization Board would operate both the Sterling and the U.S. dollar funds. Ibid, ff. 45-46. For the intention to establish an FECC, see Chinese Embassy (Soong?) in Washington to Phillips, April 25, 1941, in FO 233/233, ff. 99-102; see also, Memo of a telephone conversation with Fox dated Aug 30, 1941, U.S. Treasury Archives. The first meeting of the FECC was in September. not a series of personal problems arisen, suggesting perhaps unkindly that currency stabilization might best be preceded by personality stabilization. The Chairman of the new Stabilization Board was Chen Kwang-pu [K P Chen], Chairman of the Foreign Trade Commission and Governor and founder of the Shanghai Commercial and Savings Bank and of the China Travel Service; he was China's most qualified private banker. This solved the problem of Chinese leadership, but since Chen had been earlier suggested by American interests as a superior financier and therefore likely to succeed H H Kung, there was apparently some atmosphere of unease. The selection of Pei Tsu- yee of the Bank of China and Hs i Te-mou of the Central Bank of China was another sound decision, but after this there were problems. Apparently Cyril Rogers when in the United States did some quiet lobbying for the nomination of Arthur N Young as the American delegate, and he would, of course, have been an excellent choice with his many years of experience as financial adviser in China.89 In the event A Manuel Fox, a Columbia University professor of economics, was chosen; a forceful person. ality he moved swiftly into centre-stage, upsetting the British--which presumably did not worry him—in the process. Cyril Rogers, the natural British choice, had been rejected by H H Kung, and those who ventured an opinion suggested it was because of his forthright expression of views to the Chinese Finance Minister, and possi. bly also because of his tendency to side with T V Soong in any relevant dispute; the Generalissimo too was reported unshakably in opposition to Rogers.90 As late as March the British negotiators assumed that Cyril Rogers would be the British member of the Stabilization Board.91 Rogers' support of Young would not have endeared him to Fox and, in any case, Fox reported negatively and offensively on Rogers as a person and as an adviser. At the same time it should be noted that Fox, in an interview with E L Hall-Patch, Far East Adviser to the British Treasury, denied that he considered Rogers persona non grata.92 Thus although the new Agreement was signed on April 1, 1941, the first meeting of the Board, was not held until August 18; the British had held out. There was an unconfirmed report that W C Cassels of the Hongkong Bank would be appointed--he was in fact appointed the alternate, but the British, after more than four months' delay, finally appointed Hall-Patch despite the latter's declaration to Fox, 'China must accept Rogers, and that is that.' Manuel Fox, record of an interview with E L Hall-Patch, dated June 6, 1941, in Treasury Archives, Box 65, File G-6. 9^See, for example, comments by U.S. Ambassador C E Gauss in his letter to Fox, dated Chungking, June 3, 1941, U.S. Treasury Archives, Box 65, File G-6, and Hall-Patch in an interview with Fox, see note above. The atti. tude of President Chiang Kai-shek is reported by Fox in his July 15, 1941, letter to the Secretary of the Treasury cited. 91t.160/1083/F15194/028. 92a m Fox (i) comments in a letter to the Secretary of the Treasury, July 15, and (ii) report of a second interview with Hall-Patch, June 9, 1941, in U.S. Treasury Archives, Box 65, File G-6. 93-phe Board in Chungking announced commencement of its operations to the HKC by letter dated Aug 17, 1941, in FO 233/233, ff. 141-44. EASTERN BANKING In the meantime the Hongkong Committee of the Currency Stabilization Fund had continued operations and continued to do so while the Board struggled with its initial tasks in an effort to become operative, which it did in stages. The plan was for the Board to take over the Fund's resources and operate them. For this reason on April 28, 1941, a supplementary agreement was entered into between the two British banks, the Chartered and the Hongkong, and the British Treasury, extending the latter's guarantee and thus further extending the period during which the two banks' ￡5 million would be frozen. The initial delay in the Board's access to the sterling resources was due to the failure of the Chinese to accept Rogers and thus the Sino-British Agreement (1941) could not come into operation. This problem resolved, the Board then refused to take over the Fund's resources without an audit, which was not practical until the Fund ceased operations. This was done as of November 29, 1941, on the basis of duplicate records stored in Singapore and transferred to Calcutta and books carried out by Rogers as the Japanese approached Hong Kong.9^ Even then, with the fate of the CNC notes stored in Hong Kong and Shanghai unknown, the audit could not be complete or satisfy the requirements of the British Treasury, but the Board agreed that the Fund's responsibilities had ceased and accepted the accounts for this purpose effective March 31, 1942. All concerned continued to be aware that currency stabilization was but part of an over-all economic program and, as with the Stabilization Fund, this was acknowledged. Fox, in keeping with the American position, saw the Board, unlike the Fund's Hongkong Committee, playing a significant role in matters beyond exchange operations. As the Hongkong Bank's politi. cal officer, W C Cassels, noted in the margin of a clipping of an ambitious speech by Fox in Chungking, 'Interesting. The Board has big ideas apparen. tly.' Certainly the Board, chaired by a Chinese and containing government as opposed to bank representatives, had more claim to play a larger role, but it is probable that Kung' s establishment of the FECC was in part a counter to the publicity Fox was obtaining in his speeches on general economic matters. Fox had given high -priority to a Shanghai visit. On his arrival in Hong Kong from Manila, he received a letter from U.S. Ambassador C E Gauss warning him of political problems and of the non-appointment of Rogers. Gauss wrote cautiously, implying that a visit to Shanghai before coming to Chungking to meet members of the government and 'your colleagues on the Stabilization [Board]' was not the wisest move. He refrained from going further than suggesting Fox send a cable of warm greetings to H H Kung. Significantly, Gauss noted that all Chinese members of the new Board had been called to Chungking and again by implication suggested that the Board's operations would no doubt be directed from the Chinese capital.^5 Writing later to the Secretary of the Treasury, Fox noted receipt of 9^A slight note of impatience, perhaps reflecting personal strain, is sensed in Rogers' letter to the Board (K P Chen), Nov 15, 1941, in FO 233/ 233, f. 212; see ibid for the audited report of the Fund, f. 228. For the transfer of responsibility see HKC minutes for May 14, 1942 in ibid, ff. 1314-17; see also HKC, minutes, Sept 12, 1941. ^Gauss to Fox, June 3, 1941, cited. Gauss' letter and also his at least partial rejection of its advice.96 Fox went to Shanghai both before and after the Chungking visit and concluded on the need to operate in Hong Kong where the Board would be in contact with the banking and commercial community and away from political pressures. Gauss had undoubtedly been correct in his assessment, however; a brief article in Chungking's China Press, in noting Pei Tsu-yee's arrival, adds s imp 1 y, He will remain permanently to look after the affairs of the Committee [i.e. Board] since the main headquarters of the organ. ization will be established here. The British and American members of the Committee were expected to arrive here shortly.97 Pei Tsu-yee, a Chinese member of the Stabilization Board, later confirmed that the National government continued pressure for the Board to remove to Chungking.98 Fox went to Shanghai reportedly full of righteous zeal against the foreign merchants and speculators who had wasted the resources of the Currency Stabilization Fund. Fox also went to Shanghai to check on the social activities of his alternate, William Taylor, with whom, according to Pei Tsu-yee, he was not on good terms. Fox's strong speech on the wrong. doings of Shanghai merchants and bankers was delivered at the American Club and was not, predictably, well-received.^ Henchman had but recently pre. vailed upon the Yokohama Specie Bank to approach the Japanese authorities with a view to obtaining the release of some 100 employees of the Bank of China from their Nanking regime kidnappers on the grounds that he couldn't work the clearing without them and thus ... unfortunately ... Japanese cheques might not get cleared.100 He was in no mood to be lectured. The American Consulate informed Fox that Henchman was known as the 'King of Shanghai', and Fox notes that he had to call on Henchman and not, as the accredited representative of the Treasury of the United States of America might expect, the other way around. In reply to Fox's lecture, Henchman showed him the books suggesting that the drain had come from the Chinese banks and that behind them were persons in Chungking. Fox was obviously impressed, and it may have influenced his decision to urge that the Board's operations remain based on Hong Kong, operating as it were by 'remote control'. Indeed, from this point on Fox develops a policy which includes full consideration of the legitimate demands of Shanghai without abandoning his attempts to introduce exchange control. Exactly how far he went in this direction is clearly seen by a reading of his 'Memorandum of the Board's Operations' which he presented to a meeting of the People's Political Council in Chungking in November, 1940.101 96 Fox to Secretary of the Treasury, July 15, 1941, cited. 97 June 4, 1941, in HSBC Archives clipping file. 98 Pei Tsu-yee to K P Chen, August 29, 1951, in K P Chen papers. 99 ibid. 100a n Young, confidential memorandum of March 24, 1941, and letter Hench. man to Pei, in A N Young papers, Box 72. lO^Fox, report of an interview with A S Henchman, July 4, 1941, cited. The EASTERN BANKING Despite the Hong Kong operational base and the apparent influence of those familiar with the problems of Shanghai and the Currency Fund, it was not the Board's intention that the policies of the old Fund would remain unchanged. And yet in operating from Hong Kong any plan to play a large role in Chinese economic reform, even with the Board's acknowledged broader brief, would be impractical except by coordination through Chungking. As if to stress this, it was the FECC which first deliberated on the problem of Hong Kong's black market in fapi; it was this Committee which 'decided' that the Stabilization Board in Hong Kong should negotiate the matter, in? which it did successfully, with the Hong Kong government. The overlap. ping roles of the FECC and the Board did not escape notice; control of the economy would come from Chungking, that is, from the Chinese government. Nevertheless there was still a broad area in which the Board could work in setting up an allocation system against which exchange would be provided at the 'supported' rate. Shanghai was severely rationed, partly to deprive it of the means of currency speculation and partly to prevent imports destined for Japanese-occupied China being financed with Chinese government resources. Grayburn deplored the confusion and claimed, cor. rectly, that Shanghai industry would be deprived of raw materials--the Chinese people were the sufferers. 1^3 As the imports had in fact to be financed, in the absence of an 'open market' a 'black market' developed in which all foreign banks, except the Hongkong Bank, began operating in August 1941. Pressure to withdraw was put on the various banks through their home authorities, but the Hongkong Bank complained that the black market operations continued and that they were losing business. In fact by August 31 the Hongkong Bank was the only foreign bank not operating in the black market and it was expected to change policy the next day. Other banks, reacting to messages of various strengths from head offices over. seas, were in and out (mostly the former) of the market. ^4 Although on August 21 Grayburn cabled Henchman, 'I see no reason why you should not operate black market for commodities not sanctioned by Board', at the urgent request of the Central Bank of China the Hongkong Bank held back despite the pressure of competition. The controversy had not been resolved by the end of October. the The nature of this interview is confirmed in a letter Henchman to Morse, Sept 30, 1941. Henchman's view of the adverse role played by Chinese commercial banks is supported by A N Young in his Memorandum of July 27, 1940, p. 22, and by C Rogers as reported by an American offic" Division of Monetary Research, 'Chinese Currency Situation', p Chungking report with a covering letter from Fox to the Secretary of State, dated Nov 24, 1941, U.S. Treasury Archives, Box 1 09 ‧ J ’ Kuo Min News Agency release dated Chungking, September Archives, F2.8/4. 1 O'} 1UJGrayburn to Arthur Morse, London Office, September 1, Morse, September 30, 1941. 1 r\f ' 1 7 Bowley to Cochran [U.S. officials], September 4, 1941, reporting infor. mation from Fox, U.S. Treasury Archives. 1O^See exchange of cables between Henchman and Grayburn between August 20 and October 28 when file ceases. HSBC Archives, Fll.36. 64, 24, File H-24. 1941, in HSBC 1941; Henchman to Meanwhile others reported on Fox's energy in his office, Room 318, Hongkong Bank Building, Hong Kong—a 'real madhouse' was the way A N Young put it, as all were learning the exchange control business, but with Fox dominating.10^ He resisted pressure to move to Chungking and from Hong Kong established an elemental control system which hardly became effective before December 8. Indeed, the 1939 Currency Fund's accounts, as noted above, were not closed until the end of November 1941; the Board, although operating its fund at the same time the Hongkong Committee was continuing responsibility and some operations with its Fund, had little time to prove itself in the China coast context.10? The Chungking-Hong Kong controversy was ended dramatically with members of the Board flying out from Kai Tak as the Japanese advanced. The Japanese took control of the Hongkong Bank's assets in both Shang. hai and Hong Kong; the fapi notes in the No. 7 accounts had not been de. stroyed, but the Fund's books had been hidden. The Japanese liquidators from the Yokohama Specie Bank conducting an historical survey of stabiliza. tion operations learned to their surprise that the Hongkong Bank had no history department—their successors are presumably still surprised. They had therefore to undertake the research themselves, submitting a question. naire to Henchman. They took the opportunity to inform him that his ex. change operations were of a greater magnitude than the sum of such opera. tions in all other foreign banks in Shanghai. 1*-^ The 'King of Shanghai' was repatriated, but Grayburn, interned and deprived of adequate medical assis. tance, died. And after: the Board and the Fund The declining days of the Stabilization Board have already been described by Evans Thomas, formerly Tientsin manager of the Chartered Bank and subse. quently the British representative on the Board; he has written of the death of Fox, of his replacement by Solomon Adler, of the Board secretary, Ch'i Chao-t'ing, who was styled 'secretary-general', referred to H H Kung as 'uncle' and had direct access to the minister, and of the consequent cliques and cabals as operations ground to a halt.109 previous to Evans-Thomas' appointment, W C Cassels, then a counsellor of Embassy, had been the British member of the Board (after Hall-Patch), but it would appear that neither ex-Hongkong Bank nor ex-Chartered Bank executive had real influence in the last days of the Board. As for the 1939 Stabilization Fund, although it ceased operations as of November 29, 1941, several problems remained. First, until December 6 1^6a n Young in a letter to his wife, Dec 7, 1941, Box 69. lO^The simultaneous operations of Funds A and C were a consequence of the Board refusing to take responsibility for Currency Fund A until the accounts had been audited, as previously explained. 108a s Henchman to J R Jones, Aug 23, 1954, in biographical file, HSBC Archives . l°9Evans Thomas, Vanished China, Appendix B, 'The Break-up of the Stabili. zation Board of China', pp. 288-97. EASTERN BANKING the Bank of China through the agency of the Hongkong and Shanghai Banking Corporation in Hong Kong had continued to sell sterling against CNC to the amount of ￡204,500 or CNC$20.4 million in an effort to prevent a collapse of the market — and the Bank of China wanted compensation from the Fund; secondly, there were problems arising from the capture of Chinese currency notes in Hong Kong and Shanghai to a total of approximately CNC$200 million (= ￡2.5 million) despite considerable and totally wasted efforts over the life of the Fund to devise a satisfactory destruction plan; thirdly, there were the accounts and the formal closing of the Hongkong Committee's activities to be concluded. Three meetings were in fact held in Chungking, with W C Murray representing the Hongkong Bank; the Hongkong Committee adjourned sine die on May 16, 1942, and its accounts submitted to the Board as agreed on March 31. In July 1942 the contingency account was cleared by refunding the Bank of China for the Chinese currency bought in the last days of Hong Kong.^*-* Although the 1939 Stabilization Fund (Fund A) ceased operations, a fully audited account, the condition legally essential for its final deter. mination, could not then be provided, and the British Banks were thus not eligible to claim repayment of their contributions through a technicality; similarly the Chinese banks for the same reason considered that their obli. gation to continue interest payments at 2f percent on ￡5 million to the British banks was unfair under these unforeseen circumstances. The ac. counts as available in 1942 recorded an exchange loss of ￡5 million result. ing from purchases of CNC with sterling and holding CNC as its value fell; the assests of the Fund were, then, mainly in CNC worth ￡4.7 million at 3 l/64d and the sterling held totalled ￡266,490 in the Bank of England with ￡69,000 in interest due from the Chinese banks. The British Treasury how. ever could only act on its guarantee, i.e. pay the interest due to the Hongkong Bank and Chartered Bank, by first declaring the Chinese banks in default, a solution which, for obvious reasons, they found unacceptable. A special vote for ￡5 million was eventually passed by Parliament in March 1945 enabling the Treasury to repay the principal sums as guaranteed, i.e. ￡3 million and ￡2 million to the Hongkong and Chartered Banks respectively; the Chinese government agreed to pay the remaining interest due, and the Chinese banks were not declared in default.m But all was not thus happily ended. After the war, the books were dug up and brought forward, the various parties made claims and counterclaims over several operations, and eventually sums were written off—a rather mundane and tedious ending to the heroic effort of a small group dominated by the two officers of the Hongkong Bank—Grayburn and Henchman—to 110See the minutes of the Chungking meetings in FO 233/233, ff. 1314-30. For the Bank of China/HSBC's last Hong Kong operations in support of Chinese currency see letter from Rogers to HSBC head office (then in London), annex to minutes of second Chungking meeting in ibid, f. 1323. The March account is in FO 233/233, f. 228; the revised account dated Sept 30, 1940, is in the K P Chen papers, part 3. ^ K P Chen papers, part 3, 'Repayment of British Banks' Subscriptions', with copies of key documents. See also, A N Young papers, Box 71, documents dated April 14, 1945, and cable of Dec 9, 1944. stabilize the exchanges, 112 war. 11 z to save the currency of an entire nation at The Role of the Hongkong Bank in China The Board of Directors of the Hongkong Bank had authorized its Shanghai manager to maintain the Bank's prestigious position even if this involved the Bank in a loss. Their decision, supporting the advice of their Chief Manager, was based on long-run considerations and was not taken in isola. tion. Grayburn wrote Henchman that Shanghai, previously the Bank's great. est source of profit, had now been surpassed by Hong Kong; conditions there forced consideration of withdrawing that portion of the Bank's capital assigned to Shanghai and of downplaying its role. Alternatively the Bank could, while recognizing that a strong central government would undoubtedly limit its role, opt to continue to play as major a role as circumstances would permit. The Bank took the latter course. On reflection no other option was open, but the decision nevertheless took courage. The decision was not, however, that surprising. As was stated at the beginning of this essay, the Hongkong Bank regarded itself as an exchange bank, its profits coming from the finance of trade. In these terms all its activities, all its other banking activities, might be interpreted. A prosperous but nationalistic China might limit the Bank's role, but its over-all financial activity would still grow in this more restricted or narrowly defined sphere. For although the Bank had branches in many parts of China, their location reflected the scope of foreign penetration under the Treaties; the Bank did not serve the market towns and villages; and even in the cities the Bank worked through the Chinese system making funds available to the local money market and native banks—this it would prob. ably still be able to do. How then did the Bank's decision to remain an important actor in the Shanghai scene affect its fortunes? In the immediate situation the answer is—very little. Grayburn and Henchman noted to each other from time to time that the Hongkong Bank was still being blamed for alleged wrongdoings of many years ago, despite the help presently being provided to China. Grayburn even complained that, although the Hongkong Bank lent the Currency Fund ￡3 million at a very low rate of interest, he could get no payment on certain outstanding Canton debts--tramways and waterworks. Grayburn must have recognized that the debts, as H H Kung reminded him, were not national and were secured by revenues in the hands of the Japanese, and the complaint reflected general frustration rather than cool reasoning.11J As for the longer run, with extra-territoriality abandoned in 1943, the 1l^Post-war liquidation proceedings are a subject in themselves, are well documented in the Bank's archives, but are not within the terms of reference of the present essay. 11^Grayburn was referring to the Canton municipal waterworks and tramways to both of which the Bank had made loans. The position had been explained to him in a letter from H H Kung dated May 8, 1940 (A N Young papers, Box 90), and Grayburn gave vent to his feelings in an internal letter of May 16, 1940, copied in J R Jones history file. EASTERN BANKING Hongkong Bank sought a banking licence to open a branch in Chungking. This it received—Licence No. 1 in fact — and opened on March 1 , 1943. The Bank also participated in discussions on post-war foreign banking; its former political officer, W C Cassels, was with the British Embassy—and the Chartered's Evans Thomas was Treasury representative. After the war the Bank reopened in many of its old locations under the control of the nation. al government, but it never recommenced operations in, e.g. Harbin. The Bank's fate was tied up, of course, with political developments of a magni. tude not foreseen in the days of the stabilization funds. China's attitude to the Hongkong Bank during the late 1930s was nega. tive in that the government saw the Bank as part of the Treaty Port/extra. territoriality system, positive to the extent the Bank played a cooperative role in the money and banking system. With the outbreak of the Sino-Japa- nese War, of course, China needed the Hongkong Bank; its own banks in Shanghai could not withstand the multiple pressures of Japan, gangsters, and their own officials; their assets were not safe; extra-territoriality was to play a pro-Chinese role in its last years. Thus by taking over certain central banking functions, the Hongkong Bank (and other foreign banks) were able to protect Chinese interests, including the personal safety of her bankers. And yet in accomplishing these tasks for China, the Hongkong Bank could not avoid criticism—even as it gave it—acting as a foreign expert, operating in the domestic economy, critical of the economic administration of the country, aware of the graft and corruption, the lawlessness, but nevertheless 'knowing' China and operating within the traditional treaty-port system. No wonder the new generation of experts, A Manuel Fox, for example, appeared naive and excessively eager--he didn't 'know' the Chinese or 'understand' China; no wonder the new generation of Chinese economists and politicians should focus on the 'foreignness' of the Hong. kong Bank. Foreign exchange administration is now better understood, although not necessarily more ably applied, extraordinary places like Shanghai have been systemized into tax-havens where the increasingly burdensome restrictions prevalent in so-called 'mixed economies' can legitimately be avoided. The Hongkong Bank continues to assist China, but at China's pace. Perhaps one could conclude by saying that the Hongkong Bank did its duty. A rather conventional judgement perhaps, but useful. The Hongkong Bank then was, as were all 'exchange banks', regional. The Bank was founded to serve a China trade reaching out from Hong Kong and from Shanghai; it was (i) the events of 1949 and (ii) the general developments in the banking industry which moved the Hongkong Bank to become inter. national. And given that it was regional, its base was China; it thought out its policy from Hong Kong and Shanghai; thus its role is wholly under. standable and its actions not the less dramatic for being an inevitable fulfillment of a recognized corporate role, a role which the Hongkong and Shanghai Banking Corporation had developed for itself in the years since its founding by Hong Kong merchants of many nations in the year 1865. Bibliographical Note Before commenting on documentary sources, I must make full acknowledgement of published works describing the economy of China in the period 1937 to 1945, and written by those most directly involved. Had A S Henchman but undertaken a similar work, there would have been little further to add, but Henchman admitted he was no author and searched for some former Hongkong Bank staff member with writing ability—the name he came up with, P G Wodehouse, was unfortunately not approached. Indeed, there are aspects of the story that would have been better told by that master, but for the present we stay with an economic historian. A. Published works by participants: A N Young, China and the Helping Hand, 1937-1945 (Cambridge, 1963) and his China's Wartime Finance and Inflation, 1937-1945 (1965) together tell the story. Young's papers (see below) are important for the basic papers they contain and, of course, for copies of Hongkong Bank correspondence, but the essence has already been published. For the Chinese point of view there is Chang Chia-ngau, The Inflationary Spiral, the Experience in China, 1939-1950 (New York and London, 1958) and , one generation removed and more theoretical , S H Chou, The Chi. nese Inflation, 1937-1949 (New York and London, 1963). For a strongly British view, the delightfully personal but very insightful autobiography of W H Evans Thomas, Vanished China. Far Eastern Banking Memories (London, 1952?), with its more technical appendices, is very valuable. B. Other published works: An early study of the modern Chinese banking system is Frank M Tamagna, Banking and Finance in China (New York, 1942). Robert W Barnett's Economic Shanghai: Hostage to Politics, 1937-1941 (New York, 1941) is, of course, more directly relevant. This is hardly an exhaustive list; rather these are the works used as references in the writing of this essay. C. Public Record Office, London: The main sources used were: FO 233/233, which provides the most complete file of the transactions, correspondence and minutes relevant to the Chinese Currency Stabilisation Fund; T.160 files and T.188 (Leith-Ross papers); FO 371 and 436; and CO 129 dealing with Hong Kong. D. The HSBC Group Archives: During the 1950s and early 1960s J R Jones, legal counsel of the Hong. kong Bank, collected materials for the centenary history of the Bank. Little of this material was in fact used in Maurice Collis, Wayfoong: the Hongkong and Shanghai Banking Corporation (London, 1965); a re. vised edition with postscript was privately distributed in 1978. Jones arranged newly-typed copies of key letters and other materials by subject, e.g. silver, business, loans. He also collected biograph. ical material through correspondence with retired staff members. In London a similar project was undertaken by F H King (no relation) and in Shanghai by E C Hutchison. The problem with these copies and EASTERN BANKING extracts--and other similar files not mentioned here--is that they were not adequately proofread and may not be comprehensive. But they have nevertheless been fully utilized for this study. The Group Archives also contain the archives of the Mercantile Bank of India, Ltd. and its predecessors. Specific references to correspondence is found in the footnotes and especially to the correspondence among Grayburn, 0 J Barnes, and A S Henchman, material relating to Huxter's exchange transactions in the Group's Mercantile Bank archives and a Japanese report on the Fund and Board's operations based on war-time research. In most cases correspondence is cited only by name and date. The Group Archives are being reorganized and full references would not be particularly useful. Because of the limited variety of materials, the Controller of Archives can locate the sources from the references given. D. The U.S. Treasury Archives Material relevant to a study of Chinese currency stabilization has not as yet been turned over to the National Archives. Certain classified material has been obtained through Freedom of Information Act proced. ures, although the cooperation of officials concerned was so readily provided that the formality of the Act was probably unnecessary. Especially useful is the 67-page study by the Division of Monetary Research, dated May 29, 1940 (Box 53, file B-4), giving the background to the stabilization problem at a time when America was actively con. sidering involvement. E. Private collections 1. The K P Chen papers are available in the Rare Book and Manuscript Collection of his alma mater, Columbia University, Butler Library. These contain materials for a history together with a draft of the history of the Stabilization Board of which Chen was chairman, with details also of the Currency Stabilization Fund. It is apparent that Chen had some consultation with his long-time friend and later fellow- Board member, Evans Thomas. The materials in this collection support the conclusions the latter reaches in his autobiography cited above. 2. The A N Young papers have been deposited in the Hoover Institution Archives, Hoover Library for War, Revolution and Peace, Stanford, California, and are vital for any study of China's financial history in the 1930s and 1940s. Particularly useful are the longer studies made while Young was financial adviser in China and which formed the basis for his published works, but which still should be consulted for any important research. 3. The T V Soong papers are also being made available to researchers in the Hoover Institution Archives, but of those now available, only one document appeared directly relevant to the present study. DEFENDING THE CHINESE CURRENCY Appendix 1. Extracts from the 1939 Interbank Agreement An Agreement made the Tenth day of March one thousand nine hundred and thirty-nine between the Hongkong and Shanghai Banking Corporation ... the Chartered Bank of India, Australia and China ... the Bank of China . . . and the Bank of Communications . . . whereby it is agreed as fo1 lows : - 1. The Hongkong Bank and the Chartered Bank are hereinafter to. gether referred to as 'the British Banks' ... . 2. The British Banks and the Chinese banks shall establish a Chinese Currency Stabilisation Fund of ￡10,000,000 and for that purpose shall with fourteen days from the coming into force of this Agreement pay to an account at the Bank of England ... the following sums in Sterling:- The Chinese Banks in such proportions as they may agree ￡5,000,000 The Hongkong Bank ￡3,000,000 The Chartered Bank ￡2,000,000 3. The Fund shall be used solely for the purchase and sales of Chinese dollars and other necessary operations on the exchange markets of Hong Kong and Shanghai in order to check undue fluctuations in the Sterling value of the Chinese dollar. 4. (a) All Chinese dollars purchased with Sterling belonging to the Fund shall be held in Chinese legal tender money and in no other form and shall be deposited in Shanghai or Hong Kong for account of the Fund in the Hongkong Bank or Chartered Bank or in both such Banks in a separate account or accounts ... . (b) Such deposits shall be available for satisfaction of all sales of Chinese dollars made on behalf of the Fund and for no other purpose. 5. All Sterling sums received on sales of Chinese dollars made on behalf of the Fund shall be paid to the Sterling Account. 6. (a) All Sterling in the Sterling Acount ... may be invested in Treasury Bills of the United Kingdom or Prime Bank Bills of not more than ninety days maturity. (b) Any interest or discount earned on such Sterling assets shall be paid into a separate account at the Bank of England (Sterling Income Account) and so long as this Agreement remains in force shall be used solely in or towards satisfaction of the interest payable to the Hongkong Bank and the Chartered Bank ... . 8. (a) Until the amounts respectively subscribed to the Fund by the Hongkong Bank and the Chartered Bank ... have been repaid in full either under this Agreement or under Clause 2(a) of the Agreement [with the Treasury] there shall be paid in London to the [British Banks] interest in Sterling at the rate of 2f per cent per annum on so much of the amounts so subscribed as remains unpaid. (c) The interest payable under this clause shall be paid out of the Sterling Income Account . (d) The [Chinese Banks] undertake that if and in so far as the EASTERN BANKING sums standing to the credit of the Sterling Income Account are insuf. ficient to pay interest as aforesaid in full ... they will on demand pay the amount of the deficiency to [British Banks]. 9. (a) The management of the Fund shall be vested in a Committee which shall meet in Hong Kong and shall be composed of five members. (b) The Chinese Banks shall have power jointly to appoint two members and the Hongkong Bank and the Chartered Bank shall each have power to appoint one member of the Committee and the remaining member of the Committee shall be a suitably qualified British subject ap. pointed by the Chinese Government in agreement with His Majesty's Treasury and approved by the British Banks. (d) ... the member appointed by the Chinese Government shall not be removed without the consent of His Majesty's Treasury ... . 11. Three members of the Committee shall be a quorum of whom one shall be the member appointed by the Chinese Government, one shall be a member appointed by one of the British Banks and one shall be a member appointed by the Chinese Banks. All questions arising at any meeting shall be decided by a majority of votes. Save as aforesaid the Committee may determine their own procedure. 14. The duties of the Committee shall be to determine the day- to-day policy best suited to achieve the purpose of the Fund as set out in clause 3 of this Agreement and to give instructions to the Hongkong Bank and the Chartered Bank as to the extent and nature of the operations of the Fund in the Exchange Markets of Hong Kong and Shanghai necessary to achieve that purpose and all matters incidental thereto and no operations for account of the Fund shall be conducted by the Hongkong Bank or the Chartered Bank otherwise than in ac. cordance with the instructions of the Committee as aforesaid. 16. The Hongkong Bank and the Chartered Bank will make no charge for their services in operating on behalf of the Fund but cables bro. kerage paid to and retained by any exchange brokers and other out-of- pocket expenses of a similar nature incurred by them may be charged to the Fund. 17. (a) This Agreement shall come into force on the date on which Treasury Agreement comes into force. (b) . . . for twelve months . . . with concurrence may renew for further consecutive periods of six months. (c) The British Banks with the consent of His Majesty's Treasury or the Chinese Banks with the consent of the Chinese Government may at any time determine this agreement before the due date ... . 18. [Deals with disposal of assets on determination of the Agreement, a subject not covered in this paper.] [The Agreement was signed on behalf of the Hongkong Bank by E C Davies, in the absence on sick leave of 0 J Barnes.] Source: FO 233/233, ff. 2-8; T.160/1083/F1519/028; or T.188/234, ff. 300-6. 2. Extracts from the Treasury Agreement An Agreement made the Tenth day of March one thousand nine hundred and thirty nine between the Commissioners of His Majesty's Treasury ... The Hongkong and Shanghai Banking Corporation ... and the Chartered Bank of India, Australia and China ... whereby it is agreed as follows 1. The Hongkong Bank and the Chartered bank undertake that:- (a) they will use their best endeavours at all times to ensure prudent disinterested management of the Fund established in accordance with the terms of an Agreement ... [see above] but subject to the aforesaid they shall be at liberty to deal in Chinese dollars and effect other currency or exchange operations (including sales to and purchases from the said Fund) on the exchange markets of Hong Kong or Shanghai in the ordi. nary course of their respective businesses as Bankers; .(c) they will take no steps to determine the Bank Agreement or agree to any renewal or amendment thereof except at the request or with the consent of the Treas. ury . 2. In consideration of the Hongkong Bank and the Chartered Bank entering into and faithfully performing the terms of the Bank Agreement and the terms of this Agreement the Treasury (a) if the sums which the Hongkong Bank and the Chartered Bank have respectively received in sterling (otherwise than by way of interest) upon the distribu. tion of the said Fund on the expiration or earlier de. termination of the Bank Agreement (including sterling obtained on sales of Chinese dollars received upon such distribution) are less than the amount of their sub. scriptions to the said Fund provided in accordance with clause 2 of the Bank Agreement, will pay to the Hongkong Bank and the Chartered Bank in sterling an amount equal to the deficiency; (b) if the Bank of China and the Bank of Communica. tions fail to pay to the Hongkong Bank and the Chartered Bank interest as provided in clause 8 (d) of the Bank Agreement, will pay to the said Banks the amount of interest in respect of which default has been made within one month of the date on which the interest was due. 3. If as a result of the distribution of the said Fund the total amount received by the Hongkong Bank and the Chartered Bank in sterling (otherwise than by way of interest) including sterling obtained on sales of Chinese dollars received upon such distribu. tion is in excess of their subscriptions to the said Fund respec. tively they will pay forthwith to the Treasury such excess amount. 4. If as a result of the distribution of the said Fund the Hong- EASTERN BANKING kong Bank and the Chartered Bank hold Chinese legal tender money which the Chinese Government with the approval of His Majesty's Treasury do not purchase for Sterling, the Hongkong Bank and the Chartered Bank shall pay such Chinese legal tender money to His Majesty's Treasury or otherwise deal with it as His Majesty's Treasury may direct. 6. The guarantee given by the Treasury under clause 2 hereof is subject to Parliamentary approval and this Agreement shall come into force on such date as the Treasury may determine by notice in writing given to the said Banks after the necessary Parliamen. tary authority has been obtained. Source: T.160/1083/F15194/028; or T.188/234, ff. 307-10. 3. A summary by A N Young of the provisions contained in an interbank agreement for the establishment of Fund B, July 6, 1940—the Agreement was cancelled when the British signed the Washington Agreement with China for participation in the Stabilization Board, April 24, 1941. A. Approximately two-thirds of the funds to be contributed by the Central Bank, the Bank of China and the Bank of Communications, and one-third by the Hongkong and Shanghai Banking Corporation [but see note 76 above], total contributions being about ￡3,000,000. B. The Bank of China to guarantee interest to the Hongkong Bank, and the Chinese Ministry of Finance and the Bank of China to guaran. tee the Hongkong Bank against loss in operations. C. The Management Committee of Fund "A" to manage Fund "B". D. Fund "B" to sell only after Fund "A" has been reduced to the min. imum which the management of the latter deem it necessary to retain. E. Subsequent purchases of exchange to be equally divided—provided that if Fund "B" has no Chinese currency, purchases shall be made solely by Fund "A". F. Fund "B" not to be liquidated or any assets withdrawn before Fund "A" expires or is otherwise earlier determined. Source: T V Soong and A N Young, 'Memorandum on the Chinese Currency Situation', Annex II, July 27, 1940, in A N Young papers, Box 69, Hoover Institution Archives, Stanford, California. 16. A HISTORY OF THE JAPANESE SILVER YEN AND THE HONGKONG AND SHANGHAI BANKING CORPORATION, 1871-1913 by Takeshi Hamashita The one yen silver coin was established in 1871 as a symbol of the modern Japanese currency system and ceased to be the main Japanese currency in Manchuria just before World War I as a result of the final establishment of the gold standard system. There are three periods in the history of the one yen silver coin and each period had its own characteristics corresponding to the changes in the international financial market. Silver yen coins began to be issued from the 1870s. This period constitutes the first period. The issue of silver yen was an attempt by the new Japanese central government to establish an independent international currency. The second period is represented by the withdrawal of silver yen coins at the end of the nineteenth century. The withdrawal of silver yen was a reflection of the influence that the fluctuation of the gold-silver ratio in the world market exerted on Japan. This was an indispensable precondition for Japanese currency reform. The gold standard system could never have been successfully instituted in 1897 without the withdrawal of the silver yen. The third period is marked by requests that the Hongkong and Shanghai Banking Corporation (HSBC) made to the Japanese Foreign Ministry asking for permission to issue banknotes in Japanese colonial territories. This was the period after the Russo- Japanese War, when Manchuria and other Japanese colonies faced a whole array of social and political problems. The HSBC found it necessary to engage in diplomatic negotiation to advance its interests in Japanese territories. The HSBC played a different role in each period of modern Japanese financial history betwen 1870 and 1913. Next, let me briefly introduce the major issues in Japanese financial policy that concerned the HSBC and sil. ver yen in the three periods listed above. First period: In this period the HSBC played the role of an organizer of the multilateral settlement system and of the bullion market in Asia. This can be seen in their connection with the following two issues:- (1) Acceptance and support of silver yen. (2) The Japanese government policy of lending money at low interest rates and giving a monopoly over Japanese exports to the Yokohama Specie Bank established in 1880 severely affected foreign banks and merchants. In by-passing foreign banks and merchants, the Japanese government created a one-sided balance of exchange; foreign banks were forced to engage in an unbalanced import busi. ness. Foreign banks and merchants found it difficult to buy silk and tea in Japan, so they began to invest their spare yen funds in gold yen and send it to Shanghai. Second period: The central issue in this period is the connection the HSBC had with the withdrawal of silver yen when the gold standard system was adopted in 1897. In this period the HSBC helped as a promoter of currency circulation and a reformer of monetary systems in East Asia. EASTERN BANKING Third period: As the Japanese advanced into Asia, the HSBC found that diplomatic negotiation was necessary to engage in business in Manchuria and China, such as for the establishment of a branch at Dairen, and for the international consortia on railway construction. This situation forced the HSBC to both act as a negotiator and to use negotiation to attain its aims. This is clearly seen in the following two issues:- (1) Loans to Japanese central and local governments, and to private companies, and the question of the acceptance of government bonds. Here the HSBC acted as an intermediary for the Japanese government; the HSBC raised money on the London money market to make loans to Japan. (2) The HSBC negotiated with the Japanese Foreign Ministry to do busi. ness in Japanese spheres of influence and for the leadership in international consortia. It is in this period that special banks such as the Bank of Taiwan (1899) and the Bank of Chosen (1913) were established in order to manage colonial financial affairs. In this essay, I will briefly explain the relationship between the Japanese silver yen and the HSBC from the 1870s to the 1910s in the context of this periodization scheme. Let us begin by briefly looking at the his. tory of foreign silver in Asia during the nineteenth century. THE FIRST PERIOD: THE INTRODUCTION OF JAPANESE SILVER YEN The silver dollar in Asia before the 1870s Even with the large Asian trade with the West in the nineteenth century, silver, and not Western industrial goods, could be regarded as the most familiar and influential import from the West. Spanish silver dollars found their way to Asia during the sixteenth century and were widely circulated until the middle of the nineteenth cen. tury when Mexican dollars became popular. Spanish and Mexican dollars were widely used in commercial transactions, but were generally less favoured by governments, though some places such as Singapore did make them legal tender in 1867. However, in the late nineteenth century, the question of whether Asian countries could build a modern financial system depended on them maintaining an autonomous currency system. Therefore, to Asian coun. tries financial modernization depended upon the extent to which their government could abolish the Spanish and Mexican dollars which were currently in circulation and adopt a new currency system which they con. trolled themselves. During the 1870s, the value of silver began to depreciate. This depreciation of silver heralded the opening of the "Trade Dollar Era". In this era Western countries began to mint and export trade dollars for cir. culation in silver-using countries; the Hong Kong dollar was minted from 1866 to 1868, the US trade dollar from 1873 to 1885, the silver piastre from 1878 to 1925 and the British dollar from 1895 to 1935. Western countries minted trade dollars for two reasons. First, they wanted to use JAPANESE SILVER YEN their coins as a countermeasure against the falling value of silver. West. ern bankers and merchants noticed that value of silver in silver-using countries was not depreciating at the same rate as it was on the inter. national silver market. It was profitable for them to export silver, which was depreciating in value in their own countries, to Asia, particularly to China where it was still in demand. In short, trade dollars were minted in order to facilitate the movement of silver to Asia. Second, trade dollars were designed to replace Mexican dollars in Asia. The increased use of trade dollars served to establish a currency through which each European country could extend its influence over the economies of Asian countries.^ It was in the context of the need to achieve an autonomous currency system that the Japanese government decided to adopt the silver yen as legal tender. By using silver yen, the Japanese government intended to stop the large outflow of gold that began after Japanese ports were opened to foreign traders. The Minting of the First Silver Yen Coins After the opening of the treaty ports to foreign trade in 1858, the Mexican dollar (a coin of 416 grains, 0.900 silver) came into circulation in Japan as an acceptable currency. In February 1868 the Japanese government pro. claimed the circulation of the Mexican dollars to be lawful and fixed the rate of exchange at three Japanese silver bu 53- coins to one Mexican dollar.^ in April 1868, in order to mint new coins, the Japanese govern. ment bought an English coining mill from Hong Kong through the Oriental Bank in Yokohama. This coining mill was transported to Osaka. In December 1869, however, a fire destroyed the mint machinery, so the authorities decided to build another mint. The machinery was imported from England. Upon the recommendation of the Oriental Bank the Japanese government had appointed the former master of the Hong Kong mint, Major William Kinder, as director of the Japanese mint, and concluded a five year contract with him on 3 March 1870. It was the Oriental Bank, however, that acted as the agent of the Japanese government in the employment of Kinder and nine other European mint engineers.3 In December 1870 the government announced that a one yen silver coin weighing 416 grains equal to that of the Mexican dollar would be the base of the new currency. The formal Japanese name of this coin was "trade one yen silver dollar" MSbiEIBi&W and the term "yen" (j was taken from the Chinese name "yuan" in the Hong Kong one dollar (yuan) minted in 1868. Together with ten auxiliary silver, gold and copper coins, they were to be round, not square as formerly, and a decimal system was adopted. This was the beginning of the issuing of silver yen coins. This was also the year ^A P Andrew, 'The End of the Mexican Dollar', Quarterly Journal of Eco. nomics , 18 (May 1904), 321-56. 2Hiroshi Shinjo, History of the Yen, Kobe, Kobe Univ Press, 1962, pp. 15-38. ^Grace Fox, Britain and Japan 1858-1883, Oxford, Oxford Univ Press, 1969, pp. 402-4. EASTERN BANKING that Thomas Jackson of the HSBC arrived at his post as manager of the Yokohama branch and that the Kobe branch started its bank business.^ Foreign Bank Policy Towards Japan In this section, I would like to examine how foreign banks responded to the issue of silver yen. Along with the Oriental Bank which was an agent for the Japanese government, the HSBC and the Chartered Bank of India, Austra. lia and China also played a big role in shipping silver yen to other parts of Asia during this period. Yen silver was sent out of Japan as payment for imported goods and as a means of repaying foreign loans. Kinder paid particular attention to the outflow of silver yen from Japan: The Oriental Bank Corporation continue in the position of for. eign bankers and agents of the Government, and now the currency of Japan is becoming more fully recognized abroad.^ Kinder continues: The Government of the Straits Settlements recognized the new coin as a legal tender, and it was also accepted at other places on the coast of China. But the Japanese silver yen, as then proposed, was the precise equivalent of the Hongkong dollar, the application to His Excellency the Governor of Hongkong, for the Japanese yen to be proclaimed in that colony as a legal tender, was, at the instance of the Chamber of Commerce, refused. Strange to say, however, the Canton Government immediately proclaimed the coins for acceptance.^ After pointing out the prevalence of silver yen, Kinder noticed that serious objections were raised as to its weight of 416 grains, whilst the trade dollar of America weighed 420 grains. This source shows that in some cases the circulation of silver in Asian countries was determined by the policies of each colonial government and was not only determined by the level of fineness.^ Yen silver in Japan was regulated with the domestic circulation of gold yen at the ratio of 16.01 to 1. This ratio was fixed a little lower ^Here follows a list of the dates when branches and agencies of the HSBC were established in Japan: Yokohama: 1865 Agency, 1866 Branch; Kobe: 1870 Branch; Nagasaki: 1870 Agency, 1896 Branch (-1930); Osaka: 1872 Branch Office; Shimonoseki: 1906 Branch Office; Hakodate: 1919 Branch Office. -*T W Kinder, 'Report of the Director of the Imperial Mint at Osaka, Japan, for the Year ending 31st July 1874', Minutes of Evidence Taken before the Select Committee on Depreciation of Silver, London, 1877, p. 158. "Ibid, p. 159. ^R Chalmers, A History of Currency in the British Colonies, London, 1893, pp. 336-88. JAPANESE SILVER YEN than the international market ratio at the inauguration of the New Coinage Act of 1871. Although this act stipulated gold coin as legal tender having the same parity with the U.S. dollar, silver yen was also to be used as legal tender in foreign transactions. So the Japanese monetary system at that time can be considered as a bimetallic system. After 1875, however, silver prices began to decline in Europe, and as a consequence 51.3% of the gold coins minted were exported during the six years from 1871 to 1877 (see Table A). In 1875 the government decided to change the legal gold-silver parity from 1:16.01 to 1:16.17 in order to prevent the outflow of gold coins (see Table B). According to Table A, this change was not so effec. tive, and gold continued to flow out of Japan in large quantities. The British consuls in Yokohama and Hyogo reported that since 19 Sep. tember 1879 the foreign banks had accepted silver yen on a par with the Mexican dollar and it had virtually expelled the latter from circulation in Japan.R This was good news to the Japanese government, which was suffering from a rapid outflow of gold yen, and they even decorated A M Townsend, the manager of the Yokohoma branch of the HSBC for his acceptance of silver yen. There were two reasons why foreign banks accepted silver yen on a par with Mexican dollars. First, once foreign banks knew silver yen was circu. lating well inside Japan, they found an effective method of receiving sil. ver yen of fixed value in order to prevent loss caused by the depreciation of silver. In a situation where there was an excess of imports, foreign banks tried to find stable means of settling trade. So it was profitable to hold stable silver yen in place of depreciating Mexican dollars. The second reason was that silver yen began to be accepted as a reliable cur. rency in Asian markets such as Hong Kong and Singapore, in which foreign merchants' trade interests with Japan were increasing. Despite the support silver yen received from commercial bodies in Hong Kong, their policies were not always accepted by the Home Government. In 1880 the governor of Hong Kong, Sir John Pope Hennessy, proposed to make Japanese silver yen legal tender, but in spite of being firmly backed by Thomas Jackson, the Hong Kong Chamber of Commerce and the Chinese bankers, his plan was rejected by the British government.^ At the same time the Japanese government itself was endeavouring to organize Japanese financial institutions abroad. Faced with an increas. ingly unfavourable balance of trade, the Japanese government first engaged in transactions connected with foreign bills of exchange in October of 1880. It entrusted the sum of three million yen to the Yokohama Specie Bank, to enable that bank to discount foreign bills of exchange on the security of exported goods, at the request of mercantile companies engaged in the direct export trade. The main object of engaging in discounting foreign bills of exchange was both to encourage the direct export trade and to secure specie. The government wanted to use the specie thus obtained to pay off the principal and interest of the foreign debt. ^British Parliamentary Papers, Commercial Reports by Her Majesty's Consuls in Japan, 1879, pp. 8, 31 (Hyogo and Kanagawa). ^Nihon Gaiko Monjo (Japanese Foreign Office Archives) Vol 11 (1878), Tokyo, 1950, pp. 315-16, 320-21. See also Fox, pp. 408-11. Amount of Coins Table A Issued & Exported from Japan Gold Table B -Silver Parity Gold Coin Silver Coin Japan London Issue Out flow Issue Out flow Legal Market (1000 yen) (1000 yen) 1868 15.58 16.38 15.59 1869 15.58 15.10 15.60 1870 15.58 15.10 15.57 1871 2,667 2,740 16.01 15.55 15.57 1872 26,304 143 3,685 22 16.01 15.55 15.63 1873 45,671 2,120 3,685 22 16.01 15.55 15.93 18 74 49,428 9,716 4,627 55 16.01 15.48 16. 16 1875 50,338 18,021 4,864 386 16.17 15.85 16.64 1876 51,109 21,269 6,379 239 16.33 16.82 17.75 1877 51,799 26,058 7,531 1,662 16.33 16.43 17.20 1878 52,305 29,078 8,679 2,256 16.17 17.03 17.92 1879 52,730 32,907 10,593 3,209 16.17 17.87 18.39 1880 53,128 38,199 16,020 6,577 16. 17 17.22 18.05 1881 53,874 40,177 18,948 9,580 16. 17 17.58 18.25 1882 54,439 41,390 24,037 10,194 16.17 17.40 18.20 1883 54,983 42,328 27,673 10,477 16.17 17.82 18.64 1884 55,552 43,554 31,272 11,134 16. 17 17.79 18.61 1885 56,555 44,000 35,569 13,155 16. 17 18.66 19.41 1886 57,454 44,166 44,653 20,566 16. 17 20.15 20.78 1887 58,351 44,240 52,929 30,914 16. 17 20.96 21.10 1888 59,180 44,491 62,406 36,226 16. 17 21.49 22.00 1889 60,949 44,593 71,702 40,028 16. 17 21.22 22.10 1890 62,140 45,869 98,995 71,633 16.17 19.47 19.75 1891 63,220 46,012 86,513 51,130 16. 17 20.42 20.92 1892 64,535 52,225 97,700 50,778 16. 17 22.78 23.72 1893 65,838 53,601 108,104 55,980 16. 17 25.97 26.49 1894 67,219 55,262 128,683 82,391 16. 17 30.82 32.56 1895 68,807 56,552 150,790 103,598 16. 17 31.60 1896 69,945 57,134 162,288 111,310 16. 17 30.59 1897 70,578 57,151 165,134 110,816 32.34 34.20 (Sept) Source: Count Matsukata Masayoshi, Report on the Adoption of the Gold Standard inJapan, Tokyo, 1899, pp. 13-16. Okurasho (the Japanese Ministry of Finance) ed, Meiji Zenki Zaisei Keizai Shiryo Shusei (A compilation of sources on financial economic history of the former half of the Meiii Period), 12: 46-47. JAPANESE SILVER YEN Unfortunately, in spite of efforts by the Japanese government, the profit it got from the direct trade policy was offset by the depreciation of silver. Under these circumstances, even a fixed and stable ratio be. tween silver and gold had become a factor that accelerated the outflow of gold. As a result, the Japanese government was all the more eager to find a way of exporting silver yen abroad in order to prevent the outflow of gold. Next, let us see how silver yen circulated in Asia. The Circulation of Yen Silver in East and Southeast Asia Prior to proposing the Coinage Act in February 1897, the Finance Minister despatched telegrams to Japanese consuls stationed at various places, instructing them to report any information available on one yen silver coin in their respective regions. According to rough estimates made from their reports, the amount of yen silver coin in circulation in their ports amounted to : Korea Fusan Chemulpo Won-san China Chefoo Tientsin Shanghai Hong Kong Singapore 20,000 yen 70,000 yen 43,500 yen 700 yen, 1,200 yen of 5,000 yen 0 500,000 yen 7,000,000-8,000,000 yen smaller coins Judging from these estimates, Hong Kong and Singapore were the two largest centers of circulation, the latter being outstandingly enormous.^ The Hongkong and Shanghai Banking Corporation and the Chartered Bank have constantly been buying up silver currency; the former bank especially, being provided with an abundant silver capital, has right along been storing away the Japanese yen in its specie reserve, on the security of which its convertible notes are issued. But lately this bank has been using with renewed zeal every means in its power to secure our silver yen; and it is probable that the bank has had already some quantities shipped to Japan direct from Singapore.^ I placed the estimate of the amount held by the [HSBC] Corpora. tion at 300,000 yen in the new coins and 250,000 yen in current money; of the amount held by the Chartered Bank at 150,000 to 200,000 yen in the new coins; while of the amount held by the community here altogether at 150,000 yen or less.^ l^Count Matsukata Masayoshi, Report on the Adoption of the Gold Standard in Japan, Tokyo, Govt Press, 1899, pp. 250-53. ^Japanese consular report, Hong Kong, August 1897, in ibid, p. 270. ^Another Hong Kong consular report of 1897, in ibid, p. 271. EASTERN BANKING From these reports, it is clear that Japanese silver yen in Hong Kong was fundamentally in the hands of banks, and was being used as a reserve fund to finance seasonal commercial transactions. The same report continues: It should be noted that every year, about the end of the autumn, the Mexican dollar rises in price and the demand for its impor. tation increases. This is owing chiefly to the fact that in the province of Canton there is at this time of the year a strong call for capital for the purchase of raw silk. . . . This year about 2 dollars are charged per 1,000 dollars even where the coins are more or less chopped. Such being the state of things, the Chinese bankers are vying with each other in drawing out specie from the Hongkong and Shanghai Banking Corporation and the Chartered Bank and forwarding it to Canton with great activity. In consequence the amount of the new Mexican dollar, drawn out of the Conversion Reserve of the Hongkong and Shanghai Banking Corporation during the last five or six weeks is thought to be over two million dollars.^ This example indicates that the reserve fund of the HSBC varies according to the fluctuation of trade in Canton, and that as a consequence, it was both possible and necessary to accumulate silver for obtaining a reserve fund from outside Japan. Under these circumstances it was possible for foreign banks in Japan to export Japanese yen silver to Hong Kong for use in the Chinese trade. Let us look at how yen silver was faring in Singapore. At the time of our [Japanese] war with China, it was arranged to settle the remittances Japan had to make to Europe in payment for arms, ammunitions and vessels, against European drafts for. warded to Singapore in payment of commodities, so that great facilities were opened for our silver yen to enter this place. Besides, there was still another cause to encourage this ten. dency, i.e. the fact* that all the banks here took the silver yen in preference to others, whenever there was an importation of silver coins. Furthermore, about this time, in the Far-Eastern ports our silver yen did not change at par for the Mexican dollars but there was a disparity of a few sen [100 sen = 1 yen] in favour of the latter, so that it was profitable to gather in Mexican dollars in Singapore and change them for silver yen in those other ports, a process which naturally drove the Mexican out of this port, inviting the silver yen in its place.^ It is evident that an enormous amount of one yen coins were accumulated in Singapore as a result of the settlement of Japanese government 13Ibid, p. 274. 1 / 4A Report of the Japanese consul from Singapore, May 1897 in ibid, p. 282. JAPANESE SILVER YEN expenditure, the preference for silver yen by native and foreign banks and the policy of exchanging silver yen for Mexican dollars. These reports indicate that Hong Kong was an entrepot of southern China and that Singapore was an intermediary market with Europe. Both were great centres for the circulation of Japanese silver yen. There is evi. dence that yen silver circulated very widely in Southeast Asia. Another Japanese consular report from Singapore dated 2 April 1897 confirms the extent of circulation: According to the researches conducted here, it appears that the trade dollars, after being exported, ultimately reached Calcutta and that there they were recoined into silver rupee. Eighty or ninety per cent of the silver yen exported to the Straits Settlements eventually reach Dali, in Sumatra, and there they get into the possession of the natives and of a large number of the Chinese employed on the tobacco plantations. The silver yen is not destroyed while in the Straits Settlements; but is con. tinually being taken back to China by the returning Chinese labourers and it probably all gets melted down or defaced.^ Table C Exports and Imports of Japan (1,000 yen) Years Merchandise Bullion and Specie Exports Imports Exports Imports 1868-1872 ( ave rage) 15,800 22,611 1873-1877 ft 22,124 26,585 10,780 2,978 1878-1882 If 30,267 32,618 9,250 3,396 1883-1887 If 42,114 32,769 6,616 7,331 1888-1893 II 77,118 72,466 8,379 12,011 1894-1898 II 139,200 223,040 35,897 39,116 1899-1903 II 243,880 270,406 20,593 20,522 1904-1908 II 377,041 441,879 34,493 27,693 1909-1913 II 495,683 544,133 22,315 23,199 1914-1916 II 808,895 628,204 34,098 44,811 1917-1919 If 1,887,992 1,625,904 53,243 241,573 1920-1923 II 1,571,608 1,956,925 2,816 136,304 S Uyehara, The Industry and Trade of Japan, London, King & Son, 1926, p. 50. Junnosuke Inouye, Problems of the Japanese Exchange 1914-1926, Glasgow, Robert Maclehose & Co, 1931, pp. 222-23. 15Ibid, pp. 279-80. EASTERN BANKING Furthermore, the following 1897 report from Singapore states: Japanese yen from its superior design, as well as on account of there being but few counterfeits of that coin, has continued to grow in credit and popularity and to enlarge the area of its circulation so that it occupies not only the foremost place among the currencies in circulation in the Straits Settlements but is making a triumphant entry into the neighbouring countries such as Malay archipelago, Siam. Annan, Burmah, Borneo, Sumatra, etc, being welcomed everywhere. ° These sources demonstrate that silver yen was in circulation over a very large part of Asia. Basically the silver yen was exported from Japan as a means of rectifying the unbalanced trade Japan had with foreign countries (see Table C). After silver yen began to circulate in Asian countries, it passed into the hands of native merchants, manufacturers, labourers and local mints all over East and Southeast Asia and was used for settling trade, investment, home remittance and currency speculation. SECOND PERIOD: WITHDRAWAL OF SILVER YEN AND THE JAPANESE ADOPTION OF THE GOLD STANDARD The Coinage Act of 1897 When the Japanese government adopted the gold standard system of 1897, Japanese silver yen ceased to be legal tender. Its history, however, was connected not only to the monetary system of Japan, but also to monetary and bullion circulation in East and Southeast Asia. So the Japanese government had to take some measures to deal with yen silver coins outside Japan. One measure was the promulgation of the new Coinage Act on 26 March 1897. Another was the withdrawal of silver yen from inland and abroad, as a consequence of the new act. According to the act, the unit of price was 750 milligrams of fine gold which was called yen. It should be noted that the new one yen gold coin represented exactly half of the weight and fine. ness of the one gold yen defined by the old Coinage Act of 1871. This meant that the legal gold-silver ratio changed from 1:16 to 1:32 in order to adapt itself to the ratio of the international market. The name of silver coins in Japan was also changed. Silver coins were now known as sen, though the silver yen continued to be used in Japanese colonies and overseas territories. The Coinage Act provided that all the one yen silver coins then in circulation should be, at the convenience of the government, exchanged at the rate of one yen gold for one yen silver from the first day of October 1897. But early in July of the same year, some of the foreign banks at the treaty ports, being doubtful as to the actual working of the act, sent out 16Japanese consular report, 2 May 1897, in ibid, p. 282. JAPANESE SILVER YEN circulars to their customers notifying them that, after the first of Octo. ber, they could choose either gold or silver coins in making specie pay. ments.^ Under these circumstances the government feared that such meas. ures by foreign banks would eventually lead to a change in the market ratio between gold and silver. To prevent a change in the market ratio, the Finance Minister, Count Matsukata Masayoshi , entrusted domestic exchange business to the Bank of Japan and foreign exchange to the Yokohama Specie Bank. The Japanese government then instructed the Bank of Japan to ask the Yokohama Specie Bank and the foreign banks in the treaty ports to exchange their one yen silver coins for gold yen coins. The Japanese gov. ernment offered a better exchange rate than that available on the inter. national money market and took measures to ensure that the Yokohama Specie Bank and foreign banks could retain a good quantity of debased (chopped) silver for use outside Japan. Foreign banks in Japan also dealt also dealt with a large portion of foreign exchange and the success of the plan to Table D A Comparative Chart of Foreign Trade Bills Handled by Exchange Banks Bills for Mitsui Bussan Bills for Japanese Foreign in 1914 (10,000 yen) Trade in 1911 (10,000 yen) Export Bill Import Bill Yokohama Specie Bank 12,472 20,230 23,029 Chartered Bank 689 4,992 6,855 The HSBC 3,247 13,708 14,608 Deutsch Asiatische Bank 309 1,098 1,440 International Bank 499 2,404 4,175 Bank of Taiwan 919 Bank of Holland 12 Bank of Chosen 154 Russo-Asiatic Bank 41 1,200 1,475 Credit House 238 Mitsui Bank 1,171 Others 738 (Mitsui Bussan) 1,463 Total 21,952 44,743 51,381 Source: Mitsui Bussan Co , The Ninth and the Tenth Business Reports for 1914, pp. 59-60, 69 (Bussan 615). All the business reports quoted in this article are held by the Mitsui Library, Tokyo. Okurasho (Japanese Ministry of Finance) ed, Meiji Taisho Zaisei Shi (History of finance of Meiji-Taisho Period), D (Tokyo 1960), 480. 17Ibid, p. 243. EASTERN BANKING withdraw one yen silver coins depended upon the attitude of foreign banks (see Table D above). However the fund problem caused foreign banks to doubt whether the Coinage Act was feasible. This was solved by bringing to Japan a portion of the Chinese indemnity in the form of specie, both in gold and silver. Another problem was the institutional guarantee to with. draw silver yen coins promptly lest a change in the ratio between gold and silver and consequent speculation should be produced. This was partly solved by the greater role played by the Yokohama Specie Bank in silver transactions, but a sizable part of the silver transactions were still handled by foreign banks and merchants of respective regions. The Process of Withdrawal: Hoarding After the promulgation of the Coinage Act, hoarding of silver yen began. In the consular report from Singapore dated 24 April 1897, the Japanese consul pointed out the hoarding of silver yen and its consequent disappear. ance from circulation, and noted that the tendency was accelerated by the fall in the value of silver. He reported: Now that the Japanese government has decided to adopt the gold standard, considerable restlessness has come to pervade the mon. ey market here. Especially the more shrewd among the bankers are even declaring that the greatest money making scheme in the world just now would be to corner the Japanese silver yen. . . . In the meantime the exchange rate has been steadily declining and the sight draft on London was quoted at the end of this week at 24 ~Vl6 shillings. Indeed according to the present rate, a profit of about 5 sen [about 5%] can be made by getting one yen silver changed for one yen gold, and the depreciation of silver is yet going on without an abatement. . . . Again in observing the specie handled by the Hongkong and Shanghai Banking Corpora. tion, the Chartered Bank, etc, at this port, we see that, while the specie they handled formerly consisted almost entirely of the Japanese silver yen, the Mexican and British dollars forming but a very small part, it has recently come to be the case that the British dollar forms the largest portion of the currency thus handled and that the Japanese yen forms but a small part.^° It was principally the bankers and the Chinese and Indian money bro. kers who were trying to buy up the silver yen in Singapore. Besides these were also a number of commercial firms as well as individual businessmen intent on accumulating silver yen.^ As a consequence, it was generally recognized that it would become increasingly difficult to reclaim silver yen in a situation where the value of silver was depreciating. 18Ibid, p. 280. 19lbid, p. 289. JAPANESE SILVER YEN Release of Silver This situation did not last long. On entering July of 1897 silver yen began to appear in circulation again. The Japanese consul in Singapore interviewed Frizell, manager of the Chartered Bank, and quoted Frizell's reason for the reappearance of silver yen. Frizell gave two reasons: one was that the depreciation of silver currency was unexpectedly slow, nor did the exchange rate show expected fluctuations; the other was the scarcity of the supply of British and Mexican dollars.2^ This fluctuation of silver had two effects on silver yen. First there was a demand for specie to be shipped out of Japan to be used for buying local products and for other purposes. Second the bankers with perfect unanimity, all at once, began to release their silver yen on account of a fear that the profit expect from hoarding silver yen would not be real. ized. This trend provided a favourable environment for the Japanese government to buy back silver yen. The Japanese government later debased this silver yen and exported it to Japanese colonies and territories. On 3 September 1897, however, Thomas Jackson, chief manager of the HSBC, provided, under these circumstances, a different estimate of the quantity of silver yen withdrawn. He told the Japanese consul who ques. tioned him about the total amount of the silver yen which would probably be sent back to Japan that, 1) the amount would be unexpectedly small, ranging between five and six million yen at the least and not more than ten million at the most; 2) the amounts possessed by his bank did not exceed much over one million and seventy thousand yen at head office and over nine hundred thousand yen at the Singapore and Penang branches; 3) a large portion of the coins which found their way into India, the Straits Settlements and the neighbouring regions have been either melted down to be manufactured into ornaments, or chopped and demonetized by the Chinese. He concluded that less than one tenth of the total amount of silver yen exported from Japan would find its way back to Japan. The Japanese consul added the following comment: "Mr Jackson is a man deeply experienced in the financial affairs of the Orient, with a reputation for far-sightedness, so that his views are, I believe, worthy of careful consideration."^ Then what was the real amount of silver yen withdrawn? The official period that Japanese government fixed for the exchange of silver yen with gold yen was from 1 October 1897 to 31 July 1898. According to the calcu. lation made on 31 July 1898, the following statistics were given: (millions of yen) Total issue of one yen silver coin 165.1 of which: exported = 70% 116.2 abroad, not yet returned for exchange (99.5) circulating in Formosa (5.7) disbursed in China during Sino- Japanese War (11.0) [continued on next page] 20Ibid, p. 293. 21Ibid, p. 277. EASTERN BANKING Total amount of one yen silver coin withdrawn from circulation = 28% of total issue 46.1 of which: returned from abroad (11.0) Total amount of one yen silver coin: (i) exchanged for gold coins 45.6 (ii) recoined into subsidiary coins 0.533 The following three points may be noted from these statistics. One, the percentage of silver yen exported and still remaining abroad is very high, almost seventy per cent of the total issue. Two, the amount of one yen silver coin withdrawn from circulation and either exchanged for gold yen or recoined into subsidiary coins is about twenty-eight per cent of total issue. Three, apart from trade settlement, silver yen was used for war expenditure and colonial finance. The official figures are in fact close to Jackson's estimate of less than ten percent, i.e. only nine percent of the silver yen sent abroad was returned to Japan. In fact, however, the official purpose of the withdrawal could be achieved regardless of the quantatative amount actually withdrawn. As the Japanese consul in Singapore said, since Japanese yen could be exchanged for gold yen, it had all the characteristics of a gold currency. From the viewpoint of financial policy of the Japanese government, official withdrawal was an indispensable measure for the adoption of the gold standard. 23 The demonetization of silver yen sent abroad as legal tender was necessary in order to devaluate gold yen as far as fifty per cent lest silver yen abroad should flow back into Japan for gold speculation after devaluation. The Japanese government was very pleased with the adoption of the gold standard for two reasons. First, it had a good effect on the foreign trade of the country. A report of the High Commission on Agriculture, Commerce and Industry in October 1898 expresses this quite clearly: The volume of our trade with the gold standard countries amounts to two thirds of the entire volume of our foreign trade, while the amount of our trade with the silver standard countries com. prises but about one third. And since it is clear that we have benefited greatly through our reform in our trade with the gold standard countries, we must conclude that the effect of our recent reform on the foreign trade of the country has been on the whole wholesome and beneficial.24 It is obvious that the gold standard was beneficial to foreign trade, particularly to gold standard countries, in spite of increased competition with silver-using countries (see Table E). Second, it improved the finan. cial condition of Japan. It was expected that losses created by depreci. ation in the price of silver on increasing national expenditures for goods bought abroad, such as warships, etc, could be avoided now that Japan was a 22Ibid, pp. 247, 251. 23Ibid, p. 287. 24Ibid, p. 371. JAPANESE SILVER YEN gold standard country. Japanese government gold bonds also began to sell better on the European market, and their names began to appear regularly in the price list of the London Stock Exchange.25 Table E Japan's Trade With Major Silver-using Countries and Major Gold-using Countries (1,000 yen) Year Silver-using Countries Gold-using Countries Exports Imports Exports Imports 1895 37,156 52,109 92,334 75,526 1896 43,704 63,115 66,911 106,749 1897 59,581 95,185 94,101 122,081 1898 75,133 129,479 82,226 144,771 1899 90,682 98,356 114,057 116,262 1900 95,017 92,573 95,419 189,154 1901 111,477 111,309 132,274 139,554 1902 101,269 123,376 147,252 142,569 1903 126,775 169,165 153,026 142,388 1904 134,532 182,539 173,641 178,644 1905 162,754 187,181 148,206 287,610 1906 198,084 165,837 212,181 240,187 1907 191,766 200,096 225,468 275,910 1908 157,401 168,273 205,989 253,459 1909 168,589 176,779 227,699 202,122 1910 186,280 226,058 252,272 218,462 1911 176,917 217,300 248,007 274,815 1912 218,728 260,048 283,002 330,325 1913 275,928 348,055 331,698 342,698 Department of Finance, Returns of the Foreign Trade of the Empire of Japan for the Forty Six Years from 1868 to 1913 Inclusive, Tokyo, n.d. , pp. 23-40. The New Role of Silver Yen The role the withdrawal of silver yen played in the can be clarified by examining the subsequent disposal follows an account in detail of the amounts of the otherwise disposed of:2^ gold standard policy of silver yen. Here silver yen sold or 25Ibid, p. 376. 26Ibid, p. 311. EASTERN BANKING Total sold and otherwise disposed of Details as follows: Transferred to the mint bureau Transferred to and sold in Shanghai In one yen silver coin -do- stamped In horse-shoe shaped silver In promissory notes of the mint Transferred to and sold in Hong Kong In one yen silver coin -do- stamped 75,093,822 yen 27,567,012 17,546,288 200,000 yen 550,000 500,000 16,296,288 1,870,000 13,953,000 15,823,000 Sold to foreign banks In one yen silver coin -do- stamped In promissory notes of the mint Disbursed in Formosa at current valuation Disbursed at Wei-hai-wei at current valuation Disbursed at Korea at current valuation 3,000,000 2,250,000 2,167,374 7,417,374 6,212,973 197,175 330,000 Let us look at each item in more detail. An imperial ordinance of October 1897 ordered the nominal enforcement of the gold standard in For. mosa. But in practice the stamped silver yen was put in circulation at current valuation. In Korea, the First Bank exchanged at par value these stamped one yen silver coins for the undefaced ones in circula. tion in Korea. In November of 1898, the Japanese occupation forces at Wei-hai-wei sent a request for 50,000 yen in one yen silver coins, so the government had stamped silver yen to the amount asked for shipped there and the practice was repeated.27 The Yokohama Specie Bank was responsible for selling silver yen in Hong Kong and Shanghai. Sources indicate that the Yokohama Specie Bank conducted the following business: "The Specie Bank shall buy in Hong Kong drafts on London, with the above mentioned stamped silver yen, and deliver them to the Government".28 "The Yokohama Specie Bank shall exchange the silver bullion for the silver tael at the rate of 58,000 grains of pure silver for 111 Shanghai taels, and pay back in Tokyo to the Government the corresponding amount of gold, at the rate of exchange paid by the said bank in buying drafts on Shanghai". 29 The Yokohama Specie Bank also handled the sale of silver yen to foreign banks such as the HSBC and Chartered Bank. As stated above, silver yen withdrawn from abroad played a vital role for the Japanese linkage with London and for Japan's expansion toward Asia. Silver yen was used in Japanese colonies and spheres of influence like Formosa, Korea and Wei-hai-wei. These areas served as an intermediary zone for the Japanese gold standard; colonies and territories were incor. porated into a system whereby Japan could obtain gold in exchange for silver, and at the same time prevent a decrease in the amount of silver required for the working of colonial financial policy due to a sudden 27Ibid, pp. 326-27. 28Ibid, p. 318. 29Ibid, p. 316. JAPANESE SILVER YEN withdrawal of silver yen from circulation. The sale of silver yen at Hong Kong, Shanghai and to the foreign banks helped to accumulate an exchange fund and stores of gold. Furthermore the Yokohama Specie Bank had exclu. sive rights over an exchange fund and used this government money to in. crease Japanese export trade. Thus although silver yen ceased to be a legal currency in Japan, it began to act as a spearhead for Japanese expan. sion toward East Asia. After Japan adopted the gold standard in 1897, the relationship be. tween foreign banks and the trade of Japan experienced some change. Basi- cally, the amount of foreign exchange handled by foreign banks in Japan was declining owing to the rise of Japanese foreign exchange banks. For example, let us look at the relationship between Mitsui Bussan (Mitsui Bank) and the HSBC. In 1898 the director of Mitsui Bussan, Takashi Masuda , made the following statement on the policy of the company toward the HSBC: Recently, I [Masuda] have given the managers of the Mitsui Bussan branches in Shanghai and Hong Kong the following instruc. tions regarding our policy towards the HSBC: You should not bow down before the HSBC but raise your head high and associate with them on equal terms. When you need to buy exchange, do not worry, I will send you as much as 50,000 or 100,000 yen as soon as I receive your telegram. In this way the HSBC will recognize the strength of the Mitsui family and will be willing to make finance available to us.^0 As a result, foreign banks began to issue Japanese government bonds and make advances to Japanese firms. In engaging in this new business, foreign banks developed their interest with the London money market, and expanded out into Asia-wide trade and began to look toward Manchuria. On the surface, foreign banks seem to have lost their influence in Japan, but it is important to notice that they were still closely connected with Japanese finance; the HSBC made loans to central and local governments in Japan.^ (See Table F.) -^The speech by manager Masuda on Management Policy of Mitsui Bussan given on 25 July 1898; Records of the Board of Directors Meetings for 1898 (Bussan 120, held by the Mitsui Library), p. 9a-b. -^Once the financial panic following the Russo-Japanese War finished, apart from bank overdrafts and other special contracts, the Hongkong and Shang. hai Banking Corporation began to lend Mitsui Bussan as much funds as they wanted. The Hongkong and Shanghai Banking Corporation was willing to make loans to Mitsui Bussan because of the good credit standing of the affiliate organization, Mitsui Bank, with which the Hongkong and Shanghai Banking Corporation was closely related. See, Mitsui Ginko Hachiju-nen Shi (Eighty years history of the Mitsui Bank), Tokyo, 1957, TpT 190-95. EASTERN BANKING Table F Foreign Loans the HSBC made in Japan from 1906 to 1912 1906 Aug Tokyo municipal govt 5% sterling bond (1.5 million pounds) issued in London 1907 Mar Governmental 5% sterling bond (2.3 million pounds) issued in London and Paris July The South Manchurian Railway Company's 1st sterling debenture (4 million pounds) issued in London 1908 June The South Manchurian Railway Company's 2nd sterling debenture (2 million pounds) issued in London Dec Japan Industrial Bank's industrial debenture (2 million pounds) issued in London and Paris 1909 April Yokohama municipal govt 6% gas works bond (648 thousand pounds) issued in London May Osaka municipal govt 5% sterling bond (3.08 million pounds) issued in London 1910 May 3rd governmental 4% sterling bond (10 million pounds) issued in London 1911 Jan The South Manchurian Railway Company's 4th sterling debenture (6 million pounds) issued in London 1912 Feb Tokyo municipal govt 5% sterling bond (9.175 thousand pounds) issued in London, Paris and New York Source: Okura-sho rizai-kyoku gaisai-ka (Department of Foreign Debt, Bureau of Treasury, Ministry of Finance), Honpo gaikasai kankei shiryo (Sources concerning the foreign debt of Japan), n.d. THE THIRD PERIOD: JAPANESE MANCHURIA AND THE HONGKONG AND SHANGHAI BANKING CORPORATION Background From the end of the nineteenth century, Manchuria attracted attention in Japan as a market that was as yet untouched by western capital and commodities. In the past Russia had been expanding her economic and political JAPANESE SILVER YEN influence toward Manchuria. In negotiating the treaty of Shimonoseki after the Sino-Japanese War, Japan tried to secure a foothold in Manchuria by leasing Port Arthur and Dairen, the main entrepots of Manchuria. Russia, France and Germany, however, refused to accept these Japanese privileges, so Japan was forced to temporarily give up ideas of gaining a sphere of influence in Manchuria. Japanese commercial and financial activities in Manchuria began at the turn of the century. The South-Manchurian Railway Company established its head office in Dairen in 1906 and Mitsui Bussan a branch in 1904. The Yokohama Specie Bank and the Bank of Chosen set up branch offices in Dairen in 1904 and in Antung in 1909 respectively. These financial institutions laid the foundation for Japanese influence in Manchuria; Japanese banks provided Japanese companies with funds to do business there. From the 1890s foreign powers had been trying to gain concessions in the north-east provinces. They wanted to open the market there to trade, build railways and make loans to the provincial government.32 The result was international competition and conflict over Manchuria. In order to resolve the clash of interests, the powers found it necessary to engage in political negotiation. America and Britain were determined to expand their own interests in Manchuria, which resulted in diplomatic negotiation. As a consequence, Tokyo and Peking became two important centres for negoti. ation. 33 In 1905, when Japan tried to monopolize the foreign trade of Manchuria by taking responsibility for managing the customs, it met with strong oppo. sition from British and American merchants. These merchants had the British and American ambassadors in Tokyo press for the introduction of fairer trading conditions in the Kwangtung Leased Territory. The British ambassador referred to the complaints of British merchants in Ta-tung-kou, Newchwang, Dairen and Mukden and demanded that Japan abide by the prin. ciples of the open door policy and give equal commercial opportunity to merchants of all nationalities in Korea and Manchuria. 34 Evidence which 32hsu Shih-ch'ang , Governor of North-east provinces of China, also required a large amount of foreign capital for his plans for economic construction. W Gardner of the Hongkong Bank, J 0 P Bland and Lord French of the British and Chinese Co visited Mukden in 1908 for the negotiation of Hsin-Feng railway with Hsu Shih-ch'ang. See Nihon Gaiko Monjo Japanese Foreign Office Archives, 40 (1908) No 2, 518-43. 33with regard to the view of the U.S. on Manchuria at this time, see Paul A Varg, Open Door Diplomat, The Life of W W Rockhill, Urbana, The Univer. sity of Illinois Press, 1952, pp. 83-90. 34-Nihon Gaiko Monjo, Vol 39 (1907) No 1, pp. 194-237. Historically, from the viewpoint of international relations, there were 'three' Manchurias. First, the Manchuria located in the north of China which exported furs and mineral products to Russia; this area was under the influence of Russia. Second, the Manchuria that developed after the Japanese made inroads into north-east China; this area was a Japanese sphere of influ. ence and eventually became Manchukuo. Third, the term Manchuria also refers to the Japanese Kwantung Leased Territories, the railway zone of EASTERN BANKING proved that Japan permitted goods of her own nationals to enter Manchuria duty-free, that Japanese goods were carried at lower rates on the Japanese- owned railways and that the Japanese military excluded foreign goods entirely from some areas was provided. The Issue of Silver Yen Notes in Manchuria Expansion of trade in Manchuria was greatly dependent upon the establish. ment of financial facilities for business transactions. The first entry of Japanese banks into Manchuria was made by the Yokohama Specie Bank, which established its Yinkow branch in January 1900. As stated before, the Yokohama Specie Bank was a pure exchange bank run under government ordi. nance. It was also one of the special banks that received both financial and political support from the Japanese government. In September 1901 the Yokohama Specie Bank revised its articles of association so that it could issue bank notes in China. Such bank notes were designed to supply cur. rency for commercial transactions and to give financial aid to Japanese merchants in China and Manchuria. The Tientsin branch first issued the bank's notes in China, and this was soon followed by a similar issue of notes from the Yinkow branch. According to the reports by three basic parties concerned at that time, the Yokohama Specie Bank, the Japanese Ministry of Finance and the Bank of Chosen, the situation of the Yokohama Specie Bank in Manchuria can be described as follows.-^ During the Russo-Japanese War, the Japanese army issued military notes to the value of Yen 150 million. After the War, the Japanese government tried to redeem these military notes. An imperial order was issued in September 1906, instructing the Yokohama Specie Bank to use its branches in Dairen and other places to issue silver yen notes in order to redeem the military notes. These silver yen notes (called yin p'iao ( fill ) or ch' ao p'iao ( iPM ) by the Chinese) were to circulate as Japanese legal tender in the Kwantung Leased Territory and the railway zone of the South Manchurian Railway Company. Thus the Yokohama Specie Bank be. came the official Japanese note-issuing bank in Manchuria. At this time it also acted as the agent for handling Japanese national funds in Manchuria. The silver yen notes circulated well from the start and the redemption of notes proceeded smoothly.36 Beginning in 1907, however, silver bar the South-Manchurian Railway Co, and cities which had Japanese settle. ments. In this essay, I mainly use the term Manchuria in its third sense, although with regard to the circulation of silver yen, the term refers to a wider area. ^^Yokohama Shokin Ginko, ed , Yokohama Shokin Ginko Shi (The history of the Yokohama Specie Bank), Tokyo, 1920, pp. 248-73. Yoshiro Sakatani , Vice-Minister of Finance, Manchuria: A Survey of Its Economic Development, New York, 1932 (confidential), pp. 40-44. Bank of Chosen compiled, Economic History of Manchuria, Seoul, Chosen, 1920, pp. 258-62. ~^The amount of silver yen notes issued by the Dairen branch of the Yoko. hama Specie Bank was as follows: JAPANESE SILVER YEN quotations against gold fell, and there was considerable fluctuation in the market exchange rate between the silver yen notes and gold yen notes issued by the Bank of Japan, which had begun to find their way into Manchuria despite being issued primarily for use in the Japanese empire. Japanese merchants in Manchuria were worried by an instability in transactions due to fluctuations in the price of silver. The Yokohama Specie Bank was forced to consider the problem of whether the gold standard should be introduced to Manchuria or not. Previously the Yokohama Specie Bank had advocated sticking to the silver standard, but by about 1907 this policy was being criticized from various quarters.3? Besides, in April 1907, the Government General of the Kwantung Leased Territory had adopted the gold yen standard for its finances, and in October of the same year the South Manchuria Railway Company began to collect freight and passenger charges and to keep its accounts on a gold yen basis. 38 These changes suddenly created an increased demand for the Bank of Japan gold notes. Beginning in December 1909, the Yokohama Specie Bank accepted deposits in gold as well as silver, and handled gold drafts. The silver yen notes, however, con. tinued to circulate, but at par with the gold yen notes. The silver yen notes were freely used in private transactions with Bank of Japan and Bank of Chosen gold yen notes though they were no longer legal tender in Japa. nese Manchuria. The Hongkong and Shanghai Banking Corporation in Manchuria With silver circulating smoothly and a special gold-silver currency system being created in Manchuria, the HSBC formally asked the Japanese government to permit them to use silver yen and issue bank notes at Dairen. On 2 December 1909 the British ambassador in Tokyo wrote to Jutaro Komura ) Foreign Minister of Japan, on behalf of the HSBC, saying: The Manager at Yokohama of the Hongkong and Shanghai Banking Corporation who desires to do banking business at Dairen has approached me with the enquiry whether the Imperial Japanese Government would be so good as to mint Silver Yen for them at Shinozaki 1908 3,999,907 yen 1912 3,439,255 yen 1909 2,856,630 1913 4,049,181 1910 3,604,823 1914 2,984,721 1911 7,198,176 1915 2,517,348 Yoshiro Manshu Kinyu oyobi Z no Genjo (Present situation on the finance and financial circles of Manchuria), Dairen, Osakayago shoten, 1927, I, 29. 3?There were controversies inside the Yokohama Specie Bank on which cur. rency, silver or gold, should be adopted as legal tender in Manchuria. See Yokohama Shokin Ginko, Yokohama Specie Bank, ed, Dai-ikkai Toyo Shitencho Kaigi Roku (The record of the first meeting of branch managers in Asia), Tokyo, Nihon Keizai Hyoron Sha, 1976, I, 332-59. 38shinozaki, pp. 169-90. EASTERN BANKING Osaka, at the usual charge, for use in Manchuria with issue at Dalny [Dairen], and also whether the Japanese Government would be prepared to grant that Bank permission to issue Notes at that port. I gather that the Newchwang branch of the Yokohama Specie Bank Limited, acting under Imperial Ordinance No 267 of Septem. ber 1906, issues notes which are accepted in all transactions public and private in the Leased Territory, but they held no monopoly in this matter, it being the opinion of the Local Authorities that there is no legal currency in that region. Under these conditions it would appear that any Bank establish. ing itself at Dairen should be able to issue its Notes as is done in Chinese ports. y This letter was passed on to the Minister of Finance, Taro Katsura who answered the request. Katsura rejected the request to issue notes because the Yokohama Specie Bank had already been given exclusive rights over issuing notes in Manchuria. He also refused to mint the silver yen at the Osaka mint on the grounds that the mint was too busy producing subsidiary coins to mint silver yen. Katsura concluded by saying that any. one desiring to do banking business within the Kwantung Leased Territory should apply for permission to do so from the Kwantung Governor. Since the Kwantung Government would never permit a foreign bank to issue silver yen notes in the territory under its jurisdiction, this was tantamount to saying that the Japanese Government would not permit such action. Kat- sura's comments, however, were not sent to the bank, together with the negative answer that the Foreign Minister furnished the HSBC on 8 January 1910. On 14 April 1910, British Ambassador Macdonald wrote again to Foreign Minister Komura displaying his displeasure with the previous answer and reiterating his earlier request: I now venture to recur this subject and to require whether it may not now be found possible to accord to the bank in question the facilities they desire. It is well known that the Yokohama Specie Bank are enabled to obtain Silver Yen to the extent of their requirements in Manchuria, and the fact that similar facilities are denied to the leading British Banking institution in the Far East creates an unfortunate impression of inequality of treatment, the Hongkong and Shanghai Banking Corporation's actual conditions being penalized by having to obtain money through the Yokohama Specie Bank at a rate fixed by the latter. In this connection there is in particular one point to which I would invite Your Excellency's kind attention. Since previously writing it has -^Letter from Claude M Macdonald, British Ambassador in Tokyo, to Jutaro Komura, Foreign Minister of Japan, in the Hongkong Bank file of the Gaiko Shiryo Kan (Archives Division of the Ministry of Foreign Affairs) in Tokyo. JAPANESE SILVER YEN come to my knowledge that the British Indian government adopt a liberal attitude towards Japanese Banks at Bombay, not only minting coins on their application but actually, I am informed, giving them a preference in this matter. I cannot but think that this consideration will dispose the Japanese Government to meet in a generous and friendly spirit the reasonable request which I have the honour to proffer on behalf of the Hongkong and Shanghai Banking Corporation.* 4R This time in repeating the request that the HSBC be allowed to obtain Yen Silver for circulation in Manchuria, the British Ambassador made a point of mentioning the help the British Indian Government rendered Japa. nese banks in Bombay, thus trying to apply diplomatic pressure. It is difficult to understand from the letter what the real attitude of the HSBC was regarding this second request. It is not clear whether the Ambassador made the second request as a part of British diplomatic policy towards Japan or simply because of strong pressure from the HSBC. Nevertheless, a case like this which displays a connection between diplomacy and banking is characteristic of this period. The HSBC, however, failed to get permission to issue bank notes and to acquire silver yen coin. As a result, it was forced to specialize and restrict its business in Manchuria. The HSBC's main field of business was advancing money for purchases to bean exporters and operating in exchange. The HSBC began exchange business in Manchuria after their negotiations with the Japanese government failed. In 1911 they appointed the English trading firm Cornade,. Eckfard & Winning Company as their agents in Dairen. This firm had the largest range of business in Manchuria next to the Standard Oil Company of the United States. In the same year, the Bank established a branch office at Harbin, the central market of North Manchuria. In 1912 they began business at Changchun with Jardine, Matheson & Company as their agents. HSBC business in Vladivostok was dealt with through Kunst & Albers Company, the oldest German trading firm in Siberia, until 1918 when the Bank established a branch there.4^ The main trade foreign firms conducted in Manchuria was the import of cotton goods and petroleum into the region and the export of bean commodi. ties out of it. Tables G and H show cotton goods imports by countries and the export of soya beans and bean cakes by ports and countries respec. tively. We can draw the following conclusions about the expansion of Manchurian trade. The Japanese share of the cotton goods trade rapidly increased after the 1910s, and the United States was in second position with its sheeting imports. The characteristic feature of the export trade of soya beans and bean cakes is the relationship between the ports of export and destina. tions. Vladivostok was the center for the export of soya beans to Europe, 40Ibid. 4*Mantetsu Rinji Keizai Chosa Iinkai The South-Manchurian Railway Co, the Provisional Committee for Economic Research, Manshu ni okeru Gaisho no Seiryoku rS#| ^tl (Foreign merchants' influence over Manchuria), Dairen, 1929, pp. 64, 216. Cotton Piece Good Imports into Manchuria (Piculs) EASTERN BANKING rp ro a> vO ro ‧—i CN CTt rp ro CO CO ro LO i—i o VO P P ro m ro CO ro P p o (T. fd p ro vO U) ro LO r-* CO ro LO 0 CO rp O CN ro LO CN P LO Eh 0^ rp P p ro ro CO CN CN rp ‧—1 ‧—i CN P p O o CN O o fd vO p O CO CO C CO r- ‧H ‧* 6 cn CO 1—1 ro o p p <3 O O O o vO O o P CN G O O o vO vO ro LO r- G ?3 rp i—1 p CN CN ro LO r- vo ‧H 4-> <1> ft ip p CN O CN CN o rP vO r- ro P P co U) P ‧H P o i—1 o LO o VO ro o ro CQ rp CO o o O LO o C0 r- CO CN CN CN o ro LO P LO vO P ro CO in vO O P VO vO p 00 O 1—1 P P p rp CN 0) o LO ro LO CN LO O LO CO CN VO O o CO r- p o rp o v0 P ro CO o r- o w o o ro o CN ‧—l CO m o LO CO ro LO ro CN 00 D (T> O O i—i CN ro ro LO vo ro rp P ‧—i CN CM CN O LO o CO <—1 vi> CN CO vo 1—1 r* fd rp CN r- (T> CN r- ro vO p 0 o VO (X* o r- CO r- LO vo CO Eh ro LO CO o (X. LO p cr. p P p p p ro LO CN o o o o p LO ro G o o o o o VO VO r- fd ft LO o LO LO CO * .. k. fd LO p CO LO a> VO CN .3 LO vo o CN (7> p CN G -P P ‧P X, P ‧P o o o 00 ro CO ro P p LO ro o CN LO 00 ro m ro CO VO O VO ‧k .. k. ‧ LO ro o CN ro VO p vo o r- ro 00 ro o o p P p o LO VO o LO c- 00 P CO p O o w CO CN ro vo CN r- D CO LO o o o O o o O o o o p (T> cn cn .P p p P p p P P p ip 3 G Q) s 3 U <1) ‧S ‧H G 3 x w -p g Q) B > s CM O ^ vO & ft a) ,c ■P ip o 3 P fd Q) fd ip H d) S U Hi* fig 3 CQ ‧H a) w G I 5 3 o +j o eh o -P .- -tv & II *§ JAPANESE SILVER YEN and Newchwang was the center for the export of bean cakes to Japan. Dairen was the main port for exporting soya beans and bean cakes to China. Both these goods were exported to Japan in large amounts. As a consequence financial facilities were set up in Dairen and Vladivostok to settle the soya bean and bean cake trade with China and Europe respectively, and for the settlement of a triangular (soya bean-cotton goods-sundry goods) trade between Dairen, Japan and Shanghai. The HSBC engaged in the issuing of trade bills for the settlement of these international commercial trans. act ions. Table H Export of Soya Beans and Bean Cakes from Manchuria by Mitsui Bussan in 1911 Source Desti. nation Soya Beans Desti. nation Bean Cakes piculs % piculs % Vladivos tok Newchwang Dairen Japan 220,186 241,719 (65.3) (10.6) Japan 1,264,963 503,346 (34.1) (9.0) Total 461,905 (16.3) 1,768,309 (18.8) Vladivos tok Newchwang Dairen Europe 1,119,847 (20.7) Korea 573 (20.0) Total 1,119,847 (19.3) 573 (20.0) Vladivos tok Newchwang Dairen China 44,855 (3.1) China 41,400 (3.8) Total 44,855 (1.3) 41,400 (1.5) Grand Total 1,626,637 (13.4) 1,810,282 (14.9) Source: Mitsui Bussan Co, The Fourth Business Report for the Latter Half of 1911, pp. 36-37 (Bussan 615). ^A 1927 summary of business conducted by the HSBC in Manchuria: Harbin: The HSBC occupies all buying exchange of special products in Manchuria in co-operation with the branches in Dairen and Vladivostok. Moreover they absorb bills of exchange of sundry goods on Shanghai and Europe by issuing credit letters for import. Especially they advance a large amount of capital for the purchase of special products (p. 227). EASTERN BANKING The Last Phase of Silver Yen In July 1913 the Japanese government permitted the Yokohama Specie Bank to issue bank notes convertible to gold yen or the Bank of Japan gold notes, with a specie reserve of the issue amount besides the former silver yen notes. This measure was the result of pressure by the South Manchuria Railway Company, Kwantung Leased Government and Japanese residents in Man. churia, who favoured gold notes because of severe fluctuations in the price of silver.^ once convertible notes were issued, silver notes underwent a drastic change. The issue of convertible notes meant that silver yen notes ceased to be connected genuinely to silver. This change spelt the end of the silver yen. With this change, the Yokohama Specie Bank came to occupy the position of a central bank for Japan in Manchuria and secured low interest funds from the Japanese Ministry of Finance to make long-term loans to enterprises and commercial activities in Manchuria. In November 1917, however, the special privileges of the Yokohama Specie Bank were abolished. These were conferred upon the Bank of Chosen and the Yokohama Specie Bank reverted to only conducting exchange business again. In Korea, the gold standard system was adopted in 1902, following the adoption of that system in Japan. After that the Korean branch of the First Bank (Dai-ich Bank) became a central bank and the bank note was stipulated as legal tender in Korea. In Taiwan, the gold standard system was finally adopted in April 1911, after the issue of silver yen notes had been stopped long before, in 1906. This process of monetary reform was intimately connected with the policy of colonization in each country. In Korea, silver yen, which ceased to be legal tender from 1902, was kept in circulation as part of the monetary policy. At the same time, it should also be noted that silver notes were continually issued in commercial transactions with local merchants in China, Taiwan and Korea, according to the requirements of the situation.^4 Mukden: Foreign merchants make use of the HSBC in their exchange and business transactions. Remittance bill transactions with Europe, how. ever, are managed from Harbin where foreign exchange is more favourable than Mukden (p. 175). Dairen: The following chart of foreign trade bills handled by banks in the Dairen Bankers Exchange Association is useful in explaining the position of the HSBC in Dairen (p. 106). See Table I. ^Fluctuations in the value of a 100 yen silver note (ch1 ao-p1 iao) in Dairen quoted by gold yen were as follows: 1913 1914 1915 1916 1917 (Shinozaki ^In Taiwan, March 94.905 92.323 82.787 92.995 112.904 Yoshiro, p Messrs Cas June yen 96.729 yen 90.457 81.168 98.085 120.743 37.) & Company at Taipei September 96.907 yen 84.508 79.663 101.870 158.260 and Bain & were appointed as HSBC agents. They went bankrupt respectively. In 1901 Samuel & Company Limited was December 93.442 yen 80.781 86.980 115.521 135.778 Company at Anp'ing in 1900 and 1903 appointed agent in JAPANESE SILVER YEN Table I A Comparative Chart of Foreign Trade Bills handled by Banks in Dairen during the Month of August 1929 (yen, 000 omitted) Remittance Bill Documentary Bill Open contract Payment Open contract Collection Bank of Chosen Gold 26,792 35,789 477 1,208 (Dairen branch) Silver 58 60 — — Yokohama Specie G 15,068 6,649 9,026 2,207 (Dairen branch) S 5,363 13,080 4,315 2,555 Shoryu G 4,383 3,634 259 541 Bank S 440 404 — 1,135 Bank of Manchukuo G 1,785 1,308 187 198 Bank of China (Dairen branch) S 1,405 458 — — HSBC G 729 3,425 2,361 515 (Dairen branch) S — — — — International G 3,308 1,155 576 1,286 Bank (Dairen) S — 30 ” ““ ““ Chartered Bank G 204 608 — — (Dairen branch) S — — — ““ ___ Mantestu Rinji Keizai Chosa Iinkai, p. 106. Conclusion Here follows a brief summary of the major points made in this essay. (1) The history of the silver yen is inextricably connected with the introduction of the gold standard in Japan in 1897. (2) Outside Japan the silver yen circulated broadly in East and South. east Asia, forming the foundation of Japanese expansion during the last quarter of the nineteenth century. In order to first realize the circula. tion and then the withdrawal of silver yen, the Japanese government adopted a policy of using the Chinese indemnity as a fund to maintain the value of silver yen. One part of the indemnity was used as a reserve fund in London Taiwan. In Korea, Holme, Ringer & Company Limited acted as agents at Chemulpo. EASTERN BANKING to stabilize the foreign exchange rate of yen. The other part was used as a fund to back the withdrawal of silver yen during a period when there were severe fluctuations in the value of silver. (3) Foreign banks were closely connected with the circulation and withdrawal of silver yen. Silver yen served both as a media of trade settlement for Japanese trade and as international currency in the Asian area at the end of the nineteenth century. (4) The relationship between the HSBC and the Japanese silver yen varied according to periods and places. First, in Japanese treaty ports, foreign banks performed two functions. They supplied foreign currency, i.e., Mexican dollars, and exchanged Mexican dollars for silver yen coins. Second, foreign banks acted as an intermediary for and organizer of the Asia-wide currency market and trade settlement network. In this period, silver yen coins were accepted and circulated in Asia, both for use in international settlement and within the domestic economy. Third, silver yen continued to be legal tender in Japanese colonies and territories even after the adoption of the gold standard in Japan. At this stage, foreign banks, particularly the HSBC, made capital loans for Japanese internal and external economic expansion. In making such loans, foreign banks found it necessary to engage in diplomatic negotiation where economic interests in China and the Japanese Empire were concerned. This essay has shown that foreign banks also had to resort to such methods of negotiation concerning the usage of Japanese silver yen. Previous researchers have only considered silver yen in relation to the Japanese domestic economy.This analysis of the history of the Japanese silver yen from 1870 to 1914 demonstrates that silver yen should also be treated with respect to Japan's external relations. It also sug. gests that further studies on the relationship between the Japanese economy and foreign banks in Asia are necessary before we can arrive at a total understanding of the modern Japanese economy. The history of the silver yen shows the modern Japanese economy in a wide perspective. It indicates that rather than solely emphasizing Japan's independence from foreign influence after the Me,iji Restoration, the introduction of the gold stand. ard as a sign of economic independence and the autonomous tariff system, attention also has to be paid to the close relationship foreign banks had with the Japanese economy during the Meiji period. This study also suggests that we should re-appraise current defini. tions of the role played by foreign banks in Asia, especially the HSBC. Foreign banks in Asia have been given various labels - overseas banks, commonwealth banks, colonial banks, international banks, etc.^ These labels are based upon political divisions within the British Empire. For example, within the colonies there were colonial banks, in Australia and Canada commonwealth banks, etc. Such labels undoubtedly indicated the ^For example, see Hiroshi Shinjo, pp. 75-84. ^See A S J Baster, The Imperial Banks, London, P S King & Son Ltd, 1929, pp. 144-219, The International Banks, 1935, pp. 10-38; R J Truptil, British Banks and the London Money Market, London, Cape, 1936, pp. 166- 72; W F Crick, ed, Commonwealth Banking Systems, Oxford, Oxford Univ Press, 1965, pp. 1-53. JAPANESE SILVER YEN importance of Britain to the banking system. Banks operating in Asia, however, could be better understood by referring to the special economic relationship between Europe and Asia, the geographical region in which they operated, rather than simply referring to British political divisions. My theory is that while foreign banks in Asia should be treated in the context of their relationship to London, which was the centre of the world monetary market, ^ they should also be defined with reference to the peculiarities of the Asia-wide economy. In trying to elucidate the characteristics of the HSBC in the period before World War I, the role of the Bank should be understood in the context of this London/Asian relationship and also from the Asia-wide economic perspective. I also venture to say that further studies of the Japanese silver yen will help to explain the role of the HSBC in the period under consideration. 4-?For an analysis of the process of incorporation of China into a worldwide financial system from the 1830s to the 1850s, see T Hamashita "Shihon shugi shokuminchi taisei no keisei to Ajia 1850 nendai Igirisu ginko shihon no Chugoku shinshutsu katei = 4 7 v 7 1850^ft, (Asia and the formation of the capitalist- colonial structure—the process of the advance of British banking capital into China in the 1850s), in Koza Chugoku Kingendaishi + 41 Safin ft ‧￡ I (Studies in modern and contemporary Chinese history), Nozawa Yutaka and Tanaka Masatoshi, eds, Vol 1, Chugoku Kakumei no Kiten (The beginnings of the Chinese Revolution), Tokyo, Tokyo daigaku shuppankai, 1978, pp. 13-44. For a brief summary review of this article in English, see Peter Perdue's review essay in Modern China, 7, No 2 (April 1981), pp. 228-29. 17. THE HISTORY AND DEVELOPMENT OF THE HONGKONG AND SHANGHAI BANKING CORPORATION IN PENINSULAR MALAYSIA by Chee Peng Lim, Phang Siew Nooi and Margaret Boh* Introduction The Hongkong and Shanghai Banking Corporation (HSBC) was one of the earli. est commercial banks to be established in Peninsular Malaysia. ^ Today it is the largest foreign bank and the third largest commercial bank in Malay. sia, in terms of fixed assets. The HSBC is also the first bank in Malaysia to offer on-line computerised customer services and it has the largest net. work of on-line branches throughout the country. In short, the HSBC occu. pies a pre-eminent position in the Malaysian banking community. It would be interesting to trace the events which led to the HSBC's achievements. In this essay we will begin by outlining the early historical development of the HSBC in Malaysia, beginning with the establishment of its branch office in Penang. The essay will then examine the role which the HSBC played in the early economic development of the country, more specifically, the kind of commerce and trade which the bank financed and the nature of services which the HSBC provided to the business community. In addition, some attention will also be paid to the role which the HSBC exerted in the financial and monetary system of Malaysia during the colonial period. In the second part of the study, we will trace the development and expansion of the HSBC and its various branches throughout the country. This will bring us to the post-independence period which saw the introduc. tion of various changes in the financial policy and system in the country. The most important of these changes include the development of an indige. nous banking system, restrictions placed on foreign banks, the evolution of an independent monetary policy, the development of a central bank and the introduction of the New Economic Policy. In this part of the study, we will examine how the HSBC has responded and adapted to the various dimen. sions of the above changes and, in particular, to the requirements of the New Economic Policy. Two aspects of the New Economic Policy will be given *We wish to acknowledge the assistance provided by Mr T R K Crozier, Man. ager Administration, and other members of the staff of the Hongkong and Shanghai Banking Corporation in Malaysia in the collection of data for the preparation of this paper. We also wish to thank Professor Frank H H King, University of Hong Kong, for his comments and suggestions. Needless to say, none of these individuals is responsible for any of the views and errors found in this paper. ^Malaysia is made up of two distinct regions: Peninsular Malaysia covering an area of 132,000 sq km, and Sabah and Sarawak with a total area of 199,000 sq km. The two regions are separated by about 650 km of the South China Sea. Due to a budget constraint, it was decided to confine the scope of this paper largely to Peninsular Malaysia. special consideration, namely loans to priority sectors and the employment of bumiputras.2 In the concluding section, we will attempt a comparative analysis of the HSBC's role before and after independence. In addition, we will also analyse the present relative standing of the HSBC, in terms of deposit base, loans and growth potential. Before we begin, we would like to point out some of the problems we faced in collecting primary data for this study. The HSBC in Malaysia does not have any historical records relating to its activities in this coun. try. Its earliest files date back to only 1974. A lot of the Bank's early records which were not sent to Hong Kong were destroyed during the Second World War and in the 1971 flood. We had no access to recent records, since it is the Bank's policy not to reveal any document less than fifty years old. We were also not given all the data we requested, such as that relating to the Bank's recent lending activities or its labour force. Apparently the Bank is not keen to reveal the extent of its compliance with the New Economic Policy, given the sensitive nature of this policy and the Bank's delicate position in the local banking system. We tried to interview old members of the Bank's staff. Unfortunately, those who were still alive and were privy to the background and reasons for the Bank's early policies were all Europeans and had all left the country. The most senior Asians employed by the Bank in its early days were the Chinese compradors. We managed to trace and interview two of the Bank's oldest compradors, one in Penang and the other in Kuala Lumpur. These gentlemen provided us with the only first-hand accounts of the HSBC's early activities. Finally, we also tried to gather information from non-HSBC sources, but this attempt was unsuccessful. The National Archives had hardly any material relating to the HSBC; neither did the University of Malaya Library. The Central Bank of Malaysia had recent data on the HSBC, but refused to reveal any of it. Given the lack of primary data, we had no alternative but to rely largely on secondary sources for the material presented in this paper. We realize that this is a serious deficiency in this essay but was one we were not able to overcome. Establishment in Penang The foundation for the pre-eminent position of the HSBC in Malaysia today was laid about one hundred years ago when Malaya (the name by which Malaysia was formerly known) was experiencing rapid economic development, particularly in the growth of trade between the various European countries and Asia.^ At the same time, tin mines and rubber plantations had been 2The term bumiputras (sons of the soil) refers to the indigenous races of Malaysia and includes mainly Malays, Kadazans, Ibans, etc. ^The political organisation in Malaysia has undergone a number of important changes. Before World War II there were the Straits Settlements (Penang, Malacca and Singapore), the Federated Malay States (Perak, Pahang, EASTERN BANKING developed and these soon became the main pillars of the Malayan economy. Naturally all these growing economic activities gave rise to the need for banking facilities and activities. Foreign banks, particularly British banks, were quick to seize the opportunity to expand their branches to Malaya to cater to the financial needs of the rapidly growing enterprises in the country. The honour of establishing the first commercial bank in Malaya went to the Chartered Mercantile Bank of India, London and China, which established a branch in Penang in 1859, seventy-three years after the founding of Penang, the first British Straits Settlement in Malaya, by Captain Francis Light.4 The Chartered Mercantile Bank of India, London and China was subsequently renamed the Mercantile Bank and was to become a wholly-owned subsidiary of the HSBC in 1959. Thus in a way the HSBC may be regarded as the oldest commercial bank in Malaysia. The second commercial bank to set up a branch in Malaya was the Chartered Bank in Penang in 1875. It was not until 1884 that the HSBC established a branch in Malaya, located also in Penang, although it must be noted that a branch of the HSBC had already been in existence in Singapore since 1877, fifty-eight years after the founding of Singapore by Sir Stamford Raffles. When the Singapore HSBC was founded, the population of Singapore had risen to one hundred thousand and the port had become the greatest entrepot between Calcutta and Hong Kong and mistress of the Straits of Malacca. The bulk of its import and export trade was with Great Britain and India, while the commerce with China was a good second.^ The HSBC was somewhat late in starting business in Singapore. No less than seven banks had already been established in Singapore before the HSBC, by appointing the Borneo Company to represent it, made a tentative entry in 1865. However, it was in no hurry to extend its commitments. The HSBC's manager in Shanghai, E Cameron, was against the idea of opening a branch in Selangor and Negri Sembilan) and the Unfederated Malay States (Johore, Kelantan, Trengganu, Kedah and Perlis). The Straits Settlements were governed from Singapore until 1867, after which date they were admini. stered under the Colonial Office. In 1946, the Straits Settlements, with the exception of Singapore, combined with the Federated and Unfederated Malay States to form the Malayan Union. Singapore became a separate colony. Malaysia was formed in 1963 and included Singapore, Sarawak and Sabah. Singapore separated in 1965. The word 'Malaya' used in this paper refers to present day Peninsular Malaysia. ^Bank Negara Malaysia, Money and Banking in Malaysia, Kuala Lumpur, 1979, p. 26. ^C M Turnbull, A History of Singapore 1819-1975, Oxford Univ Press, Kuala Lumpur, 1977. ^Maurice Collis, Wayfoong: The Hongkong and Shanghai Banking Corporation, Faber and Faber Ltd, London, 1965, pp. 93-94. Since the agency houses were the chief pioneers in the Straits Settlements, it was natural that, when the HSBC and other foreign banks first considered doing business in those regions, they should appoint the agency houses as their agents. For details of the early banks in Singapore see Lee Sheng-Yi, The Monetary and Banking Development of Malaysia and Singapore, Singapore, 1974, pp. 66-70. Singapore as long as the Bank's funds could be fully used in China. 2 When the Bank finally resolved to establish a branch at Singapore, it was put under the charge of H Cope with J McNab from the Manila branch acting as the accountant. Subsequently the Bank discovered that its Singapore branch could not be opened without special permission from the Lords Commissioners of the Treasury. Consequently, it was decided to set up an agency so that it could begin operation as soon as possible.R In the meantime, Cope recommended that the Bank should issue its own notes in Singapore and at the same time apply for permission to set up a regular branch.9 Following the establishment of its agency in 1877, the HSBC was authorised by the Straits Settlements government to issue notes in Singapore.1R With this authorisation, the Bank decided to issue notes, without waiting for permis. sion from the Lords Commissioners of the Treasury who could be left to object if they chose.H However, the Bank received a telegram from London stating that it could not issue any note until it had obtained the sanction of the Treasury to open a branch in Singapore.12 This permission was finally received in October 1881 and HSBC's note issue at its Singapore branch commenced on 1 December 1881.1R The Singapore HSBC was housed in one of the most imposing and beauti. ful buildings in town, at the corner of Collyer Quay and Battery Road.l^ The standing of this branch advanced rapidly, it succeeded in winning the privilege of banking half the government's account, a most welcome deposit of silver. Apart from dealing in bills of exchange, the Singapore HSBC supplied a substantial share of the advances which Chinese opium merchants required. The Indian bankers, the Chettyars, were also accommodated to the extent of $1,000,000 in 1887, and more thereafter, when they were in diffi. culties after the failure of certain mining and property speculations.!R The events that led to the establishment of the first HSBC branch in Penang in 1884 can be traced to the historical development of Penang during the eighteenth century, when the English East India Company obtained a lease on the island of Penang from the Sultan of Kedah in 1786. Subse. quently, Penang became a British port as well as a centre for trade activi. ties. Penang grew rapidly soon after its establishment.!R In 1805, Penang was elevated to a "Presidency", on an equal footing with the three great Presidencies in India—Calcutta, Madras and Bombay. By this time, 2 HSBC Board of Directors, Minutes, 9 Nov 1876; HSBC Archives. R Ibid, 7 Aug 1877; HSBC Archives. 9 Ibid, 1 Nov 1877; HSBC Archives. 1°Ibid, 20 Dec 1877; HSBC Archives. 11Ibid, 11 Sept 1879; HSBC Archives. 12ibid, 29 Jan 1880; HSBC Archives. lRIbid, 1 Dec 1881; HSBC Archives. 1^Arnold Wright and H A Cartwright (eds), Twentieth Century Impressions of British Malaysia: Its History, People, Commerce, Industries and Resources, Lloyd s Greater Britain Publishing Co Ltd, 1908, p. 141. 1RCollis, p. 94. lRFor a good account of the early development of Penang, see F G Stevens, "Early History of Prince of Wales Island (Penang)", Journal of the Malayan Branch, Royal Asiatic Society, 7, Pt 3, 1929. EASTERN BANKING Penang's population had increased to twelve thousand. Its trade kept pace with this increase in population. By 1825, Penang's trade was valued at ￡1,114,614 million.Penang's rapid development had led to the hope that it would become a great trade centre and a naval harbour. Unfortunately, this hope did not materialise. Firstly, although Penang had a good har. bour, it was found to be unsuitable for the construction of dockyards. Secondly, although the trade and population of Penang increased steadily, it did not show the same spectacular growth as Singapore, which began in 1819 and soon overtook the older settlement.^ Although its importance as a port was overshadowed by the rise of Singapore, Penang did not decline into an economic backwater. Trade with Indian ports and with China still continued, although diminished by the concentration of shipping routes on Singapore. For Achech, and other Sumatran ports, Penang remains an important centre for the collection of pepper, betelnut, camphor, rattans and resins; opium and textiles, both Indian and European, were exported in return. From the west coasts of Burma and Siam, Penang imported rice, birds' nests, tobacco and tin, and for these areas Penang was a distributor ot textiles, opium and Chinese produce. Penang also developed an increasing interest in the collection of tin from the western Malay states, especially Perak.^ All these factors contributed to Penang's continued development and probably influenced the HSBC to establish its first agency in Malaya, which was to be located in Penang. There were probably other factors. Major McNair, the Officer Adminis. tering the Government at Penang, had stated that if the banks did not provide banking facilities to the people of Penang and Perak, the Straits Settlements Government would probably try to establish a bank of its own and give such a bank the exclusive privilege of note issue.* 2^ There was an added reason for establishing an agency in Penang. An extract from the Straits Settlements Government Gazette of 21 March 1884 showed that the Chartered Mercantile Bank had notes circulating in Penang to the value of M$821,360, while the Chartered bank had notes circulating in Penang to the value of M$757,235. ^Clearly the value of the total notes in circulation in Penang alone indicated a profitable opportunity for the HSBC. Thus the Manager of the Singapore HSBC was instructed to seek the Straits Settle. ments Government's permission to open an agency in Penang.2^ Permission was given in 1884 and an agency was opened in the same year, but it was not clear if permission to issue notes had been obtained. W Gardner was specially sent from the Shanghai HSBC office to open the Penang agency.2^ The agency was housed in a small building in Beach Street and the officer- l^John Bastin and Robin W Winks, Malaysia: Selected Historical Readings, Oxford Univ Press, Kuala Lumpur, 1966, p. 157. l^John G Butcher, The British in Malaya 1880-1941, Oxford Univ Press, Kuala Lumpur, 1979, p. 154. 19j Kennedy, A History of Malaya, MacMillan & Co, London, 1962, p. 210. 2%SBC Board of Directors, Minutes, 21 Feb 1884; HSBC Archives. 21lbid, 10 April 1884; HSBC Archives. 22Ibid, 21 Feb 1884; HSBC Arch ives. 2^Ibid, 15 July 1884; HSBC Archives. in-charge was known as the Agent.24 When the HSBC opened its branch in Penang, it had already been pre. ceded by the Chartered Mercantile Bank of India, London and China (1859) and the Chartered Bank of India, Australia and China (1875). Nevertheless, the Penang HSBC was welcomed by the local business community because the existing banks were always short of funds. The growing resources of the HSBC enabled it to secure a large share of the banking business in Penang.^5 The financial activities of the HSBC during the later part of the nineteenth century after the setting up of its branch in Penang was based predominantly at first on purely banking business, for example, receiving money for current or deposit accounts, discounting bills, lending money on short-term and making advances when suitable collateral were made avail. able. The opium trade was rather an important business during the nine. teenth century and the banks would normally advance loans against the security of cases of opium kept at their vaults. However, this activity was not undertaken by the Penang HSBC which confined itself basically to the activities mentioned previously. The explanation given was that the Singapore branch of the HSBC was then handling the opium business very well and it was felt that this pattern should be maintained.26 As time went by, the Penang HSBC expanded into other types of finan. cial activities, the most important of which was foreign exchange opera. tions with London, India and China. With the growing importance and rapid expansion of the Malayan rubber and tin industries, the Penang HSBC also became active in financing the tin and rubber trades. However, unlike the Dutch banks in the Netherlands East Indies, the HSBC, like other British banks, adhered firmly to the conservative traditions of British banking and did not participate in the long-term investment of the tin and rubber industries. 27 Still, the development of the tin and rubber industries in Malaya introduced new financial opportunities for the Penang HSBC. Tin had been mined in Malaya for a very long time. The discovery of rich tin ore resources in the Larut district of Perak in 1848 and further tin resources in the Kinta valley in 1880 attracted Chinese miners who introduced the palong or water wheel system which greatly expanded the industry in 1903. Soon tin mining became a lucrative industry. In the 1860s, tin export averaged six thousand long tons; by the end of the century, it had 2Zf"Downing Street Penang", Berita Hongkong Bank, Vol X, March 1981, p. 4. Until 1956 all the HSBC branches in Malaya were referred to as Agencies, so the men in charge were known as Agents. Only the Singapore branch had a Manager. After 1956, Managers were appointed for the larger Agencies, namely Penang, Kuala Lumpur and Ipoh. 2^This was equally true of Singapore, where the HSBC prospered exceed. ingly. See Compton MacKenzie, Realms of Silver, One Hundred Years of Banking in the East, Routledge & Kegan Paul, London, 1954, p. 113. ^interview with Datuk Koh Sin Hock, third comprador of the Penang HSBC. ("Datuk" is an honorary title.) 27G C Allen and A G Donnithorne, Western Enterprise in Indonesia and Malaya, G Allen & Unwin, London, 1962^ p"! 203. EASTERN BANKING increased to forty thousand, making Malaya the largest producer of tin in the world.28 The expansion of the tin mining industry was further acceler. ated by the inflow of British capital which also introduced a modern tech. nique of tin mining using dredges. With the vast expansion of tin produc. tion, export of tin rose dramatically and the few foreign banks in Penang (which was the chief centre of the tin industry) were called upon to finance the export of tin.29 The Chartered Bank had had a branch in Penang since 1875, nine years ahead of the HSBC and so it was in a position to dominate the financing of the tin industry. But at this date, for some reason, the branches of the Chartered Bank in the Straits were short of funds. This provided an opportune moment for the Penang HSBC which had built up some reserves and liquid assets to move into this area of finan. cing. Thus the HSBC was able to gain a substantial share of the financing of the tin industry in Malaya. However, it must be noted that although the Penang HSBC had involved itself in this activity, financing of the tin industry remained largely in the hands of the Chartered Bank because of its connections with the sole tin smelting company—Straits Trading Company. Originally, the HSBC was given an opportunity to finance the Straits Trading Company, but its directors in Hong Kong would not agree, much to the disgust of the Singapore HSBC's manager, W G Greig. It was then that the Straits Trading Company approached the Chartered Bank, which agreed.30 Looking back, the HSBC lost a golden opportunity at that time. The HSBC, however, made up for its loss in financing the tin industry by eventually taking the lead in financing the other great Malayan indus. try, rubber, which helped to augment the fortunes of the tin industry. Commercial planting of natural rubber in Malaya began in earnest in the closing years of the nineteenth century, about twenty years after the first seedlings were brought from Kew Gardens to Malaya in 1877. With the demand created for rubber by the mass production of the motor car, the price of rubber began to rise steeply, from 4 shillings (4s) a pound at the beginning of this century to 12s a pound at the peak of the boom in 1912.^^ Fortunately for the HSBC, financing the rubber industry turned out to be of far greater value than tin, generally twice the value, and’ in the peak year of 1951 seven times as valuable, with M$3,962 million worth exported against the tin export of M$589 million.32 Credit for this achievement, however, should be attributed to Sir John Peter, who was the Manager of the Singapore HSBC from 1911 to 1922. Up to 1922, the HSBC was far from being the premier bank in Singa. pore. The situation changed in 1922 when the first rubber slump occurred and the price of rubber fell to the disastrously low price of Per pound. Many rubber estates were forced to close down and a number of large merchant houses were affected. The latter were unable to meet the demands of their bankers to redeem their overdrafts. At that time Sir John was not slow to recognise an opportunity to elevate the position of the HSBC. He 28Allen and Donnithorne, 29collis, p. 95. 30jbid. 3 ^Butcher 32col lis, p. 13. p. 96. p. 152. called the managers of the affected merchant houses and explained that if they would in future place their accounts with the HSBC, he would be pre. pared to take over their overdrafts. These managers readily agreed and the Bank then underwrote their debts involving millions of dollars.33 Soon after this, the Stevenson Rubber Restriction Act was introduced, under which no further planting of rubber was allowed in Malaya. Subsequently the price of rubber recovered and by 1924, rubber was selling at 4s per pound. Business boomed and the merchant houses were able to repay their loans. By this deft stroke, Sir John enabled the HSBC to take first place in rubber financing in Malaya. In view of his achievements, Sir John Peter has been referred to by a contemporary Chief Manager as the best servant of the HSBC. Apart from laying the foundation for the future prosperity of the Singapore branch, Sir John was very friendly with the Colonial Secretary, who sought a lot of advice from him on financial matters, such as those relating to the Malayan currency. It was largely due to Sir John's advice that the revaluation of the Malayan dollar did not take place. In recognition of his services to the Colonial Government, Sir John received a knighthood in 1922.3^ As Penang began to develop and expand into an important port and settlement in Malaya, other activities began to appear which needed the services of the foreign banks situated there. The Penang HSBC was able to cater to the expanding British and local enterprises and businesses which sprouted up as a result of the lucrative tin and rubber industries. For instance, various agency houses were established that were involved in trading and import/export businesses, such as Guthrie & Company Limited, Boustead and Company, Harrisons and Crosfield and Paterson Simons & Com. pany. Some of these very large agency houses could finance their business largely with their own resources, but the greater part of the foreign trade, whether conducted by Westerners or Chinese, called for banking ser. vices. The banks also gave credit to enable the agencies to finance their purchases or produce during the periods of processing and transport. This took the form of overdrafts, packing credits, advances against shipping documents and the discounting of bills.33 The agency houses were exclusively managed by foreigners or were foreign-owned and the Penang HSBC had a share in financing their trading and business activities. As most of these import/export agencies were British-owned, the normal procedure would be for them to approach the mana. ger of the HSBC, who was also British, to secure whatever finances were needed by them from the bank. These agency houses were also responsible for importing certain consumer goods catering for the rich locals and expa. triates in Malaya, like tea and other beverages, and various manufactured foods from England. However, this did not mean that the activities of the Bank were purely directed towards financing foreign-owned companies and agency houses. There were already in existence during this period local Chinese wholesalers who were also involved in trading activities. These 33Letter by D 0 Russell to J R Jones, 16 Jan 1957; HSBC Archives. -^Report by R Steuart to J R Jones, 15 Feb 1955; HSBC Archives. 33For further details of agency houses, see Allen and Donnithorne, pp. 53-58. EASTERN BANKING merchants or wholesalers were mainly dealing in the import of consumer goods from China and Hong Kong for the local population, while some were trading in commodities, exporting agricultural products like pepper, spices, small quantities of rubber and tin. With time, these local busi. ness companies also began to increase and expand, thereby compelling them to seek finance and monetary backing from banks. Hence, these Chinese merchants also sought the help of the foreign banks in existence at the time, including the HSBC. Thus the HSBC in Penang found itself involved with a different group of clients and its activities further expanded and diversified. Since the clients were local Chinese merchants and the Man. ager of the bank a foreigner, it necessitated the use of a local agent by the Bank to liaise between the Bank and the local clients. This led to the development of an important system by the HSBC, as well as other foreign banks, known as the Comprador System. The Comprador System^*? The comprador system originated in China. The term comprador was used by foreign traders at Canton in the days before the Opium War to designate the Chinese who acted as agents of western companies. At that time members of the foreign community in China were restricted to an area just outside the city walls. The assistance of a comprador, a trusted Chinese who could serve as a buffer between the foreigner and his "security merchant", lin. guists and servants was necessary. Since the foreign trader had not learned the language or studied the business needs of the country, and could not buy directly himself, he needed a Chinese whom he could trust to ‧ *37 look after the Chinese end of the business. Initially, the role of the comprador, though important, was compara. tively humble, for they were strictly controlled by the licensed Hongs. After the collapse of the Hong system and the opening of other ports by the Treaty of Nanking their position was very much strengthened, for now they were answerable only to their foreign employers, with whom they were on terms of mutual dependence. Shanghai soon became their special theatre of activity, but for many years, whether in Shanghai or the other ports, most of the compradors, or middlemen, who formed the link between the foreigners and their Chinese customers, tended to be Cantonese, who had inherited the craft by family tradition. ° [See Smith on HK compradors, Essay No. 6.] Foreign 'taipans' (heads of firms) were entirely dependent on the compradors who carried on the Chinese side of the foreign merchants' busi. ness in the new ports, partly because they knew the tea and opium trades intimately, but even more because they could guarantee one another in the ->DThis section is largely based on materials obtained from interviews with Datuk Koh Sin Hock, third comprador of the Penang HSBC and Lee Tiam Onn, fourth comprador of the Kuala Lumpur HSBC. ^^H M Vinacke, A History of the Far East in Modern Times, G Allen & Unwin, London, 1971, p. 33. 38h enry McAleary, The Modern History of China, Weidenfeld and Nicolson, London, 1967, p. 84. necessary Chinese fashion. From the Chinese point of view, the comprador was the principal trader. Under his contract with the foreign firm, he proceeded to hire his own staff, deal with Chinese merchants from the interior, secure market information, conduct exchange transactions, take responsibility for all Chinese personnel and for warehoused goods, and even deal with the Chinese customs house on behalf of the firm. The comprador thus became not only the foreigners' agent in the Chinese scene, but also a broker par excellence, able to develop his own operations as an independent t r ad e r From China the comprador system was transplanted to other countries in Asia, such as Indochina and Malaya.^ In Malaya, the term comprador was originally applied to the chief interpreter of a foreign bank. At that time most of the local businessmen could not speak or understand English. Yet they had to deal with foreign banks since there were no local banks until 1913.^2 providing financial services to local businessmen was a lucrative business, so the foreign banks were induced to employ the ser. vices of a local agent to deal with the local businessmen. Apart from serving as interpreters, the compradors also became guarantors or under. writers for the foreign banks in their dealings with the local business. men.^ In short, the comprador served as a link between the foreign bank and the local business community. All the Malayan compradors were Chinese, but unlike their counterparts in China, the former did not belong to any dialect group nor inherited the profession from the family. All the compradors in the Penang HSBC were Hokkien, but this was because Penang was settled mainly by Chinese immi. grants from Fukien province. Kuala Lumpur, which was settled mainly by immigrants from Kwantung province, had one Cantonese, one Kheh and two Hokkien compradors.^ The Penang HSBC comprador, Datuk Koh, secured his position by applying for it when the advertisement appeared in the local newspaper. According to Datuk Koh, his father-in-law was the comprador before him, but his father-in-law recommended the assistant comprador (no relation) for the post. Datuk Koh was recommended by the manager of the trading company where he was the chief salesman. The Kuala Lumpur HSBC's comprador, Lee Tiam Onn, was offered the post by the HSBC Manager who had 3^John K Fairbank, "The Creation of the Treaty System", in John K Fairbank (ed), The Cambridge History of China, Vol 10, Cambridge Univ Press, Cambridge, 1978, p. 230. ^*-*Ibid . ^For an account of the comprador system in Indochina, see C Robequain, The Economic Development of French Indochina, Oxford Univ Press, London, 1944, p. 43. ^The first domestic bank to be incorporated in Kuala Lumpur was the Kwong Yik Banking Corporation which was established in 1903 with a wholly Chinese clientele and transacted only local businesss. It was founded by a Chinese immigrant, Wang Ah Fook, a successful Singapore contractor. See Wright and Cartwright, p. 145. ^One of the comprador's functions was to verify signatures written in Chinese characters. ^Interview with Lee Tiam Onn. EASTERN BANKING acted on the recommendations of his business associates in Malacca. Lee graduated from the Technical College in Kuala Lumpur and was in the govern. ment technical service. He was not really keen to become a comprador because he did not know anything about the job. Although the Malayan compradors might have come from different dialect groups and had different levels of education, they had one thing in common. They all came from families with a relatively wealthy background. For example, Lee's father was a tin miner, rubber estate owner and landed proprietor. His family was one of the earliest settlers in Kuala Lumpur and started the Kheh Society. One of the major roads in Kuala Lumpur, Chow Kit Road, was named after the father of Lee's wife, an equally wealthy businessman. It was important for the potential comprador to be a person of some wealth, since the bank required him to deposit a certain sum of money to guarantee his integrity. In certain cases the bank might also ask him for the title deeds to some of his houses as security. The foreign banks had to be cautious especially when the local business started to expand and the banks were providing substantial overdrafts and other loans on the recom. mendation of the comprador. Some compradors also had to sign an agreement with the bank stating that they would make good all losses from local transactions to which they were parties. In short, the compradors had to guarantee, and were responsible for, all overdrafts and loans to those clients which they had introduced to the bank. Apart from being wealthy, the aspiring comprador was required to have some education, at least up to the secondary level, have a good command of English and be a local person. In addition, he had also to be a person of some standing the local community. This was important if the comprador was to play a successful role in introducing creditworthy clients to the bank. ^ The comprador's position enhanced a person's social status, so many compradors became prominent community leaders. For example, the Penang HSBC's comprador, Datuk Koh, was a member of at least forty social organi. sations, as well as being a Municipal Commissioner and Federal Legislative Councillor during his years as comprador. The Kuala Lumpur HSBC's compra. dor, Lee Tiam Onn, was a Justice of the Peace, a founder member of the Malaysian Chinese Association and member of various clubs. Singapore HSBC's comprador, Swee Ewe Lay, founded the first Chinese newspaper in Singapore and was well-known in European commercial circles. He also had close connections with China.^ Another Singapore HSBC's comprador, See Tiong Wah, was a prominent public figure, Justice of the Peace, municipal councillor, President of the Chinese Commercial Association and head of the Hokkien Huay-kuay.^7 It was important for a comprador to mix and socialise very frequently with the business community because he had to have a good knowledge of his potential clients. Thus when a client approached him for loans or over. drafts, he would be able to reply on his knowledge of the client's ^ The comprador's clients were not restricted to the Chinese community. ^Turnbull, p. 123. *7Ibid. background and credibility before recommending to the bank the amount that could or should be given. But even a comprador could make a bad judgement. In order to protect himself against clients who defaulted on their loans, the comprador would obtain some collateral (generally in the form of land or buildings) from his clients. The loans which the comprador would then recommend would generally be about half the value of the collateral provided. For his efforts in bringing business to the bank, the comprador received a relatively good salary from the bank, as well as commission or interest (usually one or two per cent per annum on the amount borrowed) from the local customers who borrowed from the bank. In the case of the Penang HSBC, a maximum salary of M$1,000 per month was paid to the comprador, although the initial starting salary was about M$400 per month.On top of this, the comprador was paid commissions on all the remittances, loans or overdrafts which he recommended to the bank. These commissions could go up to a maximum of of M$5,000 a month.^ At the same time, the comprador could also be involved in other businesses of his own without the interference of the bank. He had his own department in the bank which he organised, as well as his own employees whose salaries were paid out of his earnings from his commission or interests. In Singapore, the compradors even kept separate ledgers for their transactions.-^ The comprador introduced all kinds of businesses to the bank ranging from the local businessman who wanted to expand his furniture business to the local trader who wanted finance for his trade with nearby Sumatra. However, one of the most interesting transactions handled by the comprador was remittances to China. Like the other British settlements in Malaya, Penang had a large population of Chinese immigrants. These immigrants had many relatives and friends and even families living in China to which they made substantial and regular remittances. The China remittances were generally made with the help of the comprador and they constituted one of the most lucrative businesses handled by him. For introducing this type of business to the bank, the Penang HSBC paid one eighth per cent commission on the value of remittances to its comprador. ^ The comprador system survived up to the Second World War, but died a natural death after that when the old compradors retired from the banks and their places were taken over by the business advisers. There were several reasons why the comprador system was replaced. Possibly the compradors had become redundant after the Second World War when more Chinese businessmen had learned to speak English. Thus they could approach the foreign banks directly instead of going through the compradors. At the same time, the banks also felt that what they needed were "contact" men with good government connections, rather than compradors who had links only with the ^8At that time M$1.00 was roughly equivalent to present-day US$5.00. ^interview with Lee Tiam Onn. ^interview with Mr T R K Crozier, Manager Administration, HSBC, Kuala Lumpur. ^Commission on remittances to other countries was only 1/16% on the value of the remittances. Interview with Datuk Koh. EASTERN BANKING Chinese business community. However, according to Lee Tiam Onn, the most important reason for the replacement of the comprador system was opposition from the former Governor of the Central Bank of Malaysia. The Governor felt that the compradors had no place in a post-colonial banking system. More important, the Central Bank objected to the practice of banks paying commissions to the compradors who were their own employees. Whatever the reason, some of the functions of the compradors have been taken over by business advisers with varying responsibilities in different banks.52 Like their predecessors the compradors, the business advisers are also people with some standing in the business community and are natives of a particular area. For example, the Penang business adviser was born and bred in Penang and knows the community very well. However, unlike the comprador, the business adviser is a full-time employee of the bank. He is recruited as an executive officer of the bank and abides by the terms and conditions of service of that particular bank. Generally, the business advisers work along the same lines as the compradors before them, except that today they have to abide by the Banking Act of 1973. These business advisers only introduce business to the bank managers. They do not act as guarantors and are not responsible for the creditworthiness of their clients. Unlike other employees of the bank, they are not transferable to other branches in other states, for the simple reason that they have estab. lished themselves in that particular business community and would be able to advise the bank on any customer as well as on the market condition in that area. The changeover from the comprador to the business adviser varied with each bank. In most banks, however, the comprador had given way to the business adviser by the early 1950s. In the case of the Penang HSBC, however, the first business adviser only assumed his position in 1969. Previous to that, the Penang HSBC relied on its comprador. The fourth and last of the Penang HSBC compradors was Mr Khaw Bian Chiat who retired in 1967. Mr Khaw started as an assistant to Datuk Koh when the latter was appointed comprador. When Mr Khaw retired in 1967, the Penang HSBC appointed a business adviser in 1969. Issue of Currency An interesting function of the HSBC during the end of the nineteenth cen. tury was that of issuing currency. As mentioned previously, Penang emerged as an important trading centre and became the focal point for all trade and other transactions between Malaya and other foreign countries during the nineteenth century. One of the problems which Penang and other Straits Settlements faced at this time was the perennial shortage of currency. In the days when the Straits Settlements were administered by the India Office, the rupee was the official currency, although trade was conducted and taxes paid in various types of silver dollars.53 These superseded the c 2 J Initially the successors to the compradors were known as Asian Business Advi sors. c T J Allen and Donnithorne, p. 200. rupee for all purposes when, in 1867, the Settlements passed under the administration of the Colonial Office. The dollars included those coined in Hong Kong, Mexico, Peru, Bolivia and Spain; in 1874 the American trade dollar and the Japanese yen also became full legal tender. The variety of coins led to some confusion and provoked the Chambers of Commerce in Hong Kong and Singapore to urge that a British trade dollar should be minted for use in British territories in the East. This demand was refused by the British Government on the grounds that the cost of minting would be higher than the cost of obtaining dollars from Mexico. Instead, in 1890, in an effort to introduce greater uniformity, the Mexican dollar was recognized as the standard coin. The decline in the price of silver at this time, however, led to a reduction of the export of dollars from Mexico and, consequently, to a shortage of currency throughout the East, a shortage that was intensified by the temporary closing of the Osaka mint for the coinage of silver yen. In order to overcome this problem, the Colonial Office introduced a British dollar and in 1894 the minting of this coin started in Bombay.54 At the same time the government allowed certain banks to issue their own bank notes. The HSBC was in a favourable position to take advantage of the second measure. The Bank had strong financial backing in England with London bankers known as the London and Country Banking Company Limited of 31 Lombard Street.55 It also had a paid up capital of M$10 million and a reserve fund of M$21 mil lion.56 At the same time, the Penang HSBC was doing extensive business along the west coast of Malaya.57 with its strong financial backing and increasing volume of transactions, the Penang HSBC was able to play a dominant role in the issue of currency notes which it did under the authority of the Straits Settlements Ordinance No X of 1881. The currency note issued by the Penang HSBC was recognised by the Malayan Government as part of the regular currency of the Straits Settlements and the Federated Malay States. Apart from the Penang HSBC, the Chartered Mercantile Bank of India, London and China and the Chartered Bank of India, Australia and China were also given the privilege of issuing bank notes.58 The notes issued by Penang HSBC were of the following denominations: $5, $10, $25, $50, $100 and $500.59 The HSBC was bound by ordinance to retain specie to the extent of one-third of the amount of notes issued.60 Initially the bank notes were welcomed, but public receptiveness to their issue was adversely affected by a general lack of confidence that 5^MacKenzie, p. 189. 55now the National Westminster Bank. 5^Wright and Cartwright, p. 141. 5 7Ibid. 58Two other banks which were also issuing bank notes, the Asiatic Banking Corporation and the Oriental Bank Corporation, had closed down by 1884. Incidentally, the Oriental Bank Corp issued the first bank notes in the Straits Settlements. See Lee Sheng-Yi, p. 8. 59p0r further details, see William Shaw and Kassim Hj . Ali Mohd. , Paper Currency of Malaysia, Singapore and Brunei 1849-1970, Museums Dept, Kuala Lumpur, 1971, p. 19. 6^Wright and Cartwright, p. 138. EASTERN BANKING developed from the failure of a few pioneer banks in Singapore. In the absence of a central bank, losses of a few early banks due to loan losses and the depreciation of silver prices resulted in runs on their note issue, with the result that the remaining banks, including HSBC, had to redeem these notes to prevent possible runs on their own note issue. 61 In addition, by the mid-1870s, Britain and other leading European countries had moved away from the bi-metallic (gold and silver) standard to the gold standard. In response to the economy's growing trade with the major European countries compared with those countries remaining on the silver standard, increasing pressure was exerted on the Straits Settlements to reform the currency, which still depended on the import of foreign silver coin, and to move to the gold standard. All these factors contributed to the general opinion that the govern. ment itself should issue notes to enable the full convertibility of paper money and at the same time solve the problem of the scarcity of currency which arose now and then.^2 As a result, in 1897 the Board of Commission. ers of Currency was established, giving the Straits Government currency issuing powers. The Currency Ordinance of 1899 gave the Straits Settlements Government the sole responsibility for the issue of currency notes subject to a legal tender reserve of silver coins of at least two-thirds of the value of the currency issue; the remainder was to be covered by approved securities. Prior to this, the Straits Settlements Government was only responsible for the issue of subsidiary silver and nickel coins (no reserve was kept against such issue), whilst the foreign banks performed the function of supplying or importing the silver coins.The note-issuing banks on several occasions in the Legislative Council objected to the proposal of the issue of government notes which was considered "a slur on their private notes". Despite their objections, the 1899 Legislation was passed and its effect was to replace all bank notes with the Currency Board notes. The government suspended the authority of the Chartered Bank to issue notes effective from December 1904 and that of HSBC and the Mercantile Bank from August 1908.64 In 1899, the year of the first issue of government's paper currency, the average currency circulation of the commercial banks rose to M$8,082,210; this fell to M$6,713,132 in 1900 when the HSBC began a planned ^Bank Negara Malaysia, p. 27. 6^Lee Sheng-Yi, p. 9. Sir Frank Swettenham, the British Resident, had suggested in 1892 that the government should issue its own notes to over. come the shortage of currency in the 1880s. However, the banks which had a monopoly of note issue raised such strong objections that nothing came of it. See Chai Hon Chan, The Development of British Malaya, 1869-1909, Oxford Univ Press, Kuala Lumpur, 1967, p. 84. For a detailed account of the government note issue controversy, particularly the role played by the HSBC, see W Evan Nelson, "The Hongkong and Shanghai Banking Corpora. tion Factor in the Progress Toward a Straits Settlements Government Note Issue, 1881-1889", Essay 9 above. 63Ibid. 64Ibid. withdrawal of its notes in both Singapore and Penang. ^5 gy 1902, the private bank notes in circulation had dropped to M$4,966,518. In 1903 the value of currency notes issued by the various banks in Malaya and Singapore were as follows: Hongkong and Shanghai Banking Corporation M$2,860,000 Chartered Bank of India, Australia and China 885,000 Mercantile Bank of India 100,000^ It is interesting to note that even in 1903, HSBC's currency notes in circulation exceeded those of the other two banks combined. Although the number of all banknotes continued to decline after 1903, they continued to circulate in the Straits Settlements throughout the inter-war period to the amount of around M$135,000.67 Today the Penang HSBC still has an outstand. ing note issue account of M$22,575. The government's note issue was readily accepted as the common medium of exchange in view of its convenience and public confidence in its value. More important, the Currency Board system imposed a strict monetary disci. pline, with the value of the Malayan dollar defined precisely at M$l=2s 4d sterling and with full backing by sterling reserves.68 All these were to have immediate benefits for foreign investment and trade. With a stable currency against sterling, the country attracted a significant amount of capital from London for investment in the plantation and mining indus. tries. At the same time, with sterling being then the foremost reserve currency in the world, trade was facilitated with not only the Sterling Area, but also the rest of the world. All this meant more business for the HSBC. With an expansion in the type and volume of business activities, the Penang HSBC began to employ a larger staff. By 1927, its staff totalled thirty-five.^^ At the same time, in the wake of this expansion, the Penang HSBC moved from its original small premises in Beach Street to the present palatial building in Downing Street in December 1906. After the termination of its note issuing function in 1909, the HSBC's most important role was to act as a banker to the Johore State Government. This came about when the HSBC became the first bank to set up business in Johore in 1910. The Bank was initially housed in two rented shophouses on Jalan Ibrahim, in Johore Bahru. Only the ground floor of one of the shop- houses was used as the office. The other house was occupied by the Govern. ment Chandu Shop, with the top floors of both houses being converted to make living quarters for the sub-agent, H A Cortney. Apart from serving as the Johore Government banker, the Johore HSBC also had the privilege of being bankers to the Sultan of Johore and members of the Royal Family and continued to fulfil both functions until the opening of Bank Negara's branch in 1966. 6^Shaw and Kassim, p. 19. 66Fred G Penney, "Report on Currency Note Issue", Singapore, 13 Feb 1930, p. 45. 6^Lee Sheng-Yi, p. 10. 6RIbid . ^Berita Hong kong Bank, Vol X, p. 4. 70"The Hongkong Bank, Johore Bahru", Berita Hongkong Bank, Vol XI, June 1981, p. 2. EASTERN BANKING Expansion of the HSBC in Malaya Up to the beginning of the twentieth century there were only eight branches of banks in Malaya, excluding Singapore. Five of them (including HSBC) were in Penang, while the remaining three (all branches of the Chartered Bank) were in Kuala Lumpur, Taiping and Ipoh respectively.^ The expansion of the Penang HSBC provided the stimulus for an expan. sion in the Bank's overall financial activities in Malaya in the early twentieth century. Moreover, economic conditions were favourable for the expansion of HSBC to mainland Malaya. Thus in 1909, HSBC established its second agency in Malacca. The Bank was encouraged by Sir John Anderson, the High Commissioner of the Federated Malay States and Governor of the Straits Settlements to open an agency in Malacca. 72 The HSBC requested the Government to provide temporary offices free of rent and also requested that the Government's and municipal accounts be kept with the Bank. This was readily agreed to and the Straits Settlements Government offered the Bank temporary offices and living quarters for the Agent in Government buildings free of rent. A building site selected by the Bank was also given free on certain conditions. Finally, the Government undertook to keep all its accounts and also those of the Municipal and Rural Boards in Malacca with the HSBC.^3 At the time of the establishment of the HSBC's Malacca agency, there were more areas under rubber in Malacca than any other state except Selan. gor. The Malacca Rubber Company had already banked with the Singapore HSBC and was anxious for the Bank to establish an agency in Malacca. So were several rubber planters. The Chartered Bank lost the opportunity to open a branch ahead of the HSBC because it wrote to the Resident-General for permission without first going through the Governor of Singapore.^ The Straits Settlements Government also wanted HSBC to open an agency in Negri Sembilan and was willing to furnish temporary offices free of rent. The Bank, however, preferred Malacca to Negri Sembilan because it felt that its customrs in Negri Sembilan could turn to Kuala Lumpur for their banking requirements while the southern and coastal parts of Negri Sembilan, Malacca and possibly North Johore could look to Malacca.^5 Initially it was expected that the principal business at the Malacca agency would be making advances and buying cheques on Singapore. It was hoped that later on the agency would finance direct rubber export and Chinese remitting shops would buy exchanges in Malacca instead of in Singapore.^6 The establishment of the Malacca agency was followed a year later in 1910 by the establishment of agencies in Ipoh, Kuala Lumpur and Johore Bahru (Table 1). T S Baker, another prominent Singapore HSBC manager, played an important role in opening up these agencies. ^Wright and ^ ^Inspector' s 7-^Ibid . ?4Ibid. 7^Ibid. ^Inspector' s Cartwright, p. Report, 1909; Report, 1910; 140. HSBC Archives. HSBC Archives. Table 1 HSBC Branches in Malaysia and Date of Establishment Branch Date Opened HSBC/MB* Kuala Lumpur: Main Office 1 Jan 1910 HSBC Medan Pasar 1909 MB Bukit Bintang 26 Jul 1965 HSBC Jalan Ipoh 21 Apr 1965 HSBC Bentong 1 Jul 1961 MB But terworth 1963 MB Cameron Highlands 1 Jul 1947 HSBC Ipoh: Jalan Sultan Yussuf 14 Mar 1910 HSBC Station Road 1929 MB Johore Bahru 16 Apr 1910 HSBC Kota Bharu 1912 MB Kuala Lipis 1929 MB Kuala Trengganu 1936 MB Kuantan 1929 MB Malac ca 22 Nov 1909 HSBC Mentakab 20 May 1961 MB Muar 1 Jan 1930 HSBC Penang: Beach Street 1860 MB Downing Street 1884 HSBC Petaling Jaya 17 Apr 1961 HSBC Raub 3 Jan 1961 MB Seremban 9 Mar 1959 MB Sungei Patani Feb 1922 HSBC Taiping 1 Jan 1959 MB Teluk Anson 28 Nov 1946 HSBC Teme rl oh 1 Nov 1956 MB Malacca, Bukit Terendak 4 Feb 1961 HSBC Sabah: Beaufort 29 Mar 1961 HSBC Kota Kinabalu 1 Jul 1947 HSBC Labuan 2 Jan 1957 HSBC Papar 17 Apr 1961 HSBC Sandakan 1 Jan 1948 HSBC Tawau 1 Jan 1948 HSBC Sarawak: Kuching: Jin Tun Hj Openg 18 Jul 1964 HSBC Padungan Road 16 Apr 1958 HSBC Sibu 10 Aug 1959 HSBC *MB = Former Mercantile Bank branches before integration. Source: HSBC, Kuala Lumpur. Ipoh was the centre of the tin mining district of Kinta in Perak. The Chartered Bank had been established there for some years and was doing a profitable business. Among other business houses, the Eastern Smelting EASTERN BANKING Company had promised to transfer all its accounts to HSBC if it opened offices in Ipoh or Kuala Lumpur. When HSBC decided to open an agency in Ipoh, the Resident-General helped the Bank to select a site located between a river and the recreation ground.7? The most important of HSBC's new agencies was the one in Kuala Lumpur. Up to 1874, the British had confined their activities to the Straits Settlements in Penang, Malacca and Singapore. In 1874, the British decided to intervene in the Malay States and proceeded to set up the British Resident System in Perak, Selangor, Negri Sembilan and Pahang. In 1896, these four Malay States were incorporated into the Federated Malay States.Kuala Lumpur, on account of its central position, was chosen to be the headquarters of the Resident-General and of the departmental heads, and it thus became the Federal capital. By this time Kuala Lumpur had also developed very rapidly. In 1884, Kuala Lumpur had a population of only four thousand. Eleven years later, when the town was chosen as the admini. strative headquarters of the Federated Malay States, the population had risen to twenty-five thousand. 79 The town was well-placed to benefit from the rubber boom of around 1910. Thus the establishment of HSBC's Kuala Lumpur agency came at a propitious time. When the HSBC set up its Kuala Lumpur agency, the Chartered bank had already had an established branch there for some twenty years. Initially, the Chartered Bank carried out its business partly in Government offices, but later moved to its own building.80 When the future of the Federated Malay States was still uncertain, the Straits Settlements Government granted subsidies to banks to open branches in Kuala Lumpur, but by 1910 it was reluctant to do so. Still the Resident-General promised that the HSBC would be provided with suitable temporary offices free of rent and half or at least a large part of the Government's accounts would be kept with the Bank. The Resident-General was anxious to have HSBC establish an agency in 81 Kuala Lumpur and even promised to consider the offer of a free site. HSBC's first office in Kuala Lumpur was located on a temporary site in Java Street, now known as Jalan Tun Perak. But a year later a new site was acquired in the historic Old Market Square. In 1912, HSBC decided to locate its Malayan head office in Kuala Lumpur. The old building was torn down and a new building put up in its place. This building housed HSBC's head office in Malaya until 1973, when it was demolished to make way for the present building.82 The establishment of the Kuala Lumpur HSBC also marked the expansion of the HSBC's network of branches to other states in Malaya. Table 1 shows the establishment of HSBC's various branches in Malaya and their dates of establishment. Table 1 also shows that HSBC's most rapid expansion took 7 7ibid. 78fot a detailed account of British intervention in the Malay States, see C Northcote Parkinson, British Intervention in Malaya, 1867-1877, Univ of Malaya Press, Kuala Lumpur, 1960. 79Kennedy, p. 237. SOinspector's Report, 1909; HSBC Archives. 81Ibid . 82HSBC, A Milestone in Malaysia, Kuala Lumpur, 1979, p. 3. place in 1910 when a record three branches were established. After that, only two new branches were established up to the outbreak of the Second World War. After the War, the Bank's most rapid expansion took place in 1961 and 1965 when two new branches were established in each of the two years. The HSBC continued to expand up to 1965 when it established two more branches in Kuala Lumpur. In July 1965, the Malaysian government prohibited foreign banks from establishing any more branches with a view to encouraging the establishment of local banks. HSBC's expansion to the eastern Malaysian states of Sabah and Sarawak first took place in 1947 when it established a branch in Kota Kinabalu, Sabah. Its first branch in Sarawak was not opened until 1958 in Kuching. Today HSBC has a comprehensive network of a total of thirty-six branches in Malaysia including the fourteen branches established by the Mercantile Bank (Table 1). These branches are located in all the major towns and cities in Malaysia. Finally, Figure 1 shows that the expansion of HSBC's Malaysian branch network was concentrated mainly along the west coast of Peninsular Malay. sia. This was the result of an unwritten agreement between the three top foreign banks at that time, that is, Chartered Bank, Mercantile Bank and HSBC, that they would not compete with each other in small places or towns where business was limited. That was why, based on the agreed policy, the Mercantile Bank concentrated on and expanded along the East Coast. It was only much later, when business grew and the situation allowed for fur. ther expansion, that the Chartered Bank expanded to the East Coast. The HSBC did not establish any branch in the East Coast. 84 All its present East Coast branches were established by the Mercantile Bank and these were taken over by the HSBC when the Mercantile Bank became a wholly-owned sub. sidiary of the HSBC in 1959.R^ But even after the Mercantile Bank became a subsidiary of the HSBC, its branches continued to be known as the Mercan. tile Bank and functioned as such, with only its major policies dictated by the HSBC. In 1974 the Mercantile Bank was completely integrated under the banner of the HSBC and henceforth became known also as the HSBC, thus enabling the Hongkong Bank Group to maintain a single unified presence in Malaysia. Postwar Developments The growth and development of the HSBC was interrupted by the outbreak of of the Second World War. When the War broke out, the Straits Settlements and the Federated Malay States Governments had to raise large sums of money for defence preparations. The HSBC played a leading role in floating and ^Interview with T R K Crozier, HSBC Kuala Lumpur. However, according to the HSBC's Controller Group Archives, S W Muirhead, there was no such agreement. See S W Muirhead, "The Mercantile Bank of India on the East Coast of Malaya", Essay 28. ^According to Lee Tiam Onn, the HSBC felt that there was not enough busi. ness on the East Coast to justify the establishment of a branch. S^For further details, see S W Muirhead. Map of Malaysia Showing Location of HSBC's Branches EASTERN BANKING 3 C servicing various loan issues. The Bank also acted as Army bankers for Malaya, in which capacity it had to provide cash for paying the soldiers.The Bank staff also played a role in defending the country. W C Murray, the Agent in Penang at the start of the War, was appointed Quartermaster of the local defence force.8? When the Japanese attacked Malaya in December 1941, several HSBC agencies sent all their cash, books and records to Singapore. During the war years some HSBC agencies were closed, while others were occupied by the Japanese. In Penang, the HSBC building was taken over by a Japanese bank, the Nampo Karhatsu Kinko or Southern Bank, while in Ipoh, Malacca and Johore Bahru, the Bank's buildings were occupied by the Yokohama Specie Bank. After the Japanese occupation, the HSBC reoccupied its bank premises and resumed operations. Although the pattern of activity remained the same, except that the volume of business continued to increase, a dramatic change occurred during the years after Malaya's independence in 1957. While the HSBC was still involved in financing trading activities, export and import, the composition of its customers began to change. Since independence, trading activities had been slowly taken over by local people. Thus the Bank had an increasing number of customers who were now mainly locals while the number of foreigners grew at a much slower pace. Within the Bank itself, policies were changed. As early as 1960, the HSBC commenced its Malayanisation program, where for the first time Malayans were recruited to serve as executive officers in the Bank, although expa. triates still held the top posts. Before this, the comprador was the most senior Asian employed in the Bank. The next most senior position occupied by an Asian was the office assistant or chief clerk. There were at least ten Europeans employed in the Kuala Lumpur HSBC. In addition to the manager, assistant managers, and accountants, Europeans were also in charge of various departments such as cash, inward and outward bills and currency exchange.88 with the intro. duction of the Malayanisation policy, the expatriates' positions were gradually taken over by local staff. An important milestone was reached in 1974 when the Penang HSBC appointed a Malayan Chinese as its Manager. Today there are only five expatriates in the HSBC in Malaysia. They hold the positions of Chief Executive Officer, Deputy Manager, Manager Administration, Manager Operations and the EDP Coordinator. The most senior Asians in the Bank hold the post of Manager of Branches and Manager of Marketing. The change in Malayan policies towards the pattern of development in the country also played a crucial part in changing the financing and busi. ness activities of all banks after independence, including the HSBC's. By the late 1960s, the government had begun to place more emphasis on the manufacturing sector. This gave rise to the opening up of industrial and free trade zones. In this respect, the HSBC began playing a significant role by involving itself in the financing of the manufacturing sector, 86Report by R A Steuart, 15 Feb 1955; HSBC Archives. 87Letter from A Chalmers to J R Jones, 28 Sept 1951; HSBC Archives. 88jnterview with Lee Tiam Onn. EASTERN BANKING financing the factories being set up as well as meeting the financial requirements of manufacturers and developers in the construction and purchase of necessary plant and machinery. The change in the pattern of HSBC's loans to the different sectors in the Malaysian economy may be seen in Table 2, which shows the percentage of HSBC's loans by industry sectors during the last ten years. The table shows that agriculture, which accounted for thirty-four per cent of total HSBC loans in 1972, received only fifteen per cent of its loans in 1981. On the other hand, the share of loans to the manufacturing sector rose from twenty per cent to twenty- seven per cent during the same period. Apart from financing the manufacturing sector, the HSBC also played its role in financing economic development in Malaysia after the country achieved its independence. For instance, the Bank provided a loan of $20 million to the Federal and Colonial Building Society, which was sponsored by the Colonial Development Corporation and the Government of the Federa. tion of Malaya.Similarly, the HSBC contributed M$32 million at prefer. ential rates during the period 1972 to 1978 towards the Government Housing 90 Loan Scheme to enable government employees to purchase houses. The change in the pattern of its lending activities did not divert the HSBC from its expansionary program. The Bank continued to develop steadily and uneventfully until 1976 when the Bank became involved in the Harun corruption case. Dato Harun Idris was the Chief Minister of Selangor and a leading politician in the ruling party, the United Malays National Organi. sation (UMNO). In 1972, the HSBC gave Harun a total of M$250,000 (US$98,425) as a political contribution to UMNO. When Harun was subse. quently tried for corruption in 1976, evidence given by the Bank's officers revealed that there was a connection between the Bank's political donation and its applications for the necessary approvals from the Selangor State Government to build the proposed twenty-eight-storey headquarters in Kuala Lumpur.91 The fact that the money was meant for UMNO rather than for Harun himself was irrelevant, not only because the Bank's witnesses stressed that UMNO and Harun were "synonymous" in their eyes, but also because of the nature of the charges brought against Harun. Harun was found guilty of corruptly soliciting money from the Bank, in that the money was an induce. ment to him as Chief Minister to get the approval of the State Executive Council for the Bank's new building. Harun' s conviction could have placed the HSBC in a serious position because under Malaysia's Prevention of Corruption Act, the giver as well as the receiver of a bribe is guilty of an offence. Fortunately, the Bank was not prosecuted.92 Instead it was persuaded to provide the necessary 89i.ee Sheng-Yi, p. 79. 9^Data provided by HSBC. 9-^For further details of the Harun case, see the following issues of the Far Eastern Economic Review: a) "Harun Idris: A Case To Answer", 94, No 40, 1 Oct 1976, 20; b) "Constitution Questioned in Harun's Case", 96, No 17, 29 April 1977, 12-13; c) "Harun: the Lost and Last Appeal", 96, No 25, 24 June 1977, 13-14. ^zHad the Bank committed and been found guilty of a similar offence in Hong Kong, the relevant people would have been liable to a sentence of up to Percentage of Loans and Advances HSBC (Malaysia) by Industry Sectors, 1972-1981 CO O rH 00 CP 1—1 CP in o in rH P- P- o o i—1 o i—i CN CN rH ‧—i o rH 00 CN tD in CO m CN m o p- rH CO 1—1 o o vo o i—i CN CN rH rH o 1—1

i \ 0 Cn P i—i -P i—i P ‧H m fd CO C) fd fd 0) co fd CQ q CP -P CX CD CO m LX ￡ c CD Q \ u p T5 K CD 0 ex CO ‧H 0 CD P T5 H \ q > '—1 CO p O q 4-1 -p 0) CO q p (D rH -H fd 0 .q p ‧H -P ‧H 0 < a s u 3 H IP O ￡ Eh ■K EASTERN BANKING evidence in the Harun trial. In this connection, the HSBC flew in wit. nesses from the Channel Islands, the Middle East, Singapore and Hong Kong. The HSBC's involvement in the Harun case, which was no doubt the most dramatic court case in Malaysia since independence, harmed its reputation for conservatism and integrity. Consequently, the manager was replaced and M J Calvert, the present manager, was sent to reorganise the Bank. Calvert did a good job and the Bank has now recovered from the trauma of the Harun case and resumed its steady pace of development. So far we have shown how the HSBC responded to the changing economic environment of its host country. In the early days, the Bank was mainly involved in financing trade and commerce. Subsequently it became involved in the agricultural sector when the rubber plantations developed. With the emphasis on the manufacturing sector since Malaysia's independence, the Bank is now making the largest portion of its loans to this sector. In the following sections we will examine how the HSBC has responded to the changing policies of Bank Negara Malaysia, the country's central bank. Impact of Bank Negara's Regulations The most significant development which exerted a crucial impact on the activities and growth of HSBC was probably the establishment of Bank Negara Malaysia (the Central Bank) and the launching of the five-year Malaysian plans, beginning in 1966. Prior to the establishment of Bank Negara, the operations of HSBC and other commercial banks were under the ambit of the Companies' Ordinance 1948, which was actually more applicable to business companies in general and not specifically related to commercial banks. Like other central banks around the world, Bank Negara Malaysia also has within its control a set of standard monetary instruments directed at regulating the cost of money and availability of credit in the Malaysian economy. Up to the 1970s, the principal instruments of monetary management of Bank Negara had been mainly variations in the statutory reserves, liquidity ratios and periodic changes in interest rates. Since their introduction, the reserve and liquidity requirements have been changed from time to time. As far as HSBC is concerned, the standard credit controls by Bank Negara do not pose significant hardship or problems in its operations since they are imposed uniformly on all commercial banks in Malaysia and none of them is particularly onerous. Most banks, as a matter of prudence, in fact maintain a liquidity ratio higher than that required by law. One of the major changes that might have some discriminating effects on HSBC's dealings abroad is the exclusion of all foreign assets in the composition of liquid assets for the purpose of calculating the liquidity ratio. This ruling was introduced in 1965. Prior to that, certain foreign liquid assets were regarded as eligible liquid assets. This change in composition of liquid assets was apparently one of Bank Negara's measures to encourage foreign banks to withdraw their sterling balances and securi. ties from abroad and to make more local loans and investments. ten years' imprisonment. See "Harun: Bad Buy For a Bank", Far Eastern Economic Review, 29 May 1976, pp. 99-100. 3 74 Besides the "normal" credit controls, specific Bank Negara restric. tions which are imposed only upon the foreign banks are not many. It is clear that since independence, the Malaysian government has continued to make substantial efforts to attract and encourage foreign investment, though at the same time, measures are being taken to increase and promote the level of Malaysian ownership and control in private investment. Under the Banking Act 1973, there are certain additional conditions imposed on foreign incorporated banks. For example, the head office of a foreign bank like HSBC is required to have a paid up capital fund of not less than $5 million, whereas for a locally incorporated bank, its paid up capital and reserve must not be less than $2 million. In addition, the branch office of a foreign bank in Malaysia is also required to maintain net working funds in Malaysia of not less than $2 mil lion.^3 However, as far as repatriation of profits and dividends by HSBC to its home office in Hong Kong is concerned, so far no explicit restrictions have been laid down by Bank Negara or the Malaysian government. The only requirements are that all such transfers of funds must be approved by the central bank as a matter of procedure and that the amounts remitted should not exceed the reported profits. Restrictions on Expansion and Growth of Indigenous Banks To HSBC, the most serious restriction, which has greatly hindered its expansion and growth, has been the central bank's policy which makes it difficult for foreign banks to obtain approval to set up additional new branches or to relocate an existing branch office to a different location. This policy has in fact been in effect for more than fifteen years and it explains why HSBC has not opened up more new branches after the last branch was set up in Jalan Bukit Bintang, Kuala Lumpur, in 1965. Looking back, it can be clearly seen that the most important feature in the Malaysian commercial banking history was the predominance of foreign incorporated banks. At the beginning of the 1960s, the five largest commercial banks in the country were all foreign banks, and HSBC was one of them. Together they accounted for nearly three-quarters of total bank deposits and two-thirds of total bank loans and advances at that time.^ When Bank Negara commenced operations, one of its first priorities was to encourage and promote the establishment of domestic banks and the expan. sion of the banking network, especially to the rural areas and small towns. In order to assist and protect the development of locally incorpor. ated banks, limitations were imposed on foreign banks to restrict their geographical expansion. The most significant outcome of this policy was the emergence of Malayan Banking Berhad and the United Malayan Banking Corporation, two local banks which were established around 1960 and both of which were based in Kuala Lumpur. The special characteristics of these two banks was that they were able to establish, within a short time span, a very wide branch network, and by the end of 1964 they had between them set 9^The Banking Act, 1973, section 5. 9^Bank Negara Malaysia, p. 144. EASTERN BANKING up about one hundred and forty branches.With the encouragement of Bank Negara, these two banks had opened up branches mainly in rural areas which previously lacked banking facilities. The entry of new banks provided a considerable competitive spur to HSBC and other foreign banks, although the impact of the domestic banks was not felt until the mid and late 1960s. According to Bank Negara reports, up to 1966 the number of branches of foreign banks had continued to outnumber that of domestic banks. Effect of Changes on the Development of HSBC During the 1960s, the growth and development of HSBC were not affected significantly by the establishment of Bank Negara and the introduction of various changes in the financial system of Malaysia. This was due to several factors. Firstly, until the early 1970s, the central bank policy regarding regulation of the banking industry in Malaysia was largely broad and general. To encourage the development of a modern and progressive banking system, Bank Negara relied more on moral suasion to regulate bank. ing activities rather than on specific quantitative directives. Secondly, being a foreign bank, HSBC enjoyed certain financial advan. tages; for example, the requirements for reserve and liquidity would not affect its expansion of credit or lending facility significantly since it was able to replenish its liquid reserves by borrowing from its head office abroad in times of need. Thirdly, at the time Bank Negara was established, the growth of domes. tic banks in Malaysia was still in its infancy. As mentioned earlier, the banking industry then was still dominated by four or five large foreign banks. An important move by HSBC which later proved to have a profound effect and which helped to contribute significantly to the success of HSBC today was the acquisition of the Mercantile Bank of India in 1959. At the time the latter was acquired, HSBC already had branches set up in major townships on the west coast of Peninsular Malaysia, whereas the Mercantile Bank's banking network was mainly on the East Coast of the Peninsula. As a result of the acquisition, HSBC was able to enjoy a well-distributed branch network which covered almost every important urban centre in Peninsular Malaysia at a time when the country's banking activities were mainly urban-oriented. Finally, HSBC was predominant in international trade in Malaysia in the 1960s, although at that time the Malaysian government had begun to realize the importance of economic diversification and was actively encour. aging local industrialisation. According to Bank Negara's Annual Report and Statement of Accounts 1964, international trade and commerce repre. sented over half the loans and advances extended by all banks at the end of 1964.“ Considering that financing of external trade and foreign exchange had been HSBC's major line of activity since its early establishment in J Drake, Money and Banking in Malaya and Singapore, Malaysia Publica. tions Limited, Singapore, p. 59. (The figure, of course, includes branches set up in Singapore.) 96Ibid, p. 61. Malaysia, it was able to continue to enjoy a substantial market share of the banking business together with a few other large foreign banks. The New Economic Policy—The New Challenges The five-year Malaysian plans were launched as a result of an intensive review of the nation's priorities of development and of awareness of the need to intensify the nation's efforts to deal with the economic and social problems confronting the country. Following the civil disturbances in May 1969, the New Economic Policy was formulated and adopted in the Second Malaysia Plan 1971-1975.97 The two-pronged policy, which reflects the Government's call for shifting priorities in the nation's economic development, aims at eradica. tion of poverty, irrespective of race, and the restructuring of society to eliminate the identification of race with economic function. The ultimate objective of the Plan is to promote national unity.* * 9R Under the new environment, Bank Negara's policies which evolved in the 1970s were no longer directed merely at maintaining monetary and financial stability in the country, but also at promoting economic growth with parti. cular emphasis on achieving the objectives of the New Economic Policy. With respect to the first objective, that is the eradication of poverty, one of the elements in the planning strategy is to promote indus. trial development, with particular emphasis on channelling more credit and financial assistance to certain "priority" sectors of the economy, such as the bumiputra community, the agricultural sector and manufacturing indus. tries. Since one of its functions is to influence the credit situation in the country, Bank Negara had to take a very active role in urging the commercial banks to increase their lending to these priority sectors. Initially, Bank Negara relied mainly on the technique of moral suasion to encourage commercial banks to step up such loan facilities. Apparently this approach did not bring about satisfactory results and consequently, more selective forms of quantitative guidelines were introduced by the central bank beginning in 1974. Lending to Priority Sectors Since their introduction, these selective quantitative guidelines had been revised from time to time to meet the changing economic emphasis of the nation. With each change, the guidelines were made more and more specific. For example, in 1975, the commercial banks were required to extend a minimum of fifty per cent of their net increase in advances during the year to the bumiputra community and the manufacturing industry. From October 1976, Bank Negara directed all commercial banks to lend a minimum of twenty per cent of net increase in advances to the bumiputra community; 97Malaysia, Second Malaysia Plan, 1971-1975, Government Press, Kuala Lumpur, 1971. 9RIbid. EASTERN BANKING in addition, a minimum of ten per cent of net increase must be lent for agricultural food production, sixteen per cent for small-scale enterprises (as defined by Bank Negara), twenty-five per cent for the manufacturing sector and ten per cent for individual housing loans.99 To ensure effective implementation, Bank Negara also imposed penalties for failure in compliance. These penalties assumed various forms and included the compulsory channelling of funds from the defaulting banks to the central bank in the form of deposit at a "penalty" rate of interest. 1^0 Since such strong measures in a way by-passed normal market mechanism, their impact on the operations of HSBC and other commercial banks was con. siderable, especially on the management of bank assets and loan portfolio. The significance of such "directives" on the financing activities of HSBC can be analysed from the latest credit guidelines issued in March 1981 which contained the following requirements: Priority Lending Guideline to be complied with for year ending 31.12.1981 Sector Percentage/Amount 1. Bumiputra community 2. Small-scale enterprises 3. Housing loans 4. Manufacturing industry 5. Agricultural food production 17% 12% 10% to maintain level of lending at 31.12.1980 8% The above percentages are defined in terms of the total amount of advances and trade bills receivable outstanding at year ending 31 December 1980. A commercial bank like HSBC has to comply not only with the above loan portfolio with respect to the priority sectors, but also with the terms and interest rates regulated by Bank Negara for certain types of loans. For example, with the exception of certain small-scale enterprise loans which have a lower interest rate, the interest rate for loans extended to all bumiputras must not exceed nine per cent per annum. Com. pliance with requirements for categories (4) and (5) does not pose signifi. cant problems to HSBC since the Bank is free to charge interest on such loans at a competitive market rate commensurate with the riskiness of the projects, except when the loans are granted to bumiputra companies or individuals. In addition, although the terms of the repayment period vary from case to case, the general length of financial commitment to such lend. ing is relatively short compared to other long-term loans like housing loans to individuals. Furthermore, since a majority of these loan appli. cants do not qualify for the Special Loan Scheme under the category of small-scale enterprises (to be discussed later), it usually follows that 99 Bank Negara Malaysia, p. 133. 1978, the penalty interest rate was 5%. In 1981, the rate was 5% for the first year of non-compliance and 2% p.a. for subsequent years. such loans must be fully backed by security or collateral of various kinds. Housing loans (category 3) are investments which are considered less attractive to a foreign bank like HSBC for two reasons, although such loans are generally very "safe". Firstly, the bulk of housing loans are term loans with a maturity structure ranging from ten to twenty-five years in some cases. This feature is not attractive to HSBC and most other commer. cial banks because it means tying down large sums of funds for long periods (banks are generally averse to long-term commitment because of the related uncertainty). Secondly, for small individual housing loans, where the cost of house and land does not exceed $100,000 in each case, a ceiling interest rate of ten per cent has been prescribed by Bank Negara. (For bumiputras, the rate must not exceed nine per cent per annum in all cases, as mentioned earlier.) Lending to Small-scale Enterprises For HSBC, probably the biggest challenge is to meet the target percentage of lending to small-scale enterprises. Small-scale enterprises are defined as "all registered businesses with net assets of up to $250,000 or in the case of limited companies, shareholders' funds of up to $250,000".1^1 In the credit guideline issued in March 1981 (see above) Bank Negara also stipulates that, included in the total loans to be extended to small- scale enterprises (quota of twelve per cent), a commercial bank must provide credit facilities under a so-called "Special Loan Scheme" of up to five per cent of the total amount of advances and trade bills outstanding at 31 December 1980. The special characteristics of the Special Loan Scheme are as follows: 1. Each individual loan must not exceed $50,000. 2. The interest rate is fixed at seven and a half per cent per annum. 3. The loan must be without security (that is, clean loan) except for loans used for purchasing fixed assets, in which case the banks are allowed to take a charge on such assets. 4. Loans must be accepted for guarantee by the Credit Guarantee Corpo. ration which will guarantee sixty per cent of such loan in return for a fixed charge of half a per cent per annum of the outstanding value of each loan so guaranteed.1^2 5. Banks will be eligible for a tax rebate of two per cent on value of 1 such loans granted. 10-*-Credit Guarantee Corporation, Special Loan Scheme for Small-scale Enter. prises, Kuala Lumpur, 1981. l^xhe Credit Guarantee Corporation is a joint venture established in 1972 between Bank Negara and commercial banks. Its main objective is to minimise risk faced by commercial banks by providing guarantee for loans extended under the Credit Guarantee Scheme (the predecessor of the Special Loan Scheme). For further details, see Chee Peng Lim, et al, A Study of Small Entrepreneurs and Entrepreneurial Development Programmes in Malaysia, Univ of Malaya Press, Kuala Lumpur, 1979, p. 32. lO^Credit Guarantee Corporation. EASTERN BANKING At 31 December 1980, the total amount of advances and trade bills outstanding for HSBC was approximately $2,056 million. This means that a total of about $103 million in small loans must be extended under the Special Loan Scheme in order to comply with Bank Negara's requirement and to avoid penalty. Given that each individual loan must not exceed $50,000, it follows that the total number of loans to be granted under this scheme will come to at least two thousand. The target date for meeting the above quota is set at 31 December 1981 for all commercial banks. Although substantial efforts have been made by HSBC during the year to achieve the percentage requirement, it is believed that the target may not be attained by the deadline in view of the short notice given by Bank Negara. As far as HSBC is concerned, the problem is compounded because the magnitude of the funds required under the scheme not only represents a substantial financial commitment at a very low interest rate, but also the smallness of individual loans would mean that a tremen. dous amount of processing and evaluation effort will be required for the loan applications and administration (in addition to processing loans to other priority sectors). On the other hand, although HSBC is the third largest commercial bank in Malaysia, its market share of total customers' deposits is relatively low compared to the other two large domestic banks, that is Bank Bumiputra and the Malayan Banking Berhad. At the end of 1979, Bank Bumiputra's share of total deposits for all banks was twenty-three and a half per cent, Malayan Banking's share was eighteen per cent, whereas HSBC's share was only 7.6 per cent (Table 3). However, in terms of the ratio of total advances to total deposits, HSBC had a ratio of eighty-five per cent at the end of 1979, which was higher than the national average of sixty-nine per cent, whilst the other two large banks had relatively low ratios of forty- three per cent and fifty-six per cent respectively. 1^5 The implication of these analyses is that HSBC has a relatively small deposit base compared to the other two large banks. This in a way limits the amount of credit that can be extended, not only to small-scale enter. prises, but also to other priority sectors, in view of the extent of loan advances which were already committed. In short, a lack of liquid funds can be the main obstacle to meet Bank Negara's requirements for the current year. In addition to that, experience has also indicated that loans to small enterprises, even those granted under the guarantee of the Credit Guarantee Corporation, may be highly risky. This is because it is extremely diffi. cult to obtain "claims" from the Corporation in cases of default in repay. ment. It has been reported that over a period of five years, less than thirty per cent of claims on bad loans have been entertained. lO^Per HSBC's Statement of Assets and Liabilities at 31 December 1980. 1O^SGV-Kassim Chan, A Study of Commercial Banks in Malaysia 1979, Manage. ment Services Division, Kuala Lumpur, 1980, p. Jl. Table 3 Per Cent Shares of the Six Largest Commercial Banks in Total Deposits, 1976-1979 1976 At 1977 Snd of 1978 1979 Increase (Decrease) Bank Bumiputra 17.3 19.9 21.3 23.5 6.2 Malayan Banking 15.5 17.5 20.0 18.0 2.5 United Malayan Banking Corporation 9.3 8.4 7.5 7.1 (2.2) Chartered Bank 13.4 11.5 9.3 8.0 (5.4) HSBC 9.2 8.5 8.0 7.6 (1.6) Overseas Chinese Banking Corporation 7.2 6.6 6.0 4.8 (2.4) Source: SGV-Kassim Chan, A Study of Commercial Banks in Malaysia, 1977 and 1979, Management Services Division, Kuala Lumpur, 1980, Schedule L. Competition for Deposits For reasons analysed earlier, 1981 may be the year HSBC is unable to comply fully with the guideline requirement for small-scale enterprises; however, according to some senior officers of HSBC, other large and medium domestic banks may also face the same difficulty in complying in view of the current tight liquidity conditions experienced by commercial banks as a whole. The size of the deposit base is the main determinant of a bank's ability to extend credit. Competition for deposits has always been keen among the commercial banks and finance companies in Malaysia; in recent years, however, the struggle for funds has become even more evident because of the tight money market situation experienced by the economy. In the "scramble" for additional deposits, some banking institutions have pushed up the fixed deposit rates to an unprecedented level of around thirteen per cent or higher in recent months. This is a considerably high rate of interest in Malaysia (without comparing those of neighbouring countries) and is almost double the stipulated interest rate of seven and a half per cent for small loans under the Special Loan Scheme. In view of the high cost of funds, the reluctance of some commercial banks to meet the Bank Negara quota is obvious. Being a foreign bank, HSBC loses out to the large domestic banks in the battle to solicit more deposits, especially from the public sector. The two local banks, that is the Bank Bumiputra and the Malayan Banking Berhad, both of which are government-owned, are able to have access to the sizable deposits of the government agencies and statutory bodies because of the government's policy to maintain accounts mainly with the local banks. From Table 4 it can be seen that the growth of deposit base for EASTERN BANKING Table 4 Analysis of Total Deposits and Percentages of Annual Increase for Domestic and Foreign Banks (in M$ million) 1975 1976 1977 1978 1979 Total for domestic banks 4,346 - 6,038 38% 8,410 39% 10,488 25% 14,611 39% Total for foreign banks 4,008 - 4,716 17% 5,384 14% 5,884 9% 6,811 15% Source: SGV-Kassim Chan, Schedule S. domestic banks is much faster than that of the foreign incorporated banks. This increasing and larger share of total customer deposits by domestic banks in the country could be the main reason which accounted for their better performance on priority lending. Besides being denied access to deposits from government sources, HSBC is also restricted to drawing deposits mainly from the urban population only because it has no branches in the smaller towns which were formerly rural villages. The domestic banks, particularly the Malayan Banking Berhad, which can and have established such extensive branch networks in both rural and urban areas, are able to have a wider deposit base by tapping and attracting funds from people who live in rural areas which previously lacked banking facilities. An analysis of Table 3 also indicates that the per cent share of total deposits for HSBC (and two other foreign banks) is decreasing gradually every year. This of course is due to the rapid growth of Bank Bumiputra and Malayan Banking Berhad. The implication for the future is that HSBC may find it more and more difficult to expand its share of total deposits in the market and as competition for deposits becomes tougher, the cost of funds will most likely increase further, too. For the year 1981, the liquidity position of the banking system in the country has continued to be tight due to the continuing rapid expansion of bank credit in the face of the slackening growth of deposits (arising from the slowdown in export earnings and the weakening balance of payments). The slackening growth in deposits relative to overall increase in loans and advances is reflected in the high percentage of loans/deposits ratio which rose from 79.8 per cent at the end of June 1980 to an unprecedented high of 89.3 per cent at the end of March 1981.106 1^^Malaysia, Economic Report 1981-82, Printers, Kuala Lumpur, 1981. Ministry of Finance, Government Evaluation of HSBC's Priority Lending It is reported that commercial banks as a group have more than complied with the Bank Negara guideline in the sense that the proportion of total loans to priority sectors often exceeds the minimum requirements stipulated by the central bank. However, in terms of individual performance, only twenty-one out of thirty-eight commercial banks managed to comply with all the guidelines at the end of 1980.1^7 Analyses also indicate that, comparatively, the performance of domes. tic banks on priority lending is more satisfactory than that of foreign banks. For example, in the first half of the 1970s, on the whole, loans extended to small-scale enterprises were well distributed among the domes. tic and foreign banks. Since 1977, however, the domestic banks have increased their lending in this direction to account for more than two-thirds of the total increase in new loans extended to small-scale enterprises. ^8 pn addition, it is often reported that most of the non. complying banks are foreign banks. In this respect, it is noteworthy to mention that as far as HSBC is concerned, it has been able to comply with the lending guidelines at the December 1980 deadline. However, due to unavailability of data, it is not possible to state whether HSBC has performed better than the average bank or has only managed to adhere to the minimum requirements under the guide- 1 ines. Employment of Bumiputras With regard to the second New Economic Policy (NEP) objective, that is restructuring of society to eliminate identification of race with economic functions, the planning strategies of the second and subsequent five-year Malaysian Plans mainly involve policies towards achievement of greater economic balance among the various ethnic groups in the country. In this respect, tremendous emphasis is placed on the acceleration and restruc. turing of bumiputra equity participation and employment in the modern sectors of the economy. To understand the background of these policies, it is necessary at this juncture to analyse briefly the ethnic make-up and characteristics of the Malaysian society. The racial composition of Malaysia since pre-independence times embraces three major groups of essentially diverse origins, the Malays and other indigenous people (the bumiputra), the Chinese and the Indians. Due to historical and cultural reasons, the multi-racial population of Malaysia was very unevenly distributed in terms of geographical , economic and occupational dispersions. For example, the industrial and commercial activities in urban centres were largely run and controlled by the Chinese and, to a lesser extent, Malaysians of Indian origin; on the other hand, agriculture and related activities in rural areas accounted for the ^^Malaysia (1981). lO^Bank Negara Malaysia. EASTERN BANKING majority of bumiputra employment in the country. As a result of this distribution, the income disparity of the various racial groups was wide with the incidence of poverty highest amongst the bumiputras. This eco. nomic imbalance eventually led to the civil riots in 1969. As mentioned earlier, it was the 1969 disturbance that prompted the government to formulate the NEP with the underlying objective of correcting this economic imbalance by restructuring the equity and employment composi. tion of the economic and industrial sectors. Under the NEP, the target of equity restructuring is to achieve corpo. rate ownership structure of a 30-40-30 profile, with thirty per cent of total equity to be in the hands of bumiputras, forty per cent by other non- bumiputra Malaysians and thirty per cent by foreigners. Since HSBC is not a Malaysian incorporated company, but one which operates as a branch of its head office in Hong Kong (hence registered as a foreign company in Malay. sia) , equity restructuring cannot be carried out unless it changes its status by becoming a separate Malaysian incorporated company with equity capital. As far as employment restructuring is concerned, the NEP guideline stipulates that employment composition of companies should reflect the racial composition of the country. This racial composition requirement is not only confined to the total labour force of a company, but also at each and every level of appointment in the company organisation structure from the lowest grade to the upper echelons. For HSBC, compliance with the NEP requirement for employment means substantial restructuring of its entire staff composition in view of its employee structure during the pre-independence period and the period prior to the establishment of NEP. Since its early operations in Malaysia, HSBC can be considered as one of the "Chinese" banks with employees predomi. nantly of Chinese origin and a few expatriates (British) holding the top managerial positions. This was not a distinctive feature of HSBC; other foreign and local banks had similar patterns of work force, except that in the case of local banks, the senior positions were also held by the non- bum iputras . Employee restructuring, however, is not a recent exercise of HSBC. As stated earlier, as early as the beginning of the 1960s HSBC had already responded to the government's call for Malaysianisation in its organisation structure, except that during that time the economic imbalance was not identified with any particular community and hence no distinctive priority was placed on any racial group. For a foreign establishment like HSBC, the emphasis then was placed on recruitment of Malaysian managerial personnel to replace the expatriates in the high positions, since the staff in the low non-managerial levels were already Malaysians. To respond to the target of the NEP requirement for racial quota in the organisation set-up is certainly a more challenging task to HSBC com. pared to fulfilling Bank Negara's directive on credit expansion. This is because controlling the movements of funds can be achieved more easily and effectively than controlling the movements of human resources, especially when the category of human resources in question happens to be in short supply. Over the past ten years since the launching of the Second Malasia Plan, HSBC has been making various positive changes in its manpower recruitment policy to improve its employee structure in order to comply with the NEP guideline. The positive steps taken include hiring bumiputra personnel whenever vacancies (old or new) arise; providing training for new bumiputra staff and offering scholarships to bumiputra students who in turn are expected to serve the Bank when they complete their studies. However, unlike restructuring of loan portfolios which can be achieved in a year or two, restructuring of employee composition has proven to be a very slow and difficult process for HSBC. First of all, like other foreign banks in the country, HSBC's original staff composition was very imbalanced in its racial distribution, both in terms of total labour force and at each level of employment. Since it is unreasonable to retrench or dismiss the existing staff and replace them with employees of a particular ethnic group, the Bank has to wait for the occurrence of new vacancies or natural attrition of the work force which by themselves are very slow processes unless the Bank is expanding very rapidly. Secondly, as mentioned before, due to the economic background of bumiputras, there is a serious shortage of suitably qualified and trained bumiputra personnel in the banking and commercial sectors especially at the executive and managerial levels. Although the government and the Bank itself have undertaken various types of training programs to increase the number of bumiputras in this field, the supply of skilled bumiputra person. nel still falls short of demand. The third problem faced by the Bank is the high rate of turnover of its bumiputra staff. Even though HSBC has stepped up the recruitment of bumiputras in the past ten years, the rate of staff turnover in this ethnic group is so high that the progress of employee restructuring has become a slower and more difficult task then anticipated. In general, bumiputra personnel prefer positions in government departments to working in banks or commercial firms in the private sector. This could be due to the security and stability that government jobs offer (usually fixed office hours, fewer geographical transfers, and pensions). In spite of the above problems, HSBC has made some progress in re. structuring its labour force. This may be seen in Table 5 which shows the number of HSBC bumiputra employees during the last thirteen years. In 1970 the Bank had only sixty-two bumiputras, but by 1982 the number had increased to seven hundred and seventy—four (out of a total number of over two thousand employees). However, as Table 5 also shows, more than eighty- -five per cent of HSBC's bumiputra employees are relatively low ranking employees, that is in the clerical and non-clerical categories. The Bank is aware of this deficiency and is trying to recruit more bumiputra officers. Towards a Malaysian Identity So far the HSBC appears to have successfully coped with the radical changes in Malaysian banking policies following the adoption of the New Economic Policies. It has managed to comply with Bank Negara's lending guidelines and has employed the required proportion of bumiputra employees in its work EASTERN BANKING Table 5 Total Bumiputra Employees in HSBC in Malaysia as at 31 January of each year from 1970 to 1982 As at 31 January Officer Cleric al Non Clerical Mi seellaneous Total 1970 4 13 42 3 62 1971 5 27 42 4 78 1972 6 53 44 5 108 1973 6 60 46 4 116 19 74 20 130 106 5 261 1975 29 166 116 10 321 1976 31 200 123 10 364 1977 36 216 119 7 378 1978 46 296 166 9 517 1979 54 317 170 12 5 53 1980 63 361 179 12 615 1981 77 401 180 11 669 1982 99 475 184 16 7 74 Officer refers to: Miscellaneous refers to: a) Resident Officer a) M'sian Affairs Adviser n) Trainee Programmer b) Resident Officer b) Business Adviser o) Ops Sup Officer Trainee c) Public Relations P) Shift Supervisor c) Staff Officer Of fic er q) EDP Librarian d) Chief Cashier r) Computer Operator Clerical refers to: e) Trustee Manager s) Maintenance Asst a) Time-scale Clerk f) Property Officer t) Chargeman b) Special Grade Clerk g) Contract Officer h) Asst Property Non-Clerical refers to ‧ Officer a) Officer Boy/Messenger i) Conf Clerk/Translator b) Watchman j) Conf Secretary c) Liftman k) Progr ammer/Analys t d) Car Park Attendant 1) Senior Programmer e) Cleaner/Sweeper m) Programme r Source: HSBC, KL force. However, the mos t difficult task facing the HSBC has yet to be overcome. This is the problem of local incorporation Under the New Economic Policy, foreign companies (including banks) are required to restructure their equity so that thirty per cent of the equity would be held by bumiputras, forty per cent by other Malaysians and thirty per cent by foreigners. Initially the government stressed that the 30-40-30 formula for the ownership of limited companies' share capitral was a global target which would not be applied at the level of individual enterprises. If this is the case, the banking sector has already attained the necessary bumiputra quota. At the end of last year, bumi- putras held more than seventy-seven per cent of the paid-up capital of the domestic banks. Only two local banks now have less than the required thirty per cent: Ban Hin Lee, an eight-branch operation which is currently in the process of restructuring, and Wah Tat, with two branches in Sara. wak. H By extension, therefore, bumiputras could be said to own more than fifty per cent of the equity in all banks in Malaysia—including the foreign ones. Nevertheless, the government is still exerting pressure on the foreign banks to restructure their equity. Thus it was not surprising when Char. tered Bank recently announced plans for voluntary restructuring on 19 March 1982, followed three days later by the HSBC.H2 Both revealed that they had been holding talks with Bank Negara on the issue. The potential advantages of local incorporation are substantial. A restructured bank with fifty-one per cent bumiputra equity (or thirty per cent bumiputra and forty per cent other Malaysian) qualifies for a five per cent reduction on the standard forty per cent tax rate. Such a bank will also be eligible to receive government deposits and, most important of all, will be able to open new branches. The inability to open new branches has placed a severe constraint on the expansion of the HSBC and no doubt this applies to the other foreign banks as well. In fact, the effect of not allowing foreign banks to open new branches in the nine years since the last foreign bank licence was issued (to the Bank of Nova Scotia) has been an expansion rate among domestic banks of more than twice that of their overseas competitors. Although the above discriminatory effects were severe, they were not crucial in forcing the HSBC to confront the question of restructuring. There were other factors which made it difficult for the HSBC and other foreign banks to operate over the past twelve months. For example, many of the foreign banks, especially the smaller ones, rely heavily on the local inter-bank market. Sources say their access has been reduced since last February, when liquidity was particularly tight, not so much as a policy decision, but more as a result of government dealers using their discre. tion. In addition, discriminatory minimum capital gearing ratios were introduced in September 1981 requiring foreign banks to maintain a ratio of six per cent while the ratio for local banks was fixed at four per cent. Finally, after a debate on banking laws in December last year, the deputy finance minister singled out the foreign banks for criticism over their loan policies and parliament subsequently introduced new rules requiring lO^alaysia, Third Malaysia Plan 1976-1980, Government Printer, Kuala Lumpur, 1976, p. 278. 110"Foreigners Fade Away", Far Eastern Economic Review, 2 April 1982, pp. 42-43. 1 ^Ibid . ll2"Towards a Malaysian Identity" and "Talks Soon on Equity Structure of Foreign Banks", New Straits Times, 19 March 1982 and 2 April 1982 respectively. EASTERN BANKING them to publish information on their operations in local newspapers. Possibly in view of the above and other more stringent measures which might be introduced in the future, the Chartered Bank decided to make a pre-emptive move, since a forced restructuring could be damaging to the bank's operations and public image. After its closest rival, the Chartered Bank, had made its move, the HSBC had little alternative but to follow sui t. At present it is not clear how the HSBC would restructure its equity. Presumably it would try to retain control over the restructured company, possibly by selling off a fifty per cent holding, while keeping its main branch in Kuala Lumpur to transact international business. But in whatever form the restructuring takes place, the exercise would enable the Bank to achieve a closer identity with its Malaysian environment. Needless to say, it would also introduce a radical change in the Bank's corporate personal. ity. At the same time, local incorporation by the HSBC and the Chartered Bank would reduce foreign participation in Malaysia's banking sector to virtual insignificance.^^ This would be in great contrast to the picture just ten years ago, when foreign banks operating in Malaysia controlled sixty per cent of the country's commercial bank assets. Conclusion The HSBC has come a long way in Malaysia since it established its first branch in this country more than a hundred years ago. The Bank can claim to be not only the oldest but also the largest foreign bank in Malaysia and the most modern. In view of its dominant position in the Malaysian banking system, the HSBC exerted an important influence over the financial policy of the country and also made an important contribution to its economic development. Undoubtedly, the role and influence of the HSBC was greatest during the colonial era when the Bank was one of the three main pillars in the colonial banking system. However, according to G C Allen and A G Donnithorne, "No private Western concern holds (or has held) so dominant a position in Malaya as that formerly occupied by the Hongkong and Shanghai Banking Corporation or Jardine Matheson in the Treaty Ports of China". The important roTe ascribed to the HSBC may be seen in the various functions performed by the Bank during the colonial days. Firstly, the HSBC provided the necessary credit for the internal and external trade of the country. Its strong reserves and liquidity position enabled the Bank to become the leading financier in the rubber trade and creditor to many of the leading agency houses in the country. Secondly, the HSBC expedited the inflow of British capital to Malaya and thus helped to develop the rubber and tin industries which provided the early foundation for the economic development of the country. Thirdly, the HSBC issued most of the banknotes circulating in the H^Of the 148 overseas bank branches in Malaysia, the HSBC and the Char. tered bank account for 71 branches and in terms of assets in Malaysia, these two banks account for roughly half the foreign banks' total. H^Allen and Donnithorne, p. 51. country before the Board of Commissioners of Currency took over. Much of the success which attended the subsequent issue of paper currency by the Board could be due to the widespread use of such notes in the Straits over many years, a practice encouraged by the stability and high reputation of HSBC's notes. Finally, the HSBC, together with the Chartered and Mercantile Banks, served as the medium through which the exchange of sterling for dollars and vice versa was mainly transacted. The Straits Government had banking accounts with these banks and remittance of government funds to and from London passed through their hands. The success of the HSBC in establishing a prominent position in the colonial banking system in Malaya may be attributed to several factors. First, it was well-managed and well-organised, with adequate capital to meet a financial crisis, such as those in 1866 or 1872.^^ The HSBC had a good relationship with London and other international financial centres. Further, it had large amounts of sterling balances and securities in London to transact its foreign exchange business, mainly with Britain and the rest of the British Empire. When the Currency Board system was introduced in 1899, with the currency reserve backed one hundred to one hundred and ten per cent by sterling assets, the HSBC with its sterling balances and securities kept in London, was in a particularly strong and favourable position, and was practically unchallenged until the gradual emergence of the local Chinese banks. ^ Second, the HSBC enjoyed the co-operation and the good faith of the Straits Settlements Government and the British Colonial Office. It often advised the government in economic and financial matters, and was sometimes appointed to the Board of Commissioners of Currency. During World War II, it was appointed by the government as one of its agents in the matter of foreign exchange control. ^ A third reason for the success of the HSBC was its policy of orientating its outlook towards China, Hong Kong and Japan, instead of towards India, in trade and finance. The trade with the former area had become much greater than that with the latter, and the development of the HSBC in the former area was in harmony with the trading and financial conditions of that time.HR Since independence, the HSBC's role in the banking system in Malaysia has been slightly diminished. For example, in the early 1960s, the top three banks in the country were all foreign banks and HSBC was one of them. Today, the two largest banks in Malaysia are both locally incorporated; the HSBC, however, still remains one of the three leading banks in Malaysia. The economic significance of HSBC can best be seen from a comparative analysis of the six largest commercial banks (foreign and domestic) in Table 6. In terms of total assets, total advances and total deposits, HSBC was the third largest at the end of 1980; in terms of net earnings, ll^Lee Sheng-Yi, p. 68. 116Ibid. 1 l^Ibid. 1l8Ibid. EASTERN BANKING 03 o TJ a a) -p CO 0 iH ,Q rt CS ‧H CO >, ctf rH rt S CO X a aJ m cS *H o u Q O CJ 39- s c ‧H CO +-> s o 6 aj -P CO 03 bO Sh C0 X ‧H CO 0) 03 a) a C tji o G ‧H rG .G P u 3 id- I c P &4 nj 5 o- d)S P- cn ^ p P O d) O > O >. fd i—I n3 ￡ T3 0) P ‧H G 0 CP -H G -P ‧H rO - ^ P i S a CQ P O U TD a) aj c tj $ ia R g a m 03 X ? T3 >,-H 2 ^ n ^ tj Q 'j g ffl “ <3 <5 CQ 2 ra w P 03 &t -H TJ ‧H CO rH o 3 o

LD GO CO (T> ‧ ‧ Q CO LD CN LD ID LD ID 3 cr> CN o> CO O r-i CO co ‧ ‧ 0 co cp LD CN (T> LD CO i—1 ￡ v * CN rH <3 CO CN ‧—i i—1 CN rH CO CO CO CO LD CN CN CP P G o CO 1—1 LD CO co rH CO CO 3 CO r—i 0^ o CO rH ‧ ‧ 0 LD rH LD CN CO LD CO r- e CO CN CO 3 LD CN CN (T> rH CT> r- r- ‧ ‧ 0 rH CN CN LD CN CO CO o rH E CO rt! lD CO CN LD CN CN r—\ i—i i—1 <—1 rH i—1 rH rH H1 CP p s LD o CO LD o O rH CO 3 i—1 r-* CT> CN LD rH rH i—1 ‧ . 0 o LD CN ID LD CN LD LD 6 CN rH d 03 ‧H rd ‧H P O & 03 a) p a) x: 4-1 o o o <_> c CO CO a p ‧H 4-1 O P CP TJ -P ‧H ‧a a CO -p Q) CO CO < 4-t O CO -p r- cp 4-1 o Tl G 0) -P 03 tp G -H a p T3 § CO p d) P 03 co p CD O 03 CO a X3 CO d) Id P o a p o o G HONGKONG BANK IN PENINSULAR MALAYSIA however HSBC occupied the second highest place, just behind Malayan Banking Berhad. (In 1977, HSBC had the highest net earning figure among all the c omme rcial banks.) From the profitability point of view, HSBC has every reason to be proud of its performance, since it has the highest ratio of net earnings to average earning assets among the six largest banks. However, profitability should not be over-emphasised as the primary organisational objective of a business concern in a developing nation like Malaysia. From the various new government policies and regulations introduced in the past two decades, it is obvious that government's emphasis is not attainment of maximum economic growth, but rather achievement of greater economic equity among the various races and groups in the country. It is commendable that HSBC as a foreign commercial bank is able to achieve considerable success, both under a laissez-faire environment with minimal legislative intervention (pre-independence period) and under a set of new political surroundings with increasing government restrictions and interferences (post-independence period). Looking into the future we can predict that the Malaysian political and legal business environment will continue to be one where more formal economic planning and greater direct governmental interventions are expected to influence the development and undertakings of business concerns. Under this environment, the banking industry will continue to be as competitive as ever. For HSBC, its growth potential will depend largely on its continuing ability to persevere in less favourable circumstances and its willingness to move in the direction of government policies. Given the existing political and social set-up in the Malaysian economy, perhaps it may be advisable for the Bank to recognise political reality in the country and adapt itself to the challenging environment, even if this does mean local incorporation. Local incorporation will give a new lease of life to the HSBC and allow it to maintain its pre-eminent position in the Malaysian banking community. 18. A PRELIMINARY LOOK AT THE ROLE OF THE HONGKONG BANK IN NETHERLANDS INDIA by J T M van Laanen In basic reference works about the financial world of Netherlands India, barely any attention is devoted to foreign, ie, non-Dutch, banking institu. tions in general, and to the Hongkong Bank in par t icular. An allotment of footnotes in which the founding dates of various branches of these banks are recorded is commonly all that appears. Comparison reveals even this minimal data often contains contradictions. A partial explanation for such limited interest can be found in the fact that only a circumscribed role was reserved for the Hongkong Bank in Netherlands India. In addition, however, it should be stated that our knowledge about the Bank's transactions clearly leaves much to be desired. Verrijn Stuart, for example, asserts that for foreign (English) banks in Netherlands India, the true significance of their transactions was impossible to determine, since no statistical material was published.^ ^t the time Verrijn Stuart was writing his complaint, he was probably not far from wrong. Indeed, annual reports issued by banks in Netherlands India, and not only English banks, limited themselves to publishing the bank's balance along with its profit and loss account--practically nothing else was revealed. For reasons of competition, banks disclosed as little about themselves as they could get away with doing. Only De Javasche Bank, the colonial circulation bank, and the Nederlandsch-Indische Escompto Maatschappij NV (NIEM) produced reports which come reasonably close to what would be required by contemporary standards. Of course, under such circumstances research in primary source mate. rial by economic historians of the time was unimaginable. A thing or two has changed now, however, some thirty-six years after the Republic of Indo. nesia proclaimed its Independence. Today researchers enjoy a considerable measure of access to colonial archives, and not only in Indonesia. ^Among the most well known reference works should be included: (a) N P van den Berg: Munt-, Crediet- en Bankwezen, Handel en Scheepvaart in Neder- landsch-Indie: Historisch-Statistische Bijdragen (Currency, Credit and Banking Systems, Trade and Shipping in Netherlands India: Historical Statistical Contributions), The Hague, 1907; (b) G M Varrijn Stuart: Het bankwezen in de Nederlandsche kolonien (Banking in Netherlands India), Wassenaar, 1923 and 1934; (c) G Vissering: Muntwezen en circulatiebanken in Nederlandsch-Indie (Currency System and Banks of Issue in Netherlands India), Amsterdam, 1920. ^Verrijn Stuart, p. 128. THE HONGKONG BANK IN NETHERLANDS INDIA There is a possibility that the study of documents stored in the central archives of the Hongkong Bank will enable a more varied picture of bank operations in Netherlands India to emerge than has previously been suspected. There is also an archive outside Hong Kong which appears promising: the archive of De Javasche Bank, the predecessor of the Bank Indonesia, in Jakarta. In this collection of records, unique in Indonesia (as the author knows from personal experience), approximately four meters of financial correspondence from the period 1930 to 1950 between the Head Office and diverse branches of the Hongkong Bank can be found. Furthermore, it can be surmised that systematic examination of the minutes of board meetings in this archive will bring to light much valuable information. The search for data concerning the Bank in the Netherlands has to date not met with any success worth mentioning. The archives of two major Dutch banks in Netherlands India, the Nederlandsche Handel-Maatschappij (NHM) and the Nederlandsch-Indische Handelsbank NV (NIHB), which are situated in the General State Archives in The Hague, only provide, almost without excep. tion, detailed data about the banks' own agencies in Hong Kong. These archives would thus be highly suitable for a study about the significance of Dutch banks in Hong Kong. From remaining bank archives, even less can be expected that would be of relevance to the topic of this paper.^ In short: we have to pin our hopes on the archives in Hong Kong and Jarkata, which it has not yet proven possible for me to peruse in depth. As a consequence, the following remarks will be of a preliminary nature, and their organization has been more or less determined by the fact that only two of the sources which have been available to me contain any more direct information about the Hongkong Bank than do general reference works. The late Dr J R Jones' unpublished study entitled "The Bank's Branches", in which he devoted some pages to Netherlands India, is one of these; the other is Maurice Collis' book.^ Both make it clear that the Bank's interests were concentrated in the sugar trade between Java and Hong Kong. Therefore I will deal in detail with this trade and the Bank's possible role in financing it (Section 3). That the Bank's involvement in Netherlands India must have extended beyond the sugar trade, however, emerges from Section 4. Yet first, by way of introduction, I will sketch the growth of banking in Netherlands India, not only to clarify its twists and turns, but also to depict the framework within which the Hongkong Bank will have been obliged to operate.^ ^E.g. the archives of Bank Mees en Hope NV in Amsterdam, which house the administrative heritage of Hope & Co, the first relation of the Hongkong Bank in the Netherlands. Collis: Wayfoong: The Hongkong and Shanghai Banking Corporation, Hong Kong, 1978, pp. 96-99. ^My general summary of the development of banking in Netherlands India is largely based on P Creutzberg and J T M van Laanen (eds): Changing Economy in Indonesia: A Selection of Statistical Source Material from the Early 19th Century up to 1940, Vol 6: Money and Banking, Amsterdam, 1980. EASTERN BANKING WESTERN BANKING AND TRADE Economic Structure Two principal sectors were--speaking in analytic, theoretical terms-- distinguishable within the colonial economy of Netherlands India the tradi. tional-agrarian indigenous sector and the advanced Western sector (activi. ties of the intermediary group "Foreign Easterners", Chinese and Arabs principally, are subsumed under the Western sector for the sake of keeping things conveniently simple).R Here we will not concern ourselves with the indigenous sector of the economy which was devoted first and foremost to satisfying the subsistence needs of the small producer and his immediate environment and which had its own credit systems, separated entirely from the Western ones. To the Western sector belonged all enterprises run by non-indigenous members of the population. These enterprises acquired their value added primarily through the export of agrarian raw materials (sugar, coffee, etc) or minerals (petroleum, tin). One can regard this sector as a frontier post of Western-oriented trade and industry, "saturated by the spirit of modern capitalism and operative at its periphery".^ jf the indigenous sector was to an important extent dominated by fluctuations in volume (harvests), the price of exported goods on the world market was decisive for the economic well-being of the Western sector. Production techniques in use were far more capital intensive by nature and, above all in the sugar industry, necessitated the import of an appreciable quantity of capital goods. The course of foreign commerce, to a large extent determined by the presence of this Western economic sector, exhibited conspicuous similari. ties with commerce in most other tropical-colonial agrarian economies. The trade balance almost always showed a large surplus which, in part, flowed out of the country in the form of profits and interests returned for invested capital.R VOC—Monopoly and State Capitalism Western commercial banks continuously maintained close relations with export enterprises. Any discussion of the development of these banks can RTo portray the situation in a bit more detail: in 1930 the Western popula. tion in Netherlands India amounted to 240,000 and there were 1,400,000 "Foreign Easterners". Together these groups constituted something less than 3% of the total population. ^Translation of a reference from J van Gelderen: Voorlezingen over Trop- isch-Koloniale Staathuishoudkunde (Lectures on Colonial Economics), Haarlem, 1927, p. 6. Q ‧ ‧ °For information about this surplus, see Van Gelderen, pp. 112-6 and J H Boeke: Economie van Indonesia (The Economy of Indonesia), Haarlem, 1955, pp. 223-36. THE HONGKONG BANK IN NETHERLANDS INDIA best begin with the Vereenigde Oost-Indische Compagnie (VOC: United East India Company) which attempted to monopolise the foreign trade of the Indo. nesian archipelago from 1602 until 1798. The VOC, which started life as a purely commercial venture, in the course of time grew into an institution with certain official, governmental responsibilities as well. Regulations concerning compulsory labour and the cultivation of crops which were consi. dered commercially desirable testify to the VOC's authoritative status. In the end, internal corruption and poor policy but also, above all, increas. ing competition, spelled ruin for the VOC. Throughout the first decades of the nineteenth century, the volume of trade conducted by the Dutch was overshadowed by the more industrialised English. It was in part able to meet foreign competition that in 1830 Governor General J van den Bosch introduced the "Cultuurstelse1" (Compul. sory Cultivation Scheme).9 The Compulsory Cultivation Scheme obliged the Javanese farmer to plant part of his land with products for the international market in exchange for a small monetary compensation. According to consignment contracts which were agreed upon with the government of Netherlands India beginning in 1830, the Nederlandsche Handel-Maatschappij (NHM), established in 1824, became responsible for the transportation of produce to the Netherlands and the organisation of its sale there.^ Under the Compulsory Cultivation Scheme the government of Netherlands India, in imitation of the VOC, acquired a monopoly position dominating the export of a number of agricultural products (eg, coffee, sugar, indigo and tea). During this period (1830-1870) private initiative was undoubtedly circumscribed. Firms which had already begun business in Netherlands India prior to 1930 (including Maclaine Watson & Company and Pitcairn Syme & Company) clearly suffered hardships. The NHM remained the only commercial house of any significance, certainly in the field of export.^ Seeing that in essence the NHM was executing commissions from the Netherlands-Indian government, business practically free from all risk, and taking into account that the NHM only extended very limited amounts of credit to private applicants, her operations really fall outside the sphere of bank. ing in a strict sense. De Javasche Bank Until the 1850s, De Javasche Bank, established under Order in Council No 28 9 Among other publications on this subject, see C Fasseur: Kultuurstelsel en Koloniale Baten (The Compulsory Cultivation Scheme and Colonial Sur. plus), Leiden, 1975. l^A consignment contract binds the owner of the products (in this instance the Netherlands-Indian government) to deliver them to his creditor (here the NHM) who markets them on a commission basis. The creditor promises to provide the producer with the capital needed to cultivate the soil and to harvest the crop. Hw M F Mansvelt: De eerste Indische Handelshuizen (The First Trading Firms in Netherlands India), Batavia (Jakarta), 1938, p. 11. EASTERN BANKING of 1827 and empowered exclusively to issue banknotes, remained the sole private institution extending credit to traders who were subject to the provisions of the Compulsory Cultivation Scheme. While certain private firms made credit available to agricultural enterprises during this period, these firms generally did so, not with their own capital, but by passing on ‧ ‧ 12 credit obtained from De Javasche Bank. On Java in 1857, private traders could bid during the sale of govern. ment produce by auction for the first time in more than twenty years. Nonetheless, it was only in 1870 that the Compulsory Cultivation Scheme, subject to increasing criticism as liberal political influence grew, was officially discarded. For the first time in colonial history private initiative could proceed full speed ahead. When, as a consequence of broader opportunities, a sizeable amount of bank capital flowed into Netherlands India for investment purposes (see below) De Javasche Bank, as far as the extension of credit to private traders was concerned, steadily lost ground to the new, specialised banking institutions. The Bank decided to enter into commercial competition in a number of areas with these private banks. It was not just a matter of promissory notes being placed increasingly with private banks; competition was also becoming more intense in the direct financing of commodity trade, ie, loans on security. A number of authors have drawn attention to the great importance of De Javasche Bank as the central banking institute of Netherlands India. But the Bank's activities certainly did not measure up to the following defini. tion of a central bank: an institute on which private banks can fall back in order to bolster their liquidity, which acts as the Alpha and Omega of the flow of money, and to which a certain responsibility for the money and credit system as a whole may be ascribed by virtue of the special position it occupies.^ In Netherlands India, with a coinage system that was closely tied to the Netherlands, there was, if one leaves out of consideration seasonal peaks and the relatively modest market segments for call money and sub. scriptions to treasury paper, a lack of any independent money and capital market. Only minor fluctuations in the requirement for operating capital tended to be accommodated by the banks in Netherlands India. In normal circumstances, temporary surplus-funds were irrevocably remitted to the Netherlands by many trading and agricultural enterprises with headquarters there. ^ In part this occurred automatically, ie, to the extent that exported products were sold in the Netherlands. Where investment was not financed from ploughed-back business surpluses, this was done by the G J Gimbrere: Eenige beschouwingen over de financiering van de suiker- industrie en den suikerhandel op Java (Some Comments About Financing of the Sugar Industry and Trade on Java), Tilburg, 1928, p. 22. 13S Korteweg and FAG Keesing: Het modern geldwezen (The Modern Monetary System), Part 2: De techniek van het betalingsverkeer (The Technique of the Transfer of Payments), Amsterdam, 1974, pp. 52-3. l^Other foreign enterprises were, of course, also active in Netherlands India. This should be borne in mind when reference is made to the Netherlands in this context. transfer of funds or by the encashment of bills drawn on the Netherlands. In a technical sense, this was conducted through the banking system and its offices in Netherlands India, or, if cash was required and the position of the Netherlands-Indian banks permitted, through the banking system and De Javasche Bank. In the latter case, the Bank was required to have the necessary degree of metal cover in Netherlands India or to obtain the funds required from the Netherlands.15 Ultimately, therefore, there tended to be recourse to the Dutch money market. In many cases De Javasche Bank simply administered transfers from the Dutch monetary sphere to that in Netherlands India and was, as such, no more than an intermediary in the flow of money. Between the commercial banks and De Javasche Bank, there existed a credit relationship in the form of (re)lending on merchandise and securities as well as (re)discounting of treasury paper and promissory notes—although the size of these operations cannot be determined from the published data. Despite this relationship, however, the Bank was unable to control the domestic monetary system properly with the limited means at its command, ie, discount policy. The Bank did not, therefore, act fully as a banker's bank, nor as a lender of last resort. In retrospect, the Bank might best be depicted as an institute which, thanks to periodic extensions of its Charter by the Netherlands-Indian government, possessed an exclusive right to issue banknotes (although these notes did not become legal tender until 1914) and which also carried out some of the functions restricted to a central bank. The most appropriate term, which also conveys the Bank's commercial character, might well be "a note-issuing credit bank". Other Dutch Banks As mentioned before, until the 1850s De Javasche Bank remained virtually the sole banking institution that met the requirements for short-term credit of the private trading sector. The Government was forced to compensate for the deficit in private bank credit and to provide funds to enterprises involved in the processing of export crops produced under the regulations of the Compulsory Cultivation Scheme (principally sugarcane). The situation began to change when agricultural products were once again auctioned in Java and the government's share in commodity trade began to decline. The NHM began to extend consignment credits to private planters on a somewhat larger scale, in competition with the old trading houses witnessing a revitalisation at this time. When from the 1860s onwards the system of forced deliveries came to an end, the government ceased to act as a provider of credit. Up to 1883, however, the NHM virtually kept out of banking business proper. In 1883, giros (repayable on demand) and deposits, loans and advances appeared in the balance sheet for the first time.15 15C F Scheffer: Het bankwezen in Indonesia sedert het uitbreken van de Tweede Wereldoorlog (Indonesian Banking Since the Outbreak of the Second World War), 's-Hertogenbosch, 1951, p. 22. ^Verrijn Stuart, pp. 99-100. EASTERN BANKING Apart from De Javasche Bank, whose operational scope was severely circumscribed, banking business in a strict sense was conducted initially only by the Nederlandsch-Indische Escompto Maatschappij (NIEM), which was set up in 1857. This bank, with limited capital stock, confined its early activities to Batavia (Jakarta). In these circumstances the overall demand for credit needed to rise only slightly in order to exceed the maximum available supply. Something of this kind happened in 1862. The sharp rise in interest rates drew new bank capital to Netherlands India. 1863 saw the establishment in rapid succession of the Nederlandsch-Indische Handelsbank (NIHB), the Rotter- damsche Bank, the Internationale Crediet- en Handelsvereniging Rotterdam (International Credit and Trading Association of Rotterdam or Internatio), and an agency of the Chartered Bank of India, Australia and China. It soon turned out, however, that the actual demand for credit had been grossly over-estimated. The resultant structural overcapacity obliged the banks to enter into business with traditional agricultural enterprises, many of which had a marked need for long-term credit. With the exception of the NIEM, whose shareholders were apparently content to accept lower profits, most of the new banks threw themselves into this long-term busi. ness with youthful enthusiasm, extending large-scale credits, mainly to sugar companies. Although the Rotterdamsche Bank disposed of its interests in Netherlands India to the Chartered Bank of India, Australia and China in 1873 and the Internatio severely curtailed its activities, this did not result in the necessary degree of caution among the remaining banks. Their rashness becomes understandable in the light of the considerable improve. ment in the psychological climate that followed upon the introduction of the Sugar Act and the Agrarian Regulations of 1870.17 with this legisla. tion the government widened the scope of investment chances for private enterprise substantially. Moreover, a wave of mechanisation at that time, notably in sugar production, led to increased requirements for financing. A period of relative prosperity set in, lasting until 1883. Meanwhile a practice persisted that can only be described as risky in the extreme, namely the encashment of bills of exchange by banks in Netherlands India which were drawn on their head offices. These trans. actions came to be referred to as "pig on pork" drawings. When, partly in response to the overproduction of beet-sugar in Europe, the price of sugar on the world market fell sharply in 1883 and 1884, the receipts from auctioned sugar did not suffice to pay the bills, which were normally drawn in Netherlands India six months in advance, at their maturity date. A number of banks which had frozen an excessive proportion of their funds in long-term loans in the agricultural sector were suddenly faced with bankruptcy. This threat was intensified when it turned out that pig on pork paper was virtually unsalable. De Javasche Bank and the NHM (which was able to absorb the blow because of its size and because its agricul. tural interests were at that time still limited) did their utmost to meet the needs of the trading sector. Their support was not, however, enough: the banking system as a whole was faced with a deficit of no less than 1^Creutzberg and van Laanen, Vol 1: Indonesia's Export Crops 1816-1940, Amsterdam, 1975, Ch. 2.6. Nederlands-Indisch Courant (NICrt, the Netherlands-Indian guilder) f 40 million. Rescue operations were conducted by banks in the Netherlands. In the first place the NIHB's agricultural interests were removed and trans. ferred to a new Cultuurbank (agricultural bank), the Nederlandsch-Indische Landbouw Maatschappij (NILM). Financial assistance was also extended to the Koloniale Bank, which had been established two years after the Handels- vereeniging Amsterdam (HVA) in 1881, while Dorrepaal en Co transferred its agricultural interests to the Dorrepaalsche Bank der Vorstenlanden (Dorre— paal Principalities Bank, 1884) later (1888) known as the Cultuurmaat- schappij der Vorstenlanden (Principalities Agricultural Company). With the exception of De Javasche Bank, the NHM and the NIEM, the banking system in Netherlands India was thoroughly reformed. A fundamental reorganisation also took place in relations with the trading and agricul. tural sectors. In all, twenty-seven million Netherlands guilders in bank capital was transferred to Netherlands India. The crisis of 1884 enforced a clear distinction between general bank. ing business, ie, the provision of short- to medium-term credit, and the so-called agricultural banking business, which was concerned with long-term loans (often in the form of holdings in agricultural enterprises). With the exception of the NHM, which was to retain its "mixed" character, and, to a lesser extent, the NIHB, the remaining banks gradually divested them. selves of their direct agricultural interests. As far as possible, all long-term undertakings, mortgages and the like were shortened or called in. The banks switched to the provision of working capital (in the sense of operating capital) to commercial enterprises. Resources obtained also became largely liquid in nature. Various new banks emerged, which specialised in financing agricultural enterprises.1R Because these banks placed their capital permanently at the disposal of these enterprises, it would no longer be apt to describe them as credit-intermediaries. The HVA and the NILM are outstanding examples of this situation. By contrast, the NHM and the Internatio owned hardly any enterprises of their own. The Koloniale Bank and the Cultuurmaatschappij der Vorstenlanden were agricultural banks from the outset. After the phAse of reconstruction, throughout the 1880s, the major trade and agricultural banks underwent a period of practically uninter. rupted growth. In the twentieth century there were no longer organisa. tional problems of any magnitude. British banks in Netherlands India In 1863 the Chartered Bank of India, Australia and China was the first English bank to open its own office in Batavia.19 It soon became involved 18c Helfferich: Die Niederlandisch-Indischen Kulturbanken (Netherlands- Indian Agricultural Banks), Jena, 1914. See also Verrijn Stuart, pp. 143-211. 19In fact the Bank of Australia had already designated Maclaine Watson & Co as its agents in Java in 1836, but, according to J R Jones' TS "The Bank's Branches", "Its field appears to have been very limited," p. 26. EASTERN BANKING in the lucrative bill-broking that existed between British India and Java. Attracted by this development, from 1872 the Chartered Mercantile Bank of India, London and China let itself be represented in Netherlands India as well as through an agency in Batavia. This undertaking proved less suc. cessful in the long run, until the bank even closed down operations in the Indies definitively in 1933. The Oriental Bank Corporation also met with disappointing results and was only represented on Java for ten years between 1870 and 1880. Not until 1884 did the Hongkong Bank open its first office on Java (once again in Batavia). ^0 Since the Chartered Bank had a firm grip on relations with British companies, the Hongkong Bank started at a distinct disadvantage. What is more, in many respects 1884 was a disastrous year (see above). Martin Dyce & Company, which had been the Hongkong Bank's agent in recent years, still owned considerable sugar interests. As a result, the Bank had to suffer certain losses. It appears that for the rest, the Bank did not lose at all on any of the sizable advances which it made available to other trading businesses for the acquisition of products for the European market. Whether or not the Bank's experience with Martin Dyce & Company played a role in future policy, it is incontrovertible that after 1884 the Bank narrowed its field of interest to concentrate to a large extent on foreign trade. Evidence of this trend can be seen, for example, in a decision which was taken after an inspection tour conducted by representatives of the Hong Kong Head Office in 1887: the Batavian office should confine it. self as much as possible to transactions in foreign bills of exchange. As a consequence, and to a certain degree in opposition to the Chartered Bank which closely followed the pattern of British investments, the Bank took no part in the long-term financing of agricultural enterprises.^1 Herein it pursued the same course as De Javasche Bank and the NIEM (see above). The first years in Netherlands India were exceptionally difficult for the Hongkong Bank.^2 ^ c Kirkpatrick, the manager of the Batavian branch from 1887 to 1909, even spoke about Java as "a decaying colony" with far too many financial institutions for its rapidly dwindling volume of trade. Affairs deteriorated to such a point that consideration was given to closing the branch down.^3 2^Even earlier than 1873 De Rotterdamsche Bank performed certain services for the Hongkong Bank in Batavia. G Suermondt was appointed agent from 1873 to 1877, followed by Pitcairn Syme & Co, and finally in 1880 by Martin Dyce & Co. 9 1.. Zi0ral information from Dr H J Manschot, former Director of De Javasche Bank. Another consequence of the policies pursued was that the Bank's main business gradually became the financing of exports. The Bank had practically no import firms on its books. The resulting overbought position in sterling and the consequent shortage of cash was a frequently returning source of worry, since it was very difficult to dispose of this surplus to the Dutch banks in exchange for guilders. ^Certain similarities are apparent with the early years of the agencies of the NHM and the NIHB in Hong Kong. 23j r Jones, p. 28. What were the obstacles then that made life difficult at first for the Hongkong Bank on Java? Complaint followed complaint, for example, about how difficult it was to open bank credits in the Netherlands, which at the time was still the principal destination of exports from the Indies. How. ever, what makes it clear that this was an inheritance of political ideo. logy dating from the era of the Compulsory Cultivation Scheme rather than any violation of the "open-door" policy which Holland adopted towards its colonies after 1870 is that as early as 1885 a satisfactory arrangement was reached with Messrs Hope & Company in Amsterdam. Ultimately the bank survived its "teething troubles". In 1896 a second office was opened in Surabaya, the great sugar port.2^ Expansion never went far enough, however, to launch an office in Semarang, the third principal commercial city on Java. Towards the end of 1909, Kirkpatrick was succeeded by J C Nicholson, who stayed throughout World War I and was a very definite personality in Batavia and a quiet but firm leader. As the War wore on, relations between the allied powers and Holland became very strained. In about 1917 it even got so bad that all cables for Java were held up with the exception of those addressed to English firms or individuals. This meant that only British banks received any exchange quotations and that the Dutch banks were entirely in their hands. Rumour had it that the Hongkong Bank's Java profits in Nicholson's decade totted up to a good deal more than the aggre. gate of the preceding half century.2^ Gradually the Bank's representation spread among the other islands along lines parallel to the new agencies established by De Javasche Bank. THE HONGKONG BANK AND JAVA'S SUGAR EXPORT During, and for some time after, the period of the Compulsory Cultivation Scheme, coffee remained Java's leading export product. Only towards the close of the nineteenth century did sugar, grown only in Java, supplant it. Sugar's ascendancy was hastened by the Convention of Brussels in 1902 where producers of beet and sugar cane made definite agreements. All export premiums on sugar were eliminated in sugar—producing countries. Java's competitive position improved so much that production (— export) rose enormously (see Table 1). Whereas the quantity of sugar exported climbed continuously, virtually without interruption, the share in this increasing volume enjoyed by various countries of destination kept changing. Amsterdam was the princi. pal distribution market for all Java sugar during the period of the VOC' s 2Z*The of fice was opened after the German firm Erdmann & Sielcken began to function as agents in 1878 and the NHM acquired a similar position in 1884. 25These remarks are drawn from a letter dated 9/8/1955 from Wykeham Price to J R Jones. This letter is listed in the Group Archives of the Bank in Hong Kong under the heading "Personalities . EASTERN BANKING Table 1 Export of Java Sugar According to Countries of Destination in 1,000,000 Kg, 5-Yearly Averages Europe+ USA Singapore China4"1" Japan British India Total4"4"4" ++++ 1890-94 163.7 106.8 21.0 122.3 5.3 462.0 1895-99 142.7 277.9 21.0 138.3 8.6 7.4 613. 3 1900-04 287.8 115.5 40. 1 191.5 85.2 52.5 833.8 1905-09 270.5 89.6 40. 1 173.5 145.7 252.0 1,006.7 1910-14 324.9 28.4 77. 2 207.5 153.8 466.9 1,293.3 1915-19 477.4 10.5 106.8 215.5 187. 1 389. 7 1,444.0 1920-24 442.8 61.1 63.0 300. 2 265.0 460. 7 1,638.5 1925-29 237.9 84.4 474.3 369.9 918.6 2,220.1 1930-34 152.1 65. 1 397. 1 165. 1 528.0 1,456.4 1935-37 183.6 119.1 183.4 222.2 167. 2 96 7. 1 + including Port Said "for order" ++ mainly Hong Kong +++ including Australia and Thailand, not separately specified ++++1890-91, etc Source: H Ch G J van der Mandere: De Javasuikerindustrie in heden en ver- leden, Amsterdam, 1928, p. 94 (1890-1926); H C and R J Prinsen Geerligs: Cane Sugar Production 1912-1937, London, 1938, pp. 83-4 (1927-37). monopoly and the Compulsory Cultivation Scheme. Once the government gradu. ally began to withdraw, however, and differential export duties were termi. nated in Netherlands India in 1873, enormous cargoes of sugar were quickly shipped to London. ^6 a bit later the United States also began to import significant quantities of sugar from Java because Cuban production had fallen sharply for the time being under pressure of war with Spain (1868- 1878) and the abolition of slavery. In the meantime, exports to the Netherlands decreased dramatically. In addition, by 1900, when the supremacy of beet sugar was an accomplished fact in England, Java sugar had practically been extruded from the European market. Export to the USA was endangered as well when Cuban production recovered again. Java sought and found new outlets in British India, China and Japan. Although these countries absorbed under one third of Java's sugar exports in 1895 and something less than half in 1900, by 1903, for example, they were already purchasing sixty-five per cent! During World War I, when beet sugar disappeared from the world market, Java sugar would ^Gimbr&re, p. 31. again be diverted to Europe and North America. Afterwards, although the picture cannot be described as stable, Eastern countries, generally speak. ing, outstripped Western ones as buyers. Because of constant shifts in the destination of Java's export sugar and also because world prices fluctuated violently, the financing of trade was subject to severe strain. Available data does not allow us to say any. thing with certainty about the share of the Hongkong Bank in this financ. ing. The Bank confined its activites, as I commented earlier, to pure trade transactions, since it had no direct relations (participations, for example) with sugar refineries on Java. It will be informative, perhaps, to pursue this point further. The major agricultural banks actually controlled a considerable por. tion of the production of leading export products (see Table 2). Table 2 Relative Share of Production (Sales) of Enterprises Owned by Agricultural Banks in Total Production (Sugar) or Total Exports (coffee, tea, rubber), Netherlands India, 1933 Enterprises owned by Sugar Coffee Tea Rubber NHM 25.0 9.0 7.0 7.5 NILM 6.0 0.4 0.6 0.3 Internatio 4.0 5.0 2.0 1.0 HVA 12.0 — — — Koloniale Bank 6.0 13.0 4.0 0.4 Cultuurmij der 6.0 — — — Vors tenlanden Total 61.0 27.4 13.6 9.2 Source: G M Verrijn Stuart, Het Bankwezen in de Nederlandsche kolonien, p. 205, quoted in P Creutzberg and J T M van Laanen, Changing Economy in Indonesia, Vol 6, "Money and Banking 1816-1940", Amsterdam, 1980, p. 37. The two leading agricultural banks, the NHM and NIHB, tried, it goes without saying, to sell the sugar from their own factories, as well as from factories with which they had entered into consignment agreements, under the condition that the banks themselves would also arrange to store and ship the sugar. Should the purchaser defer, choosing to arrange for stor. age and transportation himself, a certain sum per unit weight was demanded in compensation for loss of profit. The strong position of the agricul. tural banks can also be illustrated by the fact that even the Vereeniging van Javasuiker Producenten (Union of Java Sugar Producers), a marketing organisation to which after 1917 approximately ninety per cent of Java's EASTERN BANKING sugar growers belonged, generally had to accept these banks' practises. In this fashion a considerable proportion—some 50% was not unusual — of the financing for sugar exports was "tied".2? Foreign bills of a restricted negotiability were often used. When Maclaine Watson & Company, for in. stance, wished to export sugar to Europe, it could happen that the bills drawn against the exported sugar were negotiable only at the NHM in Sura. baya. The Hongkong Bank could only operate on the "free" market where it had to compete with other banks to acquire exporters' bills of exchange.^ The competition will have been keen. In support of this contention, it does not seem likely, for example, that the Bank had a network at its disposal equipped to play an important part in trade between Netherlands India and Europe or the United States. Furthermore, Japanese traders will have knocked directly on the doors of their own banks in search of credit (e.g. the Yokohama Specie Bank). Finally, although the evidence given here is not exhaustive, relations with Chinese firms such as the Kwik Hoo Tong Trading Company or Kian Gwan, the commercial branch of the Oe i Tjong Ham concern, were already dominated by De Javasche Bank. The bulk of the Bank's operations will most likely have been centred on the financing of the sugar trade between Java and China, via Hong Kong. Hong Kong was involved because it was the site of the great refin. eries: the China Sugar Refinery Company Limited, founded in 1878, and the Taikoo Sugar Refinery, established in 1882. Both refineries primarily processed raw sugar from Java for the vast Chinese market. Already in 1896 the director of the China Sugar Refinery reported that "the refinery depends upon the Java crop for its principal supplies".^9 Hong Kong also had its favourable situation and natural harbours where ocean-going vessels could always drop anchor to thank for its position as the major sugar market in the Far East. The Chinese mainland could not offer such facilities. One alternative might have been for sugar that arrived on ocean steamers from Java to be reloaded onto smaller ships at Hong Kong, but the costs of such a transfer were so high that Hong Kong need not fear being by-passed in this fashion. Sugar for the great refineries was either brought in British steamers 2?Dr H J Manschot, former director, De Javasche Bank. Oral information. 2RSugar exporters usually sold their produce for British pounds. London was for a long period the great centre of the sugar trade. "Whether sugar is bound for Australia, Japan, British India, China, France or the USA, the intercession of The City is unavoidable. London is the major clearing house of the world," wrote W Suermondt in 1916. Eenige gevolgen van de wereldoorlog op den Java-suikerhandel (The Consequences of World War I for Java's Sugar Trade), Haarlem, 1916, p. 369. In later years the Netherlands-Indian guilder became more important in international trans. actions, especially in trade with Eastern countries. R E Smits: De beteekenis van Nederlandsch-Indie uit Internationaal Economisch Oogpunt (The Importance of Netherlands India from an International Economic Point of View), Batavia, 1931, p. 32). O Q , . F J Haver Droeze, Netherlands Consul m Hong Kong, in Archief voor de Java-suikerIndustrie (Archives of the Java Sugar Industry), a periodical, Batavia, 1904, p. 462. under the management of the firms Butterfield & Swire (managers of the Taikoo Sugar Refinery) or else in steamers hired for the voyage and flying a Dutch or some other foreign flag. Jardine Matheson & Company held a considerable interest in the Hong. kong Bank. Add to this a similar sort of relation between the Taikoo Sugar Refinery and the Ocean Steamship Company (the Bank was involved in rela. tions of this company in China and Java) and it becomes likely that the Hongkong Bank occupied a prominent position in negotiating sugar-bills. The NHM's and NIHB's interest in the Hong Kong sugar trade can be seen from their both electing to open agencies there in 1906. Of marked signi. ficance in this context is the complaint of the local NHM agent that most traders only wished to do business on more favourable terms than those offered by the Hongkong Bank. Whether because of long-standing relations or other obligations, the Hongkong Bank was usually the merchants' first cho ic e . If, on the basis of the above, we wished to draw a preliminary conclu. sion, we might assert that gradually the Hongkong Bank became involved to a substantial extent in the financing of sugar exports from Java, a develop. ment assisted in part perhaps by the shift of the sugar trade at this time from Europe and the USA to the Far East. The Bank's accomplishment was achieved despite competition from the major Netherlands banks.^ Although it is true, as mentioned earlier, that the government of Netherlands India adhered consistently to an "open door" policy in the sense that there were formally no restrictions to hamper the activities of non-Dutch enterprises, nevertheless in practice the vast expanse of Dutch plantations and fixed bank relations with these plantations meant that any substantial penetra. tion by foreign business interests on Java could, in general, be 32 prevented. THE HONGKONG BANK'S OTHER ACTIVITIES IN NETHERLANDS INDIA Brief comments about two of the Bank's secondary activities will be pre. sented in this section: its acting as an intermediary in remittances to China by Chinese traders, and its lending support from time to time to De Javasche Bank. It remains for further research to determine whether there 3°General State Archives (The Hague): Archief van de Nederlandsche Handel- Maatschappij (Archives of the NHM), No 9273. 3iThis competition took place primarily on Java. Along Sumatra's east coast, by way of contrast, where non-Dutch investors had considerable interests, the Netherlands banks exercised little control over foreign penetration. The only foreign bank on the scene was, for that matter, the Chartered Bank of India, Australia and China. In the economic devel. opment of Sumatra's east coast this bank played an extremely important roIe. (Archief Bijbank De Javasche Bank in Amsterdam, dossier 469 B I, p. 15.) 3^Japan in the 1930s proved to be a significant exception. EASTERN BANKING are yet additional operations worth the effort to report about. As far as the China remittances are concerned, one finds an interest. ing reference in the Annual Report of De Javasche Bank for 1883/84, page 46. According to this report, the glaring reduction of specie remitted to China after 1864 (several hundred thousand fewer NICrt annually) was directly connected to the development that English banks with branches in China had established about the extent of the demand for bills payable in China. Probably, for the twentieth century at any rate, considerable sums must have been involved, given the scope of Chinese corporate investments in Netherlands India. As far as special services for De Javasche Bank are concerned, the Hongkong Bank receives honourable mention in the Annual Report for 1914/15; the citation rests on a variety of contributions which the Bank had made: - When shortly before the outbreak of World War I grave doubts arose as to whether there would be a sufficient supply of food should sea connections with the outside world be broken and when the demand for rice from different regions, especially from beyond Java, rose to a high peak, in order to avoid runaway price escalation it was considered a good idea to centralise the sale and distribution of rice in government hands. The financing of the rice supplies which the government purchased in Rangoon, Saigon and Bangkok did not proceed without difficulties. Given that other banks were in no condition at the time to lend assistance, the job fell to the note-issuing institution; with the help of the Hongkong Bank's agency in Batavia, De Javasche Bank was able to make arrangements which guaranteed the financing of the imported rice. - De Javasche Bank managed to achieve a necessary increase in its gold reserves by purchasing gold bullion in Shanghai. The Hongkong Bank took these ingots into its "safe custody" for De Javasche Bank. In the same way De Javasche Bank bought sovereigns in Hong Kong and Japanese gold in Yokohama; the sales were concluded under the condition that, after advance warning, the sellers would buy back the gold at an identical price and payment would be made in London. These transactions were all realised with the intercession of the Hongkong Bank. - When, as a consequence of the nascent war, private banks declined to sell any more bills of exchange payable in the Straits, but the demand for remittances to the Straits, especially along the east coast of Sumatra, was extremely pressing, De Javasche Bank was obliged to see to it that the exchange rate between the Netherlands-Indian guilder and the Straits dollar remained within the gold points. As the result of the co-opera. tion of the Hongkong Bank, the financial resources of De Javasche Bank in the Straits could be supplemented regularly so that private demand was satisfied at normal prices. ^^W de Cock Buning assessed Chinese corporate capital investments at NICrt 250 million, "Kapitaalbeleggingen in Nederlandsch-Indie" (Corporate Capital Investments in Netherlands India), Nieuw Indie, The Hague, 1923, p. 135; for the late 1930s, G H C Hart posits the figure of NICrt 350 million (Towards Economic Democracy in the Netherlands Indies, New York, 1942, p. 43). CONCLUDING REMARKS In closing it seems fit to emphasise the tentative nature of any and all conclusions ventured during the previous pages. Ongoing research in rele. vant archives in Hong Kong and Jakarta may unearth a quantity of previously unknown facts. Yet, I do not mean to imply that the time will necessarily come when we will have to "rehabilitate" the Hongkong Bank in Netherlands India, revising our estimation of the Bank's activities so that rather than an institute of peripheral significance it emerges as one of central impor. tance. It may well turn out, however, that in certain specific areas, among them the financing of the sugar trade between Java and countries like British India, and especially China, the Hongkong Bank did play a far more considerable role than sketchy allusions in basic reference works would lead us to believe. Editor's note: Dr van Laanan's paper was of course written before he visited Hong Kong. In the Group Archives he found references to the Bank's Netherlands India business, an example of which he has summarized below. Since then he has undertaken, at the request of the Bank of Indonesia, a survey of their Archives and, in the process, discovered considerable correspondence with the Hongkong Bank. Negotiations are underway [late 1982] to have these transferred to the custody of the Hongkong Bank so that they may be avail. able for research purposes. All this supports Dr van Laanan's concluding comments on the tentative nature of research to date. We turn now to his abstract from Group Arhives. Dr van Laanan writes: After I finished this paper, Prof F H H King made available copies of some hitherto unavailable letters written to the late J R Jones (listed in the Bank's Group Archives under the heading "Personalities"). In a very inter. esting sample, C L Edwards mentioned the following functions of the Bank in Netherlands India in 1919: 1) The finance of sugar shipments to Hong Kong; 2) The finance and clear. ance of opium shipments from Calcutta; 3) The finance of exports and imports by British merchant firms and the negotiation of the resulting bills; 4) Any general banking business offering, which apart from the above was of small consequence. Edwards adds the followings notes on the Bank's modus operandi: - Due to the negligible amount of capital allotted to the two offices in Batavia and Surabaya, the business was carried on on the thought of the Bank's good name. Items 1) and 2) to some extent set themselves off. - There were certain deposits by Chinese which helped the finance of packing credits, but British firms appear to have some working capital employed in their business so that the principal part played by the EASTERN BANKING Bank was in the buying of export bills and house paper. These bills could be handed over to De Javasche Bank and loans obtained against a goodly percentage of their total. De Javasche Bank would then mail them to London and after arrival, sales of resulting sterling in the market would enable the loans to be repaid. Purchases of bills were always the subject of forward contracts which, due to fierce competition among the banks, had to be covered only by sales at the approximate dates of the delivery of the bills in London or New York as the case might be. This resulted in a permanent large overbought exchange account, which might amount to ￡2 to ￡3 million. 19. THE GUARANTEE SHROFFS, THE CHETTIARS, AND THE HONGKONG BANK IN CEYLON by H L D Selvaratnam Introduc tion I was handicapped in the presentation of this paper as there was very little information available at the Bank itself to support it quantita. tively. Most of the information was obtained from outside documentation centres like the National Archives, the National Museum and Records Office, or from former employees of the Bank. The history of the Hongkong Bank can be divided into three periods: a) the Colonial Period, 1892-1945; b) the Transitional Period, 1945-1950, and c) the Post-Independence Period, 1950 onwards. During the Colonial Period the British Banks were very powerful. It was said that the European Bank Manager represented the acme in British imperialism. He dealt with only the European customers and a few (ten per cent) of the Ceylonese cus. tomers. The shroffs dealt with the remaining ninety per cent of the customers. The shroffs were equally powerful where the Ceylonese were concerned. It was said that they formed an empire within an empire (imperium in imperio). The power of the shroffs declined considerably during the Transitional Period and disappeared during the Post-Independence Period. The Hongkong Bank opened a branch in Ceylon on 1 July 1892. Earlier, Messrs Delmege Reid and Company were their agents in Ceylon for nearly ten years. In June 1892, the New Oriental Bank (which took over the Oriental Bank Corporation [OBC] in 1884) closed down. The Head Shroff of the Oriental Bank and the New Oriental Bank was S Cathiravelupillai. He became Head Shroff of the Hongkong Bank in 1892. As the Oriental Bank Corporation was the biggest bank in Ceylon from 1851 to 1884 and had established branches in Ceylon and in the East, it can be reasonably assumed that most of the indigenous customers and Chettiars of the OBC continued their busi. ness with the Hongkong Bank. Cathiravelupillai continued as Head Shroff until 1895, when he was succeeded by his son, C Namasivayam. Cathira. velupillai had put in forty-seven years of service, most of which was as Head Shroff, and perhaps his length of service was a record for a shroff. It might be mentioned that he died in 1917 when he was ninety-seven years of age! The first bank of some standing to operate in Ceylon was the Oriental Bank Corporation, which commenced business in 1851. The next bank was the Mercantile Bank of India, London and China, which opened a branch in 1854. The Bank of Madras (State Bank of India) opened a branch in 1867 and the National Bank of India (Grindlays Bank) in 1881. The Hongkong Bank and the EASTERN BANKING Chartered Bank both opened branches on the same day in Ceylon: 1 July 1892. All these British banks had "guarantee" shroffs. The Head Shroff was responsible for the cash and also looked after practically all the "native" customers, while the European customers had direct dealings with the Bank Manager. J Tyagaraja, who was joint Head Shroff of the Hongkong Bank from 1920 to 1925, in his evidence before the Ceylon Banking Commission in 1934 said correctly that there were two departments in the British banks: the European Department, looked after by the Manager, and the "Native" Depart. ment, looked after by the Head Shroff. The ordinary Ceylonese who could not have a bank account, got his loan from the Chetty who himself borrowed money, often on a mere pro-note on the guarantee of the Head Shroff, from the Bank. Before British banks opened branches about the middle of the nine. teenth century, the Chettiars provided a limited "banking" service to the businessman—foreign and indigenous. The Nattukottai Chettiars, to give them their full name, were merchant bankers. The ordinary chettiars were traders and retailers. The Nattukottai Chettiars, with whom the banks had dealings, came from Chettinad in South India, and had over several years established business connections in various parts of India, Burma, Malaya, Indo-China and Ceylon. They were referred to as the "Jews of South India". Until about the middle of the nineteenth century the notes that circulated were mainly Imperial Government notes, while the coins were those of the British Government and the earlier Colonial governments. There were also a few Indian and Ceylonese coins. This limited currency was sufficient up to the middle of the nineteenth century for limited busi. ness transactions. With the British rulers opening the hinterland and planting coffee, the limited resources of the chettiars were totally inadequate to meet the demands for banking services. As stated by Dr H A de S Gunasekera in his book From Dependent Currency to Central Banking in Ceylon, "The large-scale impact of Western Capitalism on the hitherto slow moving feudal economy of Ceylon soon outstretched the meagre resources of the Chettiars." The evidence given by witnesses before the Ceylon Banking Commission of 1934 reveals the shortcomings in the banking services provided by the British Exchange Banks to the indigenous population during the Colonial Period. The Chairman of the Exchange Banks' Association in his evidence mentioned that eighty per cent of the export business was in the hands of Europeans, and the Chairman of the Banking Commission told the Chairman of the Exchange Banks' Association that his information was that only ten per cent of the Ceylonese customers dealt directly with the European management, while the balance dealt through the shroff. These shortcomings in the provision of credit to the indigenous customers by the foreign banks would also apply to the Hongkong Bank, but not to the same extent as to the other banks in view of the contacts which its first guarantee shroff had with the indigenous population and the more liberal policies followed by the Hongkong Bank in respect of the indigenous customers. The evidence given by Tyagaraja before the Banking Commission is most valuable. He was a barrister with Cambridge degrees, influential, knowl. edgeable and highly respected and regarded. He had inside information about the banks because he himself was the joint Head Shroff of the SHROFFS AND CHETTIARS Hongkong Bank from 1920 to 1925. He gave evidence ten years after he left the Bank and therefore it can be considered objective and impartial. It might also be mentioned that Tyagaraja later became the Manager of the State Mortgage Bank, a Member of the State Legislature and the first Appointed Member of the Monetary Board of the Central Bank. He held this post for twenty-one years, from 1950 to 1971. His evidence shows the shortcomings in the banking services provided to the indigenous population, the shortcomings in the Guarantee Shroff System and Chetty lending to those who could not afford to obtain bank credit through the Head Shroff. At the Hongkong Bank, according to Tyagaraja, there was no discrimina. te ion in the granting of credit to Ceylonese. The Hongkong Bank, like the other European banks, was an exchange bank and not a mortgage bank. Its primary function was to make profits by exchange and for that purpose it advanced money to exporters. The form of credit was by self-liquidating overdraft (short-term). The Ceylonese were not shippers; the majority were either landowners or businessmen. The security they offered was land and the Bank was not interested in long-term loans, nor did it want to take a mortgage over property, as land title in Ceylon was notoriously defective and invariably complicated. The Bank was therefore satisfied if the shroff was able to guarantee the loans given to Ceylonese customers. The majority of Ceylonese business was with individuals and not companies. Invariably the purposes of their loans was to acquire more land and the Bank was not interested in long-term loans. The Europeans were personally known to the managers and the firms to which the advances were given were exporting firms, with their head offices in London, and known to the head offices of the banks. There were also certain banking principles that had to be followed in granting commercial bank loans. It was not merely the secur. ity, but also the period and the purpose and source of repayment. Viewed in this light, the charge of discrimination against Ceylonese by banks would not appear to be correct. Of all exchange banks, the Hongkong Bank advanced the most for Ceylonese business. The Guarantee Shroffs This system, peculiar to Ceylon, in view of the volume of advances, was one where the shroff was responsible for the payment of the loan given to the indigenous customer. The shroff of course was paid a commission for this. Tyagaraja recommended to the Ceylon Banking Commission of 1934 the aboli. tion of the Guarantee Shroff System. According to him, this system was not in the interests of the bank, the customer, nor the shroff himself. It was not in the interests of the bank, as the bank manager should know his customers and not depend on his shroff. If the problem was one of communi. cation, the shroff should act as interpreter and not as guarantor. It was not in the interests of the customer, as he could not obtain a loan, how. ever creditworthy he was, if the shroff was not willing to guarantee him. It was not in the interests of the shroff, who was an individual and who could not possibly, in the event of a default, make good the amounts that he guaranteed without his family being ruined. Tyagaraja took over the advances guaranteed by his predecessor, who EASTERN BANKING was his father-in-law, C Namasivayam, and who was Head Shroff from 1895 to 1920. The amount of the guarantee given on advances to Ceylonese and chettiars at the time of the take-over was approximately RslO million. Tyagaraja, who was administering the estate of his father-in-law, asked for time to pay up this sum and was allowed it. At the time he severed his connections with the Hongkong Bank in 1925, he had been able to reduce the outstandings to Rsl million, which loss the estate had to bear. Among this Rsl million was one large loan of 4 lacs given to an individual company; the others were smaller amounts. The Hongkong Bank Inspector who came in 1924 was willing to recommend, in appreciation of the loyal services of the late C Namasivayam, several measures to the Head Office to ease the burden on the late shroff's family. One was waiving the interest on some of the loans guaranteed by the late shroff and another was a reduction of the rate of interest on the other loans. The Hongkong Bank lost nearly Rs3 million on the advances guaranteed by another joint Head Shroff, M Theagarajah, who served from 1920 to 1929. He was also a relation of S Cathiravelupil lai. His security was 3 lacs whereas the amount of the advances guaranteed by him was 47i lacs at the time his services were terminated in October 1929. At the Supreme Court trial where Theagarajah was charged for discounting forged pro-notes and defrauding the Bank, the presiding judge questioned the Chief Accountant of the Bank, G Ferguson, regarding the "wisdom" of the Bank in allowing the shroff to guarantee such a large amount in relation to the security he had given. Ferguson's reply was that at that time the Bank did not consider it a risk. Dr G Wignaraja was Head Shroff from 1929 to 1958. He was the last of the Guarantee Shroffs of exchange (later commercial) banks. He had to make good about Rsl million on advances he had guaranteed. One such large loan was to a shipper who was delaying shipment of tea, expecting a rise in prices. This did not happen, and the shipper lost on the transaction. After setting off the securities lodged with the Bank, the Head Shroff had to make good the difference. There were six Guarantee Shroffs at the Hongkong Bank during the period 1892 to 1958: (1) S Cathiravelupillai, 1892-1895. (2) C Namasivayam, 1895-1920. (3) J Tyagaraja, Jt Head Shroff, 1920-1925. (4) M Theagarajah, Jt Head Shroff, 1920-1929. (5) C Sri Namasivayam, Jt Head Shroff, 1925-1929. (6) Dr G Wignaraja, 1929-1958. All these Head Shroffs brought considerable indigenous and chetty business to the Bank. Several Ceylonese individuals and firms were helped by the shroffs and chettiars. In the process, the shroffs did lose occa. sionally. Only one shroff (Theagarajah) betrayed his trust and the Bank lost nearly Rs3 million. The shroffs were paid ten per cent of the interest charged on advances guaranteed by them and a half per cent on any business introduced by them. Apart from their salary, the "official" commission of a shroff was about Rs45,000 a year. Theagarajah stated that he earned by way of commission SHROFFS AND CHETTIARS Rs450,000 during the period 1920 to 1929. Working on these figures it can be estimated that the amount of loans guaranteed by a shroff during a year at that time could be in the region of Rs5 million. Theagarajah's out. standing guarantees at the time he was dismissed in October 1929 were Rs4,7 50,000. The Banking Commission stated that nowhere else in the world would the Guarantee Shroff System as found in Ceylon be tolerated. It was peculiar only to Ceylon. In India the shroff recommended but did not guarantee. According to the Chairman of the Exchange Banks' Association in Ceylon, the shroffs were required to guarantee in view of the volume of advances to the indigenous population. During the Colonial Period the guarantee shroffs were very rich and powerful and the sole arbiters of credit to the indige. nous population. As a rule, no Ceylonese could obtain an advance from a commercial bank unless it had been recommended and guaranteed by the shroff. There were only a few exceptions. The intervention of the shroff in the granting of credit could therefore be considered more harmful than beneficial to the Ceylonese borrower. It made credit more costly for the Ceylonese businessman and placed him at a disadvantage vis-^-vis his foreign counterpart. Commissions, both authorised and unauthorised, had to be paid to the shroffs. The guarantee shroff system also interrupted busi. ness, as when a shroff died or retired, the loans that he had guaranteed were called up unless his successor was willing to take over the guaran. tee. New loans were not given until the new shroff got into his stride. The Chettiars As mentioned earlier, the coming of the British banks displaced the limited banking services provided by the Nattukottai Chettiars. They did not disappear entirely from the financial scene. There were the smaller indigenous businessmen who required loans and who could not possibly go to the bank even with the guarantee of the Head Shroff. These businessmen went to the Chettiars. The Nattukottai Chettiars had their head offices in Chettinad in South India and the exchange banks were able to ascertain their financial stand. ing from their offices in Madras. The Bank of Madras was in the most advantageous position in this respect and very often was able to furnish bankers opinions on the Chettiars. On this information, the other banks were able to fix limits for each Che tty firm. As stated by Dr W Weerasooriya in his book Nattukottai Chettiars: Associated with the banking system in the Island and an invalu. able and almost indispensable feature of the commercial life of the Island, is the financial system maintained and directed by the Chettiars. The Chettiars, or to give them their caste designation, the Nattukottai Chettiars, are an influential and highly intelligent clan of native merchants who are largely engaged in financial operations. The Chettiars formed a distinct link between the banks and the public, freeing the former in a considerable measure from EASTERN BANKING the risk in direct lending. They worked as a medium between the suppliers and seekers of credit. It must be said to their credit that in moving the surplus capital from places both internal and external to the points of requirement, they have contributed in no small measure to the economic development of the Island. As stated by Dr H A de S Gunasekera: For most Ceylonese the Chettiars were the only source of credit, whether on long-term or short-term. They made loans for the purpose of development of estates as well as for trade produc. tion and consumption. Since the availability of bank credit was restricted and there were no other credit institutions, it must be recognised that whatever Ceylonese enterprises existed were largely indebted to assistance provided by the Chettiars. Ceylon exporters and importers, retailers .and small boutique keepers, estate owners, coconout millers and arrack renters—all of them--at one time or another had to obtain accommodation from the Chettiars. The Chettiars were in fact responsible for this trickle of credit which found its way to internal trade and production. They lent on mortgages over land and buildings on promissory notes with or without security and sometimes on post-dated cheques . . . With the exception of a few Ceylonese who had facilities for obtaining credit from the local banks, the bulk of the Ceylonese had to resort to the Chetty money lenders in order to be financed in their various undertakings. The Chettiars went forward boldly to the rescue of the Ceylonese applicants for loan of money. He lent both on mortgages as well as otherwise. In view of the admitted fact that the law of title to land in Ceylon was highly complicated it was really commendable that the Chettiar invested so freely on the mortgage of Ceylon land. Large acreages of Ceylon jungles and waste lands have been opened up and cultivated with coconut with the aid of money borrowed from the Chetty community. Several individuals and commercial undertakings have been freely financed by them and the petty trader and retailer had to depend entirely upon the Chetty for financial assistance. A noteworthy feature of all these transactions was that money became available to the Ceylonese borrower at a moment's notice in any part of the day or night without his being obliged to go through the formalities which a borrower had to experience elsewhere. Several witnesses before the Ceylon Banking Commission have paid ungrudging tribute to the Chettiars' part in the economic building up of Ceylon. The Chettiars made lending so easy that some borrowers continued to go to them without realising whether or not they were in a position to pay up. The rate of interest on Chetty loans given by commercial banks on the SHROFFS AND CHETTIARS shroff's guarantee was two to three per cent higher than the Bank of Madras' discount rate which varied between eight and ten per cent. The normal rate of interest that the Chettiars charged their borrowers was fifteen to eighteen per cent. This rate cannot therefore be considered excessive. They followed the policy that the greater the risk the higher the rate of interest. If credit had been given direct to the Ceylonese borrower by the bank, it would have eased the financial burden, but that type of borrower could not go to the bank. In this respect the role of the Chettiar in placing himself between the bank and the borrower needed commendation. According to the Exchange Banks' Association, the Chettiars performed "a public duty" by this action. Chettiars were also considered very honourable in their dealings with the banks. They seldom defaulted on the due date. They helped each other so that their reputation as a community did not suffer. They never worried about the security provided by the borrower or the purpose of the loan or the period. To this extent they were building up an unsound credit struc. ture . According to the evidence given by the Nattukottai Chettiars' Associa. tion to the Ceylon Banking Commission, they had invested about Rsl50 million in Ceylon up to 1925. Of this sum, only Rs25 million was borrowed from the exchange banks, Rs85 million representing their own funds and Rs40 million funds from their friends and relations. According to Tyagaraja's evidence, the Hongkong Bank had lent Rsl5 million to the Chettiars during his tenure of office and the other commercial banks at least Rsl million each. According to other sources, the Imperial Bank had lent at least Rsl5 million. These bank loans were used to assist Ceylonese. The Hongkong Bank Inspector stated that in 1924 the Hongkong Bank lent Rsl.6 million to Chettiars and the other banks Rsl.75 million. It would therefore be correct to say that the Hongkong Bank lent to Chettiars as much as all the other banks put together, and what was lent to the Chettiars went to assist the Ceylonese. In 1922 the Hongkong Bank introduced the business of discounting Chetty pro-notes on the guarantee of the Head Shroff. Theagarajah, joint Head Shroff, had a limit of 10 lacs for this purpose. He had almost reached this limit when pro-notes falling due were not honoured. It later came to light that most of the pro-notes were fictitious and that there were no such Chettiars to whom these loans were given. The Hongkong Bank lost nearly Rsl million on these pro-notes. Whenever Chetty pro-notes were discounted, the shroff had to initial the notes as proof of his guarantee. The Bank expected the Chettiars to have accounts with the shroff and not have only cash transactions with him. Apparently, Theagarajah had not followed the Bank's expectations in this respect. According to Tyagaraja's memorandum to the Ceylon Banking Commission, the Chettiars borrowed from one bank to pay off their dues to another. As the due dates of the loans vary in different banks, the Chettiars borrowed from one bank to pay another so that a Chetty firm which was financially embarrassed could easily tide over its difficulties, and if it was actually insolvent, the loss would fall on the bank to which the loan was payable last in order of time. The Chetty loan system operated satisfactorily EASTERN BANKING until 1925, when a leading Chetty firm failed, dragging several other firms with it. The shroffs who guaranteed these Chetty loans had to bear the loss. When the Oriental Bank Corporation suspended payments of its notes, the Government came to its rescue and guaranteed payment of OBC notes. The Chettiars at that time had a considerable number of OBC notes with them, but they were not unduly alarmed and kept "quiet through it all" on that fateful day, 3 May 1884. After hearing about the Government guarantee, they were prepared to make full payment on the OBC notes. The Governor, Sir Arthur Gordon, appreciated this gesture on their part as per his minute dated 24 May 1884, reading as follows: The native traders or Chettys on whose action with regard to the sale of rice especially, everything depended, have as a whole behaved very well and at a meeting of members of their body at Colombo they made it a 'Caste rule' that it is a matter of honour among them, that they should accept the OBC notes at their full nominal value on trade transactions, a resolution of great importance, as such decision involved the adoption of the same course here and at Jaffna at which latter place the Chettiars have shown some signs of an inclination to accept the notes at a depreciated value only. My last accounts from Jaffna are however quite satisfactory on this point and I may add that the Chettiars are now themselves taking advances from the Bank of Madras on notes of the Oriental Bank. The Pettah import business was financed by the Chettiars and not by the banks. The banks preferred to play the role of "Money Lenders' Credi tor" . Tyagaraja said in his memorandum: There must be something radically wrong with the credit struc. ture in Ceylon, which instead of increasing the prosperity of the country was impoverishing the people and paralysing the actual and potential trade and industry of the Ceylonese. The local banks must to a great extent be held responsible for this state of affairs and the greatest disservice they render to the people of this country consists in the ready and ample accom. modation they give the Chettiars. If the greater part of the Rs20 million lent to Chettiars on mere pro notes by the banks prior to the depression [1922] and re-lent by the Chettiars to Ceylonese businessmen were directly lent to them, they would not have come to the parlous state in which they were [in 1934]. This is not correct as most of the Ceylonese wanted loans for speculative purposes and they were not shippers. The small Ceylonese borrower was not an acceptable customer to the exchange banks. With the depression of 1929, Chetty business was no longer profit. able. Ceylonese who had borrowed from Chettiars lost heavily. The Govern. ment came to their rescue by passing the Land Redemption Ordinance and SHROFFS AND CHETTIARS preventing the Chettiars from taking possession of mortgaged lands. The volume of credit given by the Hongkong Bank to Ceylonese and Chettiars on the Shroff's guarantee in 1920 (at the time of Namasivayam's death) was approximately RslO million. In October 1929, at the time Theagarajah was discontinued, the total amount given to Ceylonese and Chettiars on his guarantee was Rs4.75 million, that is about half the total guaranteed by Namasivayam. This was possibly due to the crash of one lead. ing Chetty firm in 1925, the depression of 1929 and the banks recalling most of their loans. The sum of Rs4.75 million consisted of Chetty pro. notes totalling Rsl million, loans to Ceylonese of 8? lacs and overdrafts to Ceylonese of 29? lacs. In 1924, according to the Hongkong Bank's Inspector's report, the Bank had lent Rsl.6 million to Chettys, while all the other banks together had lent Rsl.75 million. Since Chetty loans went indirectly to finance Ceylonese, it can be said that the Hongkong Bank assisted Ceylonese to a much larger extent than the other banks. This is also borne out by Tyagaraja's evidence before the Ceylon Banking Commis. sion, where he stated that the total amount of Chetty loans up to 1925 given by the Hongkong Bank was Rsl5 million, while the other banks had lent at least Rsl million each. The total by the other banks can be estimated at RslO million as the Chettiars stated to the Banking Commission that they invested Rsl50 million in Ceylon, of which Rs25 million was from banks. The Chettiars were the "handmaids of the banks" and the "forerunners of the finance companies". The Chettiars and the guarantee shroffs were indirectly helping in building up an unsound credit structure by lending irrespective of the purpose or repayment capacity. It was only after the Ceylon Banking Commission of 1934, the establishment of the Bank of Ceylon in 1939, Independence in 1948 and the establishment of the Central Bank in 1950, that the foreign banks became more involved and interested in devel. oping Ceylonese business undertakings and Ceylonese customers. The Chetty system of financing the Ceylonese ended with the depression of 1929/30. No new guarantee shroffs were appointed in the Post-Independence Period, that is, after the establishment of the Central Bank in 1950. Summary and Conclusions The Guarantee Shroff System was peculiar to Ceylon. The British banks, which were exchange banks, opened branches in Ceylon primarily to serve the European export firms. Eighty per cent of export business was in their hands during colonial times. The exchange banks were not interested in financing Ceylonese enterprises, unless they were short-term or brought foreign exchange. J D Smart, Agent, Hongkong Bank, stated accordingly in his evidence before the Agricultural Committee in 1920. Hence, practically all Ceylonese business was left in the hands of the guarantee shroffs, and through them, in the hands of the Chettiars. The banks preferred to play the role of "Money Lenders' Creditor" where the bulk of the Ceylonese were concerned. This method of indirect financing of Ceylonese had the following draw. backs : (a) It built an unsound credit structure. EASTERN BANKING (b) It increased the cost of credit to Ceylonese. (c) It interrupted the business of Ceylon. (d) It was unrealistic. (a) Unsound Credit Structure In granting credit, the purpose, the security, the source of repayment and the standing of the customer has to be considered. Loans are granted in accordance with banking principles. None of these was considered as long as the shroff's guarantee was there or the loan was given to the Chettiars on the shroff's guarantee. The manager did not know his borrower or his creditworthiness. The Chettiar made it worse for the spendthrift Ceylonese by making credit too easy and thereby ruined him, as he seldom thought of how he was going to pay back the loan. (b) Cost of Credit The bank paid to the Head Shroff an 'official' commission of a half per cent on the amount of loan granted on his guarantee or any business introduced. In addition, ten per cent of the interest on the advances guaranteed by the shroff was also paid to him. Theagarajah stated that during the ten-year period from 1920 to 1929 he had earned Rs450,000 by way of commissions. There were also various other types of 'unoffi. cial' commissions that the borrower had to pay the shroff. All these increased the cost of credit and made it difficult for the Ceylonese businessman to compete with his foreign counterpart. This was inevi. table since it was not direct lending by the bank but through an intermediary. (c) Interruption of Business Every time a shroff retired, died or was dismissed, the loans he guaranteed were recalled, unless his successor was able to make some arrangement or to guarantee them himself. No new business was enter. tained until a successor got into his stride. (d) Unrealistic As stated by Tyagaraja, it was ridiculous to expect a shroff who was an individual and who had given a couple of lacs as security to guarantee, and repay in the event of default, millions of rupees. It is indeed fortunate that the Hongkong Bank lost only about Rs3 million on loans guaranteed by the shroff after setting off any security and his assets. There have been other banks where the shroffs' families also had to bear considerable losses. Bank advances must be in accordance with banking principles and the banker must know his customer directly. At that time, perhaps, the exchange banks did not want to get involved in this as the returns were not worth the trouble. It was only natural that with development and progress, the shroff system and SHROFFS AND CHETTIARS Chetty financing should have been abandoned. Direct lending to Ceylon. ese based on better credit information and better analysing of applica. tions for credit was made by the management of banks. The volume and types of credit required better in-depth studies which the shroffs could not handle. In colonial times, European exchange banks had very little contact with the Ceylonese and the Ceylonese hardly exported. There was also a "cultural" and interest barrier between the Ceylonese and the Europeans. Hence the little financing the banks did for Ceylonese was indirectly by the guarantee shroffs and the Chettiars. There was also no indigenous bank to assist the Ceylonese and hence credit extended was small and costly to the Ceylonese until an indigenous bank was opened and the country became independent. The foreign banks are now fully involved and are partners in the economic development of the country. Today the Hongkong Bank is one of the best banks in Sri Lanka. It has one of the finest buildings and the interior has been completely redeco. rated. In a sense it is the oldest bank in Sri Lanka, since it took over the Mercantile Bank in 1959 and as the Oriental Bank Corporation, which opened in 1851, closed in 1892—the year the Hongkong Bank opened a branch in Sri Lanka. The Hongkong Bank is the first bank in Sri Lanka to write its history, to computerise its accounts, and the first foreign bank to have a Ceylon. ese, R Thambiah, as its manager. In fact this is remarkable as Thambiah joined the Mercantile Bank as a ranker in 1943. The Hongkong Bank has therefore shown no discrimination where Ceylonese are concerned and has given them every opportunity to improve their prospects and even come to the top. Post-Conference Comments The Chettiars had established themselves in Ceylon about five decades before the British banks commenced operations in Ceylon in the middle of the nineteenth century. The Guarantee Shroff System was introduced to Ceylon by the British banks. This system in the form it was found in Ceylon was not in existence in any other part of Asia or the Far East. It prevailed with reduced powers of the shroffs until the establishment of the Central Bank, after which no new guarantee shroffs were appointed. The last of the guarantee shroffs was coincidentally from the Hongkong Bank and he retired in 1958. The period of the guarantee shroffs at the Hongkong Bank thus covered sixty-six years, from 1892 to 1958. The Chettiars obtained loans on pro-notes from the exchange banks on the guarantee of the Head Shroffs, over a period of nearly eighty years — from the middle of the nineteenth century until the depression of 1930. The Hongkong Bank gave Chetty loans over a period of thirty-eight years, from 1892 to 1930. There were no Chetty loans in 1934 according to the Ceylon Banking Commission Report. Ninety per cent of the indigenous customers obtained bank credit through the shroffs for nearly one hundred EASTERN BANKING years, 1850 to 1945, that is, throughout the Colonial Period which can be considered as having ended in 1945 with the end of the war. During the Transitional Period (1945-50), the power of the guarantee shroff declined considerably and the Ceylonese were able to deal more directly with the British bank managers. The Post-Independence Period (1950 onwards) marked the gradual disappearance of the guarantee shroff, more liberal bank credit to the Ceylonese and bank managers having direct dealings with, and credit information on, Ceylonese borrowers. What kind of people were the Guarantee Shroffs? They were all men of standing, wealth and position. They all came from the Tamil community. The Englishman seemed to have had confidence in the Tamil community for their honesty, loyalty and hard work. In fact, as far back as 1864, before the Hongkong Bank opened in Sri Lanka, H D Andree, a European accountant of the Chartered Mercantile Bank, in his book, Progress of Banking in Ceylon, compared the Tamils to the working bees and the Sinhalese to the drones. All the Guarantee Shroffs were related and, except for Theagarajah, served their banks with loyalty, acceptance and distinction. Most of them distinguished themselves in civic and public life. Dr Wignaraja was Rotary Governor, not only for Sri Lanka, but for a district which included South India as well. He represented this district at an International Rotary Convention in the States. Sir Arthur Morse, Chairman of the Hongkong Bank, who came to Sri Lanka in 1949, was delighted at the honour conferred on Dr Wignaraja and gave him all the leave he wanted to attend this conference and requested him to tell everybody that he was from the Hongkong Bank. 20. THE HONGKONG BANK IN THAILAND: A CASE OF A PIONEERING BANK by Thiravet Pramuanratkarn* The founding of The Hongkong and Shanghai Banking Corporation in 1865 was preceded by political developments, e.g. the establishment of French authority in Cochin-China in 1863, which facilitated the Bank's expansion in the years immediately following. That it did not establish a branch in Thailand until 1888 is in part a reflection of the foreign policy of King Mongkut (1851-1868) and King Chulalongkorn (1868-1910), which was designed to balance the encroaching power of both Britain and France. Indeed it was the notice that a French company intended to represent the Banque de l'Indochine that provoked the British Legation in Bangkok to urge the Hong. kong Bank to open a branch, and the Bangkok Times was able to make the announcement that a British bank was to be the 'first bank in Thailand', a fact which the Hongkong Bank proudly promotes to this day: The long talk of the scheme of opening a branch of the Hongkong and Shanghai Banking Corporation in Bangkok is at last un fait accompli, and Mr J R M Smith has now arrived in our capital to start the business at once. It is reported to be favourably regarded by the Siamese Government, who fully appreciate the benefits that this country will reap by a branch operating on a large scale here and abroad, and ready to promote financial, commercial, and friendly relations ... .^ The Hongkong Bank had, in fact, long been represented first by Picken- pack, Thies & Co—Thies had signed the 1858 commercial treaty between Siam and the Free Hanseatic Cities of Hamburg, Bremen and Lubeck—and subse. quently, with the failure of that company in 1883, by the Swiss firm of Jucker, Sigg & Co.* 2 Smith's arrival was confirmed in a Head Office circu. lar of November 3, 1888, and on December 2nd, the Hongkong Bank's Bangkok office was formally opened at the 'old Belgian Consulate' at a rental of $74 a month. As the Hongkong Bank's sub-manager in Hong Kong, G E Noble put it, '...by establishing its Bangkok Agency when it did, the Bank for the first time got ahead of its main competitor, the Chartered Bank ... . In 1890 the Bank moved to Klong Kut Mai, between Customs Lane and the *This essay is based on a research report which was too long to be included in full in these proceedings. There has been insufficient time to clear with the author all the resulting modifications, which includes material added from other sources. The author's acknowledgements have been appended. [Ed.] ^Bangkok Times (24 Oct 1888). 2From 1865 to 1883 the Hongkong Bank [HSBC] was represented in Bangkok by the German firm of Messrs Pickenpack, Thies and Co. EASTERN BANKING Oriental Building--a place known today as Tanam Si Phya. This location was kept until 1977 when the Bank moved to the Siam Commercial Centre and the site is now under development as a hotel, a joint venture in which the Hongkong Bank Group maintains an interest.^ The first building on the site had been rented for MexDollars 200 for 15 years initially; the lease was renewed in 1905 and the office rebuilt in 1929. At the ceremonies marking the opening of the new building in 1929, Prince Chantaburi stated that the Hongkong Bank was the 'doyen of banking institutions in this country'.^ The Bank certainly played a significant role in Thailand's early trade and business development, and not only because it was the first bank in the country; rather one needs to consider the Hongkong Bank's close relations with the Thai Royal Treasury, even before its establishment in Bangkok. As a British ambassador to Thailand was later to recall— From the moment of my arrival at Bangkok in 1904, the Hongkong and Shanghai Bank was associated more than any similar institu. tion, to my mind, with Siamese affairs. More than that, I re. garded the Bank--as, I think, did most of us—as being the principal agent (though in the nature of things it could scarcely be recognized as such officially) of H.M. Government in the United Kingdom in financial matters affecting the Far East generally.^ Thailand's early foreign banking relations In the decade preceding the establishment of the Hongkong Bank in Bangkok, there were clear signs of economic awakening with the growth of rice ex. ports—which would expand dramatically before the end of the century--and most important as a signal to foreigners, the approval of railway construc. tion. The financing of either activity would be sufficient justification for a bank, while the state of the currency (despite the opening of a mint in 1860) and the accumulation of wealth reinforced the need.^ The Hongkong Bank was involved (i) with the Treasury and (ii) with economic development, in addition to its traditional role in the finance of trade. ^This quotation is from the Hongkong Bank Group Archives. As these are in the process of rearrangement, the temporary reference numbers will not be listed . ^But the Bank is still remembered by the pedicab drivers and foodstall operators stationed just by a forgotten sign. When the Editor stopped to take a picture, the crowd was curious at the choice of scene until one old man called out, 'Hongkong Bank?' Then there were smiles and all was the understood. Ed. ^HSBC Group Archives. f) Letter from the Ambassador, then in Mombassa, Kenya, to J R Jones, 18 Sept 1955. Jones was collecting material for the Bank's centenary history. ^Bangkok Times (7 Feb 94) reports on a survey of the Korat-Nong Khai line. THE HONGKONG BANK IN THAILAND From 1877 Thai Government records reveal that the Treasury had funds in modern banks abroad; specifically the tax revenues of the southern prov. inces of Ranong, Takua Pa, Takua Tung, Panga and Trang were deposited in the Penang branches of the Hongkong Bank and the Chartered Bank. Although records are not complete, it would seem that $110,004 was so deposited in 1884, with $24,000 in the Hongkong Bank. In this period there were attempts to separate the finances of the King's privy purse from those of the State, and although this was partially achieved, the operating signa. ture on all accounts in foreign banks was that of Prince Naradhip, who held the two posts of Deputy Minister of Finance and Deputy Director-General of the Royal Treasury, leading eventually to an internal government dispute, described below, which the Bank was able to handle with impartiality. Although the Chartered would appear to have held the bulk of the Penang deposits, the King's private funds were exclusively with the Hong. kong Bank in Singapore under the account name of 'Ngern nguad pra klang', i.e. 'Treasury monthly deposit, current account'. Other Thai funds were also kept in the Singapore branches of the Chartered Mercantile, the Chart. ered and the New Oriental banks, presumably to spread the risk. The over. draft in the Thai Government account with the Hongkong Bank of Straits Dollars 102,128 for 1888, shown in Table 1, should be noted, although no reason, except perhaps the existence of the new Branch in Bangkok where funds may have been deposited as collateral rather than remitted to Singa. pore, can be assigned. The records indicate that the Hongkong Bank first quoted a rate of five per cent, but this was subsequently lowered by stages to 3.5 per cent due to the unfavourable trade situation; the other banks changed their rates simultaneously. By 1890 the Hongkong Bank in Bangkok had some 350 current and deposit accounts, including those of such firms as Bombay Burma Trading, the Borneo TABLE 1 THAI GOVERNMENT ACCOUNTS ABROAD, 1884 -88 (Straits dollars: exchange S$3.00 = 5 baht) YEAR 1884 1885 1886 1887a 1888a Source: Thai National Archives, King Rama V File, Finance 20 (1-5). Abbreviations: CBI, Chartered Bank of India, Australia and China; CMB, Chartered Mercantile Bank of India, London and China; HSBC, The Hongkong and Shanghai Banking Corporation. aSeparate balances in CBI and CMB not accessed for these years. It is possible that there may have been a small deposit in the New Oriental Bank. BANK CBI 86,004 60,768 CMB 6,812 [no data] CBI + CMB 375,795 426,365 HSBC 2,400 40,571 68,921 ‧102,128 EASTERN BANKING Company, Jucker, Sigg & Co, the U.S. Legation and many of the Thai aristo. cracy. It is assumed that accounts under the name of Prince Naradhip were in fact the King's private accounts, and a list of these was sent on March 20, 1893, at the request of Prince Devawongse by the Hongkong Bank's manager (then referred to as 'agent'), an increasingly well-known character by the name of T McC Browne—the outcome of an internal struggle between Prince Devawongse and Prince Naradhip over the latter's right to operate the accounts on his single signature. Although Prince Naradhip resigned over the affair, he would appear to have been in a position to continue his control of the accounts. Browne had acted on the instructions of the British Consul, and conveyed the information contained in Table 2 only after having requested and received authorization, which he was then careful to cite: 'At the request of Mr E H French, Consul, I have the honour to hand Your Royal Highness herewith memo of Current Accounts, standing in the name of H R H Prince Naradhip and others and over which he has full control. The Bank was to gain a reputation for handling such matters carefully, and despite the establishment of the Chartered Bank in 1894 and the Banque de l'Indochine in 1897, the Hongkong Bank continued to act as the main spokesman in dealing with the Thai Government. In the course of business the Hongkong Bank imported dollars, but it was anxious from the first to issue its own banknotes; the permission of the Thai Government was noted at a Board of Directors meeting, and the issue began in May 1889 in nine denominations, viz. 1, 5, 10, 40, 50, 80, 100, and 400 baht; the Chartered Bank issue began in 1897 and that of the Banque de l'Indochine two years later, both on a more limited scale. Smith as first manager, developed close relations with the Customs, one of the departments which had been instructed to receive the Hongkong Bank's notes in payment of duties. 9 These would be deposited in the Bank and the pro. ceeds transferred to the Royal Treasury accounts. But despite such suc. cesses, the Bank's notes did not gain a wide circulation, nor did Smith attempt to develop the Bank's general business to the countryside beyond the trading and aristocratic circles of the capital. Indeed, the history of the banknotes even within this limited sphere was to be brief; in 1902 the Government introduced its own notes and the foreign issues were effect. ively withdrawn. In 1902 the Thai Government, in response to the continued decline in the gold value of silver, closed the mint to free coinage, and the baht was to be henceforth on a gold exchange standard. In anticipation of this move, which apparently caught the foreign banks by surprise, the Government had withdrawn funds from the Hongkong Bank in silver coins, which were then stored in the Treasury. In consequence of the closing of the mint, the foreign banks claimed they had incurred losses which ought to be recovered from the Government. As reported by the Financial Adviser, C Rivett ^Thai National Archives, King Rama V File, Finance 3/1. 9'The Bank's Bangkok Agent, J R M Smith, advised that the Siamese Govern. ment had agreed to accept the Bank's notes and it was decided to try the experiment of note circulation on a small scale.' HSBC Board Minutes, November 1897. THE HONGKONG BANK IN THAILAND Carnac, to the Minister of Finance, formal representations were made by 'Messrs Browne, Forbes and Sire (representing the Hongkong and Shanghai Bank, Chartered Bank, and Banque de l'Indochine respectively)' claiming they had not received official notification of the closing. Browne was the principal spokesman, claiming that the Hongkong Bank stood to lose $150,000 on outstanding mercantile transactions and asked if the Government would grant compensation. Carnac, the Financial Adviser, disagreed with the calculations and with the concept of compensation. The next source of potential loss was the redemption of the note issue, but again Carnac was able to counter Browne's arguments, showing that the notes had been issued before the latest depreciation of silver and that, therefore, no actual loss would be incurred. Finally, Browne wished to know whether the Govern. ment would accept dollars in payment of its tical balances with the Bank and whether the Government would give ticals for the dollars already im. ported by the Banks but which had not yet been presented at the Treasury for conversion into ticals. There was a veiled threat by the Chartered Bank representative that the Banks might refuse to buy ticals at the Government rate and so prevent the financing of the rice exports, but Carnac simply observed that the Thai Government was, after all, only doing what the Indian Government had done in 1895, and in that case no compensation had been pa id . ^ In the events that followed there is no evidence that the banks were paid compensation, which for the Hongkong Bank was initially estimated at $150,000 in total, although the Thai Government did purchase dollars already imported at the old rates and some adjustments were made in the rate at which official accounts were transferred.^ The Chartered Bank attempted unilaterally to refuse to honour Government checks at the new rate, but, especially as the action was not co-ordinated with Browne, who was the spokesman for the foreign exchange banks, the Government was able to counter by ordering the withdrawal of all its revenue accounts; the Chartered capitulated, an apology given and its manager replaced. Mean. while, J C Nicholson, the acting manager of the Singapore Branch of the Hongkong Bank, arrived—on December 4, 1902, the day of the Chartered's unco-ordinated action—apparently to the annoyance of Browne who left the office to play rugger at the Sports Club. Nicholson reported a recalcula. tion showed that the actual losses would not reach the previously antici. pated amounts, but he was unable to make progress beyond the stage reached by Browne as Carnac continued to give independent advice to the Thai Gov. ernment. And, finally, it had to be accepted that Thailand was formally on the gold-exchange standard; it was up to the banks to operate on this basis. The Hongkong Bank had since its establishment in Bangkok in 1888 fol. lowed a conservative policy. While it had financed the growth of trade, introduced banknotes, and through the initiative of Browne, established close relations with government officials and kept the King's accounts, the the Bank was very much in the private sector. The closing of the mint and ^From 'Report of the 1902. Thai National 1^HSBC Group Archives. Financial Adviser Archives. to the Minister of Finance', 28 Nov EASTERN BANKING related events is evidence of the inability of the Bank to influence a Government advised by a foreign financial expert in an official capacity, but within its s'phere, the Hongkong Bank continued to play a significant and pioneering role. Thailand's Foreign Loans and The Hongkong Bank Although Thailand employed a team of English surveyors for its initial railway development as early as 1887, not until 1902 did the Financial Adviser consider a foreign loan necessary and negotiations do not appear to have been undertaken seriously until 1904. Even then the Government's American adviser, Stroebel, considered the amount required too small for the New York market and others reported that Thailand could itself finance all its requirements. Nevertheless the Council of Ministers on November 18, 1904, approved a proposal that the government seek a loan, and The Hongkong Bank in Bangkok was approached. This first loan, in 1905, was for ￡1 million for the construction of the Northern Line, and the paying agents were the HSBC, Banque de l'lndo- chine and the Danske Landmannsbank. This last had become involved in Thai finance through its capital contribution to the so-called "Book Club", an embryo bank later to become the Siam Commercial Bank, initially with Danish and German [Deutsch-Asiatische Bank, DAB] interests. The background to the Danish role is to be found in King Chulalong- korn's reign when Admiral du Plessis de Richelieu, Phya Cho1layudhyodhin in Thai, was with the Royal Thai Navy and proposed to Finance Minister Prince Mahisra that Thailand have her own national bank. The idea was rejected on the grounds that the bulk of the capital would come from Denmark, thus placing the economy too much under one country's control. In 1906 Admiral de Richelieu was successful in drawing both Danish and German banks into the "Book Club", i.e. the embryo Siam Commercial Bank. Continued high costs of contructing the Northern Line led Thailand, then constructing a Southern Line, to negotiate for a further ￡3 million, the Loan of 1907, which involved a clash of economic interests among the British (i.e. the Hongkong Bank), the French and the Germans. The account from German sources unfolds with the approach in 1906 by Felix Kilian of the DAB, but then working for the Siam Commercial Bank, with the offer of a loan from a German consortium. In October the Thai finance minister asked for offers in Berlin, London and Stockholm for a 4% railway loan for between ￡2 and ￡3 million at 92 to the government. The Germans were still concerned that they had not been involved in the 1905 loan, and this time agreed to take a participation of ￡750,000 in the new loan with the HSBC and the Banque de l'Indochine, with the understanding that the HSBC should alone conduct the negotiations. The Hongkong Bank, however, appears to have brought the Banque de l'Indochine into the negotiations and, without consulting the DAB, reached an agreement with the Thais, who then refused 12see Prince Mahisra's memo of 9 May 1899 to His Majesty the King, Thai National Archives, King Rama V file, Finance 20/1 ('Foreigners' Request to found Banks in Thailand: 14 March 1890-19 May 1899'). THE HONGKONG BANK IN THAILAND to accept the Germans as co-contractors. The confusion may well have resulted from the fact that negotiations had apparently been conducted both in Europe, through the Hongkong Bank's London office, and in Bangkok, where the local manager stated he was unaware of the German agreement. After considerable discussion, the King's decree was amended, and on January 19, 1907, the Hongkong Bank, the French, and the Germans signed as co-con- tractors for a 4loan of ￡3 million, to be issued to the public at 97|.^ Due to the state of the European markets, the loan was not a success and was only fully sold in 1911. In 1908, indeed, the Thai Government and the DAB were in disagreement over the amount to be withdrawn from the German bank, the government insisting on the full ￡750,000, the DAB releas. ing only ￡500,000. 14 The conflict perhaps reflected German-British antag. onism over the actual construction of the railway, but the issue was even. tually resolved with the Thai Government agreeing to buy ￡100,000 German Government bonds. Political issues further complicated relations, since the British had a secret treaty with Thailand affecting the Southern Line, eventually leading to Thailand's loss of suzerainty over Perlis, Kedah, Kelantan and Trengganu. The Thais did not borrow again until 1922 when the Hongkong Bank nego. tiated a 7% loan for ￡2 million under conditions which permitted renegoti. ation at the end of ten years. As this made the loan technically 'medium- term' it became subject to a ban imposed by the Bank of England, and the Hongkong Bank, which had been encouraged in making the agreement by the British Foreign Office, advanced the funds itself until the Bank of Eng. land's regulations could be amended. In this loan the Siamese Legation in London acted as agent, and the Thai minister in London wrote to the Hongkong Bank's London Office that the loan had been confirmed: With reference to Sir Charles Addis' letter of the 27 September last and the subsequent negotiations on the subject of the pro. posed Siamese Government Loan, I have now to inform you that His Siamese Majesty's Government have decided to accept the terms offered by your Bank a loan of ￡2,000,000 (two million pounds) bearing interest at the rate of 7% (seven per cent), the issue price to the public to be par and His Siamese Majesty's Govern. ment to receive 93i (ninety three and a half per cent) of the nominal capital; all other terms to be as in the Loans of 1905 and 1907.^ The high interest rate reflected the tight conditions following World War I; the other provisions, which Thailand insisted upon and which had landed the Hongkong Bank in temporary trouble with the Bank of England over the ^Certain of the information in the above paragraph has been added by the Editor from David J S King's report on HSBC/German relations, Chapter V, Siam, in HSBC Group Archives. His references were Maximilian Miiller- Jabusch, Funfzig Jahre Deutsch-Asiatische Bank, 1890-1939 (Berlin, 1940), and 'Siam No. 1' in the German Foreign Ministry Archives. 14Ibid. l^HSBC Group Archives EASTERN BANKING question of the right to renegotiate after ten years what was apparently a 35-year loan, included the usual statement of the amortization table and the schedule for the drawing of bonds. The loan was issued on the general credit of Thailand to be used to replenish the Treasury reserves which had been drawn upon for a number of years for expenditure on railways not pre. viously financed by foreign borrowing, irrigation and similar public works. In evaluating the Hongkong Bank's role in Thailand, it should be noted that loan negotiations were mainly carried out in London; the local manager was more concerned with exchange operations and local arrangements with the Thai authorities, especially the holding of government funds. While the manager might discuss particular terms, the initiative for bor. rowing came from the Financial Adviser and the London Office of the Bank being close to the London market, played the major role. Indeed, one might conclude that the local branch did not play a key role in Thailand's early economic development outside the finance of the growing export trade, the financing of the foreign sector, and to some extent to the providing of expert advice. Thailand borrowed again in 1924 and 1936, negotiating primarily with the National Provincial Bank, the reasons for which require consideration of the development of the Thai banking system. The Hongkong Bank and the Thai Banking System Although the Hongkong Bank had never had a monopoly of official Thai bank. ing business, it was often 'first' and, in a sense, favoured. This resulted in complaints from other foreign banks and was anyway inconsistent with Thailand's general foreign policy. Attempts to establish her own government bank were frustrated by internal political relations, by the foreign exchange banks' fears that they would lose exchange business, and by Britain's concern that Germany was unduly influential in the Siam Commercial Bank.^ In 1907 the Finance Minister, Phya Suriyanuwat, on the recommendation of Rivett Carnac, the Financial Adviser, approached the National Provincial Bank as an institution not having previous interests in Thailand, and that bank accepted an initial deposit of ￡300,000 at 3% from March 31, 1907. The need for a neutral banking policy was confirmed when the Thais deposit. ed railway income with the Disconto-Gesellschaft and the Chartered Bank who outbid foreign rivals in Bangkok for further deposits. Not that the Hong. kong Bank ceased to play a significant role, but it was rather that the Thai Government refused to remain tied to the "pioneer bank". In 1917, that is, during World War I, a member of the Hongkong Bank staff was seconded to manage the Siam Commercial Bank, which had been criticized not only for the German influence but also for unsound operations in connection with the China-Siam Bank, in Bangkok.^ At one point the Hongkong Bank was subjected to rumours that its 16Cf the comments on Danish and German influence cited above. l^An account of the Siam banking crisis and related matters is to be found in the Public Record Office, London, file T.1/11845. Ed. THE HONGKONG BANK IN THAILAND position was insecure and the Thai Government responded by retaining with the Bank funds it had apparently intended to transfer in the normal way. The British Minister, Dering, wrote: There is a mischievous and ill-founded rumour current in Bangkok, I understand, tending to intimate that the position of the Hongkong and Shanghai Banking Corporation is insecure. I hasten to let you know that I attribute the spreading of this rumour to German intrigue with Chinese and others. Further I desire to state that the Head Office of the Hong. kong Bank at Hong Kong has telegraphed here today stating that there is no justification whatever for any rumour of the kind and that the Bank's position was never better. I may mention that a similar manoeuvre was instituted at Shanghai a few months ago, likewise directed solely against the Hongkong and Shanghai Bank, which resulted in a futile run on that Bank. This was also due to German machinations among the Chinese, who are always ready to seize an opportunity for a speculation. I would beg you to give every necessary publicity among all Departments of the Siamese Government to this perfectly satisfac. tory assurance by the Bank as to its position. To this the Minister received an immediate and satisfactory response from Prince Devawongse: His Royal Highness attributes it to a manoeuvre of some local Chinese banks in Sampeng which might be led on by some intrigues of Europeans who are subjects of Nations at war with England in order to try and get Chinese deposits in the English bank transferred to those Chinese banks by giving such a false alarm. He is quite sure as I feel myself that no Department of the Royal Siamese Government will in the least credit such a rumour, and he cited an act which his Ministry have done to allay, if not to assist, the Bank against this rumour, namely that at this time a sum of ticals 200,000 to be withdrawn from the Bank to the Treasury would not now be withdrawn until the rumour has subsided. Such action, I think, will be most effectual and will quiet down such mischievous rumours. I can safely assure you all Departments of His Majesty's Government continue to be satisfied with the security of the position of the Hongkong and Shanghai Banking Corporation. Following World War I the Hongkong Bank was again seen to be playing a major role in the Thai banking system with its influence in the Siam Com. mercial Bank, its handling of the 1922 loan, and with its acceptance of 1RIn Thai National Archives, King Rama V File, Finance 15/18. l^Ibid, letter of 28 November 1916. EASTERN BANKING large Thai deposits in its London Office--the latter in 1920 offered and the Thais accepted a "free deposit account" of ￡1 million at Baht9.54 per pound sterling and 4i% without deduction of income tax, the rates reflected the exceptionally but temporarily high value of silver.^0 In 1930, Arnold Jones, the manager of the Siam Commercial Bank and a former staff member of the Chartered Bank, recommended that the Privy Purse be transferred from the Hongkong Bank to the Siam Commercial. King Pracha- thipok doubted the wisdom of this move, but certainly the transfer of con. trol began at this time with the Siam Commercial being asked to take responsibility for handling through National City Bank in New York the finance of the royal visit to the United States.The payroll for officials in the Railways Department was reportedly still handled by the Hongkong Bank in 1932, but the transfer of official funds to Thai banks had almost been completed. As Table 2 illustrates, banking remained heavily dependent on the foreign exchange banks at least until World War II. All banks, with the exception of the Chartered Bank's branch in Phuket, were located in Bang. kok. In addition there were 'gold shops' of the traditional kind, but some were to be the founders of post-war commercial banks.22 With the Commercial Banking Act of 1945 Thailand took note of the war. time growth of local banking under conditions of some economic complexity. In 1942 the National Bank of Thailand had been opened by Pibul Songkram in the river-front building of the Hongkong Bank, and it was the Thai employ. ees of the Hongkong Bank who assisted in the formation and management of Thailand's first 'central bank'. The development of the banking industry post-war can be seen in Table 2 (part B), and one consequence of such growth was, not surprisingly, the development of central bank control and further legislation on the role of foreign banks. The Hongkong Bank, however, established a second office in Bangkok, the Suapah Road Agency, before any ban on branching was effected, and as this was a site more convenient to its Chinese customers, the Bank's depos. it base was accordingly improved. Formal opening was on July 18, 1956, by H.H. Krommuen Bidyalabh Prudhiyarkorn (H.H. Prince Dhani Nivat), Chairman of the Privy Council, who was acting as Regent in the absence of the King. With the Bank's acquisition of the Mercantile Bank in 1959 the Hongkong Bank Group had three outlets in Thailand's capital. In 1962 a new banking act was passed under which foreign banks were permitted to establish themselves only in Bangkok and then with only a single office. This provision alone would virtually rule out any direct, active involvement in ordinary domestic banking, and the Hongkong Bank was no exception. However it will be instructive to describe the Hongkong Bank's changing position relative to other foreign banks in Thailand ■^Telegraphic communication between the Thai Minister to London, Buri Nava- rasth, and the Finance Mnister, Prince Chantaburi, dated between 10 Oct 1919 and 7 Feb 1920. 21Thai National Archives, King Rama VII file, 'The King's Expenses on a State Visit to America, 1930'. Cf the history of Hong Kong's successful Hang Seng Bank in Essay No. 30 of this collection. Ed. TABLE 2 COMMERCIAL BANKS IN THAILAND AND THE DATE OF ESTABLISHMENT Part A. 1888-1939 Foreign Banks Thai Banks The Hongkong and Shanghai Banking Corporation 1888 Chartered Bank 18 93 Banque de l'Indochine 1897 Siam Commercial Bank 1906 Sze Hai Tong Bank 1909 Bank of Canton 1919 Mercantile Bank 1933 Wang Lee Chan Bank 193 3a Tan Peng Choon Bank 1934b Yokohama Specie Bank 1936 Bank of Asia for Industry and Commerce 1939 aWang Lee Chan is not a commercial bank in true sense because its purpose was for family affairs. ^Recognized and changed to the new name, Thai Development Bank, 17 August 1960. Part B. 1941-1957 1 Foreign Banks Thai Banks Siam City Bank 1941 Provincial Bank 1942 Bangkok Bank 1944 Bangkok Bank of Commerce 1944 Bank of Ayudhya 1945 Thai Farmers Bank 1945 Kwangtung Provincial Bankc Indian Overseas Bank 194 7 Bank of China 194 7 Laem Thong Bank 1948 Thai Danu Bank 1949 Union Bank of Bangkok 1949 National Handelsbank 1949 Bank of America 1949 Metropolitan Bank 1950 Agricultural Bank 1950 Mitsui Bank 1952 Thai Military Bank 195 7d cKwangtung Provincial Bank was opened in 1947 and closed in 1949. dThe Thai Military Bank is strongly under political influence and is not a commercial bank in a bona fide sense. EASTERN BANKING summarized in Table 3. Total assets of all commercial banks in Thailand increased from approximately 4.0 billion baht in 1955 to 9.5 billion in 1961, with the Hongkong Bank ranked throughout this period as the largest bank in terms of assets and liabilities. However the figures indicate clearly that the Hongkong Bank was TABLE 3 ASSETS, DEPOSITS, AND ADVANCES OF AS COMPARED TO OTHER BANKS THE HONGKONG BANK 1955-1981 All banks HSBC Foreign banks ASSETS Average increase/year % 1955-1970 20.0 - - 1971-1980 22.5 9.4 - 1962-1970 - 11.7 - 1962-1980 - 10.2 - Proportion (%) 1962 - 14.2 100 1980 5.3 100 DEPOSITS Volume (million baht) 1953 1,461 - - 1963 9,974 - - Average increase/year % 1965-1980 21.2 7.8 9.7 1971-1980 22.2 9.3 9.3 Proportion (%) 1962 - 9.7 100 1980 — 8.7 100 ADVANCES Volume (million baht) 1962 7,530.1 - - 1980 224,316.6 - - Average increase/year % 1962-1980 21.0 - - 1971-1980 23.4 6.1 - Proportion (%) 1971 100 3.1 1974-1979 100 1.0 1980 100 .4 1970-1973 - 10.0 100 1979-1981 — 5.0 100 Source: Computed from the annual reports of the Bank of Thailand, the Bank of Bangkok, and the Hongkong and Shanghai Banking Corporation. THE HONGKONG BANK IN THAILAND expanding less rapidly than the Thai average—from 1962 to 1980 the Hong. kong Bank's average rate of growth was 10% per annum; the rate of all banks was 20% from 1955 to 1970 and 22.5% from 1971 to 1980. In consequence the Hongkong Bank's share of the total banking assets decreased from 2.4% in 1962 to 0.4% in 1979. Comparing the Hongkong Bank with other foreign banks, in 1962 it had 14% of the total foreign bank assets; by 1980 the position had fallen to 5%, perhaps reflecting in part Thailand's heavy trade involvement with Japan and the United States. Looking now at the bank deposits situation, one should note that deposits in all commercial banks increased nearly seven times in ten years —from 1.5 billion baht in 1953 to nearly 10 billion in 1963. Of course, the growth rate was higher among local as opposed to foreign banks, the latest period, i.e. from 1965 to 1980, giving an average annual increase of 21% for local banks and nearly 10% for foreign. But the Hongkong Bank in this last period showed a deposit increase of only 8% per annum and thus its share of foreign bank held deposits declined from 20% in 1962 to 9% in 1980. This situation is also reflected in the figures for advances with all commercial banks in Bangkok showing an increase of some 21% per annum on the average, and a faster pace of 23% during the last decade. The Hongkong Bank during the period 1971-80 increased its advances at an average of 6%, so that, by 1980, its total advances had declined from 3% to 0.4% of the total. Considering only the foreign banks, the Hongkong Bank's advances declined from 10% of the whole in the early 1970s to only 5% in 1979-80. Concluding comments The Hongkong and Shanghai Banking Corporation was brought to Thailand as part of the political and economic process generally characterized as 'Western dominance' or 'colonial expansion' and, as far as Britain in Thailand is concerned, specifically defined in the Bowring Treaty of 1855. As such the Bank contributed to Thailand's development through trade finance and exchange operations. But it was part of Thailand's traditional policy that no one country and, therefore, no one bank from any country, should dominate. Thus although only the Hongkong Bank held the Privy Purse and although many of the Thai nobility long continued to hold their local and overseas accounts with this institution, official policy was flexible, and, under the advice of mainly British financial advisers, decisions were made in part at least after consideration of competitive factors--except during World War I when German influence was discarded. Prior to World War I, although the Hongkong Bank's primary role had been trade finance and exchange, the Bank also played a small role, with other foreign financial institutions, in Thailand's economic development. The consequent international rivalry created the situation which helped to assure Thailand's continued economic and political independence. German influence perceptibly declined during World War I, but the Hongkong Bank continued, in the inter-war period, as an exchange bank while retaining certain of its special functions. Meanwhile the first Thai local EASTERN BANKING bank, which had been formed in 1906, began to play an increasing role and received the support of other foreign banks. Thailand opened its own bank, which had been formed in 1906, began to play an increasing role and received the support of other foreign banks. Thailand opened its own National Provincial Bank, with whom the Thai government conducted sucessful loan negotiations in 1924 and 1936. After World War II the emergence of a domestic banking system, the growing role of the Bank of Thailand as central bank, the importance of banking legislation and the change in the direction of trade--coincident with the introduction into Thailand of Japanese and American banks— modified the proportionate role played by the Hongkong Bank, although the scope of its activities in the international field expanded. The Hongkong Bank remains Thailand's senior foreign bank and its role is once again on the resurgence. It has made the adjustment from pioneer to well-established international bank and continues to maintain the prestige which it has so long possessed in the eyes of the Thai banking c ommunity. Acknowledgments: The author wishes to thank Piyanart Bunnag, Samart Chia- sakul and Darunee Muangkaew for their collaboration and assistance; and Vice-Rector Amphon Namatra and Dr Pensri Duke of Chulalongkorn University for the institutional support. Somchai Sakulsurarat of the HSBC, Bangkok, and S W Muirhead, Controller of Group Archives, were of great assistance in relations with the Hongkong Bank. The author also expresses his thanks to Bundit Pradistanuwong for typing the original manuscript of this report. Finally, he greatly appreciates Professor Frank H H King's advice, encour. agement and editorial assistance without which this report would not have been possible. 21. THE HONGKONG BANK IN THE PHILIPPINES, 1899-1941 by Roy C Ybanez INTRODUCTION The first major bank in the Philippines was the Banco Espanol-Filipino de Isabel II which opened in 1852, by virtue of a royal decree in April 1828. With the ousting of Queen Isabel II in 1868, the bank's title was abbrevi. ated to Banco Espanol-Filipino. It was, in effect, the official government bank. The 1828 charter also granted the bank the sole privilege of note issue.1 This privilege it continued to enjoy well into the American period, officially confirmed by Act No 1790 of the Philippine Commission on 12 October 1907, though the monopoly privilege was removed.2 The privilege ended with World War II and the establishment of the Central Bank. Today the Bank Espanol-Filipino exists as the Bank of the Philippine Islands (renamed in 1908) and is the largest private domestic bank in the country. On 2 August 1882, the country's first savings bank was established, the Monte de Piedad y Caja de Ahorros de Manila, founded by Father Felix Huertas. A branch of the Banco Peninsular Ultramarino of Madrid was like. wise opened in 1883, but halted operations four years later.^ The 1860s saw the entry of the British banks. The Chartered Bank of India, Australia and China was initially represented by a mercantile firm, Ker, Bolton and Company. In May 1872, new agents were appointed, Martin Dyce and Company, and a year later the Chartered Bank opened its Manila agency with James Somerville as agent. Ten years later, the Iloilo agency was opened and, in 1900, the Cebu agency.^ The Hongkong and Shanghai Banking Corporation (HSBC) opened almost simultaneously with the Chartered Bank. Together with the Espanol- Filipino, these banks controlled the banking business in the islands until the emergence of American and Filipino banks in the 1900s. The establishment of the Hongkong Bank's agency in Manila was decided, it would appear, simultaneously with the establishment of the Bank itself. In fact, when the capitalization of the Bank was being pursued, applica. tions for shares were invited from residents of Manila and accepted on 26 December 1864. ^Araceli p. Vergara, "The Bank of the Philippine Islands" (unpublished thesis, Univ of the Philippines, 1954) p. 6. Vegara claims the more frequently cited date of 1854 actually involved a reduction of the ceiling of note issue, the privilege having been granted in 1828. ^Act 1790 of Philippine Commission, 12 October 1907. ^Bankers Association of the Philippines (BAP), Banking in the Philippines (Manila, 1957), p. 6. ^Compton Mackenzie, Realms of Silver: One Hundred Years of Banking in the East (London, Routledge & Kegan Paul Ltd, 1954), pp. 133 and 217. EASTERN BANKING On 25 March 1865, the Court of Directors appointed the leading mer. chant house in Manila, the American firm Russell, Sturgis and Company, as the Bank's first agent in Manila.5 The date was only twenty-two days after the opening of the Bank in Hong Kong and preceded the opening of branches in Shanghai and Yokohama. When the firm collapsed in 1875, it was decided that a branch of the Bank should be established in Manila. Hence, on 11 November 1875, the Court of Directors appointed Charles Ilderton Barnes as Special Agent to conduct the business of the new Manila Agency. Barnes had previously been engaged by the Bank to report on the Chinese Sugar Company in Indo-China and Bangkok. His experiences in sugar gave assurance of his capability to manage the agency profitably. In 1887, a case developed from relations with the firm Jurado and Company which would embroil the Bank in a lengthy legal battle and force the issue of its legal existence in Manila. The existing antecedent then was simply the Treaty of 29 June 1883 between the Court of Madrid and the Court of St James giving free commercial access between Great Britain and Spain. The case resulted in a decision by the Audiencia in Manila against the Bank, on the grounds that the Bank had no legal personality in Manila. The issue was argued by Bank lawyers in Madrid and in Manila. On 6 June 1889, the Supreme court of Madrid gave a favorable verdict as to the question of the Bank's personality in the Philippines. On 27 June 1889, the Bank was registered in Manila and the certificate was held by the agent. The bankruptcy case against Jurado and Company was, however, to drag on until 1896, when the Supreme Court irrevocably confirmed the bank. ruptcy of the firm.^ The legal recognition of the Manila agency was also a matter of con. cern, since it was not mentioned in the original Ordinance by which the Hongkong Government gave authority to the Bank to set up branches in speci. fic locations. The Hongkong Bank forthwith submitted a draft ordinance, reciting the fact that the Bank, with the approval of the shareholders, had since incorporation established banks, branches and agencies in places not specifically mentioned in the bank ordinances, such as Saigon, Batavia, San Francisco, New York, Bangkok, Lyons, and Iloilo. The draft ordinance then proceeded to authorize that nothing in the Ordinance should preclude the Bank from establishing banks, branch banks or agencies at ports, cities, towns or places not specifically mentioned in the original Ordinance. On 26 September 1889, notice of the approval of the Treasury was received with the proviso that the Bank give security for $2,500,000 (being one-third of the Bank's authorized note circulation) which could be in Chinese Government loan bonds. The Bank decided to agree to this condi. tion. The Secretary of State granted his approval on 10 October 1889. The Governor of Hong Kong agreed to introduce it to the Legislative Council, which in turn passed the Ordinance on 7 November 1889. Finally, on 16 January 1890, an extraordinary meeting of stockholders ^References from the HSBC Board of Directors' Minutes, in "The Philippine Branches. The Hongkong and Shanghai Banking Corporation" (mimeo); HSBC Archive s. ^Ibid. For the legal background, see Wesley-Smith, Essay No. 4 above. THE HONGKONG BANK IN THE PHILIPPINES was called to authorize the Court of Directors to accept the new Ordinance, No 29 of 1889, and the conditions of the Secretary of State. The Bank opened its Iloilo branch on 2 April 1883, upon the advice of its Manila agent and sugar expert, C I Barnes. Barnes realized the poten. tial and was partly motivated by news that the Chartered Bank would be opening a branch. The Hongkong Bank branch opened with John McNab as its agent, and two days later the Chartered Bank opened its Iloilo office with W H Young as its agent. Young's stint was lively and competition, though friendly, was shortlived.7 The Chartered Bank office closed in 1885, to be reopened only in 1911. The Iloilo sub-agency of the Hongkong Bank generally accounted for less than ten per cent of the total resources of the Philippine branch. Among its primary business was the granting of loans and discounts, over. drafts and the buying and selling of bills of exchange. THE HONGKONG BANK IN THE EARLY AMERICAN PERIOD Shortly before the turn of the century, tension between Spain and the United States escalated into open warfare. This brought the fleet of Admiral George Dewey to Manila. The ensuing naval battle saw the Spanish flotilla defeated and signalled the end of over three hundred years of Spanish rule in the Philippines. At about the same time, the Filipino General Emilio Aguinaldo declared independence from Spain and Filipino revolutionaries closed in on the colo. nial capital. Before the revolutionaries could achieve their ultimate objective, however, the Spaniards had formally surrendered to the Ameri. cans. It soon appeared to the Filipinos that the Americans had come as conquerors rather than liberators. For a short time, Filipino revolution. aries waged war with the U.S. military forces, but were soon subdued by superior forces. With the signing of the Treaty of Paris, the formal transition from Spanish to American rule was effected. The Bank as a government depository As may be expected of the entry of foreign occupation forces, the issue of currency and banking in the Philippine Islands came to be a major concern of the U.S. Government. The four existing banks handled the banking requirements of the archipelago; the Banco Espanol-Filipino held the only legal authority to issue currency notes. The two British banks were quick to recognize the opportunities opened by the entry of an economically powerful nation into the Philippines, particularly the banking and exchange requirements of the new government. 7[See Walter H Young, A Merry Banker in the Far East (and South America) (London: John Lane, The Bodley Head, 1916), pp. 57-59. Ed.] EASTERN BANKING This business may be classified into two: the transactions of the government ins-tituted for the islands under the financial control of the Secretary of War, and those of the U.S. military and other agencies with authority vested in the Secretary of Treasury. Transactions of both U.S. and insular governments included business with banks such as exchange transactions and deposit services. The deposit requirements of U.S. agencies, however, posed a more difficult problem, since American laws then required U.S. funds to be deposited only with the U.S. Treasury, though in places where the Treasury was not represented, the Secretary of the Treas. ury was authorized to designate the appropriate depository. As agent for the Hongkong Bank in the US, Alfred M Townsend conducted most of the official representations with the U.S. Government. On 6 April 1899, Townsend wrote to the Secretary of War, Russell A Alger, with a formal request that the Hongkong Bank be designated an official depository of the insular funds arising under the military government maintained by the War Department. Townsend justified his proposal thus: In doing so, I would say: 1. That this Bank's capital is Mexican $10 million and surplus Mexican $10 million. 2. That this Bank has for the past thirty years done most of the financial business for U.S. Government Officials in Diplomatic, Naval and Consular Services in the East, and has, I believe, the goodwill of all your Officials who have thus been brought into contact with our staff. (As confirm. ing this I would call your attention to General Otis' tele. gram just received by you.) 3. That I believe this Bank is the only foreign Bank estab. lished in the Philippines, elsewhere than at Manila. 4. That this Bank has also Agents at the principal ports in China and Japan. 5. That this Bank is the only Eastern Bank having its own Branches in America (at New York and San Francisco). 6. That this Bank's Head Office is in Hong Kong with American Firms represented in New York for 19 years, encouraging American Trade with the Orient.R The telegram referred to was an important endorsement, coming from Major General Elwell S Otis, a member of the First Philippine Commission (Schurman Commission).9 on 6 April, the president of a major American firm, China and Japan Trading Company Limited, sent a similar endorsement to Alger. A.ncj on 25 April, Admiral George Dewey, then Commander-in-Chief of the Asiatic station, cabled his recommendation of the Bank to Alger: R Letter, A M Townsend to U.S. Sec of War, Russell A Alger; in microfilm of the National Archives of the United States, Record Group 350, File 1988. ^ Cable, Maj Gen Elwell Otis to Secretary Alger, in ibid. ^Letter, Silas Webb, Pres of China and Japan Trading Co Ltd, to Sec Alger, in ibid. "Navy does nearly all exchange through Hongkong Bank, strongly recommend them as Fiscal Agents, Depository for War Department."^-*- Such a designation would mean substantial business for the Bank. Since the start of the American Occupation to 31 July 1899, a span of one year, receipts for the insular funds amounted to over $5 million from customs duties, taxes, licenses, fees, etc. Corresponding disbursements amounted to about $2.5 million.-*2 At this time the Bank's resources total. led about $20 million. Secretary Alger, however, appeared more sympathetic to the Chartered Bank. Hoping to muster support, Townsend wrote on 3 May to Secretary of the Treasury Lyman J Gage discussing the merits of the Hongkong Bank's proposal, ending with a request that Secretary Gage discuss the matter with the Secretary of War.*-R And on 20 May 1899, Townsend dispatched another letter to Secretary Alger expressing his concern over Alger's apparent commitment to the Chartered Bank. In his letter, Townsend cautioned giving a monopoly to the Chartered Bank. He noted that at present both banks handled government business on a competitive basis, but, since the Hongkong Bank generally offered better rates, most of the business went to the latter.*-^ On 12 June 1899, Acting Secretary of War George D Meiklejohn informed Townsend that the Chartered Bank had been appointed the official depository for insular funds of the military government. He also pointed out that the designation of a fiscal agent of the U.S. Government, since this involved U.S. Government funds, was within the -jurisdiction of the Secretary of the IS Treasury.1J The Secretary of the Treasury clarified, however, that even as the Chartered Bank had been designated an official depositor, the appointment did not bar the Hongkong Bank from seeking a similar designation. On 16 June, Townsend sent another letter to the Secretary of War requesting that the Hongkong Bank be designated in addition to the Chartered Bank.12 The Acting Secretary promptly replied on 20 June that ". . .in the event of its being considered advisable to designate a depository in addition to the Chartered Bank of India, Australia and China, your request will receive full consideration by this Department".-*-R The Chartered Bank did not complete all the requirements until 5 August. Within the week, Assistant Secretary of War Meiklejohn wired the Manila Government an order to transfer government deposits with the Hong. kong Bank, amounting to about $1.3 million, to the Chartered Bank. *-9 This may have been the crucial order; presumably the Bank's campaign was waged 11-Cable, Adm George Dewey to Sec Alger, in ibid. l2Statement of Receipts and Expenditures, Philippine Islands, issued by Office of Sec of War, in ibid. lRLetter, A M Townsend to Sec of the Treasury, Lyman J Gage, in ibid. 1^Letter, A M Townsend to Sec Alger, in ibid. ^Letter, Acting Sec of War, George Meiklejohn, to A M Townsend, in ibid. ^Letter, Sec Gage to A M Townsend, in ibid. l^Letter, A M Townsend to Sec Alger, in ibid. lRLetter Acting Sec Meiklejohn to A M Townsend, in ibid. l^Cable, Hongkong Bank in Hong Kong to A M Townsend, 11 Aug 1899, in ibid. EASTERN BANKING on several fronts. Upon receipt of this order, General Otis of the Philip. pine Commission cabled the Assistant Secretary reiterating his recommenda. tion for the designation of the Hongkong Bank as a depository: If practicable, Hongkong and Shanghai Banking Corporation should likewise be designated depository for convenience. It alone has branch in Iloilo. Civil fund deposits large at times.^0 On 10 August 1899 the Assistant Secretary of War issued orders "by direction of the [U.S.] President" designating the Hongkong Bank a deposi. tory of the insular funds in the Philippines.21 The same order required the Bank, as was required by law, to deposit an initial surety of $1 million. The bonds, with the American Surety Company acting as surety firm, were submitted on 16 August. On 24 August 1899, the bonds were approved and the Hongkong Bank officially operated as a depository, nine. teen days after the Chartered Bank operated under the same designation. As it turned out, the main bulk of the business did not stay long with the British banks, who had to give up most of the deposits with the entry of American banks in 1902. Approximately seven months after its designa. tion, on 31 March 1901, the Hongkong Bank, held as government deposits Pesos 8,616,812.23, while the Chartered Bank held Pesos 6,345,047.03.^2 The government business was valued highly by both banks. In the case of the Hongkong Bank, government deposits accounted for about half of the Bank's total deposits. The Banco Espanol-Filipino did not share in these transactions, not being able to muster the financial resources required of a depository.23 In 1902, two American banks, the International Banking Corporation and the Guaranty Trust Company, established offices in Manila. The lawyers of the Hongkong Bank, Hopkins and Hopkins, immediately inquired with the War Department if this meant the Bank would no longer be a depository. 2^ The Acting Civil Governor replied that the business would be shared equally among the four banks. This of course meant less business for the Bank, and by year-end government deposits had dropped to about Pesos 5,450,000. By 31 December 1904, this amount had dropped further to Pesos 379,000, and was maintained at even lower levels in subsequent years.25 This was of course to be expected in the face of competition from American banks. Certain opinions expressed by the U.S. Comptroller of the Currency may have also contributed to this decline. In a report to the Secretary of War dated 29 20cable, Gen Otis to Asst Sec of War, in ibid. 2^official Orders (unnumbered) issued by Asst Sec of War Meiklejohn, in ibid. ^^Memorandum, Treasurer of Philippine Islands to Col Clarence Edwards, Chief, Bureau of Insular Affairs, in ibid. 23yergara, p. 33. 2^Letter, HSBC Attorneys, Hopkins and Hopkins, to Col Clarence Edwards, Chief of Bureau of Insular Affairs, U.S. War Dept, 24 July 1902, in microfilm Record Group 350. 25statement of Assets and Liabilities for 31 March 1904, Hongkong Bank, Philippine Branch, in ibid. THE HONGKONG BANK IN THE PHILIPPINES July 1901, Charles Dawes, the Comptroller of Currency, expressed some con. cern over the fact that while government deposits in the Hongkong Bank were over Pesos 8 million, the Bank's capital and surplus in Manila amounted to only Pesos 1.6 million. Furthermore, he noted that the Hongkong Bank in Manila stated its capital stock in its financial reports, unlike the Char. tered Bank. This to him raised the possibility of the independence of the Philippine branch and the question of whether legal responsibility of the parent bank in Hong Kong did in fact exist. Governor William H Taft responded to express his belief in the solvency of the two British banks. In any case, the Philippine Governor noted he did not really have much of a cho ic e. In subsequent years, the requirement for a surety bond brought into question the continued service of the Bank as a government depository. In April 1908, Wade Gardner, the new agent of the Bank in New York, initiated moves to replace the bonds with American Surety Company which was due to expire on 29 April 1908.^ The Bank sought to use the bonds of Lloyds London in part because of the legal restriction on surety companies that the value of bonds given should not exceed ten per cent of their assets. Secondly, the premium paid by the Bank on the old bonds had risen from a quarter to a half per cent. This meant an increase in annual payments of $2,500, while the premium of Lloyds London remained at a quarter per cent. In the same letter Wade proposed a reduction of the bonds to ￡50,000, since government deposits with the Bank in Manila was only Pesos 190,000. The government in Manila was agreeable to both requests, noting that the use of the Lloyds bonds would "scatter", i.e. diversify, the securities. After some correspondence that sought to verify the solvency and legal qualifica. tions of Lloyds in the US, approval was finally granted with an American company, Phoenix Assurance Company, acting as agent of Lloyds London, and the primary guarantor among the four surety companies involved. On 22 April 1911, Governor General W Cameron Forbes cabled General Edwards inquiring if the Hongkong Bank could hold, in lieu of the present bonds, U.S. Government securities, Philippine Government bonds or at least guaranteed railway bonds.^8 qt was not until a year later that the Bureau of Insular Affairs formally granted the Bank use of the new type of bonds in compliance with the request of the Governor General.29 Furthermore, it was a source of concern that other than Phoenix Assurance Company, the participating surety firms did not hold American assets and hence there was doubt if the U.S. Government could, in some eventuality, legally pursue Phoenix Company beyond its individual surety of ￡50,000. The decision was, however, held in abeyance by the Governor General until the present bonds expired on 28 April 1913.^0 Qn 26 February 1913, Governor Forbes wired the ^Letter, Charles Dawes, Comptroller of Currency, to Sec of War; in micro. film, Record Group 350, File 2879. ^Letter, Wade Gardner, HSBC New York Agent, to Gen Clarence Edwards, in ibid. O Q ... Cable, Gov Gen William Cameron Forbes to Gen Clarence Edwards, in ibid. 29Letter, Col Frank McIntyre, Asst Chief of Bureau of Insular Affairs, to Wade Gardner, 2 Feb 1912, in ibid. ^Letter, Col Frank McIntyre, Acting Chief of Bureau of Insular Affairs, to EASTERN BANKING Secretary of War to inform the banks that their surety companies would have J ... O ] to register their firms in the Philippines for the bonds to be accepted. 1 On 22 July 1916, a government bank, the Philippine National Bank, was established and made sole depository of government funds. Thus ended eighteen years of service by the Bank as an official depository of the Philippine government. Even as the Hongkong Bank was exerting efforts to be designated depository of Philippine insular funds, discussion on the matter of deposi. tory for U.S. Government funds was also being initiated. Existing laws prohibited the safekeeping of such funds outside the U.S. Treasury. This caused much inconvenience for disbursing officers in the Philippines, and presumably in other U.S. territories as well. On 13 December 1899, Townsend wrote to Secretary of War Elihu Root noting the inconvenience caused by the exclusion of U.S. funds from the depository services that had been contracted. He suggested that means be explored for a bank in the Philippines to be so designated.33 U.S. authorities apparently shared the same concern and on 20 December the Assistant Secretary of War informed Townsend that the Treasury Secre. tary had already requested the Speaker of the House of Representatives to take appropriate legislative action. ^ On 6 June 1900, an act was passed by the U.S. Congress authorizing the Secretary of the Treasury to designate one or more banks as depository of U.S. government funds in the Philippine Islands, in Cuba and in Puerto Rico.3^ The law enacted, however, required that as security, such banks should deposit with the Treasury in the United States bonds to an amount not less than the aggregate sum at any time on deposit with the designated bank. As it turned out, this meant that in the Philippines bonds totalling a value of about US$10 million would be required of the designated bank or banks. This requirement quickly stifled any interest and when this provision was explained to the British and local banks in Manila, all negotiations promptly ceased.33 Currency and Exchange Issues in the Early American Period When the American forces arrived in the Philippines, they were confronted by a rather mixed-up affair in the matter of currency and exchange. The traditional Spanish Philippine gold coins had by then passed out of use owing to the rise in the value of gold. In 1887, the Spanish Government issued a decree wherein only Mexican dollars dated before 1878 would have legal value. ° At the same time it was prohibited to import Mexican 31 32 33 34 Acting Gov Gen Newton Gilbert, 12 Nov 1912, in ibid. Cable, Gov Gen Forbes to Sec of War, in ibid. Letter, A M Townsend to Sec of War Elihu Root, in ibid. 'Letter, Asst Sec of War to A M Townsend, in ibid. U.S. War Dept, Memorandum ... on Currency and Exchange in the Phillipines (Washington, D.C., Govt Printing Office, 8 Dec 1900), p, 35Ibid. 36 42. Juan Quintos Jr, "Monetary System of the Philippines, 1901 up to the Present" (unpublished thesis, Univ of the Philippines, 1952), pp. 1-2. THE HONGKONG BANK IN THE PHILIPPINES dollars. These measures never quite succeeded and smuggling proceeded with market rates responding to these, albeit illegal, forces. Exchange fluctu. ations were therefore quite characteristic and control of money supply difficult. The accepted standard of value was the Mexican dollar. Simultaneously circulating, however, were Spanish Filipino silver pesos, Filipino silver half dollars and pesetas, Filipino copper cuartos and centavos, and even foreign copper coins of neighboring countries. An article in the Manila Times referred to the difficulties resulting: The man who has any shopping to do requires to take three- quarters of his time figuring out how many reales there are in a peseta, and how many quartos there are in a cent, and what is the meaning of such things as quatro y ocho, or 4 reales and 8 quartos, how much does this pan out in existing coin? Thus again, some copper coins are 2 cents, some 1 cent, some are a cent and a quarter, and some are more like disorganized trouser buttons than anything else. So, if you get into a street car and pay the man 10 cents American, the fare being 2 cents Filipino, puzzle. What do you get in change?-^ The immediate concerns of U.S. authorities were the uncertainty and instability of the exchange rate between the U.S. dollar and the Mexican dollar, and the potential losses suffered by government offices and Ameri. can personnel in transactions involving both currencies. In addition, the bureaucracy faced the thorny issues of accounting for such transactions in the presence of various official and market rates of exchange. Purely local transactions, i.e. local receipts and disbursements of the insular government, were of course insulated from this problem. To a large extent also, purchases of foreign goods did not involve this exchange rate issue in Manila. Payments for such purchases did not generally require Mexican dollars and were effected through drafts drawn on banks abroad. Directly affected, however, were local purchases by U.S. govern. ment instrumentalities and U.S. personnel. Of the total disbursements made by American authorities, about two-thirds would eventually be expended in the local economy. The other one-third consisted mainly of remittances by U.S. personnel to their families, effected through checks drawn on treas. uries in New York and San Francisco.38 It was inevitable that U.S. Government offices and U.S. personnel would deal with the exchange banks in Manila and exchange their U.S. dollars for Mexican dollars. Although U.S. forces controlled the islands, the U.S. dollar was not declared legal tender, and even if it were, accept. ance by the community would undoubtedly be a slow process. At the same 3?Manila Times article reproduced in Memorandum for the Secretary of War on Currency and Exchange in the Philippines (Washington D.C., Govt Printing Office, 8 Dec 1900), pp. 15-16. 38Le tter, Maj Charles McClure, Chief Paymaster of the Dept of the Pacific and Eight Army Corps, to the Military Secretary, the Military Governor, in ibid, pp. 7-9. EASTERN BANKING time, the supply of Mexican dollars was generally uncontrolled and the exchange rate displayed some degree of fluctuation, hovering around the rate of two Mexican dollars to one U.S. dollar. An estimated $7-8 million . . . . . OQ of the former were believed circulating m the islands. 7 Under such circumstances, resentment against the two British banks soon developed. Bank policies must have appeared to be putting down the U.S. dollar. It did not take long for U.S. personnel to raise a clamor that Manila banks were manipulating the exchange rate. This sentiment was reflected in a report by Charles McClure, Chief Paymaster of the Department of the Pacific and Eighth Army Corps to the Military Secretary of the Military Governor: The two English banks of Manila seem to be in collusion, and charge exorbitantly for all business transacted over their counters. When an officer or enlisted man goes to deposit his gold with them it is credited to his account in silver, at the current rate—for this is a silver country—and if he wants gold for any purpose they charge him never less than 5 per cent for it. I have noticed that when pay day approaches the banks put down the rate for gold, so they can make a greater profit from the soldiers In the early stages of the controversy, various steps were suggested, primarily directed at avoiding transactions with the exchange banks. One suggestion was to pay U.S. personnel stationed in Manila directly in Mexi. can dollars acquired in the U.S. or some source where better rates could presumably be obtained. This did not, however, merit official sanction, as the military officialdom insisted on the rights of U.S. personnel, wherever stationed, to receive their remuneration in the currency of their coun. try. Furthermore, this would entail the inconvenience and risk of ship. ping coinage from foreign sources. To the individual soldier, this would mean receiving the weight of several pounds every payday. As an alternative to this proposal, McClure suggested that he be allowed to keep in his possession some Mexican silver, say $500,000, pur. chased abroad, with which to buy up gold of U.S. personnel at rates estab. lished by the War Department. 3 This proposal did not prosper either, since it would mean, technically, that military personnel undertake an exchange transaction, which was prohibited by U.S. regulations. Hence paymasters in Manila were limited to holding in their vaults for safekeeping, on an unofficial basis, U.S. dollars of military personnel not immediately expended.43 -^Enclosure from HSBC Manager, in ibid, p. 10. 4^Maj McClure, in ibid, p. 8. The term "two English banks" refers to HSBC and the Chartered Bank. ^Letters to Sec of War from C C Sniffen, Acting Paymaster-General, and M I Ludington, Quarter-Master General, in ibid, p. 5. 4^Maj McClure, in ibid, p. 8. 43Ibid. THE HONGKONG BANK IN THE PHILIPPINES As pointed out earlier, a related concern over the exchange rate was expressed by the bureaucracy who had to account for and summarize all these transactions. This problem was, however, somewhat resolved by the issuance of General Order 65 on 10 April 1899 by the Acting Secretary of War, instructing that disbursements made in other currencies would still be expressed in U.S. dollars as required, but converted and recorded at the rate transacted. ^ This eliminated the thorny issue of accounting for exchange rate losses and gains. Understandably, most of the concern over exchange rate fluctuation emanated from U.S. military forces who had to deal directly with the Brit. ish banks in Manila. On the other hand, various responsible quarters expressed an appreciation of the situation. A major newspaper noted that big banks, including in this instance branches of foreign banks in Manila, could not be expected to upset their system for the sake of a "small out- of-the-way place like Manila".Paymaster-General A E Bates, in a letter to Secretary of War Root, noted that in a silver country banks would auto. matically exchange gold for silver. By promising to hold gold and pay upon withdrawal, they would be obliged to store it. being unable to profitably utilize the gold in a silver currency country. ° The exchange rate issue reached a new peak in 1900 with the breakout of the China War. On 3 August 1900, General Arthur MacArthur, then Mili. tary Governor-General of the Philippines, relayed the following message to the Adjutant-General: Quartermaster rate of exchange is 2.10 Mexican for $ United States, announced for quarter commencing July 1; bank rate Manila today, $1.98 Mexican for $ United States. Remote cause of fluctuation is China war, which is made pretext by local banks for profitable speculation in United States currency.^ General MacArthur then proposed: A partial remedy, but not of immediate application, would be establishment of the United States sub-treasury system, whereby we would handle all our own money and not furnish foreign banks gratuitously funds for speculation in opposition to the interest of the United States. The two concerns here which now hold our deposits have something more than 5,500,000 Mexican dollars of our money. This report elicited a sharp response from Secretary of the Treasury Gage, who wrote on 10 August to Secretary Root: General MacArthur seems to think that the higher price of ^General Order No 65, issued by Acting Sec of War, 10 April 1899, in ibid, p. 20. ^Manila Times article, in ibid, p. 16. ^Letter, Paymaster-General A E Bates to Secretary Root, in ibid, p. 60. Zf7Cable, Gen Arthur MacArthur to Adjutant-General, in ibid, p. 45. EASTERN BANKING Mexicans at the bank is due to the perversity and greed of the bank, but finds its excuse in the disturbances in the movement of money caused by the Chinese troubles. I am more inclined to believe that the banks are giving no new exhibition of sordid. ness, but that they themselves are the necessary victims of the unfavorable influences occasioned by the Chinese war. They are obliged to adjust movements they cannot control, and I do not see why General MacArthur is not subject to the same rule of commercial necessity. The only sure cure would be to introduce a new supply of Mexican from some quarter of the globe, if there be such a place, where they can be purchased cheaper than in Manila. I doubt if there is such a place, when transportation and risk are taken into account.^ The Hongkong Bank was of course one of the two banks referred to in this controversy. The Bank had actually presented a proposal, soon after its designation as a depository, which stirred some amount of interest among American authorities. On 28 August 1899, Townsend presented a proposal to Secretary of the Treasury Gage, wherein paymasters in Manila would be supplied credits with the U.S. Treasury at Washington, or sub. treasuries at New York or San Francisco. ^ On this basis, the Bank in Manila would supply authorities with Mexican dollars and recovery would be made by presenting the officers' drafts at the Treasury in the United States. Such a proposal elicited favorable responses from the War Department, since this arrangement would in effect transfer the exchange transaction to the United States and assure the Department better rates of exchange.^0 Townsend pointed out that, unlike the current practice of using letters of credit, the arrangement would save the Department expenses and commis. sions. Certainly, the proposed arrangement would be preferred to the crude practice of shipping U.S. gold and notes to Manila. Having received favorable comments from the Quartermaster-General and the Paymaster-General, Secretary of War Root responded to Townsend's proposal by seeking assurance that the Manila branch would stand ready to supply the U.S. Government its monthly requirement of from $8-900,000.^^ Townsend forthwith replied on 13 September: I beg to acknowledge the receipt of your letter of the 11th instant, and in reply would say that you need not have the slightest fear but that this bank will keep on hand all the funds needed to meet the requirements of the United States Army in the Philippines or to meet the payments that may have to be made for contracts in Hong Kong, China, the Straits and Japan. It is our business to provide funds to meet all requirements in 48 49 50 51 Letter, Sec of Treasury Lyman Gage to Sec Root, in ibid Letter, A M Townsend to Sec Gage, in ibid, p. 31. Letters to Sec of War from M I Ludington and A E Bates, Letter, Sec Root to A M Townsend, in ibid, p. 33. pp. 46-47. in ibid, p. 32. that part of the world.52 By this reply, it appeared that the matter was settled. However, Townsend apparently wrote to Secretary Root a day later, clarifying that if in addition to the above service, the U.S. Government wanted the Bank to exchange U.S. dollars in Manila for whatever purpose, Manila rates would have to be applied. To avoid this, Townsend suggested that the United States require that payments in Manila be made in Mexican dollars.53 To this the Paymaster-General expressed disapproval: Not prepared to approve paying these troops in Mexican silver, and, as transport ply between Manila and San Francisco and gold can be taken at a cost of less than 2 per cent, thinks its unnecessary to change present system or use any banking house.54 The papers were subsequently forwarded to the Secretary of the Treas. ury. Apparently, the Secretary did not make an official reply. At this point, further correspondence on the proposal ceased. All these difficulties highlighted the pressing need to resolve the currency and exchange problems of the Philippines. The Philippine Commis. sion instituted an examination for the very purpose of establishing a more permanent solution. Among those consulted was C I Barnes, at this time a partner in Warner, Barnes & Company, who said in part: I have lived here twenty-four years. When I first came here gold currency was the basis, but there was also at the same time a silver dollar in circulation and as the Spanish Government never limited the circulation of the silver dollar at that time, to any material extent, in course of time a lower value of currency gradually replaced the gold. In my opinion the silver currency best suits the people ... It appears to suit the country better, and it would not be of advantage to go back to gold at this time. . . . My opinion is that there can be no better currency for these islands than the Mexican dollar, unless the United States cares to coin a dollar of the same weight as the Mexican dollar and allow it to circulate at its value.55 H D C Jones, head of the Hongkong Bank in Manila, expressed a similar sentiment: "The natives would gain no advantage by the return of the gold standard at this time".56 On this same issue, Townsend dispatched a memorandum to the Secretary of War on 31 October 1900, stating among other things: 52Letter, A M Townsend to Sec Root, in ibid, p. 33. 53pbid, p. 34. 54Ibid. 55ibid, p. 21. 56ibid, p. 50. EASTERN BANKING I do not think that the adoption of the United States gold dollar would do away with a fluctuating exchange or the influ. ence of the condition of the local supply. The English sover. eign fluctuates in value in America and Australia, according to the laws of demand and supply and according to the cost of transportation. The same would apply to the Philippines, and I do not think, for these reasons, that the parity of exchange could be maintained. I therefore do not believe that the adop. tion of the gold standard would accomplish the object sought. . . . it would seem more suitable that this Government should coin a special dollar of similar weight and fineness as the Mexican and British dollar, obtainable as required for currency in the Philippines.^7 The Chartered Bank also did not remain silent on this important matter. Its Manila agent, G Bruce-Webster, communicated to Colonel Clarence Edwards, Chief of the Division of Customs and Insular Affairs the following: I am of the opinion that while the American gold standard might not take long to be found suitable for trade purposes on a large scale in Manila, it would have a very disturbing effect gener. ally throughout the islands. . . . Assuming that a change from the present mixed currency is desirable, viewed from all points of interest, and that it should take a form as similar as pos. sible to existing conditions, I am of the opinion that the free coinage of silver at the Manila mint into a distinctly Philip. pine peso of the same intrinsic values as the Mexican dollar ‧ . . C Q would least disturb conditions. ° On this same issue, Alexander Laird and William Gray of the Canadian Bank of Commerce, New York correspondents of the Chartered Bank, expressed to the Secretary of War similar analysis and recommendations. ^9 It appeared that American authorities arrived at essentially the same conclusion and shared similar opinions. In response to Laird's letter, Secretary of the Treasury Gage wrote to Secretary Root: The suggestion of Mr Laird that an American dollar could be coined and introduced into the Philippines is, I think, worthy of most careful consideration. It is reasonable to believe that a special dollar, quite distinct from our present coinage, to possess the same weight and fineness of the Mexican dollar, not to be legal tender in the United States, might be successfully introduced in the Orient.^0 ^^Memorandum, A M Townsend to Sec Root, in ibid, p. 58. Letter, G Bruce-Webster to Col Clarence Edwards, in ibid, pp. 53-55. -^Letter, Alexander Laird and William Gray, Canadian Bank of Commerce, to Sec of War, in ibid, pp. 48-49. ^Letter, Sec Gage to Sec Root, in ibid, p. 50. Paymaster General Bates, in a letter to Secretary Gage, took a more concrete stance: Therefore it seems to me that it will be better for the Govern. ment, and in the end better for the Philippines, to establish a convenient well-divided currency for their use, making their dollar of the same weight and fineness as the Mexican dollar, and open a mint there to free an unlimited coinage of the metal. By doing this we shall confine the fluctuation in the Philippine currency strictly to the fluctuation in the value of silver, removing the fluctuations caused by the limited quantity of the circulating medium.61 Despite these sentiments, official action did not move swiftly for a permanent solution. It was not until 1903 that a currency law was enacted. One of the first major measures taken was to require a quarterly examination of banks (Act No 52 of the Philippine Commission, passed on 23 November 1900). This law specified that reports should as far as possible conform to those used in the U.S. banking system. More serious for the British banks, however, was a law quite categori. cally entitled "An Act to Prevent Discrimination against Money of the United States by Banking Institutions".62 Act No 53 specifically required that banks should honor withdrawals in U.S. dollars if deposits had been made in this currency. Neither could banks legitimately refuse deposits of U.S. dollars unless the same rule applied to Mexican dollars. This legis. lation was clearly an offshoot of the exchange rate controversy. Though a financial burden to them, the British banks had little choice but to operate under this law for over two years, until a Philippine dollar was established . Quite ironically, practically at the same time American authorities sought the assistance, unofficially, of the Manila banks in seeking some immediate relief in the currency problem. As noted earlier, currency in Manila was scarce at this period and exchange rate fluctuations increased, a situation attributed to the rebellion in China and the corresponding heightened Allied military operations. In order to relieve the shortage, the American administration lifted the ban on the imports of Mexican dollars. This measure allowed the Hongkong Bank, the Banco Espanol-Fili- pino and the Chartered Bank to import these dollars. 63 Thus under the American regime, the Hongkong Bank was again called upon for the important task of aiding the country in its currency requirements. A more long term solution, however, was being developed. The Philip. pine Commission took on the services of a financial expert, Charles A Conant, and as noted earlier, conducted a special investigation on the matter of currency in the Philippines. In this capacity, Conant consulted * 61a E Bates, in ibid, p. 60. ° Act No 53, "An Act to Prevent Discrimination against Money of the United States by Banking Institutions", Public Laws, I, 64. ^Memorandum on Currency and Exchange, p. 22. Also in "Reference to Minutes". EASTERN BANKING Sir Thomas Jackson of the Hongkong Bank and T H Whitehead of the Chartered Bank in Hong Kong in October 1901.^ Both expressed preference for the continuance of the Mexican currency system in the Philippines, but noted that a system of gold standard to back silver issues would attract capital to the islands. These studies and consultations became the basis for the plan drafted by the Philippine Commission. It was not until February 1903, however, that the U.S. Congress passed the Philippine Coinage Act. Tlie law, Act No 137, provided for the establishment of a gold standard with a theoreti. cal gold peso of equivalent weight and fineness as the U.S. dollar, each unit to be equal in value to US$0.50. On this basis and backed by a gold reserve, coinage of a silver peso and subsidiary coins would be under. taken. For practical reasons, however, issuance of silver certificates was provided for, backed up by a hundred per cent silver reserve. The Banco Espanol-Filipino protested to the latter decision, citing the Spanish decree giving it sole right to note issue. This protest was overruled by the Philippine Commission.^6 To properly implement the new system, the Philippine Commission, on 10 October 1903, passed Act No 938, otherwise known as the Philippine Gold Standard Act . The law established a separate trust fund called the Gold Standard Fund for the exclusive purpose of maintaining the 2:1 parity of the new silver peso with the theoretical gold peso. The fund would be deposited partly in the United States and partly in the Philippines. This was distinct from, and in addition to, the silver standard fund set up for the silver certificates. The Mexican dollar was declared demonetized beginning 1 January 1904 and by 1905 the new so-called Conant dollar had driven the old currency out of circulation. The Philippine economy and the banking system gradually settled in under the new monetary mechanism. Major reforms would be under. taken in the next decade and the system would eventually give way to the dollar exchange standard in 1934. BANK BUSINESS IN THE AMERICAN PERIOD, 1899-1941 Growth of Banks in the Early 1900s The establishment of American rule necessitated adjustments for the Hong. kong Bank to new priorities in the economic environment, changes in the ground rules for banking, and the impact of competition. The thrust of economic growth shifted significantly into an area that was familiar terri. tory to the Hongkong Bank: foreign trade. It was thus well-positioned to 64 65 66 67 Letter, Charles microfilm. Quintos, p. 2. Vergara, p. 29. Quintos, p. 3. Conant to Lt Col Clarence Edwards, in U.S. Archives deal with competition in the business of banking, though it had to cope with new philosophies in public policy with respect to banks. Quite inevi. tably, the Hongkong Bank would share the business with the newly estab. lished banks. On 14 July 1902, the International Banking Corporation (IBC) estab. lished offices in Manila. This was followed in 1903 by the Guaranty Trust Company, absorbed a year later, in February 1904, by the IBC. The IBC was the forerunner of the First National City Bank (FNCB) of New York, cur. rently the largest non-government bank in the Philippines. Controlling interest in the IBC was acquired by the National City Bank of New York in 1914, and all remaining holdings by 1929, at which time the IBC ceased to exist as a commercial bank in the Philippines.^ The current corporate organization of FNCB is the product of a merger between the National City Bank of New York and the First National Bank of New York in 1955. The first decade of American rule saw the rise of other banks which were relatively short-lived, such as the Bank of Pangasinan, Bank of Zamboanga and S Misaka Bank among others. Two government banks were opened during this decade: the Postal Savings Bank in 1906 and the Agricultural Bank in 1908. Both were subsequently absorbed by the Philippine National Bank, the latter in 1916.^9 The Hongkong Bank maintained its role as a leading bank in the country throughout the American period. It was in fact the top bank at the start of the American regime, with resources of almost $21 million at year-end 1900, a position of leadership that, in terms of resources, would shift from time to time to the Banco Espanol-Filipino. Both banks eventually relinquished this position to the government-owned Philippine National Bank. The entry of new banks would also dilute the Hongkong Bank's share of the banking business in the country. In the period 1906 to 1908, the Bank accounted for as much as forty per cent of total resources in the banking sector. Ten years later (1916-1918) this had dropped to about ten per cent.^0 The Bank maintained this share until the outbreak of World War II. More banks were opened in the latter half of the second decade of American rule (1916-1920). Most significant was the opening of the Philip. pine National Bank (PNB) on 27 July 1916. The PNB absorbed the relatively unsuccessful Agricultural Bank. With a capitalization of Pesos 20 million subscribed to by the government, the PNB was entrusted with the responsi. bility of financing development efforts. The bank was made sole depository of government funds, and immediately established a branch in the United States, in New York. In 1919, a powerful Japanese corporation, the Yokohama Specie Bank, established a branch in Manila, and in 1920 an American consortium of nine banks established the Asia Banking Corporation, ^Bankers Association of the Philippines (BAP), History of Banking in the Philippines (Manila, 1957), p. 7. 6^Ibid, p. 77 70From Reports of the Bank Examiner, Bureau of the Treasury; in microfilm of U.S. National Archives, Record Group 350. Also from Annual Reports of the Bank Commissioner of the Philippines to Sec of Finance, various fiscal years. EASTERN BANKING primarily to promote trade with China. This again was a short-lived ven. ture, ceasing operations four years later. In that same year, the China Banking Corporation opened, and it continues to operate to this day.* * * * 7^ The next wave of banks would occur in the Commonwealth period, with the excep. tion of the opening, both in 1926, of the People's Bank and Trust Company and the Mercantile Bank of China. The latter operated for only five years. Growth of Foreign Trade The greatest single factor that fueled the growth of the Philippine economy in this period was the free trade relations with the United States and related commercial policies. Such policies firmly established the pattern of economic activity in the Philippines and her dependence on the primary exports of sugar, copra, coconut oil, abaca and, to a lesser extent, tobacco. Only rice, the primary staple diet of the people, would attain the magnitude of production comparable to these commodities. The same policies, coupled with movements in the world economy, cemented the eco. nomic links between the United States and the Philippines, leading to a very high degree of dependence of the local economy on the U.S. economy and U.S. trade policies. Free trade did not start until 1909 with the passage of the Payne- Aldrich Tariff Act. The Treaty of Paris (1898) between the United States and Spain had provided for a ten-year period of preferential tariffs with Spain. As early as 1902, though, Philippine exports were granted a twenty- five per cent discount on tariffs. The Tariff Act allowed free entry of Philippine exports, with the exception of rice, subject to certain quota limitations. In 1913, the Underwood-Simmons Act was passed, abolishing the quotas on Philippine hemp, tobacco and sugar, and placing rice on the free list. With this passage, completely unrestricted trade was assured. The same laws provided for unrestricted entry of U.S. goods to the Philip. pines. In 1934, free trade shifted into a one-sided affair, when the Tydings-McDuffie Act and the Jones-Costigan Act reimposed quotas on sugar, coconut, tobacco and hemp exports, while retaining free entry for American goods. But by then, the twenty-five years of free trade had led to a substantial and lasting orientation towards the production of these export commodities, for the American market. In the ten-year period of the Treaty of Paris, the United States accounted for about twenty-four per cent of total foreign trade of the Philippines. This had risen to sixty-three per cent for the decade following the lifting of trade restrictions (1916-1925). This share remained at a high of over seventy per cent until the war period. The pattern of growth varied among these export products, see Table 1. 71BAP, p. 7. 72 Gregorio F Zaide, Philippine Political and Cultural History (Manila, Philippine Education Co, 1953), II, 265-67. 7^Vicente Valdepenas and Gemilino Bautista, The Emergence of the Philippine Economy (Manila, Papyrus Press, 1977), p. 113. Table 1 Values of Primary Export Products (in million pesos)^ Ye ar Sugar Copra Coconut Oil Abac a Product s Tobac co Products 1899 6.92 1.45 15.99 1.89 1900-03 5.81 6.65 35.27 2.47 1904-08 9.41 9.37 38.44 2.26 1909-13 17.56 23.69 37.07 5.37 1914-20 40.75 13.67 30.85 67.93 11.69 1921-25 65.50 31.67 32.54 44.91 10.00 1926-30 94.22 35.44 67.48 54.23 10.05 1931-34 119.77 15.92 19.54 14.90 6.99 1935-37 107.06 29.53 32.95 35.38 6.54 Sugar experienced a practically unbroken record of growth, such that in the last year of free trade (1934) sugar accounted for sixty-five per cent of total export value. The government-owned Philippine National Bank threw its support behind the industry, financing the construction of six large sugar centrals in the 1920s. The private banking system also extended credit support to the obviously lucrative business. International economic movements, however, eventually raised a clamor among U.S. produ. cers and other trading partners for the removal of favored treatment and in 1934 a quota was re-imposed. Nonetheless, such restrictions allowed the continued dominance of sugar production in the Philippine economy. Copra exports suffered a slump during World War I as military opera. tions disrupted shipping, making it practically impossible to export copra to Europe, then its primary market. Recovery was made by a shift to the U.S. market, but subsequently the Depression brought the copra market to another slump.^ Likewise, abaca had an uneven pattern of growth. Early Bank Business: 1899-1920 The new era brought a new status to the head of the Hongkong Bank office in Manila. In March 1902, the branch head, H D C Jones, was given the new title of "Manager", replacing his previous title of "Agent". These first two decades of American rule were the height of develop. ment in the abaca industry, and the Bank did a significant business ^Ibid, p. 114. Based on Hugo H Miller, "Economic Conditions in the Philippines", 1938 Statistical Bulletin, Joint Preparatory Committee on Philippine Affairs, Report of 20 May 1938. ^Ibid, pp. 115-116. ^References from the HSBC Board Minutes, copied in "The Philippine Branches. The Hongkong and Shanghai Banking Corporation". EASTERN BANKING financing exports of hemp. Among the Bank's major clients in 1904 were firms in the shipping industry, also experiencing a period of growth. This included Aldecoa & Company, who took over the steamers of Macleod & Commpany, and Compania Maritima, which does business today. Traditional clients, such as Warner, Barnes & Company, Smith, Bell & Company and Macleod & Company, received substantial credit accommodation. The above five clients alone accounted for eighty-three per cent of outstanding loans and overdrafts of the Bank in 1904. The Bank's loan portfolio accounted for forty-two per cent of its assets in 1904.77 This was a characteristic pattern for the Bank throughout the American period, and on several instances this concentration of the credit facility provoked mild rebukes from the Bank Commissioner. The Bank's other activities, such as deposit taking and transactions in bills of exchange, were fairly spread out. Also among the Bank's early and valued clients were Atlantic Gulf & Pacific Company, Siuliong & Company, Ynchausti & Company and a tobacco firm, Compana Gral. de Tabacos de Filipinas. In 1906, the Hongkong Bank was offered another opportunity to assist in the development program of the government. The plan involved the refinancing of existing debts for the Manila-Dagupan Railway and the financing for the extension of the existing lines by another one hundred and fifty miles. In this connection, the Bank, through its London office, accepted the offer of Speyer Brothers of London and Speyer & Company of New York for a one-third share as joint managers in a syndicate to float ￡5.3 million for this project. The Bank also gave discretion to the London Manager to underwrite ￡200,000.7^ Bank profits reached a new high in these early years, ranging from $650,000 to $900,000.79 The Philippine branch had an assigned capital of $1 million, but this was frequently supplemented by drawings on London. Such drawings appeared to have been quite variable reaching as much as $7 million. In addition, the Bank maintained a reserve fund and utilized undivided profits totalling about $1 million. The Bank was not spared the characteristic risks in banking of bad accounts. One such case which attracted the attention of government authorities was the Mendezona affair. Between January and 25 September 1900, the firm Mendezona and Company was able to acquire loans and advances totalling almost Mexican $5 million: Chartered Bank Banco Espanol-Filipino Hongkong Bank Augustin Friars Compania General de Tabacos Sundry other creditors $1,500,000 1,016,000 505,000 600,000 300,000 1,000,000 $4,931,000 77Reports of the Bank Examiner. ^References from the HSBC Minutes. 79Ibid. Apparently the company was able to use the same authority (hemp) several times in acquiring the loans. Until its discovery in September, none of the creditors knew of the loans granted by the others, nor were they aware of the liens on the securities pledged to them. As the Treas. urer of the insular government noted in his first report to the U.S. Comp. troller of the Currency, general laxity in banking procedures, particularly on mortgages and loan renewals, led to the Mendezona affair. He noted that the loans exceeded the reserve funds of the banks concerned. In an effort to recover their loans, the five principal creditors obtained a Public Escritura, by which the securities held by the individual banks would be pooled and then divided in proportion to the loans of each. A substantial loss would be incurred nonetheless, as the value of such securities amounted to only $2.5 million. These included hemp valued at $1.85 million located in Manila, Vizcaya, San Nicolas, etc. Other proper. ties in the province amounted to another $500,000 and other income $15,000. The Hongkong Bank held about one eighth of these securities. The Bank reports in its financial statement for 31 December 1900 $505,552.01 in bad debts for Mendezona and Company. The expected net loss was covered in the contingent account in the amount of $200,000, as the Bank held a security of $312,500.^ In 1904, two clients were in difficulties, the American Commercial Company Limited and W F Stevenson & Company. The latter case involved a small loss, but $200,000 was declared as the probable loss on the former firm, properly covered in the contingent fund.8! In that same year, Francisco Reyes received credits of $240,500 at an interest rate of eight per cent, secured on hemp, tobacco and coal.8^ For some unrecorded reason, Reyes submitted claims for damages of $800,000 to the Bank. An attempt at arbitration failed and it was feared that Reyes would take his case to court. Subsequent investigation, however, revealed that Reyes was short nine hundred tons on the fourteen hundred tons of coal promised as security for the advance from the Bank. Threatened by criminal proceedings, Reyes withdrew his claim.88 in 1915, an amount of Pesos 11,733 remained in the contingency fund for this account. Profits in 1905 dropped as a result of difficulties of Smith, Bell & Company and its related firm of Smith, Wood & Company. The crisis was resolved, however, and a bankruptcy avoided. The firm continued to be one of the Bank's most valued clients.84 In 1907, the Bank Examiner of the government noted a case of forged checks perpetrated by two employees in Iloilo totalling Pesos 24,900. Both employees were arrested and the money returned. One turned state's evi. dence and the other was convicted and taken to the national penitentiary.88 8^Facts on the Mendezona case are summarized in a Report of Capt C F Parker, Insular Treasurer to the Chief of the Bureau of Insular Affairs, in microfilm. ^Reports of the Bank Examiner. 88lbid. ^References from the HSBC Minutes. 84Ibid. ^Reports Qf the Bank Examiner. EASTERN BANKING Business continued to grow and new clients were acquired as develop. ments occurred in other commodities. Accounts for the second decade included Luzon Rice Mills, Viuda y Hijos p. P Roxas, Strong Machinery Company F L, Findlay, Richardson & Company, Limpangco & Sons and the Philippine Vegetable Oil Company. The latter firms would cause much concern to the Bank as these encountered financial difficulties. In the case of Impangco & Sons, claims on the estate totalled about Pesos 314,000 by March 1913, but the Bank expected to realize only Pesos 70,000. A corresponding amount of almost Pesos 234,000 was placed in the contingent account. In 1917, the Bank in Manila still held Pesos 1,444,000 of the Manila Railway Bonds issued in 1906. These were four per cent, First Mort. gage gold bonds.88 As in Manila, the major clients of the Iloilo branch were Warner, Barnes & Company, Smith, Bell & Company and Ynchausti & Company. Much of the business was for the sugar industry, the center of which was in the Panay Islands. Among the Iloilo clients were Levy Hermanos, Lizarraga Hermanos, Gregorio Montinola, Jose Araneta and the Compana Gral. de Tabacos de Filipinas. ^ In terms of the assets utilized, the Iloilo operation was limited, accounting for about ten per cent of Manila resources, but it provided a crucial link to the sugar centers and the mechanism for verify. ing stocks in the area offered as security on advances from the Manila office. A G Stephen's Silver Transaction In 1915, a unique and profitable transaction was arranged by A G Stephen, a former manager of the Philippine branch and at the time Shanghai Manager. Stephen was visiting Manila when he learned of a plan by the Bureau of Treasury to dispose of Pesos 20 million in silver coins. Stephen made an offer to purchase the coins, knowing the demand for silver by India. The Indian Government was then in constant need of silver to replenish her currency reserve. This had been depleted by Allied demands for military operations in Egypt, East Africa and Mesopotamia, and by hoarding of silver rupees by the Indian populace, in the absence of gold. The offer was accepted, with the proviso that the coins should be mutilated beyond any possibility of their being put back into circulation. The coins were first shipped to Shanghai, accompanied by two members of the Philippine Treasury. There the coins went through the defacing machine in the Bank's treasury room, thence to native smelting shops where they were cast into silver bars and sycee. This took all of three months, after which the silver was finally shipped to Bombay. The operation involved the equivalent of 8,350,000 sterling ounces of silver.88 86Ibid. 8^Ibid. 88From "Philippine Branches", p. 47; HSBC Archives. The Bank's New Premises For most of its existence in the Philippines, the Bank occupied one of the most advantageous and prestigious corners in the business sector, at 35 Calle Juan Luna, corner Callejon San Gabriel in Binondo by the Pasig River, near the official residence of the President of the Philippines, Malacanang Palace. The old building was a two-storey wooden structure. On 31 March 1903, an additional area of fourteen hundred square meters adjoining the Bank was authorized for purchase at Mexican $6,000. On 28 October 1919, plans for a new, more permanent building were approved by the Board.Early in that year, business was transferred to the Old Heacock building on the Escolta in anticipation of the proposed construction. The architect of the new building was G H Hayward and the general contractor Oscar F Campbell. The new home of the Bank was five storeys of structural steel encased in concrete throughout the entire frame. Its frontage straddled two streets, 110 feet on Juan Luna and 72 feet on San Gabriel. The bulding lot occupied all of 10,706 square feet, with the building itself having a ground floor area of 8,825 square feet. The heart of the Bank, its treasury vaults, had enclosing walls forty inches thick, including armored walls twenty inches thick, and was reinforced with two networks of twisted steel bars.90 On 24 September 1922, the new building was inaugurated, with Acting Governor-General Charles Emmett Yeater speaking at the dedication. He chose as his theme Lincoln's exposition of the validity of chattel property and the virtue of thrifty persistence.Many notable parties were said to have been held in its garden, and a famous cricket match in which Harry Lauder participated. A dance floor was often laid on the lawn and dancing frequently carried on until the small hours of the morning in a romantic setting by moonlight on the river bank. The Bank also owned the building it occupied in Iloilo. The head of the Iloilo office in this period, Mr Armitage, lived in the upper storey of ‧ ‧ 92 the building. Controversy over Foreign Banks in the 1920s In the 1920s public attention was drawn to the banking sector, particularly foreign banks. This renewed interest in the banking system would subject foreign banks to varied criticism, threats to disturb their financial operations and eventually lead to a new round of banking legislation. The major threat was a proposal to prohibit foreign banks in Manila accepting deposits. Certain events preceded these circumstances. By 1920, the government-owned Philippine National Bank had been in existence for four years and had already established a branch in New York conducting limited banking activities there. One limitation was the legal ^References from the HSBC Minutes. 90"Notes on New Building"; HSBC Archives. 91"The Hongkong and Shanghai Banking Corporation", American Chamber of Commerce Journal (Sept 1938), p. 33. ^Reports of the Bank Examiner. EASTERN BANKING restriction on foreign banks in the United States to receive deposits. This presumably put much pressure on the business of foreign banks and efforts to lift this restriction were exerted. The culmination of these efforts was a bill (No 2024) introduced in the New York State Assembly in April 1920 to amend banking laws and allow foreign banks in New York to receive deposits. Expectedly, this was met by some opposition, particu. larly from the Superintendent of Banks. On 17 May 1920, Governor Alfred ‧ ‧ ‧ 93 Smith disapproved the bill. The decision stirred the nationalistic spirit back in the Philippines and public attention was drawn to foreign banks, particularly the American banks. At this time there were three American banks operating in Manila and the International Banking Corporation (IBC) in particular held a signi. ficant share of the banking business. One Manila editorial criticized the act of the New York Governor as very inequitable, inasmuch as U.S. banks in the Philippines enjoyed deposit privileges. The Governor-General of the Philippines, Francis Burton Harrison, advised Washington of a growing pub. lic sentiment to prohibit foreign banks in Manila from likewise receiving deposits. At about this time, the country's foreign exchange position was worsening, further complicating the issue and provoking more criticism of foreign banks. In due time, the two issues were linked, adding more fuel to the proposed restriction. In his communication to the War Department, Governor-General Harrison reported the sentiment that the maintenance of stability in the exchange rate could not be properly accomplished unless control of the exchange banks was authorized.^5 The Washington Government was understandably in opposition to the proposal. The United States feared that if the Philippines was allowed to enact such a law, this would pave the way for similar action by other coun. tries where American banks operated, such as Japan, Hong Kong and India. As far as the Philippines was concerned, it was argued that the country would eventually end up the loser since foreign banks brought in more money than they generated deposits. The International Banking Corporation dispatched a scathing letter to the War Department accusing the Philippine Government of creating the foreign exchange problem.96 The IBC argued further that their deposit generation activities had nothing to do with the foreign exchange situation. At this juncture, it is relevant to consider the foreign exchange issue referred to. As noted previously, a Reserve Fund had been estab. lished to maintain the stability of the exchange rate in the Philippines. The implementation of the system, however, had major defects. One such defect was the practice of depositing major portions of the Fund with local banks, thus contravening its primary function of controlling the money supply and stabilizing the rate of exchange. The 1920 Annual Report of the ^Letter, Gov Alfred E Smith to New York State Assembly, 17 May 1920, on mic rofilm. ^Article in El Ideal (Manila, 13 July 1920), in ibid. 9^Cable, Gov-Gen Harrison to Gen Walcott, Chief of Bureau of Insular Affairs, 4 Oct 1920, in ibid. ^Letter, j a Wolfson, Attorney-at-Law for Asia Banking Corp and Inter. national Banking Corporation, to Gen Walcott, 8 Oct 1920, in ibid. Department of Finance of the Commonwealth Government cites the first such "error" as a deposit of Pesos 800,000 made with the Hongkong Bank in January 1908.This was followed by deposits with the Chartered Bank and the Bank of the Philippine Islands (formerly Banco Espanol-Filipino). These deposits were gradually withdrawn until the end of March 1912, but not because of a realization of its legitimate role. Rather, the with. drawals were undertaken to implement a series of legislation providing for a major investment program using Fund resources. The initial move was relatively modest, authorizing use of a certain portion of accretions to the Fund for loans in Moro and other non-Christian provinces, provided for in Act No 2067 passed on 24 July 1911. Within the year, however, a more decisive step was taken with the passage of Act No 2083. This law authorized use of up to fifty per cent of the Fund for lending purposes. On 15 February 1915 this ceiling was raised further to eighty per cent by Act No 2465. A major beneficiary of these loans was the railroad construction program of the government. On 6 May 1918, a new law (Act No. 2776) merged the Gold and Silver Reserve Funds into one common Currency Reserve Fund and replaced silver certificates with "Treasury certificates". No changes, it should be noted, were made on the loanable portion. Fortunately, a crisis was averted for some time as dollar inflows arising from the presence of U.S. military forces in the Philippines compensated in part for the recycling of pesos through the loan facility. Towards the end of the decade, however, an adverse international environment precipitated a crisis in the country's foreign exchange posi. tion. As of 31 December 1920, the minimum legal requirement of the Currency Fund was about Pesos 73 million. Though the Fund exceeded this requirement with a level of over Pesos 84 million, about Pesos 75 million, or practically ninety per cent of the Fund, was deposited with the Philip. pine National Bank (PNB) in New York.99 What apparently happened then was that the PNB sold drafts on these deposits and lent out the corresponding peso receipts without due regard to the implications for the country's monetary stability. As the IBC letter strongly hints, many such loans of the PNB resulted in "unexplained losses". These practices would undoubted. ly feed on the growing foreign exchange crisis. In retrospect, the American Trade Commissioner, 0 M Butler, made this observation: This bank [PNB] became heavily involved as a result of misman. agement and ill-advised loans, chiefly during the postwar fluc. tuations, and in its rehabilitation by the insular government during 1924, its stock was reduced to 10,000,000 pesos, which required the cancellation of 25,300,000 pesos worth of stocks owned by the government. In this rehabilitation, government deposits amounting to 20,200,000 pesos were also written off the books in 1924 and an additional 4,557,000 pesos were disposed of 9?Dept of Finance, 1920 Annual Report, p. 18. 98lbid, pp. 19-20. 99ibid, p. 16. EASTERN BANKING in the same manner during 1925. ^0 It is thus noteworthy that the PNB, specifically its New York manager, Adolph Kopp, argued against the proposal in the Philippines to prohibit foreign banks from accepting deposits, on the premise that this would endanger its business in the United States and pose a threat to the foreign exchange position of the country. Nonetheless, charges of "rapacity of banks" and foreign exchange mani. pulation were heaped on foreign banks, adding momentum to the proposed pro. hibition on deposit taking. ^2 The Hongkong Bank itself was subjected to a special investigation by the Insular Treasurer, and in his report of 15 November 1920 to the Governor-General, the Treasurer made this evaluation: While the activities of the bank under review in replenishing with excess its dollar stock in New York to such a good margin as $5,204,852.47 on July 29th last, may be regarded as a legiti. mate speculation, still such activities having been undertaken during the time when dollar scarcity was felt in the local market and taking into consideration the fact that the Bank continued buying dollar exchange in large amounts from the Insular Treasury, taking advantage of the Philippine monetary system, it appears the Hongkong and Shanghai Banking Corporation aimed at exclusively improving its own interests without any regard for the welfare of the community. The movement for prohibition eventually jelled into a bill submitted to the Philippine Senate under the sponsorship of Senator Juan B Alegre, proposing withdrawal of deposit privileges of banks not incorporated in the Philippines. The obvious targets were of course branches of foreign banks. The Hongkong Bank declared its opposition to this formal proposal in communications to the U.S. War Department and the Philippine Senate. In a letter to the Senate Committee on Banks, Corporations, and Franchises, the Hongkong Bank, through its attorneys Fisher, Dewitt, Perkins and Brady, argued against the bill on several grounds. Firstly, it was argued that the measure would not be effective because if foreign banks truly wished to remain and maintain deposit privileges, they could simply incorporate locally. Secondly, the bill threatened to completely drive out foreign banks, and thus precious capital as well. And thirdly, foreign banks did pay taxes and contribute their share to government development efforts. 100O M Butler, The Philippine Islands. A Commercial Survey (Washington, Govt Printing Office, 1927), p. 28. l^Cable, Adolph Kopp, PNB New York Manager, to Manuel S Concepcion, 9 Oct 1920, on microfilm. l^Article by Manuel S Concepcion, "Where is Our Money Flowing To?" Rapac. ity of Banks Chief Cause of Gold Difficulties", Oct 1920, on microfilm. lO^Letter, V Carmona, Insular Treasurer to Gov-Gen Harrison, 15 Nov 1920, in ibid. ^^Letters, Fisher, Dewitt, Perkins & Brady, Attorneys-at-Law for Hongkong Bank, to Gen MacIntyre and to Senate Committee on Banks, 11 Oct and 20 The bill failed to prosper and on 7 October 1926 the President of the Committee on Banks, Hermenegildo Villanueva, disapproved the bill. In his report to the members of the committee, Villanueva argued that deposits in foreign banks were amply protected by the legal twenty per cent reserve requirement and the acknowledged solvency of such banks. Their departure from the Philippines would mean a net loss of capital to the country, at a time when Filipinos were reluctant to go into banking. As to the original motivation for the bill, Villanueva pointed out that American attitude regarding their restrictive banking laws was bound to change as the United States began to appreciate the threat of reprisals.105 With this decision, the movement soon dissipated. However, the controversy had provoked a heightened concern in the banking sector and new legislation would eventu. ally emerge. Meanwhile, by Act 3058, deposit of the Currency Fund in local banks was eventually prohibited in 1922. Banking Legislation in the American Period As previously noted, government legislation on the banking system during the Spanish period was practically nil. Banking practices thus developed without much restriction, adapting to the demands of trade, and in keeping with practices in financial centers abroad. The American authorities maintained a different attitude, however. One of the first acts of the new colonizers was to bring the banking system within the sphere of government supervision, and eventually of government regulation as well. An early report in 1901 on banking in the Philippines carried a strong note of concern on the need for some government control over the banking system.10^ Thus from the very beginning of her rule over the islands, the United States had expressed some anxiety over the manner by which banks operated, and the relative freedom of these operations. Where these rare instances of rules on banking existed, American authorities complained that these were not being complied with. One such major instance concerned Article 180 of the Spanish Code of Commerce which required that banks keep in their vaults in cash at least one-quarter of the amount of deposits plus the total equivalent amount of banknotes in circulation. The latter of course applied only to Banco Espanol-Filipino. In a memorandum to Col Clarence Edwards, Chief of the Bureau of Insular Affairs, the Insular Treasurer reported on 31 March 1901 that none of the banks were complying with these requirements. He also noted laxity in banking procedures on such matters as mortgages and loan renewals, attributing the notorious Mendezona case to such practices.10^7 Sept 1926, resp, in ibid. 105Report of Senator Villanueva to Committee on Banks, in ibid. 10^Charles A Conant, A Special Report on Coinage and Banking in the Philip. pine Islands (Washington, D.C., Govt Printing Office, 1901). 10^Letter, Maj Charles McClure, Chief Paymaster of the Dept of the Pacific and Eight Army Corps, to the Military Sec of the Military Gov, Memoran. dum ... on Currency and Exchange in the Philippines, p. 9. EASTERN BANKING Authorities were particularly concerned about the note issues of the Banco Espanol-Filipino, of which about $2 million were in circulation. Doubts about the solvency of the bank had been expressed in view of a loan of the same amount forced from the bank by Spanish authorities during the Spanish-American War. It was feared that non-payment would lead the bank to insolvency. The Insular Treasurer proposed that all notes of the bank, whether issued or not, be destroyed.^RR The U.S. Comptroller of the Currency, however, warned that an immediate call of the notes would be a dangerous move, preferring that the bank continue to operate as long as it remained solvent. Rather, his proposal was to require a reduction of the note issues to the value of the bank's capital stock. He further proposed that a mechanism for receivership of banks be immediately developed. Fortunately, the Banco Espanol-Filipino managed to maintain its solvency and the serious financial crisis failed to materialize. Although concern about banks came early, legislative action was slow in developing, perhaps due to the greater demands of more fundamental issues of Filipinization and independence. In 1917, the Administrative Code of the Philippine Islands (Act 2711) was enacted. References were made to the banking sector, including tax rates on bank transactions, and a reaffirmation of reporting and examination requirements. The law also established the procedure for computing the equity capital for foreign banks that did not declare an assigned capital. This estimate was derived simply by applying the foreign bank's over-all rate of return on capital to the absolute return from Philippine operations. This was apparently intended to establish a basis for evaluation and regulation of banking operations through prescription of limits on certain financial ratios.HO Soon after the start of the deposit controversy, however, concern about banking legislation was revived. One individual who maintained a high profile on these issues was Ben F Wright, Special Bank Examiner of the Insular Government and financial adviser to the Governor-General. Wright prepared a draft of banking legislation for the Phlippines, noting that existing laws "are so scattered throughout the body of legislative acts as to be very difficult of access and amended in so many particulars as to be somewhat uncertain". Wright proposed the establishment of a banking department within the government and the enactment and codification of banking laws patterned after the California Bank Act. HI It took almost ten years for these proposals to be acted on, although Act 3154 of 1924 dealt with the requirements for the establishment of banks. It required incorporators to be residents of the country and a minimum subscribed capital of Pesos 50,000, of which at least fifty per cent must be paid up. Finally, in February 1929, Governor-General Henry L Stimson signed into law four pieces of banking legislation. H2 Act 3519 set Up the 108 109 110 111 112 Report of the Insular Treasurer to Col Clarence Edwards, 31 March 1901, on microfilm. Letter, U.S. Comptroller of the Currency to Sec of War, 29 July 1901, in ibid. Act 2711, in ibid. Letter, Ben F Wright to Gen MacIntyre, 14 April 1921, in ibid. Radiogram, Gov-Gen Henry L Stimson to Sec of War, 9 Feb 1929, in ibid. administrative machinery through the creation of the Bureau of Banking headed by a Commissioner, under the Department of Finance. The new Bureau inherited the supervisory and regulatory powers over banks formerly held by the Bureau of the Treasury. Act 3521 extended greater powers to all banks for their business, particularly lending activities secured by staple commodities. Act 3522 defined the requirements for domestic banks to set up branches abroad. Act 3520 was, however, specific to foreign banks, aptly titled "An Act Regulating Foreign Banking Corporations doing Business in the Philippine Islands". This piece of legislation was apparently the handwork of Earle B Schwulst of the Kemmerer Commission (responsible for the currency laws). This law was apparently an offshoot of the earlier deposit controversy. It required deposit-taking foreign banks to place with a trustee an amount of assets equal to ninety per cent of its deposits payable in the Philippines. However, it gave the Bank Commissoner power to suspend this requirement to permit temporary investment abroad of any idle funds resulting. Preferential rights over the local assets of the foreign bank were given creditors who were either residents or citizens of the Philippine Islands. The law also set a single borrower limit on loans for the account of Philippine branches. The ceiling, however, could be doubled through additional loans which had to be fully secured on highly market. able, insured assets of the borrower. The law remained silent on the question of assignment of capital, indicating the basic confidence and trust of the government in the foreign banks. The stipulated loan ceilings did not pose much of a problem since the Bank's assigned capital and/or net drawings from Head Office were usually substantial enough to meet the demands of any individual large account. The loan ceilings were generally complied with, although the Hongkong Bank received notices from the Bank Commissioner that it violated this rule in two instances. These were the loans to Warner, Barnes & Company and Cadwallader, Gibson Lumber Company, two of the Bank's largest accounts. The Bank was able to obtain an opinion from Schwulst that these loans did not fall within the purview of this section. The Commissioner acknowledged this opinion, but insisted on the necessity for prudence in lending such large sums, particularly since Cadwallader had been declared a doubtful account (referred to earlier). The matter was apparently settled by a notice to the Commissioner that such excesses were for the account of Head Office and not the Philippine branch.^ ^ Governor-General Stimson, in a commentary on these laws, reported that foreign banks at first objected to the "unconstitutionality" of such differential treatment. These complaints were soon silenced as it became clear that equal treatment would in fact be disadvantageous for foreign banks.^ ^ Towards the end of the year, amendments were introduced, though Act 3610, imposing additional ratio requirements. This law further strength. ened the office of the Bank Commissioner by giving it licensing powers over banks. ll-^Letter, Tirso Garcia, Acting Bank Commissioner, to B C M Johnston, HSBC Manager, 19 Aug 1932, in ibid. 1 ^Radiogram of Gov-Gen Stimson. EASTERN BANKING Bank Business in the Last Decades: 1921-1941 Four more banks entered the scene in this period. In 1937, a Dutch bank was established, the Nederlandsch Indische Handelsbank. This bank would be absorbed by the Bank of America with its entry in 1950. On 8 July 1938, the Philippine Bank of Commerce opened, perhaps the first major Filipino- owned bank. In the same year, the Bank of Taiwan was opened and a year later the Philippine Bank of Communications. Despite this new competition, the Bank continued to grow. By 1931 Bank staff and employees numbered more than sixty.H'* The Bank's business responded to the demands of trade, though continuing the practice of concentrating lending activities to large and/or established customers. Thus traditional clients, such as Warner, Barnes and Company, Smith, Bell and Company, Ynchausti and Company and Wise and Company, continued to depend on the Bank's financial services. New clients, particularly in the coconut oil and lumber businesses, were acquired by the Bank. Though large accounts, financial difficulties in their operations created problems for the Bank. 11^ On 24 January 1928, Salvador Lagdameo, a Bank Examiner of the Bureau of Treasury, addressed a communication to the Bank: There is a marked concentration of credit in a few borrowers, over Pesos 8,579,000 having been advanced to only six customers out of total outstanding loans and overdrafts of Pesos 10,612,000 . . . The large losses on the advances to the Philippine Vegetable Oil Co and Otto Ranft show the danger of this position.!^ The former firm referred to involved the Bank in another protracted legal battle. The Philippine Vegetable Oil Company, dealing in coconut oil, received credits of several million pesos in 1920. Subsequently, however, the firm entered into financial difficulties. By July 1921, the company's outstanding liability with the Bank had been reduced to Pesos 1,037,500, part of the company's total liabilities to banks of around Pesos 4.5 million. An agreement was reached between the company's president, P C Whitaker, and the Hongkong Bank, representing other creditors as well, for payment of these accounts within five years, with an additional three per cent interest in the last three years. The same agreement called for the release of existing securities of coconut oil in exchange for real estate properties in Mandaluyong, co-owned by Whitaker with Francisco Ortigas, Sr, and mining claims in Mankayan.HR The company was unable to pay and the Bank's new manager, R P Melhuish, filed a suit to foreclose the proper. ties. After years of legal proceedings, the Supreme Court ordered the foreclosure of the properties in 1929. ^Reports of Bank Examiner. H&Ibid. ll^Letter, Salvador Lagdameo, Treasury Bank Examiner, to HSBC Branch Manager, in ibid. I 1 a xxoReports of Bank Examiner. The value of these properties was not sufficient to liquidate the debts in full, and companies were organized to develop the properties. The real estate property in Mandaluyong became the business of the company Ortigas, Madrigal y Cia. The Bank's manager was a director and handled some treasury functions. The other property was owned by the Lepanto Consolidated Mining Corporation and creditors were paid off in shares of this company. -^9 By this process, the Bank came to establish a close association and lasting financial ties with two of the Philippines' most prestigious firms today. The final phases of development of the Ortigas properties are currently on the way and when completed, promise to be one of the most modern and high-priced real estate developments in the country. The Bank maintains financial support today and the Iloilo branch has in fact been "relocated" to this area. On the other hand, the Lepanto Corporation is a well-known mining firm and the Bank had undoubtedly gained by this association, particularly with the boom in the mining industry in the 1930s. In 1932, the Bank figured in another major loan which developed into a bad account. The firm referred to was Cadwallader, Gibson Lumber Company, which had outstanding liabilities of over Pesos 6 million to the Bank. The potential loss of the Bank was reckoned at Pesos 4.3 million. Together with the account of Warner, Barnes and Company, the two held forty per cent of total loans and overdrafts of the Bank.^0 This again resulted in rebukes from the Banking Commissioner and a notice was served that the Bank had violated the loan ceilings of Act 3520.^2^ The response of the Bank has already been noted, indicating how loosely the law had been promul. gated . In the same communication, the Banking Commissioner urged the write. off of loans to Smith, Bell and Company. It was noted that the financial statements of the company at year-end 1931 indicated insolvency and bank. ruptcy. The firm reported a net worth of Pesos 545,000 matched by a "good. will" account valued at Pesos 500,000. At the same time, current assets were reported at Pesos 1,832,500 against current liabilities of Pesos 3.6 million.*22 Once again, however, the two institutions averted a disastrous financial crisis, although records do not indicate the specific process. These events no doubt testify to the resilience of the Bank. Shortly before the outbreak of World War II, the Hongkong Bank was the leading foreign bank, with resources of Pesos 44 million (30 June 1940) and was one of the top three banks in the country, with the Philippine National Bank and the Bank of the Philippine Islands (Banco Espanol-Filipino) in a field 123 of seventeen banks. H^In "Philippine Branches", p. 50. l2^Reports of Bank Examiner. 12lLetter, Tirso Garcia, Acting Banking Commissioner, to B C M Johnston, HSBC Manager, 19 Aug 1932, in ibid. ^22Reports of Bank Examiner. l^Annual Report of the Bank Commission of the Philippines to the Sec of Finance, Fiscal Year 1940. EASTERN BANKING More recently, in 1981, the government decreed a substantially different set of banking rules through the adoption of the unibanking concept. The intent is to consolidate existing banks into fewer, but significantly larger, banks (the minimum capital requirement for a unibank is Pesos 500 million). This strategy also allows much more flexibility in banking operations. It is perhaps too early to assess the Bank's response to this new environment within an historical perspective. But the Bank in its one hundred and six year history in the Philippines has proved its commitment to the fate of the Philippine economy and resilience in adapting to radical changes in the banking environment. No doubt the Bank will live up to its past reputation for leadership in this exciting and unique period in the history of the Philippines. 22. THE HONGKONG BANK IN LYON, 1881-1954: BUSY, BUT TOO DISCREET? by Claude Fivel-Demoret* Lyon did not notice the birth of the Hongkong and Shanghai Banking Corpora. tion in 1865, perhaps because, in the mid—1860s, it was just beginning to look toward the Far East.^ No mention of the new bank is to be found in either the weekly Moniteur des Spies for the years 1864 to 1867 or the yearly volumes of proceedings of the Chamber of Commerce (Comptes Rendus des Travaux de la Chambre de Lyon). The only hint one gets, in a later period, of the significance of the Bank in the financing of the Lyon silk trade is to be found in the internal mail of the Credit Lyonnais, which represented the Bank in Lyon until 1881. The general manager in Lyon wrote the manager of the Paris office in 1877: "The Hongkong and Shanghai Banking Corporation sends us since many years all its silks, that we deposit on its behalf in the Magasins Gdn^raux [state warehouse]."^ The Hongkong Bank was not the only British bank to work in this line of business, as in the 1870s the Oriental Bank, the Chartered Bank of India, Australia and China, the Chartered Mercantile Bank of India, London and China, and the National Bank of India were all represented in Lyon by important local banks: the Crydit Lyonnais, Aynard et Riiffer and the Veuve Guerin. ^ *1 gratefully acknowledge the help generously given to me in the prepara. tion of this report by Professor Frank H H King and by the marvellous team in charge of the Group Archives of the Bank in Hong Kong and London. Many thanks are also due to the archives services of the Banque de France in Paris and Lyon, to the Lyon Chamber of Commerce, to the Chamber's Librar. ian, to the Librarians of the Centre Pierre Ldon d'Histoire Economique et Sociale de la Region Lyonnaise (University de Lyon II) and of the Mus4e Historique des Tissus (Lyon), and to the Archivists of the Ministry of Finance (Paris). The town hall of Reyrieux communicated a copy of F de Bovis' death certificate. Pierre Cayez, in Lyon, gave generously his advice and made available a copy of his own major work on Lyon's economic history. A special thought to Anatole, one among many (like Psmith) inspiring children of P G Wodehouse. ^One could also say that the Bank did not acknowledge much Lyon's existence either: it chose as French agent the Society Gynyrale, which had not only been created a year after the Crydit Lyonnais, in 1864, but was also chosen as "agent in Paris", not in Lyon. Hongkong Bank/Group Archives (hereafter HK/GA), Hong Kong; extract of Court Minutes, 12 Apr 1865. ^Letourneux to Mazerat, 2 Feb 1877. Quoted in Jean Bouvier: Le Crydit Lyonnais de 1863 4 1882: Les annyes de formation d'une banque de dypots, Paris: SEVPEN, 1961; p. 282n3. ^Ibid; note 2. EASTERN BANKING The Hongkong Bank was, however, the only one to decide to do without this type of representation and established itself directly in Lyon in 1881. It was to remain there for the next seventy-four years (moving in 1953 to Paris and ceasing all activity in Lyon in 1955), the oldest British bank established in France and probably the oldest of all foreign banks in the country. II Lyon: Trade, Silk, and Banking A strong tradition of international trade and banking was established in Lyon in the fifteenth and sixteenth centuries. At the end of that period, the city lost its predominance, trade and exchange fairs giving way to a more solid base of production, of which the silk manufacturers (the 'Grande Fabrique') were the most prestigious sector.^ The strength of the Lyon silk industry, which was to survive various economic and political crises for more than three centuries, originated, however, in trade. The mer. chants of the city, having obtained from Louis XI and Francis I successive charters giving them the monopoly over all French silk trade (imports and internal trade had to pass through Lyon to pay duties) invested in the creation of the manufacturers. The silk industry was pulled by a strong demand (from the country's nobility and people of wealth as well as from the whole of Europe) which in turn created a voracious market for raw silk. One now recognizes the first eighty years of the nineteenth century as the 'great period' of Lyon, 5 marked by technical progress (the Jacquard loom, the dyeing industry^) and an exceptional rate of growth,^ notwith. standing fluctuations and a dangerous dependency on the exports of the finished product.^ This growth was supported, on the industrial side, by a ^Andre Latreille et al: Histoire de Lyon et du Lyonnais, Toulouse: Privat, 1975; pp. 133-54 and 233-54. ^Pierre Leon: "La rdgion lyonnaise dans 1'histoire ￡conomique et sociale de la France: Une esquisse", Revue Historique, CCXXXVII; Janvier-Mars 1967; p. 43. ^Pierre Cayez's works on tht subject are essential reading: M￡tiere jac- quards et hauts-fourneaux: Aux origines de l'industrie lyonnaise, Lyon: Presses Universitaires de Lyon, 1978; and Crises et croissance de l'indus. trie lyonnaise 1850-1900, Paris: CNRS, 1980. Thanks to Dr Cayez I quote in this paper from his original PhD dissertation L'industrialisation lyon- naise au XIXe si&cle: Du grand commerce ￡ la grande industrie, Lille: Service de reproduct ion des theses de l'Universitd de Lille III, 1979; 2 vo1, 1254 pp. ^For 1816-1849, Cayez has found a growth rate for the silk industry of 4.2% "much greater than the average for the [French] textile industries". Cayez, p. 201. See also pp. 198, 200, and 722-47. RSee Monique Coulesque: "La crise am^ricaine et la crise de la soierie THE HONGKONG BANK IN LYON revival of Che domestic system, the looms being spread throughout the suburbs and surrounding areas, under management of the 'fabriquants'. It was, however, threatened in the 1850s by a natural disaster, when the disease pebrine1 struck the cocoon-producing areas of Italy and France, quickly reducing the production of raw silk to an amount insufficient to the needs of the 'Fabrique'^ Prices increased and the Lyon silkmen had to look for alternative sources.^ The merchants first turned to the London market, which was supported by existing British trade in the Far East, and then generated their own market in Lyon, diverting trade from London, which quickly led to the loss of the city's dominance in the field. This shift clearly appears in the graph below: % Figo 1: Silk Imports in Lyon, by origin, 1850-1890 (Graph No. 88 in Pierre CAYEZ. Reproduced with the kind agreement of Mr. Cayez) Before the 1860s, there had been little direct trade relations between Lyon and the Far East^ and even in later years, the proportion of French merchants buying silk in Shanghai and Yokohama remained small. Some attempts were made, like the pioneering and isolated efforts of the Comp- toir d'Escompte (in Shanghai since 1860) and Ulysse Pila,12 the beginnings lyonnaise, 1860-1864", Cahiers d'Histoire, IX, 3, 1964; pp. 261-278. 9 jean Vaschalde: Les industries de la soierie, Paris: Presses Universi- taires de France, 1961; pp. 20-21. See also Cayez, pp. 557-64. l^Cayez, pp. 566, 568, and 570-71. ^Tcheng Tse Tsio: Les relations de Lyon avec la Chine: Etude d'histoire et de geographie ￡conomique, Paris, 1937. Dargaud: "Un homme d'affaire lyonnaise: Ulysse Pila (1837-1909)", Actes du 89e Congr&s des Soci4t￡s Savantes, Lyon, 1964; 1965, T2, Vol 1, pp. 278-79. Pila was sent to Shanghai as a silk inspector by the British EASTERN BANKING of the Messageries Maritimes (1861), which could not really compete with P&O, even after the opening of the Suez Canal which favored a direct access to Marseille, and a project of direct trade with Japan.^ However, the "reconquest" of the silk market by Lyon was to be based on a dependency on British maritime and banking institutions.^ It would seem in fact that the comparatively weaker demand in Britain for raw silk accounted partly for this phenomenon, as British merchants chose to trade directly with the place where the big industry was situated: Lyon; "during the 1876-77 cam. paign, 33,000 bales were sent from Shanghai to France. 12,000 sent by French houses, but 21,000 by British or Swiss houses."^ In other words, at the beginning of the 1880s, Lyon had become the dominant market place of the world trade in raw silk, but not a market exclusively dominated by the French. A foreign bank already well involved in the business would find it a welcoming structure. Lyon's importance was enhanced by the "quasi-mono- polistic" position of its silk industry in France and the huge share of its exports in French external trade.^ A recent survey of that subject has revealed the pre-eminence of silk goods among French exports in the first half of the nineteenth century. At mid-century, among the twenty-five main classes of goods exported, six reached a yearly total superior to F100 million, three reached above F200 million, but only silk textiles attained F400 million. From 1820 to 1896, the share of silk in the total value of French trade declined from 23% to 7.4%. Nevertheless, it remained one of the three most valuable sectors in exports: at the end of the century only wine, silk textiles and wool reached above F200 million.^ In the 1870s the Lyonnais were not only looking toward the Far East for a supply of raw silk, but were developing other areas of trade. They were not the only ones to set a trading foot in Indochina: the Denis fami. ly, for example, based in Bordeaux, was in Saigon from 1862,but Ulysse Pila, from Lyon, who became one of the leading businessmen in Tonkin, claimed in 1884 to have been interested in this region during his early Far-Eastern trips.^ As early as the mid-1840s, the Lyon Chamber of firm Oxford & Co. There he started his own silk business and travelled in the whole Far East from 1864 to 1869. 13 . Michio and Asako Shibata: "Un aspect des relations franco-japonaises h la fin de l'￡poque Tokugawa: Le projet de fondation de la Compagnie Fran- qaise d'Importation et d'Export at ion" , Revue d'Histoire Moderne et Con- temporaine, XVI; Avril-Juin 1969, pp. 173-88. l^Cayez, p. 572 and Bouvier, pp. 278-83. l^Cayez, p. 571. 1 ‧ °Pierre Leon: "Un projet: L'^tude quantitative de la croissance dans une region dominante de l'ensemble ￡conomique franqais: la region lyonnaise (1815-1967)", Bulletin du Centre d'Histoire Economique et Sociale de la Region Lyonnaise, Mai 1969; p. 35. ^ ^Andrd Broder: "Le commerce ext^rieur: L'dchec de la conqu&te d'une posi. tion internationale" in F Braudel and E Labrousse (eds) Histoire ￡conomi- que et sociale de la France, T.III; pp. 315-17. 18 19 Louis Bergeron: Les capitalistes en France (1780-1914), Paris: Gallimard, 1978; p. 89. Dargaud, p. 280. THE HONGKONG BANK IN LYON Commerce had been strongly represented in an official French mission sent to China, Japan, Indochina and India to explore trade perspectives.^R In the future, the Lyonnais would also take an interest in Szechwan and Yun. nan, to which Tonkin appeared as a natural road. They would also retain, at least until 1914, a staunch free-trade position, being one of the few business communities in France to have adamantly supported the Anglo-French treaty of 1860 and advocating an open-door policy in China.21 One must finally give some attention to the banking landscape which existed in Lyon in the late 1870s. The wealth of the whole region was great and Lyon was still "the town of overabundant savings, floating capi. tal looking for employment, a 'golden mine', according to the Banque de France inspectors in 1878."22 Within the whole area, savings banks, nota. ries, old established family-based private banks and the younger, bigger, joint-stock deposit banks (banques de depots) were all tapping the avail. able funds of traders, landowners, rentiers and indus t r ial i s t s. 23 (Our concern with the silk trade should not let us forget that Lyon was, and remains, one of the three main industrial areas of France, along with the North and Paris.) These funds, apart from being used in big ventures, such as state loans, industrial debentures2A and various attempts of direct industrial involvement,25 were mostly invested in current operations, i.e. daily credit to industry and trade, a steady business which accumulated safe profits with which bankers could attempt more daring ventures. The main forms for these operations were discounting of bills and granting of overdrafts. The capacity of the Lyon money market was such that the recur. rent complaint of the Banque de France was that its Lyon branch was, according to its inspectors, "kept away" from it, the local banks "redis. counting the paper among themselves."26 This situation was to continue well into the twentieth century; in 1897, another inspector of the Banque de France stated that (our) "Lyon portfolio is principally fed by very short discounts from powerful credit societies . . . the paper is usually only remitted on the end of the minimum period fixed for discount . . . the *27 'beautiful signatures' are therefore only passing through." And ten years later, similar comments were to be heard: "[the paper] is excessively short . . . Lyon's market is too rich and the amount of liquid assets of 2RJohn F Laffey: "Les racines de 1 ' imp^rialisme frangais en Extreme- Orient", Revue d'Histoire Moderne et Contemporaine, XVI; Avril-Juin 1969; pp. 285-86. 21john F Laffey: "Lyonnais imperialism in the Far East 1900-1938", Modern Asian Studies, 10, 2, 1976; pp. 233-34. ^Jean Bouvier: Naissance d'une banque: Le Credit Lyonnais, Paris: Flammar- ion, 1968; p. 119. (This is the paperback version of Le Credit Lyonnais de 1863 ￡ 1882, already quoted.) 23Bouvier: Naissance..., pp. 143-48. 2^jean Bouvier: Un si&cle de banque frangaise, Paris: Hachette, 1971; pp. 66-68, and Naissance..., pp. 66-67 and 172-85. 25por a qualified assessment, see Cayez, pp. 798-804. 26Quoted in Bouvier: Naissance..., p. 88. See also pp. 186-205. 27Banque de France, Paris. Archives. Rapport d'Inspection de la Succur- sale de Lyon. Tournee de Juillet 1897. EASTERN BANKING the credit societies and local banks too extensive".^8 The facilities offered by Lyon to a bank willing to bring on the market good commercial paper for discount were quite promising and, furthermore, in the early 1880s, a unified, but not centralized, French money market was established after a long uneasy process.^9 The limitation of Lyon's—and France's—capital market was to be found more in the way it was looking at the outside world than in its size and capacity. There was definitely a vacuum to be filled in the field of international trade financing, which was suffering a lack of interest and organization on the part of French banks.30 The Comptoir d'Escompte was the only major firm to have established itself in the Far East,31 and when other French banks opened an agency abroad (in London, in St Petersburg and around the Mediterranean Sea), it was more with the purpose of partici. pating in various loan syndicates and to seize investment opportunities, than to finance French external trade. Their disadvantage in facing their British competitors was due to the latter's technical advance (mostly in the field of documentary bills) and to their capacity to rely on the best shipping network available, as well as on a sophisticated insurance market for goods transported. In the case of silk, the Crddit Lyonnais made an effort: they opened a branch in Marseille with the main purpose of finan. cing the silk trade ("it was one of the raisons d'etre of this branch"-^) and they worked on the updating of their credit techniques. But, like most other French banks, they remained dependent upon the well-entrenched Bri. tish banks for the all-important matter of knowing one's customers.^ Here was, indeed, a situation extremely favourable to a concern like the Hong. kong Bank: although it had first-hand knowledge of the standing of the various tradesmen, Lyonnais or not, involved in the Far East to Lyon trade, its position as an outsider vis-&-vis Lyon was a bonus: not involved directly in the internal transactions and squabblings which are part of any community's life, it could keep secret the details of all merchants' busi. ness, remaining, in a way, "above the struggle." Finally, as far as the law of banking was concerned, France remained, from the liberation in 1863 of the joint-stock company to the corporative laws of the Vichy regime, a country of free banking. There was not even an official definition of the word "banque" in the Code de Commerce, which, in its Article 632, assimilated banking activities to all other trade opera. tions.-^ Certain laws were passed in the 1930s about banking, but they O Q Banque de France, Paris. Archives. Rapport d'Inspection de la Succur- sale de Lyon. Tournde de Juillet 1906. ^Maurice Levy-Leboyer: "Le crddit et la monnaie: L' apprentissage du marche", in Braudel and Labrousse, pp. 391-429. ^Broder, pp. 332-34. 3lBouvier: Un sidcle..., pp. 242-43. See also Levy-Leboyer: "Le credit et la monnaie: Evolution institutionelle" in Braudel and Labrousse, p. 386. ^Bouvier: Le Crddit Lyonnais de 1863 h 1882..., pp. 278-81. 3-^Ibid . ^Quoted in M and A Meliot: Dictionnaire financier international thdorique et pratique: Guide financier pour tous les pays, 3rd ed, Paris, Nancy: Berger-Levrault, 1910; p. 136. THE HONGKONG BANK IN LYON were to be of no significance for the Bank, since they dealt with the pro. tection of the small depositor, a category that was not part of the custom. ers of the Hongkong Bank in Lyon.35 Indeed, during the second half of the nineteenth century, the state intervention in banking affairs was one of progressive freeing. Particu. larly interesting in view of the coming move of the Bank to Lyon were the various decrees (1857-64) which made "the regulation of foreign companies' operations in France more flexible."36 of course, as any other trading concern, banks, foreign or not, were expected to register with the local Greffe du Tribunal de Commerce, and pay the local tax (patente) based on the premises' value. The changes passed through parliament in the early twentieth century concerning fiscality were to raise some minor problems for the Bank, but, at the time of moving into Lyon, rules were really quite light. Ill The move to Lyon (1881) There were thus objective reasons for Lyon being an attractive place for the Hongkong Bank. To these "pull" factors, one would like to add an exam. ination of the "push" factors, i.e. the motivations of the Bank proper. We are unfortunately scarcely documented on this matter. In 1955, when help. ing the writing of a history of the Lyon agency by J R Jones, Palisson, retired sub-manager, wrote that "it was not easy to establish the reasons behind the decision" to become installed in Lyon It seems quite certain that the Bank had, the financing of the silk trade, on the Asia to Italy silk route and eight British ones.-*0 pn the interest in the Lyon scene, when the small crises of 1873 and 1876 brought to grief some houses of the place, in both cases attracting the attention of the Court of Directors, in Hong Kong, because "the Bank was interested" (in the failures).39 a further indication, however meagre, large part of it was active French houses of the Bank's 37 from very early, seized a We know, for example, that in 1869, along with three 1870s one finds some hints 35ibid. See also Georges Petit-Dutaillis and Henri Bernard: Le credit et les banques, Paris: Sirey, 1964; p. 456. 3^Levy-Leboyer: "Le crddit et la monnaie: Evolution institutionnelle", p. 384. 3'7HK/GA: H 510.1. Palisson to J R Jones, 24 Feb 1955. See J R Jones' chapter on Lyon and Paris in the unpublished manuscript, "The Bank's Branches", in HK/GA. 38Bouvier: Le Crddit Lyonnais de 1863 ￡ 1882..., p. 529. 3^HK/GA: H 500. Extract of Court Minutes, 3 June 1873 and 25 Jan 1877. Maurice Collis: Wayfoong: The Hongkong and Shanghai Banking Corporation, London: Faber & Faber, 1978, makes passing references to silk (pp. 32, 34, 43, and 53) but never in direct connection with the Bank's affairs. EASTERN BANKING is again given to us by Letourneur of the Credit Lyonnais, who in 1884 pondered retrospectively on the fact that "the silk branch [of our busi. ness] has been fructuous as long as we have been the Hongkong and Shanghai BC' s [sic] representative. We used to receive its silks, and [we] had rented premises for that purpose. But since that company has had the unfortunate idea of having an agency in Lyon, we are drowning [nous sommes h l'eau]."4R A business which, once lost, was a source of regret for the Credit Lyonnais' manager, was bound to have been of substance. We can be sure that the Bank was very aware of the growing importance of the Lyonnais silk market; remaining unknown to us are both the gross dimension of the Bank's share in the silk business and the importance of this business in the Bank's activity. Most probably we can assume that a careful study of the shifting directions of trade was made before a decision was reached. Early in 1881, letters were exchanged on the subject between Hong Kong and London. In charge of the Bank's office in England, D McLean did not "like" the idea. Was he refusing to admit the simple commercial fact of the dwindling of the London silk market to the profit of Lyon, or did he have other reasons? We do not know.^1 Anyway, during a Court meeting in June that year, "all my letters and telegrams upon the subject [having been] discussed, [it was] decided to start this agency as soon as possible, Morel as agent. decision was announced to the shareholders at the half-yearly meeting on 16 Augus t 1881.43 On 10 October, the weekly Bulletin des Spies et Soieries announced in its "various information" column the opening of the agency at N° 19? "Place Tholozan". From the following week until 1888, this professional journal ran a regular advertisement paid for by the Bank. The same appeared in the Moniteur des Soies, more concerned with the trade in silk than with the production of silk goods. The advertisments, which ceased a while before Morel had to give up his job with the Bank, were in contrast with those published by other credit institutions: Credit Lyonnais, Union G^ndrale (until its disappearance in 1882), Socidtd Lyonnaise de Depots, de Comptes Courants et de Credit Industriel. They all offered advances guaranteed by silk deposited in their warehouses, which the Hongkong Bank did not. The Francis E Hyde in Far Eastern Trade 1800-1914 (London: Adam & Charles Black, 1973) treats the financing of the silk trade solely on the general level of all chartered banking in the East (pp 58-64). ^Letourneur (Lyon) to Mail lard (London branch of Credit Lyonnais) 10 Jan 1884, quoted in Bouvier: Le Credit Lyonnais de 1863 ￡ 1882, p. 282n4. We have unfortunately no basis for a quantified assessment, except that in July 1881, a few months before the Bank opened in Lyon, of one-twelfth of the Credit Lyonnais' commercial portfolio was created through the silk trade (Bouvier, ibid, p. 281n9). The sadness of Letourneur would imply an almost total dependence of his bank on the Hongkong Bank for this line of business. 41HK/GA: H 500. Ext ract of Court Minutes, 7 Apr 1881. 4^HK/GA: H 501. Extract of Court Minutes, 7 June 1881. 43HK/GA: H 510.1. Ext ract of Minutes of General Meeting, 16 Aug 1881. The agent appointed in Lyon was designated as "special". THE HONGKONG BANK IN LYON Bank, seemingly with a wider purpose, did propose to issue and collect drafts, issue letters of credit and open current accounts for customers in direct relation with the East, all backed by a network that no other bank in Lyon could match. With all its agencies and representations in Asia, Europe and America, the Hongkong Bank was unrivalled in Lyon, and probably in France.^ In 1883, one month after the Court of Directors had given their assent to his idea, Morel also offered to take fixed deposits at a rate varying according to their duration.^ -phis practice continued well into the twen. tieth century,though not advertised any more after 1888, and although it never led the Bank as far as opening chequing accounts.47 We do not know if Morel was a Lyonnais or not. What is sure is that he chose quite well the area in which to rent premises for the Bank. As a local author put it, "this district is, par excellence, the silk dis. trict."1^R The Place Tolozan is located at a peculiarly interesting junc. tion: at the bottom of the Croix Rousse Hill, where lived and worked Lyon silk-weavers, with the famous Condition des Soies (an official laboratory charged with weight and quality testing of all silk arriving in Lyon) a couple of streets above the Bank's building; and on the left, when one looks at it from the bridge on the Rhone, began the area occupied on both sides of the Rue de la Rdpublique (leading to the Stock Exchange and the Chamber of Commerce) by the other banks and the silk houses. At a time when silk was still the dominant factor in Lyon's economic life, it was really a well-connected position to keep in touch with the latest news and fluctuations of the trade. A Note on Edouard Morel and his successors The first agent of the Hongkong Bank in Lyon was an ambiguous character. The name is fairly common (there were two hundred Morels in Lyon's direc. tories for the 1880s). One should take notice that this Morel never had any connection with the silk family of Morel-Journel, old customers of the Bank. His origins and beginnings in the banking profession have not so far been discovered, the archives of the Comptoir d'Escompte, now part of the Banque Nationale de Paris, being inaccessible. He probably took over the management of the Comptoir d'Escompte in Shanghai after Victor Kresser had ^Sloniteur des Soies, N° 998, 15 Oct 1881. ^RHK/GA: H 510.1. Extract of Court Minutes, 1 Mar 1883. Moniteur des Soies, N° 1077, 21 Apr 1883. The Court had required that the interest paid on these deposits be j% inferior to the London rate. On the influ. ence of Morel on this decision, see J R Jones: op cit, pp. 3-4. ^Hongkong Bank London Archives (hereafter HK/L) (now transferred from London to Hong Kong) 8/124. Inspector's report on Lyon agency, 18 Mar 1918; pp. 9-11. ^7HK/GA: S/0 Letters. Jones (London) to de Bovis (Lyon) 13 Nov 1917, on the uselessness, for the Bank, to join Lyon's clearing bank system. 48r Brun de ia Valette: Lyon et ses rues, Lyon: Editions du Fleuve, 1969; p. 116. EASTERN BANKING 1: The Hongkong and Shanghai Banking Corporation 2: Condition des soies \\\\ : First slopes of Croix Rousse, 3: Union des marchandes de soie fabrique area 4: Rue de la Republique //// : Silkmen and bank area Source : Indicateur Henri, 1891 left it to become the Hongkong Bank's first general manager. He was at first well-appreciated by the French merchants in Shanghai,^ but they soon cooled down their feelings in view of his supposed anglophil ia. u He received the Legion d'Honneur in 1867, but did not use that immediately in the Bank's advertisements after arriving in Lyon.51 Perhaps he waited, before claiming his standing among the local bourgeoisie, for the waves of ^Moniteur des Soies, 11 Mar 1865, quotes a "letter from Shanghai" ad. dressed to the Marseille trade journal, Le Semaphore. It is stated that the Comptoir d'Escompte's good reputation in the place ("recognised even by the English, who are so jealous of anything that is not English") was mostly due to "the taking over by its young current manager, Mr Morel. One must congratulate the Comptoir d'Escompte's directors to have an intelligent, but mostly young and not routine-minded, agent." ^Letter dated Shanghai, 4 July 1865, quoted in Moniteur des Soies, 2 Sept 1865. Morel is said in it to have returned to strict rules, bending them only in favour of British houses, whereas French firms have difficulties even meeting him. ^Letter of Hermann Wallich, Shanghai, 10 Jul 1867, in the collection of family papers held by Gov Henry C Wallich, Federal Reserve Board, Wash. ington, D.C. Information for this note and for note 53 supplied by David J S King to whom I am grateful. THE HONGKONG BANK IN LYON his departure from the Comptoir d'Escompte to settle down. It was appar. ently well known on the China coast that he had had to leave on account of his gambling ventures.^ He was safe from judicial procedure thanks to some high connections he was supposed to have in Paris. These circum. stances had not amused his successor in the job.53 Apparently, nothing of all this ever surfaced in Lyon and he was soon introduced into the Societe d'Economie Politique de Lyon (a forum where business notabilities discussed current and theoretical problems) with the sponsorship of two men of importance: the local banker, Edouard Aynard, and Mr Flotard, the Society's President.5^ There was nevertheless something odd about him, for a few months later he gave a long report on the situa. tion in Tonkin, whereas he admitted never having set foot there.55 This report did not quite satisfy Ulysse Pila, the local expert, who that very year founded his first undertaking in Tonkin, 56 and who felt obliged to complement Morel's report during the following session.57 Morel did not take any further part in the Society's discussions, and one has difficulty finding him active in any other aspect of Lyon's social life. The only exception noticed was in 1885, when he intervened during a discussion between the members of the Chamber of Commerce and Mr Cogordan, the French envoy to China on his way to negotiate a new commercial treaty between the two countries. Somehow, the discussion touched upon Tonkin and Morel advocated for that newly acquired territory a status similar to Hong Kong's, so that it would become an easy channel for French imports into South China.53 His dealings for the Bank, during the years 1881 to 1889, did not attract the Court's attention, until they suddenly got news that Thomas Jackson, analysing in London the Lyon accounts, had found Morel overdrawn to the extent of Fl,294,000, without any security other than fifty shares in the Bank's stock. 59 The Hong Kong Telegraph attributed this huge amount (a little less than ￡52,00*0 at the t ime) to "losses sustained on the bourse."30 The Bank did not press charges, but "refused to have anything to do with Morel or to reinstate him, and he later went to Shanghai as a 53j\iorth China Herald, 7 Sept 1889. Intervention of Fraser Smith during the General Meeting of the Hongkong Bank's shareholders, 24 Aug 1889. I am grateful to Prof Frank H H King for this indication, as for the source of note 64. 53see Hermann Wallich: "Aus meinem Leben" in Zwei Generationen im deutschen Bankwesen, Frankfurt am Main, 1978. 5^Societe d'Economie Politique de Lyon. Compte rendu analytique des seances de l'annee 1883-1884, Lyon, 1884; p. 2. Morel is introduced as the "directeur de la Banque d'Hong Kong". 55qbid; pp. 166-219. 53John F Laffey: "Roots of French imperialism in the Nineteenth century: The case of Lyon", French Historical Studies, VI-1, Spring 1969; p. 85. 57societ￡ d'Economie Politique de Lyon, pp. 224-258. 5RLaffey: "Racines de 1'imperial ism frangais en Extreme Orient", p. 291. 59jones, "The Bank's Branches. Lyon", p. 4. HK/GA. H 510.1. Index of Court Minutes re 18 Aug 1889 and Extracts of Court Minutes, 23 Aug 1889. 3°HK/GA: Extract from the Hong Kong Telegraph, 24 Aug 1889. EASTERN BANKING broker.it is not possible to know if this speculation had anything to do with the krach in March 1889 of the Comptoir d'Escompte, which had over. involved itself in the backing of an unsuccessful attempt to corner the world copper market.^2 Although the inspectors sent from London found the agency otherwise in good condition,^ the HK$330,000 that the Bank had to put aside to cover Morel's loss reduced by 29% the available profits, provoking the ire of at least one shareholder, who expressed himself quite strongly on the sub. ject. ^ if the event reached the newspapers in Hong Kong, such was not the case in Lyon. In this city of extreme discretion, Morel's resignation and its cause was never publicized, and it was simply acknowledged in the report of the Banque de France inspector the year after, in quiet words.^ Morel was replaced by Franqois de Bovis, whose life history, particu. larly the years until his definitive posting in Lyon, would be as fascinat. ing, if one could write it, as Morel's, though probably less hectic! De Bovis was born in Tahiti in 1853, son of an Englishwoman married to a Frenchman, which explains his command of both languages*^. He spent all his active life with the Bank (but never gave up his French status) begin. ning in 1872 (and one would like to know which "road" he took to go from Tahiti to that employment). From 1877 he was accountant, then in 1883 man. ager in Calcutta. He spent six months in New York in 1884, as acting mana. ger (Townsend absent). After that he was acting agent (1885) then agent (1887) in Bombay and was moved to Hong Kong in 1888 as sub-manager. He was due to take over the managership from Noble on his retirement. He spent some time in Lyon in 1889-90 to work out the agency's problems, then went back to Hong Kong as chief manager, the first and only Frenchman ever to hold the job. The difficulties of the years 1892-93 brought back Thomas Jackson (on shareholders' demand) to the post, although the Court was quite satisfied with de Bovis' performance and Jackson was not too keen to return to the East. De Bovis agreed to return to Lyon, awaiting better days. He was to stay there until his retirement in 1922, a highly respected man among the business community. He went to stay, like many other retired Bank managers, on the Mediterranean coast in Hy&res, but came back to the Lyon area sometime in the late twenties to die in 1930 in the little village of Reyrieux, not far from Lyon.^? His successors in the post of "directeur" of the Lyon Agency of the k^HK/GA: H 510.1. Extract of Court Minutes, 22 Aug 1889. 6^See Bertrand Gille: "Un Episode de l'histoire des mdtaux: le krach des cuivres", Revue d'Histoire de la Mdtallurgie, 9, 1, 1968; pp. 25-62. k^Jones. ^Balance sheet published in the North China Herald, 17 Aug 1889, and Fraser Smith's intervention, already referred to. k^Banque de France, Paris. Archives. Rapport d'Inspection de la Succur- sale de Lyon, 1890: "The [Hongkong Bank's] manager, Morel, who has been sacked because of his embezzlement, has been replaced by Mr de Bovis." ^Franqois de Bovis' death certificate, in the archives of Reyrieux (Ain) town hall. ^7Baker (sub-manager, Lyon) to Stabb (London), 6 Jan 1930. The information on de Bovis' career and about his successors in Lyon was found in HK/GA. THE HONGKONG BANK IN LYON Bank were: J H Hutton (1922-23), C C Barlow (1923-29), M B Lendrum (1929- 40), D A Johaston (1945-46), J S Watson (1946-50) and D C Davis (1951-53) who also saw the Bank through the move toward Paris, and the first years there. After Morel's departure, the Agency was not to be shaken again by any other unseemly event. The episode led the Court of Directors to decide to tighten the Bank's control over Lyon office. It was to be inspected month. ly by London Office,68 something which has left no trace in the Bank's Bank's archives because, perhaps, it was not after all strictly implemented (the cost would have been heavy). More important, its role was defini. tively restricted to being only a "special agency" and it is this type of very contained activity that we are now going to sketch. IV The business of a Special Agency (1) What the Hongkong Bank's agency in Lyon was not supposed to do was to get involved in any venture of importance outside of the finance of trade. When Frangois de Bovis, during his first period in charge of the agency, entered into correpondence with a Paris banker with the idea of subscribing and issuing in Lyon a 6% loan for Cochinchina,69 letters to Paris grew more and more cautious, because of the reaction he was receiving from London and Hong Kong, where the utmost caution was advised./u Clearly, he was not given the possibility to take any decisive initiative, and it is most probable that the scheme fell through. Similarly, at a later stage, one looks in vain for any intervention of the Lyon agency in all the negotiations surrounding international invest. ment in China. The loans arranged by the consortiums were shared on a geo. graphical basis, and, if one can see many prospectuses stating that the British share was issued by the Hongkong Bank in London, the right of issue on French territory was the uncontested monopoly of the Banque de l'lndo- chine. Later again, when the Hongkong Bank was involved in the setting up of the International Rice Company Limited (1935), with the Chartered Bank of India, Australia and China, the Banque de l'Indochine and other French interests, many conversations took place in Paris without any member of the Lyon staff ever being present. 71- In the minute books of the London Committee of the Bank, one finds only the most routine and simple allusions to the existence of Lyon, even in periods of general difficulties (the 1930s, the beginning of World War 68HK/GA: H 500. Extract of Court Minutes, 25 Aug 1889. 69HK/GA: H 510.2. Letters of de Bovis to Jules Rueff (Paris), 23 and 24 May and 5 Aug 1890. 7(^HK/GA: Index to Court Minutes, Session of 3 July 1890. 71HK/L: 5/71 & 82. EASTERN BANKING II).72 ^he closest the agency seems to have gone to the world of interna. tional finance was in 1907-08, when it remitted to the French Treasury, on behalf of the Shanghai branch of the Bank, three instalments on account of the Boxer Indemnity. 73 in so doing, the Bank was of course bypassing the Banque de l'Indochine, which did not fail to protest.^ But even in that case, the Lyon agency had only served as a transmitter, not as an actor. On the Lyon scene, the level of activity was higher, having been created there as "expressly constituted to finance the country's foreign trade with the Far East," but inside the Bank's own framework, the agency was there to inform, remit and transfer.75 The surviving letterbooks show Frangois de Bovis and his successors always busy informing the Head Office, London Office and various Far-East. ern branches on the state of the money market (the rate of exchange of the pound and the rates of discount at different terms) and on the progress of the most important sectors of trade. De Bovis was a scrupulous follower of financial news and one seldom finds his letters devoid of information of this type. He repeatedly stressed to his correspondents the influence that the Paris and London stock exchanges had on the Lyon market. Until World War I, the principal branch of trade in Lyon was raw silk, and the bulk of the letters written by de Bovis was addressed to Shanghai, Yokohama and Hong Kong (which dealt with the merchants established in Can. ton). Manila (for tobacco), Penang (for rubber) and Singapore (for rubber and tin) were to reach a certain importance during the inter-war period, especially with the development and growth of the car and tyre industries. In 1926, for example, a line of credit was agreed in favour of the Bergoug- nan Company of Clermont-Ferrand, which was allowed to draw ￡140/145,000 for its rubber imports from Singapore and Batavia, against a "margin" of F5 million deposited with the agency. (This amount more than doubled the level of the agency's current accounts.)76 (2) So it was silk that provided the bulk of the agency's business. Fortu. nately, the first surviving series of letters written by the Bank's mana. gers in Lyon is centered around 1907, a year of severe shock for the trad. ing community. We are thus offered a unique glimpse into the thoughts of a bank faced with the crisis. The assessment by the Hongkong Bank's "direc- teur" in Lyon of the state of the silk market shows that the traditional banker's caution was not a concept that de Bovis took lightly. His knowl. edge of the flooding capacity of Far-Eastern producers, coupled with an intimate involvement in the silkmen's daily conversations, led him to be aware, very early, of possible danger. Compared to a scholarly assess. ment, 7 0r to the quiet post-mortem delivered in a Banque de France ^HK/L: 36/662 to 665. ^Ministry of Finance, Paris, Archives: F 30.370. Hongkong Bank (Lyon) to Ministry of Finance, 30 Apr 1907, 1 Feb and 30 Jul 1908. ^Diplomatic Archives, Paris. AE. NS Chine 302. Ratard (French Consul in Shanghai) to Ministry of Foreign Affairs in Paris, 21 May 1907. 75j0nes to de Bovis, 13 Nov 1917, already mentioned. ^^HK/GA: H 510.2. Barlow to Bergougnan's manager, 24 and 27 Oct 1926. ^Rend Gonnard: "L'industrie lyonnaise de la soie", Revue Economique Inter- THE HONGKONG BANK IN LYON inspection report, his appreciation keeps us in touch with the pulse of the market, the worries—even fears—of the mercantile community. Through the 1907 example, one also understands the difference in points of view that existed between the merchants and the producers. The picture that he drew of the situation at different stages, always put to the front the factors most fraught with risk; whereas an academic author would lament the loss to Milan, since the late 1890s, of Lyon's pre-eminent market position,^ de Bovis referred preferably to the importance of the American consumers' decisions. Effectively, the 1907 crisis in the U.S.A., linked with a spec. ulative boom on the Lyon market and an excessive production of cocoons in Europe, was going to create in the old silk city a minor, but sharp, tremor of which de Bovis was to be a clever witness and, relatively passively, an actor. De Bovis had noted, in 1905 (a "fairly active year") that "the only cause that had prevented silkmen from buying as usual [had been] the fear of America giving way. In that case, Lyons [sic] silkmen would have alone to support the market."79 1906, however, was to be a quiet year. In the last week of February 1906 he wrote: We are now entering the slack season for imports, which gener. ally continues until the first cocoons are brought on the market [June]. But during those [coming] three months, there is a tail-end of the season which keeps things going. Late arrivals of cocoons from the Turkestan & South Russia, which were delayed by recent troubles may still be expected.^0 And in fact the price of silk was up some time later owing to scarcity of 'spot' silk. . . . Present prices seem to attract a fair quantity of silk from the East, although the season is supposed to be over [somebody must have been stock. piling!] We have 9 million F at sea from China & Japan, the Specie [Yokohama Specie Bank] 5 million, and the Chartered probably as much. This makes up a good total for the month of April, usually so slack.81 nationale, III, 2, 15-20 Aout 1905; pp. 260-99; and Solange Garcin: "La fabrique lyonnaise de soieries de 1900 a 1930", unpublished 'DES' disser. tation, Lyon University, 1969, 122 pp. ^RGonnard, pp. 273-76. 7%K/GA: copies of Lyon's S/0 correspondence: de Bovis to MacLaren (Yoko. hama branch), 8 Dec 1905. The incorrect spelling of Lyon (Lyons) has been kept in all these extracts. The money figures have not, either, been changed or converted into one single unit: de Bovis and his fellow bankers had the habit of jumping easily from pounds sterling to francs, sometimes in the same sentence. That the ratio between these two curren. cies remained extremely close to 25 francs per pound during all these years was certainly helpful to them. R%e Bovis to Peter (Hong Kong), 23 Feb 1906. 81-De Bovis to Smart (Shanghai), 6 Apr 1906. EASTERN BANKING Letting us realize the pre-eminent position of the Hongkong Bank among the non-French credit establishments, de Bovis is also giving us a good idea of the intimate knowledge he had of his competitors' business. This April letter was describing all the premises of a good season indeed. In July he could add "good prospects because stocks are light, even if Euro. pean crop is good". ^ Purchases were extensive and prices steady "because Milan is cheap; besides, Central Asia will be a good seller with an in. creased production".^ He then pointed out to his Shanghai correspondent: "Lyon mops up a lot of silk. So long as Shanghai does not speculate for a rise, orders will not be diverted elsewhere.Another expert, the Banque de France's inspector, who summed up local informed opinion in his report, could not agree more: "During the last two years, the silk merchants have realized serious benefits. . . . The raw material stock is presently excessively limited and they are impatiently waiting for the producing countries' crop. This impoverishment of the stock has already, as a conse. quence, led to a rise in local cocoons price."^5 The year's climax was later pictured by de Bovis: "the market is con- present stocks are barely sufficient for daily require- think there has ever been so little speculation. The rise is entirely due to the large dealings of manufacturers who now find them. selves face to face with light importation of raw silk which cannot be increased". How, then, did he look forward to the new year? He wrote in January 1907: stantly rising, ments. I don't The last quarter of 1906 has been brisk—our franc bills from the East have totalled 30 million F for November-December alone, but the importation season will soon come to an end. What is left in the East may be tempted to come forward by high prices. The trade in raw silk as well as in silk goods has been very prosperous here, therefore the present high level may be main. tained for some time.R^7 So far, so good. Little worrying signs, however, were soon to be per. ceived, without permitting an early diagnosis: "The market is disappointing since the 1st January," wrote de Bovis in February 1907, "probably because trade had largely provided for its requirements in the early days, but no serious reaction can take place with an impoverished supply and light stocks."8R Although things looked better the next month, the hint of cau. tion remained in his letters: "The market is higher again. ... It is easy enough to maintain a very high level when the season is over and Bovis to Peter, 20 Jul 1906. 83ibid. 8^De Bovis to Smart, 20 July 1906. °^Banque de France, Par is, Archives: Rapport d'Inspection de la Succur- sale de Lyon. Tournee de Juillet 1906. 86oe Bovis to Peter, 22 Dec 1906. 8?De Bovis to Peter, 11 Jan 1907. R^De Bovis to Peter, 22 Feb 1907. THE HONGKONG BANK IN LYON stocks are light. But when the new crop comes on the market, operators will have to be careful."R^ There was definitely something to be worried about, and he soon warned his correspondents, describing the mechanisms of a possible crisis hidden behind the anticipated boom. He was himself, however, balancing on more than one occurrence between optimism and a bleaker look at the future. To Smart, in Shanghai, he wrote early in April: Our barometer is permanently pointing in the same direction. This constant rise is not without causing some anxiety for the coming season. ... On the other hand it must be admitted that the legitimate consumption has been on the increase. Both merchants and manufacturers are making money at the present moment, which is rarely the case in Lyons. But we are nearing the point where the price of raw silk will absorb future profits on made up silks. However, it is on the cards that we shall open the new season at a very high level. If prices can be maintained, we ought to receive very large remittances from the East."90 And to Peter, in Hong Kong, later in the month: "There is some anxiety here that we may open the new season at too high a level. However there is no denying that raw silk is wanted, & that the rise has not yet checked 91 consumption." At almost the same period, the Banque de France inspector, noticing some tensions in the market, did not, however, draw any conclusion about their potential result; it is true that he was considering silk in the wider context of all other transactions and industrial activities: In spite of an enormous rise on all primary commodities, silks, cottons, wools, metals, etc, there is right now such a high level of industrial activity that all these products are taken at any price. Especially silk, which used to be worth 45 to 50 francs, and now sells at 70 francs; there is a slight relaxation because the crop in China and Japan is announced as quite beaut. iful and abundant, cocoons having admirably succeeded. Almost all warehouses are presently empty, and most of the arrivals are sold "on board," without the buyer having even seen the goods.* * 9^ Meanwhile, de Bovis already noticed how one of the avenues to overproduc. tion at too high a price, was opened: News from the cocoon district in France, Italy: prices will R9De Bovis to Smart, 15 Mar 1907. 90De Bovis to Smart, 3 Apr 1907. 9^De Bovis to Peter, 19 Apr 1907. ^Banque de France, Paris, Archives: Rapport d'Inspection de la Succur- sale de Lyon, April-May 1907. EASTERN BANKING range a good deal higher this season, therefore the temptation must have been great to produce as much as possible, that is, as many silkworms as can be fed. In former years the crop was not only limited by mulberry leaf, but also by the cost of labour. On the other hand, overcrowding causes disappointment. It will be interesting to watch the results, which will be late, owing to late spring weather.93 Clearly, our witness was still far from being worried for his own business. The crop in Europe was thus expected to be larger than usual; the same was expected from the Middle East crop,^ whereas the general financial conditions were not favourable to easy and cheap credit: "Money ought to be easier, were it not for overspecu lat ions on the Bourse, which have kept up a high level for advances on stock."95 All this was not going to help the small operators, if, from too high expectations, the market was to fall low, a phenomenon about which warning signs started to be regis. tered at mid-year: Prices have a tendency to weaken here, particularly for Canton sorts, which are the first to come forward. Your schedules at sea amount to 4i million francs, which is a good commencement. Political troubles between Japan & America, if they became more acute, might also disturb the price of silk.96 Effectively, the downward trend started later in June: "Canton silk has been the first to give way with announcement of good crops. It is now our turn. European silk will be abundant this year: cocoons are selling much under the parity of ready silk, which is a sure indication of weak. ness. "97 The bottom, however, was still far, because of the industry's needs: "New cocoons are nearly all sold," wrote de Bovis the next month. "The opening price was about 4.50 francs per kg, & the closing one about 4, corresponding to a further drop of 5 francs in raw silk. No wonder that the market is weak; but at a low level, there will be a considerable demand because our manufacturing trade is very active."98 The season was now open. Happy with the still good potentialities, de Bovis kept an eye on a clouding horizon: "The [silk] market remains wonder. fully firm in spite of big crops everywhere, & heavy shipments from the East this month. The fact is certain that manufacturing requirements in Lyons are on the increase. It remains to be seen whether we can continue to absorb raw silk at the present pace."99 "Some weakness might come from America & would be perceptible when this market is saturated."100 Here was 93 De Bovis 94 De Bovis 93 ibid. 96 Ibid. 9 7 De Bov i s 9R De Bovis qq De Bovis lO^De Bovis to Peter, to Peter, to Peter, to Peter, to Peter, to Peter, 30 Apr 1907. 14 June 1907 28 June 1907. 5 July 1907. 30 Jul 1907. 6 Sept 1907. THE HONGKONG BANK IN LYON the real danger: bottleneck at world level, which would prevent silk from being relatively evenly spread among the main consumers' markets. Indeed, Lyon was running out of breath, whereas America was not per. forming satisfactorily its buying role. Acknowledging both facts, de Bovis nevertheless tried to reassure himself, in the same letter, with a slightly dogmatic statement of Say's law: Prices have fallen 2 or 3 francs per kg, because Lyons is get. ting saturated, while America appears to be off the market, not only in Japan, but in Italy. However, not much anxiety is felt for the future, because to large crops all over the world corre. spond equally large manufacturing requirements.^^ This was indeed pushing things a bit far, and one thinks that de Bovis himself would not have sustained very strongly such an equalization of two different phenomena emanating from different worlds. Ideological barriers were no protection, anyway, against the realities of production and exchange and a month after, in October, a tone of gloom set in: Silk is weaker. The market has been saturated during the past quarter and there is an inclination here to hold off, especially that America is a little off buying, and silver is weaker. 102 A couple of weeks later, he summed up neatly, though bleakly, the not too bright prospects for the autumn: Our market is not brilliant: local causes, such as increase of manufactures, have been favourable to large imports, but outside causes such as the American crisis, the weakness of the silver market, etc, have depressed us to such an extent that fresh business is at a standstill. In the meantime, large shipments 103 are arriving daily with the prospect of a substantial loss. It was now time for him to worry about the state of his constituents, at least some of them. The same day he wrote to Head Office and asked for some precautions to be taken henceforth in the East: Bills outstanding must have reached 50 million francs, princi. pally drawn against silk. As stocks are large, and prices not strong, I wired you today to be very particular about names. Our big merchants have made money last year and can stand a sub. stantial loss, but those who have a very small capital should be avoided, unless coupled with strong drawers."104 From then on, his comments and warnings were to become more frequent 101De 102De 103De 104oe Bovis to Smart Bovis to Smart Bovis to Smart Bovis to Peter 13 Sept 1907. 11 Oct 1907. 25 Oct 1907. 25 Oct 1907. EASTERN BANKING and stern; he wrote repeatedly to Hynds in Hong Kong: Silk is weak. . . . Good DA paper should be taken in prefer. ence to 6 months DP from small people. Also remember that DA paper means cash, whereas 6 months DP just now is heavy to carry. 105 Outstanding are 52 million, mostly against silk. I wired you we had enough paper for the present on the following names: Sulger Rudolph Co 6,234,000 Otto Streuli 2,244,000 S Oriani Co 852,000.106 (This gives us an approximation of the size of some customers' dealings.) Silk is still on the downward course. This market has been swamped by big shipments from the East within a few weeks. . . . I estimate that the October shipments lose 15 to 20%.10? In his letter of 25 October to Peter, he had listed ten firms "that may be called small and good for a moderate loss only". At mid-November turning his thoughts towards one of these houses, who were drawing "pig on pork", he had to issue a specific warning: "very decent people, but have no means. I do not see how they can make their forward contracts good, except at the expense of the Bank. Outstandings 465,000 francs, to which must be added Japan & Canton engagements not arrived."108 In the same letter, he stated about another firm that it was "the first of our small speculators to give way. Mr Dent & Co bills on him will not be taken up, except by Dent himself." He then went on about the ways and means to prevent the Bank from suffering the coming disaster too much: Have you any regular system by which invoices can be checked? For instance, many shipments are coming forward invoiced too high; with the system of forward contract, silk contracted for in September for November delivery is passed thro' your books at the high price, which will only be recovered here if the mer. chant is first class.109 Further references to the lack of a proper control system remind us about this yet apparently underdeveloped aspect of the relations between the Bank and its customers: a lot was still left to fate! Clearly, the situation was becoming increasingly dangerous. One big British China house, an old partner in the Bank, was hit by the Lyon lO^De Bovis to Hynds (Hong Kong), 31 Oct 1907. lO^De Bovis to Hynds, 8 Nov 1907. lO^Ibid > lO^De Bovis to Smith (Hong Kong) 15 Nov 1907. 109Ibid. THE HONGKONG BANK IN LYON crisis: Herbert Dent renew all bills drawn liquidation. had to come down from London "and had arranged to by his firm over the [firms] which have gone into [Dent] proposed to sell the silk gradually, the shortage to be redrawn on Hong Kong where he will arrange with you to meet all deficiencies. "HO operation? informat ion worth about is roughly own for his But was Dent capable of undertaking such a rescue Here was an opportunity to communicate to Head Office some about the standing of that old friend: "he is 60,000 pounds, including 498 Bank shares. His loss here estimated at 12,000 pounds, i.e. 30% on 1 million francs, as calculation."HI Events must have taken a faster pace, because de Bovis wrote the week after of a more extensive debacle among the silkmen: "In spite of the numerous small failures which have taken place here. . ."112 In that letter, the following statement is extremely revealing of the importance of the Hongkong Bank for the good functioning of the Lyon silk market: The Committee of the silk trade called on me to ask what remedy I could suggest to the present situation. The first one of course will be for banks not to throw goods on a demoralized market, the second one in my mind is to obtain from silkmen in the East proper invoices, including weight, quality, price, charges. H3 (Emphasis added.) As a matter of fact, it would seem that the second one was more geared toward keeping the Bank free from unnecessary risks, though as a secondary consequence, it would of course, by the refusal to finance a certain amount of silk imports, limit the flow of the product on the saturated market, the interest of the banks and of the market as a whole being thus reconciled. In another letter written the same day, his new general assessment of the situation gave a brand new picture of the place: Manufacturers are now masters of the situation. They will buy silk when they choose, and at their own price. For the present they only buy from day to day for immediate requirements. Not only does America not absorb its share of raw silk, but does not order silk goods from Lyons. I look for further reduc. tions in our exports of silk goods. Under the circumstances, it is very imprudent to accumulate silk where it is not wanted. H This was written at the end of November. How different indeed was that situation, compared to a year before, as far as the relative positions of manufacturers and merchants was concerned! In December there was no reason to rejoice: n^De Bovis to Peter, 22 Nov 1907. 1 Hjbid. H 2j)e Bovis to Jones (Yokohama), 29 November 1907. Emphasis added. 1 Hjbid . H^De Bovis to Peter, 29 November 1907. EASTERN BANKING This market is demoralized. ... No Bills should be bought on Lyons firms now unless they are backed up by strong names. Our present oustanding 2 million pounds have not decreased during November. Deduct 25% for the loss, we shall have to recover 500,000 pounds from the silk merchants, in excess of the value of shipments. Allow a similar sum for the other Banks, the total loss is not inferior to 1 million pounds. My calculation tallies with the one made by silk brokers who estimate the stock & the depreciation with same results. . . . The Lyons prosperity up to October has deceived our silkmen, who have too much ignored America. It is remarkable that, as late as 1907, the Hongkong Bank, most proba. bly with a good degree of accuracy, could claim to bear 50% of the overall losses of the banking community during a crisis. If one assumes that risks were properly spread among the banks, the conclusion to be drawn is that the Bank, by itself, carried half of the credit requirements, hence the financing of half the total silk trade of Lyon, at a given time. From a general warning, de Bovis soon had to go into specific precau. tions to be taken toward particular customers: Two days ago, I wired you to recover 30% margin from Pasquet of Canton, against his Bills on Carisio for 175,000 francs. A fur. ther collapse took place yesterday in our silk prices. The margin to be safe should be 40%, but I doubt Pasquet's ability to meet the margin. The silk sold to Carisio at 49F—Canton's best 3—are now selling at 27 to 30. [These remarks] Also apply to Dent. His loss is no longer 12,000 pounds but 20,000. Please make arrangements with him for provisions.^^ (As a matter of fact, de Bovis was to declare, a week later, Pasquet was "cleaned out".^^) And light was still not to be seen at the end of the tunnel. The only positive consequence was the opportunity given the Bank to straighten its own procedures: The general impression is that we have not reached the bottom. The best remedy to be applied in the East would be to ask for a margin of 20% on silk. But remains the question: how are you going to appreciate the margin, unless merchants deliver proper invoices? It seems that the East should take this opportunity to insist on properly made invoices. Pessimism remained the mood of Lyon's eldest merchants: Bovis to Smart, 6 Dec 1907. H^De Bovis to Peter, 7 Dec 1907. ^ ^De Bovis to Peter, 13 Dec 1907. 118Ibid. THE HONGKONG BANK IN LYON Mr Ulysse Pila, a shrewd and experienced man, tells me that since 1862 he has witnessed all the ups and downs of silk but does not remember anything approaching to the present situ. ation. The downfall was so rapid that no silkman had time to sell much on a falling market. He estimates that out of 33,000 bales there must be 20,000 unsold. He fears that there is trouble ahead for many when the Bills mature. Now not only the small operators were suffering. "Buy sparingly," advised de Bovis in mid-December, to Jones in Yokohama, about the paper of Sulger Rudolph & Company. "A few weeks ago, when the collapse took place, they admitted holding 12 million francs, half with us and half with other banks. A good deal of their Japan silk sold in time, but they lost on Shanghai shipments."^ And that old customer, Dent & Company, was now pretty well wounded: Mr Dent's losses are a little larger than I advised you last month, on account of his liabilities elsewhere which I was igno. rant about. But I believe he is still solvent, provided he sells his Bank shares, and that he steadily applies himself to getting rid of his silk holdings without further commitments in Canton.l^l When he wrote to Peter toward the end of the year, de Bovis acknowl. edged the importance of the consequences for his agency: Silk: all shipments are losing money. Recent ones of course do not lose very much, but they add to the losses—they increase our stock—[by which he meant Lyon's stock] and they make the Bank's risk of such magnitude that I am quite incapable of tel. ling you what would be the size of our losses if the decline in prices--which average 30 to 35%—was to reach 50%. Let us hope matters won't come to that. It is unfortunate that the America crisis should have taken place in a year of excessive produc. tion.^^ In the same letter we get a further indication of his (and the Bank's) position in Lyon's economy: "I am auditor for the Magasins G￡n￡raux [muni. cipal warehouse], which were nearly empty last year, but are overcrowded now."^23 And he added: "Milan and Marseille are full of cocoons. As for the credit of firms, many are nearly ruined who were wealthy 3 months ago. The situation is dramatic in its suddenness. "124- Knew what was to be done to limit the damage to the Bank: 1l^Ibid . 120oe Bovis 12-^De Bovis 122j)e Bovis 1 23ibid . to Jones, 17 Dec 1907. to Peter, 21 Dec 1907. to Peter, 27 Dec 1907. 124Ibid. EASTERN BANKING The list of small defaulters is a long one: eleven in number-- without very much harm done to the Bank up to date. But we shall have some anxious moments to go through before disposing of our present burden of silk bills. You will help us consider. ably if you examine every bill with a magnifying glass and allow nothing suspicious to go through your schedules. Acceptances are refused here on the slightest excuse. If you are conserva. tive, your purchasing power will be restricted, but there is no help for it. Extreme caution in the East will alone save us from enormous losses. 125 One could carry on endlessly with such quotations. Working hard to protect the Bank's interest, de Bovis was hardly able to see a global solu. tion to the crisis. In present day France, the State would have been called upon to intervene, but this was not thinkable at that time. How. ever, a movement of similar nature, but of private origins, was contem. plated. He thought in December that "if a combination was not at once formed to prevent the panic from spreading," he would "look for numerous failures next Spring, when Bills have to be met".126 And, however belated, such a thing happened in February 1908 when the slack season did not bring an improvement in prices: "During the past week, there has been a fair amount of silk sold at quoted rates. An attempt made at a combination to prevent a further fall has been sufficient to bring out many buyers," wrote de Bovis, who remained sceptical. "However, I do not believe in a reac. tion, the evil is too deep".127 The only solution that he could consider was a "natural" one: "When the new crop is sold, we shall make a fresh start, probably at a low level, but with a firm basis".128 And indeed, he spent March biding his time and sending dull assessments of a dull situation. As he had expected, it was only late in the Spring that he could send better news to his Eastern correspondents, writing to Yokohama in April: "Silk is being rapidly absorbed. For the opening of the new season, I hope our positon will again be quite sound." He wrote to Hong Kong the same day: There is a better feeling in our market. Silk is in good demand at low prices, and what is still more encouraging, our heavy stocks are rapidly declining. If this activity lasts for an. other two months, we should open the new season without carrying on our shoulders the heavy stock which was apprehended.129 The crisis, by then, was over. We have kept company with Franqois de Bovis and, through him, with the merchants of Lyon during those months of worry and grief. This long jour. ney through a crisis, as seen by an actor/witness, reminds us of two Bovis to Smart, 27 Dec 1907. l^De Bovis to Peter, 21 Dec 1907. 127De Bovis to Smart, 21 Feb 1908. 128])e Bovis to Peter, 7 Feb 1908. 129pe Bovis to Peter, 10 Apr 1908. THE HONGKONG BANK IN LYON reasons that make business archives a unique source for economic history: there is the possibility, given to us by these letters, to restore to the "men on the spot" their flesh and blood, their feelings (after all, bankers are not devoid of happiness or fear or compassion, whatever their actions, dictated by the limitations of their job, maybe) and points of view. Busi. ness history can then (not always though) be written with a human angle, without detracting from its essentially economic nature. There is also the possibility of reinterpreting events such as this crisis, to give them a new dimension. The only scholarly study of the period available so far almost dismisses the crisis as a "fairly severe, but of short duration" accident in an era of "relative prosperity". 1^0 Furthermore, an interpre. tation in the long run will, quite rightly, integrate the fall in price of the 1907-08 winter in a general trend of stabilisation (as opposed to a rise) in the price of raw silk, due to growing Japanese exports. True enough from a general point of view. Nevertheless, when one tries to see things from the operators' point of view, the crisis, as seen by de Bovis, has reminded us that "the tradesmen's tradition was essentially specula. tive, on the look out for variations of yearly rates and momentary short. ages" with all the risks pertaining to that kind of approach. ^2 More important, such a crisis, considered in all its gravity, was bound to affect the actors of the trade and, consequently, the market structure, through concentration and changes of relative strength among the merchants; more research should be done on who picked up the pieces after the crisis, and the disappearance of these "many small defaulters" referred to in de Bovis' letters. It is interesting to note, for example, that there were only two well- known silkmen's houses never mentioned by de Bovis among the casualties: Morel-Journel and Ulysse Pila. But let us have a look at the state of the affairs of another major house, when, two to three months after the crisis, time had come for some fresh reassessment: Terrail Payen & Co: losses probably nearer 3 than 2 million F, including Soci￡t￡ S^ricicole, one of their branch offices. Terrail Payen & Co capital: F3 million S￡ricicole, paid up: li Deduct losses: 3_ Balance: FI4 million^^ Here was one of Lyon's major firms engaged in the silk trade, with 70% of its capital wiped off! It was not quite finished though: l-^Garcin, p. 41. l-^Solange Garcin: "La fabrique lyonnaise de soierie de 1900 A 1929", Bul- letin du Centre d'Histoire Economique et Sociale de la Region Lyonnaise, 1970, No 1; p. 16. 132pierre Cayez: "L'industrialisation lyonnaise au XIXe si&cle: Du grand commerce & la grande industrie", Cahiers d'Histoire, XXII, 1, 1977; p. 6. l^De Bovis to Smart, 5 Jun 1908. EASTERN BANKING Mr Payen's father, 93 years old, is worth 300,000 at least. Mr Terrail is a very energetic man of business, who is quite able to recoup his losses. They are the largest importer of cocoons from Cental Asia. The above capital has been made out of profits made during the past five years, now lost in one season. ^ 34 Certainly two of the perennial features of Lyonnais character, private fortune and thrift, were to help this firm (which had not, however, suffered a mortal blow) on the road to recovery. But one is left guessing about the fate of many other, less wealthy, houses. (3) Here were the fluctuations of trade, its recurrent crisis. One must also try to perceive the more stable structure of the credit system built around the agency: the mechanism of the bills of exchange, the information gathered and transmitted about the customers, the inter-branch remittances. The basic credit mechanism was as follows: Silk & Company of Shanghai would get an advance, to buy silk, from the Hongkong Bank's branch there. The advance was in local money and against a D/P or D/A bill on Silk & Com. pany, Lyon (usually the parent company; it was then a case of drawing "pig on pork", a frequent occurrence, though not the only type of transaction). The D/P bill (documents against payment) was a draft attached to the docu. ments which were necessary to release the goods from the shipping company: bill of lading and insurance certificate.^ ^ it meant that the Lyon house could only get hold of these documents (and consequently the silk it wanted to sell on the Lyon market) against cash payment to the agency of the Hong. kong Bank in Lyon. The Lyon merchant could, if he was tied up, choose to leave things as they were, a not too cosy prospect for the agency, which ran the risk of becoming laden with silk; it was nevertheless, for the Bank, a relatively safe perspective, since the goods remained in its cus. tody as guarantee. On the other hand, the Lyon merchant could "retire" the Bill by settling it before it reached maturity. He would then be allowed a certain rate of rebate off the interest due on the Bill. Since the agency was in fact advancing the money represented by the Bills to the accounts of the various branches of the Bank (those which were creating the Bills) this involved the manager in Lyon in complicated calculations to make sure that his transmission function was not costing him too much: It is understood that the rate allowed to the Branches is 3%, which is also the rate of rebate to merchants. But the true rate of selling DP Bills to our neighbours is 3.75% quoted by all the local Banks. I am glad I resisted the temptation of raising money this expensive way, because Silk Bills are prompt. ly retired. Six months DP Bills sold at 3.75, rebated after one 134Ibid. 135 . Endless references in de Bovis' letters. See also Louis Gueneau: Lyon et le commerce de la soie, Lyon, 1932; pp. 167-70. l-^See w W Syrett: Finance of overseas trade, 3rd ed, London: Pitman & Sons, 1957; pp. 56-67. THE HONGKONG BANK IN LYON month at 3%, represent a finance costing 7.5%.137 At a time when the official Banque de France rate of discount fluctu. ated between 2% and 5%, the banker's space of manoeuvre was limited, and all possibilities had to be exploited before resorting to the more expen. sive service of the central bank: one Banque de France inspector remarked in 1910 that the Hongkong Bank agency in Lyon rediscounted its portfolio, all year round, at the market rate, [and] brought it to [our] branch only when the difference between the official and the market rate was not superior to one eighth of one per cent (generally from October to July).138 The D/A Bill, on the other hand, allowed the documents to be surren. dered simply against acceptance by the drawee. The D/A bills were "put aside, ready for discount when settled by the Agent".13^ This type of bill was, therefore, in normal times, of greater interest to the agency, since it was saleable on the discount market, and could thus bring in ready cash. It was also, from the merchant's point of view, rebatable. Endorsing a bill to put it for sale on the money market implied that the drawee was fairly well trusted by the agency's manager, who had to be sure of his knowledge of the merchant's affairs. Of particular importance was the apportionment of D/A vs D/P bills inside the line of credit allowed to each customer, particularly in all the "pig on pork" cases, where drawer and drawee were the same firm or person. Judging a customer as "working satisfactorily; profits probably small, but business devoid of speculation", de Bovis advised the Bank's London Office (the customer was in transaction with a London-based China house) that the "risk advised" should not exceed ￡100,000 made of "25,000 DA and 75,000 DP".This kind of ratio was fairly common, the DP bill being of lower interest, but safer, than the D/A bill. As we have already seen, detailed information was gathered by the agency about its customers and transferred to the branches in the East and to Head Office. There were general assessments of the constituents' situ. ation, which were always linked to the state of the silk market, such as this one: Silk has not been profitable to the importer for the past three months, whereas the first quarter had been brilliant. For the big firms, it does not signify much when they disburse their profits, and start on the same level for another half-year. But we have many impecunious importers over whom we must keep a close watch, because when they cease earning the amount of their charges, they speculate in order to right themselves, and thus 13?De Bovis to Peter, 16 Nov 1906. l^Banque de France, Paris, Archives: Rapport d'Inspection de la Succur- sale de Lyon, 1910. 139hk/L. 8/124. Inspector's report on Lyon agency, 18 Mar 1918, p. 12. l^De Bovis to Jones (London), 9 June 1913. EASTERN BANKING be saved from death by starvat ion. Interviews with the customers, sometimes with the requirement that a financial document be shown to him ("He offered me a margin of F50,000, but I told him that I [would] rather see his balance sheet"^^) } led the agency manager to individual decisions and advices to the branches (they were, after all, the ones advancing the money in the East). These advices could become pretty restrictive in time of general difficulties, as we saw happen during the 1907-08 crisis. At other times, and when dealing with a less sensitive market, which could happen, even before the inter-war years, the light could also be emphatically set on green, as de Bovis wrote to Singapore where Brossette wanted to buy tin direct: Brossette & Fils--Lyons. Credit opened for 500,000 DP with us. Registered capital 600,000 plus two million F held of goods. Generally pay cash for the purchase of metals, give facilities of payment to their clients. Next to Descours Cabaud & Co, they are the biggest importer of metals here.1^3 Even in a period of general caution, as 1913 was going to be, the advice remained positive, as long as the knowledge about the customer's business allowed a refined enough analysis: Pilzer, Rudolph & Co: profits for year ending F; healthy firm. Their profit on a very large moderate, but they minimise mercantile risks good sel lers . 30 June: 685,000 turnover is only by being always Thus it was not only the financial structure, the credit pattern, of the merchant, but also his behaviour on the silk market in Lyon that was scrutinized. Sometimes, especially when the whole history of the firm concerned was known, the case was fully and more cautiously stated: Comptoir Soies: the firm pretends to work only on commission, and on a moderate scale. Their Bills should always be well drawn, as it is obvious they cannot stand an important loss. The Comptoir Soies was started to put Bernardin [the mana. ger] on his legs when he came to grief in 1907-08. The same may be said of R Pfister & Co when Sieber became a defaulter. Both these small firms may be deserving, but command a very limited c redit. The danger of overdrawing, for these small people, is con. stant, because they need covering working expenses which are of l^De Bovis to Barlow (Hong Kong), 12 Dec 1913. l^De Bovis to Barlow, 7 Dec 1913. l^De Bovis to Baker (Singapore), 24 May 1907. 144-De Bovis to Wright (Yokohama), 19 Sept 1913. THE HONGKONG BANK IN LYON course out of proportion with their limited means. A regular reference in this type of letter was the "opinion list". Unfortunately, none of these lists (which one understands to have been an early endeavour of the agency, which gathered, printed and sent to all branches every year, has survived among the Bank's archives. It would have been interesting, not for the classification, with a mark for each, of the customers according to their credit-rating, but for the fact that the list of names certainly represented all the constituencies of the Agency. Especially in later years, when silk ceased to monopolize its activities, one would welcome the possibility to analyse the changing composition of the trading activities of the Bank's customers in Lyon. From what can be guessed about these early opinion lists, one would not have found in them the detailed assessment contained in the letters; name, activity and credit-rating (a mark ranging perhaps from one to four) of the merchant were probably the only items featured there. No surprise, then, that the agency manager sometimes found it necessary to qualify such a useful, but blunt, statement: Geisenheimer--Paris: but for the risky nature of his advances, I would say that he deserves a higher credit than 2\. He owns 4 million F in his business, besides private property that may be roughly estimated at 10,000 pounds. Out of the 4 million, 3 are invested in credit to his clients, out of whom he must be get. ting fat commissions. In the same letter, reacting to a query from Yokohama, de Bovis stated that he was asking Lazard Fr&res in Paris about the standing of another house specialising in the habutai trade. The answer from the Parisian bank came a week later: Oppenheimer: no difficulties ever; discounts his own paper on arrival of each mail, and as the Bills were drawn DA, it shows clearly that he is not overtrading and that his till is full of spare cash. Lazard Fr&res states that he has 1 million worth of goods in his private godown.^^ l^^De Bovis to MacClaren (Yokohama), 3 Oct 1913. l^De Bovis to MacLaren, 28 Nov 1913. 14?The habutai was a special type of Japanese pong￡, the trade which seems, according to de Bovis, to have been fairly important with Eastern Europe. He commented in that letter to Yokohama of 28 Nov 1913: "There must be something rotten in the habutai trade. I would not be surprised if the late war in the Balkans has cost heavy losses to all those who exported habutai to the South East of Europe." Some research should be done into that branch of the silk trade now totally gone. l^RDe Bovis to MacLaren, 5 Dec 1913. The quality of de Bovis' style and expressions is another interesting, and pleasant, feature of these "Semi-Official" letters, although it does not in any way detract any. thing from his seriousness. EASTERN BANKING It was far from unusual for the Hongkong Bank in Lyon to rely on other banks to complete its picture of a customer, as witness this letter of December 1913: Gdrin Rykebus & Co: limit of house paper [i.e. "pig on pork"] exceeded. We hold 309,000 drawn by Canton & 175,000 by Shang. hai . . . . The Banque de l'Indochine is also loaded up with their house paper, 250,000 maturing [?soon?]. I am told that not a single bale has been sold out of this lot.^^ Most of the time, though, the business was steady and quiet, and the outcome of the credit transaction was a remittance made by the agency to the account of the branch concerned. It should be stressed that the agency itself did not benefit by these transactions: it was there to cash in the amounts due to the branches, to London Office and to Head Office, and this provided the bulk of its activities. On its books were accounts in the name of various branches, and, according to how much the agency had cashed in, these accounts were debtor or creditor. The agency itself, however, was always in debit toward London Office, which provided it with working funds, and through which the accounts were settled. This was due to the habit of crediting the branches' accounts as fast as possible with the results of their transactions, even before the bills themselves had been settled. The sums due to the branches were credited to them as soon as their schedules arrived and the agency carried the burden of recovering the money. A very typical extract from a letter exemplifies this situation: Japan is creditor 11 million F, Shanghai 5, Head Office 4, and myself I am still 200,000 pounds to the bad in London. These sums added together represent 1 million pounds which I hold here in DP bills and which I shall gradually transfer to London as cash comes in.1^0 And in fact, a month before, already confronted with a very heavy overdraft in London Office books, de Bovis was wondering if he should not "revert to the old system of crediting branches when Bills are cashed, not on arrival of mails", something that he did not do because, he hastened to add in the same letter, "Perhaps such a measure, although absolutely fair, might discourage branches from buying Francs".^! (4) The available documents allow us to sketch a picture of the involvement of the agency in the silk trade and of its relationship with its customers and with the other components of the Bank's network, although all this remains impossible to quantify in long time series. It is even more diffi. cult to get details about the practical relationship established between the agency and the main operators of the money market, except one, the l^De Bovis to Barlow, 26 Dec 1913. 1-^De Bovis to Hynds (Shanghai), 31 Oct l^De Bovis to Peter, 29 Sept 1907. 1907. THE HONGKONG BANK IN LYON Banque de France. All the other banking establishments have not kept their archives for the period or, in the case of the Comptoir d'Escompte (now merged into the Banque Nationale de Paris), are not yet available. Fortu. nately, the Banque de France keeps in Paris the reports of its inspectors, who visited its branches from time to time, and there is a file on the Hongkong Bank in the Lyon Banque de France branch's archives. It was an uneventful, quiet relationship and, for the period on which inspection reports are available (1881-1937) mention of the agency is very uneven. Morel is referred to as "agent in Lyon of the Hongkong and Shang. hai Banking Corporation" in the 1883 report: he had "presented" some bills to the Banque de France's discount (F153,000 in the Banque's portfolio at the time of the sampling by the inspector; all the drawers were in Lyon) and a smaller amount had been brought by other firms with his endorse. ment. 152 1884 was the last year, until 1908, when the Hongkong Bank was to appear as "presenter" (i.e. bringing its "paper" directly to the Banque de France for discount). The inspection report, however, provides us with a rare (unfortunately, unique) document: at mid-March 1884, the Banque de France's portfolio in Lyon contained F13,271,095 worth of bills of ico exchange, drawn on Lyon, Paris and other places. J Out of these, F7,394,339 were drawn "on the place" (i.e. on Lyon), and among these F4,059,000 had been brought by the Hongkong Bank's agency. From the inspectors' comments already quoted, and as Spring was the time when bills from the East matured, one can consider that such a huge (relatively and absolutely) amount had been discounted by Morel with the Banque de France only for the few remaining days left before maturation. This was indeed a peak, an amount that was not to be encountered again in the other Banque de France reports. We lack, unfortunately, any archives from the Hongkong Bank itself that would help us to comment on this bulk of paper, and to know why Morel had to resort to the Banque de France, since, by the inspec. tor's own admission, its rate was higher than the rate of the local money market. -*-54 Such an amount, however, led the inspector to append to his report a list of the major bills bought by Morel (total worth: F2,455,219). The bills selected by the inspector were not all drawn on Lyon. This list give us precisely what we lack for the other periods of the agency's history: the elements of a picture of the directions of the agency's credit transac. tions. There were thirty-eight bills on the list, created by twenty-three drawers in the East, and drawn on twenty-two houses in Europe. The biggest (F362,075) was drawn on Ulysse Pila by a British house of Yokohama, and the smallest (worth only F2,257) was drawn on a "small, paying regularly" Lyon l^Banque de France, Paris, Archives: Rapport d'Inspection de la Succur- sale de Lyon. Mars 1883. The last such report was dated June 1881. ^-^Banque de France, Paris, Archives: Rapport d'Inspection de la Succur- sale de Lyon. Tournee de Mars 1884. (With Annexe.) 15ZfIbid. The inspector wrote: "Lyon's market, even after the krach suffered [Union G4n4rale, 1882] is still very wealthy; it has little need of the Banque [de France]'s assistance, and the discount is still done here under our rate." EASTERN BANKING house (A Durieux) by a Hong Kong firm (Siemssen & Company). The average value of the bills was F64,611. Relevant calculations on the geographical distribution of the bills are found in Tables 1 and 2 below. The fact, shown by the distribution according to number, that Lyon as the main user of the Bank's facilities in the East is confirmed by a simple percentage calculation: bills drawn on Lyon represent 73% of the total value of the bills listed, even 75.35% if one includes with them bills drawn on St Chamont and St Etienne, which are part of the Lyonnais region. There is nothing in all this to surprise us. The domination, in Table 2, Table 1 Geographical distribution, by number of items, of the Bills of Exchange discounted with the Banque de France, Lyon, by the Lyon agency of The Hongkong Bank, 16 March 1884. Origin of bills (drawers) Destination of Bills (] )rawees) Lyon St Chamont St Etienne Marseille Paris Fre iburg Zur ich Total Ho ng Ko ng 9 2 1 12 Shanghai 7 1 8 Canton 8 8 Yokohama 5 1 2 1 9 Cal cut ta 1 1 Total 30 2 1 2 1 1 1 38 Source: Annexe to the Banque de France inspector's report, March 1884. Banque de France Archives, Paris. Table 2 Geographical Distribution, according to the share in the total amount discounted and average value of bills by city of origin of the Bills of Exchange discounted by The Hongkong Bank, Lyon, with the Banque de France, Lyon, 16 March 1884 Hong Kong Shanghai Canton Yokohama Cal cut ta 11.9% 38.6% 9.3% 39.4% 0.8% F24,288 FI 18,484 F28,72 5 F107,467 - Source: As for Table 1. THE HONGKONG BANK IN LYON of Shanghai and Yokohama, as places creating the credits, was also to be expected, as was the huge average size of their bills (although if one takes away from the computation the value of the big bill drawn on Ulysse Pila, one finds for Yokohama an average value of F75,660, leaving Shanghai as a definite leader). The smaller value of the average bill created in Canton or Hong Kong (whereas Hong Kong still had created a greater number of transactions) clearly indicates the lower value of the goods traded: little, if any, silk! In later years, other references to the Hongkong Bank in the Banque de France's archives mention only its endorsement of relatively small amounts of bills presented by other credit institutions, which had bought them from the agency on the money market; the Credit Lyonnais was the main purveyor of these endorsed bills, but one finds also over the years the Soci￡t￡ Lyonnaise de Depots, the Comptoir d'Escompte and the private banks de Riaz Andra, Veuve Morin Pons, Veuve Guerin, as well as some big silkmen or silk commissioners (Desgeorges, Lilienthal). These figures can hardly be given any significance: the date of the sampling in the Banque de France's portfolio by the inspectors varied in the years, blurring, because of the seasonality of the silk trade, the pos. sibilities of comparison. Furthermore, a report was not done each year. We also know that the use of the Banque de France's discount was a rela. tively small occurrence, of short duration. This implies, on the other hand, that the "signatures" presented were the best in the presenters' own portfolios (a comment that can be applied to the 1884 list). That in some cases (1890, 1892, 1899) the endorsements by the Hongkong Bank formed the biggest figure in the Credit Lyonnais prgsentation is significant of the agency's standing among Lyon's credit establishments.^^ During the years 1885 to 1908, the Bank was either not mentioned at all in the reports, or only with a brief comment: "Big business, which has, until now, given nice results";156 "Beautiful profits".15^ In July 1893: "Big gains and big losses; good credit, which is nevertheless watched by the Credit Lyonnais and the Comptoir National d'Escompte",15R followed in 1894 by: "Is regarded, on the market, as working more cautiously now, after having been too ardent". *^ This obviously referred to the interim period between de Bovis' two stays in Lyon. In the years that followed, the inspectors' opinion was to become definitely positive; it was, after all, nothing else than a synthesis of the opinions of Lyon's main bankers and merchants (who sat on the Banque de France's local board) with the branch manager's own thoughts. From these testimonies, one gathers that de Bovis had built his agency's good-will well. "Good constituency," said the 1898 report;^RR "Very good credit; Silk consignments. Gives the third signa. ture on almost all the bills of exchange drawn on Lyon's or Switzerland's 5Banque sale de 156Ibid. 157jbid. 158Ibid. 159xbid . 160Ibid. de France, Lyon. See Report for Report for Report for Report for Report for Paris, reports 1890. 1891. 1893. 1895. 1898. Archives: for 1890, Rapport d'Inspect ion 1892 and 1899. de la Succur- EASTERN BANKING silk merchants domiciled in Lyon."161 (But in the same report, exactly the same thing was said about the Yokohama Specie Bank, whereas the amount of that bank's endorsements was half of the Hongkong Bank's total.) In 1900: "Reserves (in Hong Kong) equal to the capital. Very important branch in Lyon; big dealings in silk".-*-62 Then, in 1907, de Bovis informed Head Office that 1 have at last been able to open an account with the Bank of France, in the name of the Hongkong and Shanghai Banking Corpo. ration. At distance, it may seem a small matter, but I may assure you we shall not only gain local credit, but also obtain discounting facilities, as our endorsement is accepted direct [i.e. without the backing of a French signature] by the Bank. 163 In 1908, the Hongkong Bank was listed among the presenters. That year, the inspector's report stated emphatically how au fait de Bovis was of the details in Lyon's trading: "The agent in Lyon, Mr de Bovis, is an intelligent man, who seems to be most listened to in business."164 Until World War I, the agency was classified in the Banque de France's inspection reports as a first-class establishment. After 1913 it ceased entirely to appear in these documents. This was perhaps part of a more general phenomenon, due to Lyon's industrial development, of the swamping of silk bills by commercial paper generated by other sectors of activity. It could also have been due to the changing conditions of the working of the Banque de France's accounts during and after the War: with the begin. ning of hostilities, the "foreign" signature ceased to be eligible for dis. count without the backing of French houses. These were perhaps not the only reasons for an apparent restricted level of the relationship between the agency and the Banque de France. As soon as that account had been opened, technical difficulties appeared that probably precluded the development of these dealings. The Hongkong Bank's file in the Lyon branch of the Banque de France contains some letters exchanged between the manager of the branch and a head of department in the Paris headquarters. They refer to a vain attempt made to interpret the central bank's own regulations, so that a positive answer could be given to de Bovis' requirement that advances be made direct (as he had hoped) against documentary bills of the type created by the Hongkong Bank in the East under the name of "letters of hypothecation". This was, from the Banque de France's point of view, getting too close to advances on goods, which the Banque de France only did in the case of warrants (i.e. against goods deposited in the Magasins G￡n4raux, whereas the goods concerned in the Hongkong Bank's dealings were usually still at sea when the bills' schedules arrived). That type of commercial paper greatly puzzled the man in Paris, and it was finally not possible to find a suitable arrangement ‧*-61ibid. Report for 1899. 162jbid. Report for 1900. 163])e Bovis to Peter, 13 Sept 1907. l6^Banque de France, Paris, Archives: Rapport d'Inspection de la Succur- sale de Lyon, 1908. THE HONGKONG BANK IN LYON that would have satisfied de Bovis without infringing Banque de France rules.if this did not completely, as we saw, block the functioning of the account, it was certainly an unwelcome limitation, and there are many chances that, with other general factors, it pushed the Bank, during the War and after, toward arranging credit facilities with other banking insti. tutions (Credit Lyonnais, Westminster Foreign Bank). There was, however, another attempt to develop the line of credit allowed by the Banque de France to the agency, in 1932. Lendrum, who was then the agent, wanted to open an "advance account" guaranteed by a deposit of F5 million worth of French government bonds.166 This seems a far cry from the magnitude of the business done in the 1880s: in 1932 F5 million was only worth around Fl.l million pre-War francs. True enough, 1932 was the year when Lyon really started to feel the blow of the world crisis.167 On the other hand, as we shall see, it was the year when the Bank's deal. ings with Indochina became its main concern, which helps to explain this attempt to increase the facilities allowed by the Banque de France. It was, however, another unsuccessful attempt, once more due to statutory and technical problems. There was to be no more attempt in that direction before the very last years of the Lyon sojourn of the Hongkong Bank. (5) The inter-war years provided two changes relevant to the agency's activities: inflation on international scale and the development of French relations with Indochina. Inflation did not change the structure of the agency's business, but introduced complications. After years of almost total monetary stability, the expenses of the War, and the disruption of economic relations that ensued, created havoc on the exchange markets of the world. Modern infla. tion, that "creation of the twentieth century", (Jean Bouvier) was there, and was to become a permanent condition of business. If the internal French dimension of the phenomenon is not of direct interest to this study, the changes affecting the franc's rate of exchange to the pound sterling is of central importance. The pound remained the international currency used by the branches in their dealings with the agency in Lyon, and by the agency to settle its account with London Office. After having been used to a rate of exchange that never fluctuated by more than 1%, the operators were now confronted with wild fluctuations, in a general trend of depreciation of the French money. These variations are impressive enough when one represents graphically their yearly averages: we must also remember that there were also erratic short term variations, particularly in the years 1924 to 1926. ^5ganque ,je France, Lyon, Archives: Hongkong Bank file, Sub-file "Fonc- tionnement du compte". Banque de France, Paris, to Banque de France, Lyon, 18 Sept 1907; 17 and 28 Jan and 18 June 1908. l^Banque France, Lyon, Archives: Hongkong Bank file. Letters exchanged between the Hongkong Bank's agency in Lyon and the Banque de France, Lyon branch, 26 Feb to 19 Mar 1932. 167Comitd Central de la Soie, Lyon: La Bataille de la soie, Lyon, 1933; p. 148. EASTERN BANKING Fig 2: Rate of exchange of the pound sterling in French francs, yearly averages, 1918-19390 Source: VOILLIARD, CABOURDIN, DREYFUS - Statistiques d'histoire economique-Epoque contemporaine - Strasbourg, 1964 - p031 From then on, the agency had to deal on the foreign exchange market, willingly or unwillingly, with a behaviour which, if not speculative, was directed toward anticipating the movements of the exchange. The branches kept on sending franc bills, but until these matured, the purchase of pounds to settle the accounts could be a costly business: During the last three days we have had to purchase ready, account Shanghai, 90,000 pounds, which accounts for our large overdraft with the Westminster Bank, but we have just received a large mail from Shanghai of 6,000,000 F, a certain part of which is discountable and which will help to reduce this overdraft, the bulk of the interest on which Lyons office has to bear, since after crediting Shanghai with the mail received, their account shows a small credit. We have just received a further order from Shanghai asking us to purchase a further 50,000 pounds ready, to which we have replied that we cannot execute same for November as Lyons Agency is short of funds. . . . We have just sold 25,000 pounds by order of Head Office, which will go to our credit with the Westminster Bank.168 188Lendrum (Lyon) to Jones (London), 6 Sept 1923. THE HONGKONG BANK IN LYON To be able to intervene as swiftly as possible on the money market, the agency required ready resources, more easily mobilizable than the bills created in the East or than a transfer from London Office. Hence the necessity to find increased facilities in Lyon (unsuccessful attempt with the Banque de France) or Paris. The answer there was given thanks to the old links existing between the Hongkong Bank and the London County & West. minster Bank in Britain. The arrangement in favour of the agency, estab. lished practically with the Paris subsidiary of the Westminster,169 was entered into and settled in London: in the same letter, continuing his line of thought about the Shanghai requirements, Lendrum, who was in charge in Barlow's absence, added It is probable that Shanghai will [ask us] to make arrangements with you for extra funds, in which case we will wire you to increase our borrowing power with the Westminster Bank, Paris, from 15 million to 20 million, since we must retain a certain margin of funds for current business.17^ These basic decisions regarding the credit facilities allowed to the agency by the Westminster Bank were sometimes complicated by the irregular. ities of the normal rhythm of trade between the East and France: in 1925, Barlow had to reply to a complaint by the Westminster's manager in Paris that the overdraft was different from what had been agreed upon, that We have continually lately been receiving wires from our various branches to make ready purchases of sterling on their account, which we cannot possibly foresee nor can we foresee that mer. chants will sometimes take up bills before due date, thus giving us funds on which we had not counted. He desired to have the possibility to draw on the Westminster around FI million at one day's notice, as "this would obviate our continually having to arrange for facilities in view of requirements in the near future which are not always required, owing to unexpected remittances being received" .171 These letters, two among many others, show how the transactions on the foreign exchange market were now part of the daily worries of the agency's manager. The indicator to watch was no longer the pulse of the silk mar. ket, a too simple matter of the past. Even the variations in the discount rates of the central banks in France and England were not sufficient to predict the erratic variations of the exchange. As Lendrum's letter shows, the basic mechanism of intra-bank remittances by crediting and debiting the branches' accounts nevertheless remained unchanged, and the agency's inter. vention remained almost entirely geared to the profit of other components of the Hongkong Bank's network. 169Ibid. 170Ibid. 171HK/GA: H 510.2. Barlow to the manager of the Westminster Foreign Bank Ltd, Paris, 28 Oct 1925. EASTERN BANKING The other "event" of the inter-war years is the growth of the Lyon agency's dealings with Indochina. It is easily trackable (see Figure 3) but raises some more complicated questions: the Bank's links with that French colony were not new, nor were Lyon's endeavours in Indochina. Con. sequently, if it was a factor requiring a more direct involvement of the agency with the French economy at large, it certainly cannot be understood without linking it to the history of the Indochinese branch and agencies of the Bank, something out of our scope. One must, nevertheless, try to sketch briefly that involvement. A Canadian scholar, John F Laffey, has given, in a few articles, a very complete picture of the development of Lyonnais interests in Indo. china, especially in Tonkin.172 It is not by chance that the main figure encountered in that story is Ulysse Pila, one of the Bank's main cus. tomers. The Lyonnais merchant community placed their first hopes in the Tonkin, before the French conquest, in relation to their quest for silk supplies. After the Franco-Chinese War of 1884-85 and the founding in 1887 of the colonial entity of the Union Indochinoise, the Lyon merchants slowly (but not entirely) gave up their attempts to develop silk production there and turned themselves toward other sectors of activity: cement, mining, plantations and general trade. Ulysse Pila had been represented there as early as 1884, and his firm was the Bank's agent in Haiphong from 188717^ to the end of 1893.17^ Sometime during the years 1884 to 1886 he had founded a Haiphong-Hong Kong steamship company, having realized that the British free-port colony was both the evident outlet for Tonkinese exports and the closest source of finished products to be imported in the French controlled territory.17^ He considered also, and managed to have his thoughts shared by the mercantile community in Lyon, that the Tonkin was the ideal road for French goods to penetrate the southern Chinese prov. inces.17^* When he founded his Union Commercial Indochinoise in 1904, he 172John F Laffey: "Municipal imperialism in Nineteenth century France", Historical Reflections—Reflexions Historiques, I, 1, June 1974, pp. 81- 113; "Municipal imperialism in France: The Lyon Chamber of Commerce 1900-1914", Proceedings of the American Philosophical Society, 119, 1, Feb 1975, pp. 8-23; "Municipal imperialism: The Lyon Chamber of Commerce 1914-1925", Journal of European Economic History, 4, 1, Spring 1975, pp. 95-120; "Municipal imperialism in decline: The Lyon Chamber of Commerce 1925-1938", French Historical Studies, 9, 2, 1975, pp. 329-53; "The Lyon Chamber of Commerce and Indochina during the Third Republic", Canadian Journal of History, X, 3, Dec 1975, pp. 325-48. See also the references given in notes 20, 21, and 56. Laffey does not neglect the missionary factor in his analysis of Lyon's special involvement in the Far East (the city has always been one of the main bastions of French Catholi. cism). I have not been able to read his unpublished PhD dissertation: "French imperialism and the Lyon mission to China", Cornell Univ, 1966. 17^J R Jones: "The Bank's branches. Indochina", p. 13. 17^HK/L: 2/29. Circular letter from Hong Kong, 30 Dec 1893. 175Dargaud, pp. 295 sq, and Laffey: "The Lyon Chamber of Commerce and Indo. china during the Third Republic"; p. 328. 17^*Laffey: ibid; pp. 331-33. See also Michel Bruguiere: "Le chemin de fer THE HONGKONG BANK IN LYON opened an account for it in the Hongkong Bank's Head Office, requiring growing credit facilities (up to HK$100,000 in 1906) that could only be granted thanks to de Bovis' word.I7? De Bovis held the old silkman in high esteem, but had to scrutinize the business of the Union Commerciale Indo- chinoise as closely as any other. With other bankers in Lyon, he was worried by the fact that "for a young concern . . . they are a good deal locked up" by too many goods bought in Tonkin and being sold too slowly.^78 He tried to obtain from Pila and other directors of the company a personal guarantee for the credit extension required in Hong Kong,^-7^ and succeeded with a couple of them. He also warmly applauded the decision to increase the firm's capital from F5.3 million to F8 million.180 ^e must have felt justified later in his backing of the company requirements, since the Union Commerciale expanded, at the end of 1906, in a very promising fashion.^8^ In the south of Indochina, where the Bank had opened an office in Saigon in 1866, another pillar of its business in the region was developing with the growth of the Bordeaux-based house of Denis Fr￡res, and of their relations with the Bank. "We do a steady business with them, & again send you a few bills today, although they complain that our terms are dearer than through other Banks", wrote de Bovis to the Saigon branch manager in 1905.182 Unfortunately we lack elements of comparison of these terms of various banks on the France-Indochina road. Denis Fr&res was probably not the only house realizing this difference in conditions since, even after the ex. tended facility had been granted to Ulysse Pila's Union Commerciale Indo- chinoise, de Bovis had to advise Peter in Head Office that they "ought to give us a share of the outward business, which all goes to the [Banque de 1'Indochine".I88 He further advised Hong Kong to refuse to renew the agreed overdraft if there was no quid pro quo, and added pleasantly, "Make them sit up a little, and they will be bound to come to you''.^8^ The relationship between the Bank and Denis FrSres was, however, strengthened over the next years. It became the Bank's agent in Haiphong (1901-22) and in Hanoi after 1907.^8^ This closeness allowed de Bovis to keep a better look at the standing of these customers/friends, sending to Saigon and Hong Kong the usual batch of information about the firm's du Yunnan: Paul Doumer et la politique d'intervent ion franqaise en Chine 1899-1902", Revue d'Histoire Diplomatique, 77￡me ann￡e, 1963; pp. 23-61, 129-62, 252-78, especially pp. 262-78. l77De Bovis to Peter, 15 and 29 June, 20 July 1906. 8De Bovis to Peter, 15 and 18 May 1906. 17 8t ^ De Bovis to Peter, 29 June 1906. 180oe Bovis to Peter, 20 July 1906. l^De Bovis to Peter, 14 Dec 1906 and to Hynds (Hong Kong), 28 Dec 1906. A semi-official publication praised the concern as a path-breaking agent for French trade in Indochina, see Maurice Zimmerman: "Lyon colonial", in Lyon et la region lyonnaise en 1906, Lyon: A Rey, 1906; p. 275. *^De Bovis to Hewatt (Saigon), 29 Dec 1905. 183oe Bovis to Peter, 14 Dec 1906. l^De Bovis to Hynds, 28 Dec 1906. ^8^Jones, "The Bank's branches. Indochina", p. 13. EASTERN BANKING capital, profits and trading habits. But he was careful to underline his role of strict transmitter, concluding that, whatever he could say about the parent company, the credit offered to the Saigon house was a local affair for which the Saigon agent has to put on one side of the scales all the advantages he derives from the advance, and the risk on the other. He can also feel the pulse of a firm which does all its business in Indochina. Quite firmly rooted, therefore, were the business relations of the Bank, including Lyon Agency, in pre-World War I Indochina. This was to have important consequences in the post-war years: with the inter-war growth of private French investment in Indochina,^'7 there was definitely a new aspect in the direction of the agency's activities towards that region, Lyon opening credits for the export of finished products and capital goods from France to Indochina. The weekly figures of the agency's "position", available for 1923 to 1939, when computed into yearly averages, give us the share of each branch's account with the agency in the total balance of these accounts. Until 1927, Saigon's account was kept under Hong Kong's heading. If one takes this share, expressed in percentage and, regardless of the debtor or creditor position of each account (what matters here is the geographical distribution of the level of activity), as a crude indicator of whom the agency was mostly dealing with, one obtains the results shown in Table 3. Apart from the downward trend of the Japan account, with its cyclical aspect, the most evident feature brought to light by the table is the growth of the Saigon connection, especially in the 1930s. Figure 3 brings this even more clearly to light. When the silk industry was heavily hit by the world crisis, imports from Japan and China dwindled instantly, whereas the relative share of trade (hence, credit) to and with Indochina had a boost. That this new important direction was, one can assume, not any more a Lyonnais monopoly, is unimportant. What mattered was the possibility for the agency to carry on its business, even with a certain amount of growth, thanks to that fast developing opportunity. Some rough calculations performed on the available figures confirm the vital part played by Indochina in the agency's well being, and usefulness to the Bank, in these years: whereas, over the whole period (1927-1939) the rate of growth of the total amount of the branches' accounts in Lyon was 22% per annum, and 16% without Saigon, the crisis year saw a growth of the credit transactions due entirely to Indochina: compared to 1931, the total level of all the accounts was up by 77.8%, but down by 27% if one removed the Saigon figure, which itself was multiplied eight times! For the 186pe Bovis to Peter, 7 Feb 1907. lR7jacques Marseille: "La politique m^tropolitaine d'investissements colo- niaux dans 1'entre-deux-guerres", in Maurice Levy-Leboyer (ed): La posi- tion internationale de la France: Aspects ￡conomiques et financiers XlXe-XXe siScles, Paris: EHESS, 1977; p. 398. 1 ^Interviews (Lyon, May 1981) of retired employees of the agency who were active in that period (Messrs Roche, Rocher, Vincent). THE HONGKONG BANK IN LYON Table 3 Geographical Distribution in per cent of the Accounts of Branches with the Lyon Agency of The Hongkong Bank, 1923-1939 Ho ng Ko ng Shanghai Japan* Saigon Others 192 3 27 60 13 _ __ 1924 47 27 26 — — 1925 14 73 13 — — 1926 73 20 17 — _ 1927 55 10 5 30 — 1928 34 33 8 25 — 1929 17 46 12 17 8 1930 22 20 12 20 26 1931 33 26 11 13 17 1932 8 10 15 66 1 1933 8 9 10 71 2 1934 10 7 6 72 5 1935 11 6 17 63 3 1936 2 10 10 70 8 1937 1 10 7 76 6 1938 1 3 2 91 3 1939 3 1 1 91 4 ^Yokohama until the 1923 earthquake, then Kobe. Source: Calculations based on figures gathered from the S/0 letters, weekly positions sent to London. following years (1932-1939) the average rate of growth for all the branches' accounts with the agency was 17.8% per annum, whereas it would have been only 8% without Saigon. Indochina had become the agency's main source of business. This exemplifies the notion that the French colonies found their best utility when the metropolis was in crisis, and that they were a significant factor in the comparatively easy situation of the French economy during the world crisis. One must also consider that the develop. ment of this Saigon trade was a major reason in the search by the agency of bigger credit facilities in France, since Indochina differed from the other branches in that "the piastre remained tied to the franc, and Lyons had to find its own fund for financing this business."189 The post-1945 years were a period when the dominating position of Lyon, both as a silk trade centre and as a provincial leading imperialist city, was to be considered as irremediably lost. From then on, the geo. graphical distribution of bills created by the France-Indoch ina trade was more evenly spread among Paris, Lyon and other French cities. r Jones, "The Bank's Branches. Lyons", p. 6. EASTERN BANKING Fig 3: Evolution of the share of Indochina in the Lyon agency business, shown as percentage of the total branches' accounts in the agency Source: as Table 3 The function of the agency toward Saigon remained basically the same. It was as intermediary that the Lyon agent of the Hongkong Bank tried in 1952 to arrange (in pool with the Banque de l'lndochine, the Banque Franco- Chinoise and the Banque Nationale pour le Commerce et 1'Industrie—since merged with the Comptoir d'Escompte in the Banque National de Paris) with the Credit Lyonnais an'd the Banque de France, a formidable line of credit (30-40 billion francs) in order to finance the shipment of Indochina rice to Africa. A group of Saigon houses was to create bills drawn on another group of companies, based in France, which were going to arrange for the re-exporting of the rice to Africa.^0 Actually, an ex-staff member of the Bank, who was sent from Lyon to work in Saigon branch from 1952 to 1954, clearly remembers that Hope, then Saigon manager, had cornered the entire rice crop of Indochina in 1953.Once more, technicalities and regula. tions prevented the Bank's scheme from going through: this was, after all, an inter-colonial business, and such financing of Indochinese exports to Africa, even done through the intermediary of the French houses, was, the ^^Banque de France, Lyon. Hongkong Bank file. Sub-file "Operations de credit". Note written on 1 Feb 1952 by the principal controleur of the Banque de France's Lyon branch, after an interview with the Hongkong Bank's agency sub-manager, Palisson. l^Interview with Mr Joubert, Lyon, 13 May 1981. THE HONGKONG BANK IN LYON Banque de France said, the responsibility of the French colonial banking system. The sole existence of the project is, however, an interesting indication of the importance of the Hongkong Bank in Indochinese economy under colonial rule. War and Change World War I was not, after the early weeks of uncertainty, a difficult period for Lyon, nor for the agency. Business picked up very quickly and the imports of raw silk were not disturbed, thanks to the control of the seas by the Allied fleet. The transactions left outstanding by the mora. torium decreed by the French government at the beginning of the War were gradually settled during the hostilities, or soon after. The economic con. sequences of the War, and of the type of peace that ensued, were, it has already been stated, of quite another magnitude. The passing of World War II over the agency in Lyon was to be much different. The Vichy regime created a whole set of regulations for the banking profession (a large part of these rules and institutions were to survive their creator) and imposed a national, corporatist and state- controlled structure on the banks (Organisation Professionnelle des Banques and Commission de Controle des Banques, both created in 1941), in line with its general economic policy. It was now necessary for a foreign bank, or a foreign bank's agency, to be registered as such on the list established by these organisations. Somehow, the agency managed to be registered, not among the "Banques ￡trang￡res", but among the "Banques d'Affaires", a cate. gory roughly equivalent to the British merchant banks. This position remained unchanged, at least until the Hongkong Bank moved from Lyon to Paris.193 This explains, perhaps, with the lack of capital of its own, why it was left untouched by the German authorities.1^4 But trade could not be pursued with the ease that had marked World War I. In fact, it could not be pursued at all: soon, when the phoney war was over, London was cut off and the British manager and sub-manager of the agency had to leave Lyon in a hurry, going back to England through the south of France and Portugal. In 1942, Hong Kong and other Far Eastern branches, including, soon, Saigon, were under Japanese rule, and in Novem. ber of that year, the German army, until then kept on the north of a Bordeaux to Geneva line, invaded the whole of France, Lyon included. If ^2ganque de France, Lyon, Archives. Hongkong Bank file. Sub-file "Oper. ations de credit". Direction Generale de l'Escompte, Paris, to Banque de France, Lyon, 13 Mar 1953. 193see the list, with categories, published every year by the Commission de Controle des Banques, for 1947-1953. 194j r Jones: "The Bank's branches. Lyons", pp. 7-9, annexe I, p. 3 and II, pp. 1-3. Also interviews with staff members already mentioned. EASTERN BANKING the agency did not suffer directly from this, business was brought to a standstill, apart from the recovery of old outstandings. The staff members were content, during the rest of the War, to keep a low profile, listen to the BBC and better themselves professionally (such as Mr Vincent, who took 195 It is a matter evening classes and became an expert accountant), anecdote that their salaries were fully paid during the whole period, thanks to advances made by the Lyon branch of the Soci￡t￡ Gdn4rale; one would like to know more about the reasons for that generous behaviour, but unfortunately, this question has not left any documents at the Socidte Gdndrale. The years that passed from the signing of peace to the move of the agency to Paris could hardly be called a period of certainty. As early as November 1947, the General Manager, Morse, wrote to Muriel, then in charge of London Office, that he was "far from happy as to the running of Lyons Office". 196 thought that "a great deal might be done to enhance the reputation of the Hongkong Bank there"197 and he was hoping "if and when I do get home next year, to go fully into the question of whether or not we should transfer to Paris" where he already wanted some enquiries to be made about the possibility of renting premises. 198 He aiso stated the principle that "we must always have an office in the country [France] as long as we are operating in Indochina". 199 gut he specified, a few days later, that "the ultimate decision on the Paris/Lyons controversy must be made as a result of assessing theoretical future values rather than considering present or past results of Lyons office". ^00 To all this Muriel would quite agree, with the restriction that political troubles in France should settle down first.^01 He was referring to the tension that was growing between the French CP (the Communist ministers had been excluded from the government in May) and the newly-born Rassemblement du Peuple Frangais of de Gaulle, these two sides confronting, also, the unstable centrist govern- 202 ments of the Fourth Republic. Morse's worries about Lyon had been sparked off by an Inspection Report on the agency,203 which stressed as a liability the fact that Lyon was a dependent "special agency", acting mostly (as it had always done) for other sections of the Bank. At mid-year, out of the F143 million in funds for Lyon, F72 million were held in cash with other banks, FI million repre. sented overdrafts of customers, F9 million overdrafts of other branches' 195int erview with Mr Vincent, Lyon, 14 May 1981. 196HK/L: 31/539. Lyons agency S/0 correspondence with Head Office. Morse to Muriel, 22 Nov 1947. 197jbide 198ibid . 199jbid . 200MOrse to Muriel, 26 Nov 1947. 29^Muriel to Morse, 9 Dec 1947. 202j)ue t0 a sharp rise in the cost of living and to the general hardening of life, there were many strong strikes. The Bank could avoid closing, arguing with the trade-unions that it was not French. The staff was not unionized. HK/L: 53. Watson (Lyon) to Wallace (London) 5 June 1947. ^O^hkL: 31/539. Report on Lyons Office for the last six months of 1947. THE HONGKONG BANK IN LYON accounts in Lyon books, but F60 million was on "a fixed deposit with the Westminster Foreign Bank, Lyon, earning interest for Saigon Office". 204 According to the Inspector, "when we come to consider the fullest utilis. ation of available funds, it [is] doubtful if the present procedure is satisfactory", and, as far as the "Lyons/Saigon financial position" was concerned, an "alteration in the arrangement" should be considered, which "would permit Lyons to use franc funds [i.e. branch balances etc] to a great advantage".205 Of greater importance for the "Lyon vs Paris" controversy was the fact that the F80 million of bills receivable, all account of Saigon, were now all drawn on Paris.206 On the other side of the argument, one could say that, if Saigon was also pre-eminent in the portfolio of bills purchases, the places of creation of these bills were more evenly spread over France: Lyon F22 million; Bordeaux F20 million; Paris F17,5 million; and Marseille F17 million. 207 pending an examination of the geographical distribution of these bills' origins over a whole year, the Inspector cautiously concluded that "this [did] not suggest there would be anything to be gained by a transfer of Lyons office to Paris". 208 It was also obvious that the agency could do better if it could (re)- gain a well-known position among the Lyon trading community. The Inspector was not realizing that, for the Hongkong Bank, the crucial location of the premises, so close to the silk houses, had once been a precious asset, when he wrote that "our office is right off the beaten track and nobody but the most determined is likely to seek it out".209 The traditional discretion, so valuable over the last sixty-six years, was now a liability of some sort. Should the Bank not be "experimenting with a little advertising in some French trade journal with Eastern connections?" Surely "a little advertisement or publicity would not come amiss".210 There were also regulations and technical problems related to the new exchange control rules, which were perhaps responsible for the fact that "Eastern offices do not 'push' Lyons and the facilities we are able to offer in France as much as they might do".211 True enough, D A Johnston, the agency's manager since April 1945, had succeeded in that year in having Lyon Office accepted as "banque agr￡￡e" by the French banking authorities, a qualification necessary to perform sterling tr ansae t ions. 212 But the disruption of the War and the new geographical distribution of business had cut deep into the agency's information network, and it does not seem that Johnston had yet had the time to reconstitute links as good as those that 204-Ibid . 2^5ibid . 206ibid . 202ibid. 208Ibid. 209j5￡d. 210ibid. 21 llbid . 212ganque de France, Lyon, Archives. Hongkong Bank file. Sub-file "Fonc— tionnement du compte". Johnston to Ministry of Finance, 16 Aug 1945, and Banque de France, Lyon, to Banque de France, Paris, 17 Oct 1945. EASTERN BANKING allowed de Bovis to gather all his "opinions" with caution and accuracy. The outcome of such a situation was that "Eastern office complain that it is quicker to make enquiries in regard to business with France, particular. ly credit information, through London".213 All this having been said, the question remained, in the following years, undecided, though not forgotten: in a letter to Watson, then the agency's manager, the Bank's management pondered about his housing problem, adding that "Morse states emphatically that the Bank will not invest in property in Lyons so long as there remains an uncertainty as to whether we shall continue there or move to Paris".* 2 *^4 Until a decision was reached, the agency carried on business, even with a certain amount of growth. On the basis of the 1947 results, the balance sheets of the following six years (the last spent in Lyon) showed an average rate of growth of 34% per annum. This is an extremely rough indication, based on the official fig. ures available in the yearly publication of all registered banks' balance sheets by the Commission de Controle des Banques.2^ After the peak year of 1950 (the balance sheet figure, compared to the one for 1949, had trebled) Watson could even complain of the staff being overworked,^^ and and Banque de France, Lyon, to Banque de France, Paris, 17 Oct 1945. HK/L: 31/539. Report on Lyons Office for the six months ending 1947. 214HK/L: 106. Wallace to Watson, 16 Aug 1948. 21^Commission de Controle des Banques, Bilans des Banques, Paris, issued every year, for 1947-1953. O 1 4 °The social relations in the Lyon agency represent a theme that has been left aside in this paper. Something could have been said, e.g. about the transfers of staff from Lyon to Saigon, with a return to France for the end of one's career (cases of Lasoli, sent through Lyon to Indochina almost at the beginning of his career in 1906 and who finished as senior French employee before World War II, and of Vincent, who, after a train. ing period in London, was temporarily assigned to Saigon for 1935-37. [See the quotations in French in Essay 12.] This temporary assignment in Indochina was also the case of Joubert in the 1950s). More impor. tant, but too complicated to be tackled in these pages, was the problem created by inflation in the 1920s and the relative impoverishment of the staff due to a salary system established according to Hong Kong rules, with calculations based on HK dollars or pounds sterling, and which did not take into account the depreciation of the franc. Head Office or London Office did not take kindly to the Frenchmen respectfully request. ing some improvement and gave in most reluctantly to justified begging. (Barlow, in the 1920s, considered that the people filling the lower posts in the agency had absolutely to find a second occupation to make ends meet.) It is interesting that this hard position of the Bank has not left any mark in the survivors' memories: the three retired staff members interviewed in Lyon in 1981 were all present during this period of difficulties but remember only that they were better paid than their colleagues in French banks (which, by Barlow's own admission, was not exact) or that their pension plan was much envied, especially since they retained it in later years, on top of the legal French retirement scheme. THE HONGKONG BANK IN LYON ask for some additional personnel, even temporarily.217 Business with Japan had started again, and some big customers were asking for a growing amount of credit for their imports of rubber and tin from Malaya. Not all of the factors in Morse's decision are known to us. The most evident was the physical location of these big customers, for example, Safic Alcan, rubber importers, were (and still are) in Paris. Based in Bordeaux and with an office in Lyon, Denis Freres engineered most of their deals from their Paris subsidiary. Writing to Morse during a visit to Lyon in 1951, Gray (manager in Lon. don) reminded him of the necessity to "make a decision fairly soon".2!8 He added that another factor favourable to the considered move was the "in. creasing share of Japanese business" dealt with by Lyon Office, which would be much better developed in Paris. His letter crossed Morse's announcing the Board's decision to proceed in the direction of the French capital.2!” Then, things started moving. Palisson, the French sub-manager of the agency, went to Paris "on an exploratory visit"22R ancj a formal application for the transfer, dated 6 December 1951, was handed over to the Secretary of the Association Profes- sionnelle des Banques.221 Davis, now manager of the agency, went to Paris where, together with Mabey sent from London, he met many officials and heads of banks who were present on the Association's board. 222 The General Manager of the Societe Generale was sure, like the other bankers, that the move would not be opposed. He doubted, however, that the Hongkong Bank would be allowed to retain an office in Lyon, "since French banks had not only been not permitted to open fresh branches, but had been obliged to close existing ones".228 Various administrative details were then required early in 1952, until the green light was finally given for the opening of Paris Office.22^ The same letter that announced that good news also firmly put the "no way" sign on any possibility that Lyon could remain open for more than a year after the Paris opening.228 it was then necessary to settle the usual practical problems, related to choosing and redecorating premises in Paris, on the select Place Vendome. Most of the staff moved to Paris to end there their careers with the Bank. The eldest members of the staff, Palisson and Vincent, remained in Lyon to settle outstanding Lyonnais business. The office on the Place Tolozan closed in June 1954, being then taken over by the Banque Frangaise du Commerce Exterieur (which is still there, after having extensively modernized and enlarged the offices). Palisson retired ("resigned" in the Hongkong Bank's dialect) upon closure of the office. 2-^HK/L: 75. Watson to Mabey (London), 5 July 1950 and 8 Jan 1951. 218HK/L: 81. Gray to Morse, 12 Nov 1951. 219Morse to Gray, 14 Nov 1951. 22RDavis to Gray, 27 Nov 1951. 22-*-Davis to Mabey, 4 Dec 1951. 222Davis to Morse, 18 Dec 1951. 228HK/L: 81. Notes on Mabey's visit to Paris, undated. 22^Banque de France to Davis, 22 Jan 1952, and Davis to Mabey, 2 Jan 1952, reporting "a fairly extensive cross-examination" over the phone. 228Conseil National du Credit to Davis, 15 Feb 1952. EASTERN BANKING Vincent remained on the payroll for another year as "representative", renting a small office-space in the old silkmen's area and then he, too, retired: a quiet ending to a quiet stay of the Hongkong Bank in the old silk city.226 In the meantime, Paris Office had opened its doors officially on 1 September 1953, becoming a branch and passing then under the direct author- ‧ r 9 9 7 ity of Hong Kong. z7 VI The Hongkong Bank's Lyon agency was founded on the Rhone bank at the peak of that city's silk period. In the Lyonnais environment, we have been able to discover indications of the major part played by the Bank in the financ. ing of this trade: at the turn of the century, the Bank probably carried 50% of the necessary credit. After that, silk in Lyon went, globally, on a downward trend. The city had already lost its pre-eminent market position to Milan, and the emergence of the United States of America as the major consumer market, largely through the spread of silk stockings among their wealthy popula. tion, soon took away from Europe the place of centre of the world silk industry. ^28 The Lyonnais trade and industry kept a high level of activ. ity, though, until the world crisis of the 1930s. However, they were already retreating from mass production, on their way to the glossier, but limited, realm of high fashion.229 The original purpose of the Bank's establishment in Lyon was thus slowly being lost. The Hongkong Bank, however, benefited from its early settling in Indo. china. When the time came for France to involve herself seriously in her colonial empire, the agency in Lyon provided an important link to make money out of the French-Indochinese trade. It had probably not been planned like this in 1881, but the Lyon connection, thanks to the anterior. ity of that city's concern with Indochina colonial exploitation, proved quite useful as a basis for increasing relations with other French merchant communities trading on this route. 226Hong]<:ong Bank circular letter, London, 17 Mar 1954; Taplin (Hong Kong) to Davis, 2 Mar 1954; Davis to Taplin, 25 Feb and 1 Apr 1954. 227xurner (Hong Kong) to Gray (London), 11 Aug 1953. 228Liii ian M Li: China's silk trade: traditional industry in the modern world 1842-1937, Cambridge (Mass): Harvard Univ Press, 1981; p. 84 shows that the United States had, since 1915, established their superiority among the importers of Shanghai raw silk, claiming in that year 42.9% of the exports, over Lyon's 34.3%. In Japan, already in 1909, the U.S.A. absorbed 69% of the raw silk exported; this became 83.8% in 1915. See Japan Finance (Dept of): The sixteenth financial and economic annual of Japan: 1916, Tokyo: Govt Printing Office, n.d.; p. 101. 229^enriet;te Pommier, Christian Roupioz , Martine Villelongue: Soierie lyon- naise 1850-1940, Paris: CNRS, 1980; p. 71. THE HONGKONG BANK IN LYON The agency in Lyon found thus a renewed utility, at a time when its use and existence could have been—indeed, were—quest ioned. ^30 Only the many great reshuffles that followed World War II led finally to a realign. ment with the French tradition to centralize economic power in Paris. But why, one can ask, have not other aspects of Lyonnais economy, where so much wealth and activity existed and which were developed by the reconstruction under the Fourth Republic, been exploited by the Bank? The answer probably lies in the very concept of "special agency" that presided over the Lyon Office foundation, and which put stringent limitations on its endeavours. Lyon Office was not a branch, nor, in the design of 1881 and certainly until the late 1940s, was it meant to act as part of the French banking system.231 its roie was purely of trade financing, and it had no proper resources, nor was it supposed to attract local capital (something 230 231 The main cause of concern, for the management at Head Office, was taxa. tion (another interesting but complicated theme left aside in this paper). De Bovis had managed to find "arrangements" with the local Treasury, but the problem already encountered in 1907 (de Bovis to Peter, 8 Feb and 15 Mar 1907) of a heavy tax raised on the agency on the basis of the Bank's total capital was recurrent, resurfacing as a matter of fact, both at each increase of the Bank's capital and when a new tax inspector came to town. In 1918, Stabb wrote to Addis (in London) that "if in future Lyons agency is going to be subject to heavy taxation on a basis of the total capital of the Bank,it may become necessary to consi. der the question of altering the status of our Agency there. ... If the basis of taxation is fixed too high, it might be advisable from an Economical point of view, to appoint agents instead of having our own office, and in such a case a working arrangement with the London County & Westminster Bank [which was supposed to open in Lyon "shortly"] might be possible and advantageous. However, I hope it will not come to that as no one wants to see our office in Lyons closed". (HK/L: 8/119. Stabb to Addis, 1 June 1919.) In 1922, different schemes were drafted by the Bank's lawyers in Paris and London. Forming a British concern to carry on business in France would bring tax problems in itself, and constituting a firm under French law was also dismissed "owing to the necessary introduction of a preponderance of French interests". Then, in 1923, an agreement was reached, with long term perspective, with the French Treasury in Lyon. (HK/L: 149. Jones (London) to Barlow (Lyon), 10 Oct 1923.) J R Jones: "The Bank's branches. The special agencies: Introduction", p. iii, stated that "other offices of the Bank as well as other banks all over the world direct valuable import Letter of Credit business to the special branches [sic] abroad, which handle in its last stages the resultant '‧'-'port bill business to the territory where they are situ. ated. . . The different treatment in the accounts seemed to show that the offices in Europe and America had a special place in the Bank structure, and it seems that they were intended to secure as much as possible of the trade in their respective countries to avoid the busi. ness being taken over by banks domiciled in those countries, which might not give business to the Hongkong Bank." EASTERN BANKING that could have easily been started by Franqois de Bovis). Until the development of French exports to Indochina, even "trade financing" was too big a word to describe its function, which was really, and only, to cash in and transfer the proceeds of the transactions carried on by other parts of the Bank, the Eastern branches. It was, in a way, no more than a physical extension of London Office, and its preservation was not based on the consideration of its own profits (if any) and their direct contribution to the Bank's balance sheet, but, as for any bank's department, on a comparison of its cost to the profits it permitted the whole machinery of the Hongkong Bank to generate. 232 In 1923, Jones, manager in London, concluded his review of the agency's fiscal position: I would not, however, go so far as to agree that with lower taxation there will be a substantial profit in running the agency, [but] with any big reduction in overheads due to lower taxation the agency as now constituted may be better able to justify its continuation.233 A sobering assessment! This was, however, written some years before the "Indochina boom" of the 1930s. And in 1934, he wrote his letter of resignation/retirement, Palisson had a very different image to offer, embellished, no doubt, by the fact that he had spent so many years in Lyon Office. What he wished to the newly-born Paris Office was to "remain the star that is ever to shine brilliantly in the network of our branches".234 (Emphasis added.) The truth probably lies between Palisson's rosy dreams and Jones' stern evaluation. One could easily, I think, apply to Lyon Office this picture made by Jean Bouvier of the London agency of the Credit Lyonnais as it was in 1876: "it is quite of service to the other branches, but does not get much for it".235 Not meant to be directly a money-making venture, the Hongkong Bank's agency in Lyon was, nevertheless, a necessary link between a dominant (and later important enough) market for Far Eastern trade and the other components of the Bank's structure. 232prom 1901-1941, Lyon Office was almost constantly in deficit (HK/L: 10/145. Profit & Loss Accounts 1917-1939; HK/GA: Lyons Branch results, kindly communicated by Prof King. 233jones to Barlow, 10 Oct 1923. 23^hK/L: 106. Palisson to Davis (copy), Apr 1954. 235Bouvj.er; Naissance d ' une banque . . . , p. 232. 23. THE HAMBURG BRANCH: THE GERMAN PERIOD, 1889-1920* by David J S King Introduction: A Survey of the Relations between The Hongkong Bank and Germany When J R Jones was collecting material for his history of the Hongkong and Shanghai Banking Corporation [HSBC] in the 1950's—material later utilized by Maurice Collis in his Wayfoong—he requested the managers of all the branches of the Bank to send him information. G C Moutrie, then manager of the Hamburg Branch, replied: For a life of 61 years, nothing very significant appears to have occurred to Hamburg, and the notes look excessively uninterest. ing, even to me . . . I am afraid flood, pestilence and robbery find no place, high finance and causes cel^bres have passed us by, and as far as I know, no-one has even let off a pistol in the of fice ! Moutrie added in another letter that there were not even very many anecdotes concerning the Branch and they were of "too scurrilous a nature in most cases for circulation outside the mess". The secrecy code has tended to make bankers view information on business aspects of their his. tory as confidential, while more personal anecdotes appear to them to be private or uninteresting to the historian. Despite this attitude it has been possible to piece together from various sources the story of the Bank's activities in Germany and in connection with German merchants and financiers. German merchants maintained close links with the Hongkong and Shanghai Banking Corporation from its conception in 1864 until the outbreak of the First World War and beyond. This was due to a variety of factors which developed as conditions changed. When a group of leading Hong Kong mer. chants, with the conspicuous absence of Jardine, Matheson and Company, joined together to found the provisional committee of the Bank in 1864, there was nothing remarkable about the presence on the committee of a *This essay consists of extracts from a larger report entitled "On the Relations of the Hongkong Bank with Germany, 1865-1948", deposited in the Hongkong Bank archives in Quarry Bay. It deals, in addition to the sections reproduced above, with the role played by German merchants on the Board of Directors of the Bank, with the interaction between British finance represented by the HSBC and German finance represented by the Deutsch-Asiatische Bank in China, Japan and Siam [see essay No 20], and with more technical aspects of the business of the Hamburg Branch. 1-G C Moutrie in Hamburg to J R Jones in Hong Kong, personal letter of July 24, 1951. In the HSBC archives in Quarry Bay. EASTERN BANKING German merchant, any more than that there were also American, Indian (Par- see), and Jewish members. The British of course predominated, as they pre. dominated in China and as Hcng Kong was a British colony. But this was to be a special kind of bank, a "Hong Kong" bank, founded and directed by and for the merchants of Hong Kong and the China Coast, and therefore it natu. rally sought the participation of all the important merchant houses regard. less of nationality. In the early years of the Bank's activity foreign trade had come to be dependent on the London discount market for financing. The Paris market began to assert itself with the formation of the Comptoir d'Escompte de Paris in 1860, however French trade was never very important in China. In 1870, the Germans, full of nationalistic fervor after their recent victo. ries over the French and the ensuing national unification, established the Deutsche Bank in an attempt to provide German traders with facilities to finance their trade with Germany without passing their bills through the London market. The attempt, however, was doomed to failure, as the German discount market was simply not strong enough to offer competitive rates. German-Asian trade remained to a large extent dependent on the London mar. ket until the First World War, and, under changed circumstances after the war, became even more dependent on outside financing. Until the 1880s the HSBC's activities were comparatively unhampered by politics and national rivalry. The Bank had been established to serve the interests of all the merchants in China, and there was no reason to discri. minate among them. Although the staff of the Bank was almost entirely Bri. tish, the Board of Directors remained international reflecting the nationalities of the Bank's most important constituents. Industrial and financial business with the Chinese were still on a relatively small scale, and the governments of the European Powers had not as yet begun to inter. vene to support the private business affairs of their nationals. However during the 1880s conditions began to change. The French tried unsuccess. fully to slip a clause into the peace treaty concluding the Sino-French War in 1885, which would have required the Chinese to turn to the French for capital and materials if they ever needed foreign aid to build railways. At the same time, a consortium was being formed in Germany, with the appro. val and support of the German government, which was also interested in railway and industrial projects in China. These nationalistic stirrings constituted a threat to the HSBC's international character. In 1885 they approached a German Bank in an attempt to arrange for the German bank to accept a subordinate partici. pation in the business at hand. This offer fell through, however, as the Germans saw the HSBC as a "British" institution and therefore, in order to maintain German prestige in China, could only agree to cooperate with them on the basis of full equality. Was the HSBC already a "British" institu. tion in 1885? What would this mean? In the following decades the Powers backed the business affairs of their nationals with political power, and in turn national prestige was built up through conspicuous business arrange. ments. Did the Bank in 1885 rely for support on the British Legation in China? Did the Bank's prestige in turn bolster the position of the British Legation in Peking? Was the Bank still able to keep irrelevant national. istic political issues out of the negotiations as it had been a decade THE HONGKONG BANK IN HAMBURG earlier and as would befit a truly international bank? Until the the mid—1880s the Chinese had resisted suggestions that they build railways and initiate other large-scale industrial projects. The only major contracts to this time had been for unproductive purposes, like the government loans arranged by the Bank for various military campaigns. These had naturally been placed, when the Hong Kong and Shanghai capital markets proved insufficient, in London, not because the HSBC was "British" and London was "their" market, but because London was still the capital market of the world par excellence. It was not until 1887 that a German group placed a Chinese Government loan in Germany. In 1885 German banks and companies interested in Chinese business formed an informal consortium and sent three representatives to China to investigate potential railway and other industrial business. The German diplomatic corps in China supported these efforts wherever possible, a fact which stirred an uproar in the British press. The British diplomatic corps had maintained that the diplomats should not allow themselves to become entangled in the affairs of private businessmen, and the British press greeted this activity on the part of the Germans as outrageous. But what was the real problem? It may be that the British were jealous and suspi. cious of German commercial successes. German merchants were gradually encroaching upon the markets in China which, for all their talk of Open Door and Free Competition, the British considered their special preserve. However in this case their fears appear to have been premature, as the Ger. mans did not actually achieve anything at this time even with [unofficial] diplomatic support. In the 1890s these nationalist tendencies intensified. In 1889, the Germans founded the Deutsch-Asiatische Bank [DAB], whose main concern was to negotiate large contracts for German industry and the German capital market, but which was meant also to finance German trade. After 1895 the French, Russians, Belgians and Americans also became interested in securing contracts for their own nationals in China, and, whatever its ideals, if the HSBC was to participate in this lucrative form of business, it could only participate as the representative of British industry and capital. While "government business" became increasingly politicized, ordinary trade continued in its accustomed channels. Many German merchants contin. ued to deal with the HSBC despite the establishment of the German Bank, because they found the HSBC to be more attuned to their needs, especially after the HSBC founded its Branch in the port of Hamburg in 1889. As the HSBC was still run from Hong Kong, it could keep in touch with the local conditions and the needs of the merchants. The DAB on the other hand was run from Berlin, by men primarily interested in industry and government finance and not trade. Many of them had never been to China and had no idea of what was necessary in order to do business there. The Board of Directors of the DAB insisted on controlling all policy and even most important specific decisions from Berlin, and they could naturally only evaluate proposals in comparison with European standards. Furthermore they always had in mind the overriding consideration of the state of the money markets in Germany. Many normal aspects of China trade were never accept. able to the DAB. They would not, for example, accept drafts at over three months' sight as these could not be discounted on German markets, and yet EASTERN BANKING these were common in China trade and essential to a merchant who wished to compete. Although no merchants of any nationality were represented on the Board of Directors of the DAB, the major German firms in Hong Kong contin. ued to be represented on the Board of the HSBC until the outbreak of World War I. In 1895 China was severely defeated by the Japanese, and, with the Indemnity Loans of 1895, 1896 and 1898, "government business" with the Chi. nese began on a large scale. For various reasons the HSBC came to cooper. ate closely with German Finance in this business; however this was not due, as suggested by some at the time, to the fact that German merchants were represented on the Bank's Board of Directors. As the new "government busi. ness became highly political, the Bank needed to keep in close touch with the British Foreign Office as well as the European capital markets. It is a credit to the elasticity of the management of the HSBC that it allowed the London Manager to control this profitable business, while control over the Bank as a whole remained in Hong Kong. In a sense there were two banks: the one in Hong Kong which served the interests of all merchants without discrimination and to which German merchants turned because the German Bank was not willing to offer suitable conditions, and the other in London, which served the interests of the British capital market, and which, because it was in British interests to have an ally in China against the Russo-French coalition, became closely linked with German Finance. Although these two relationships were in reality quite separate, they were confused by certain outside observers. The British, unable to recog. nize that their predominance in China had been due partially to the tempo. rary weakness of the rest of Europe and was bound to change, sought an ex. planation for the remarkable growth in the German presence in China. Some people at least, most notably The Times correspondent in China, G E Morri. son, found an explanation in the close link between the HSBC and the German Bank, which, he felt, could only be explained by the large German presence on the Board of Directors of the Bank. The absurdity of this position, which suggested that German merchants would force a bank in which they had very strong financial and other interests to support another bank which had not even been able to gain their support for normal banking business against the interests of their own Bank, was not pointed out in the English press. In the German press at the same time, these same German firms were being accused of being the cause of the weakness of the DAB. In the two decades preceding World War I the Powers struggled for political influence through a dominating position in Chinese finance and industrial development. Their competition to lend funds to China was restrained only by the fear that excessive borrowing would lead to bankruptcy and military intervention in China by the Powers which in turn might lead to war among the Powers over the division of the spoils. To diminish the danger of a one-sided intervention as well as to strengthen their own positions, the Powers formed various coalitions. The French and the Russians for a time formed an alliance in China. We have already mentioned the Anglo-German coalition. Eventually these smaller alliances were superceded by a series of consortia, which at one point included all six major Powers competing in China. When World War I broke out, England, Germany, France, Russia and Japan were all members of the consortium. THE HONGKONG BANK IN HAMBURG The First World War was not the HSBC's war. None of the various rivalries and tensions which led up to it were in the Bank's interests. Some people have explained the hostility between Britain and Germany by pointing to the intense trade rivalry and the competition in overseas investments. However the HSBC benefited just as much from the growth of German as it did from that of the British commerce, and, in China, British and German finance worked together to the satisfaction of at least the HSBC. Furthermore, a high percentage of the British export trade to China was handled by German merchant houses financed by HSBC. During the first years of the war the Bank was at times accused of being pro-German for its attempts to encourage moderation in the treatment of German firms and to stop the expulsion of the German Bank from the China Loan consortium. The Bank initially believed that when the war was over, trade would gradually return to normal, and that the HSBC would naturally resume its internation. al approach to business. But the long years and the general hatred of the war had their effect. When the war was over, the HSBC agreed never again to allow a German to be represented on their Board of Directors. The manager of the Hamburg Branch was dismissed on the grounds of German nationality--although he was British by upbringing and education and, having believed himself to be legally stateless, had, with the Bank's knowledge, only taken on German nationality in 1903. In the bitterness of the moment the Bank almost deci. ded to close down the Hamburg Branch altogether. But gradually the bitterness receded, and the practical business atti. tude returned. The question of allowing the Germans to again participate in international finance was distorted by the obvious fact that the Germans had no capital to invest abroad, and that therefore their only interest in again participating in the new Consortium in China would be to get a share of the profits from servicing the loans. It was clearly not in the inter. ests of the HSBC to simply give up a share of these profits for nothing, but as the DAB did have some claim to them, the Bank did not stand in their way. The Bank neither helped nor hindered the DAB in this question, which was effectively stalled by the Chinese for over ten years until it was fi. nally dropped. The weakness of the German capital market stood in sharp contrast to the buoyancy of the German commercial firms, and the HSBC soon realized that most of this promising business would have to be financed by foreign banks. The HSBC created a special role for itself in financing German trade with the Far East without competing with German banks for local busi. ness. The importance of this role for German trade was recognized by the German authorities. Conditions in Germany changed rapidly and were very difficult and complex, but the Bank was able to keep abreast of them through their Branch in Hamburg and made the commitment to stand by German merchants in hard times. The Bank took its share of losses in financing a large proportion of German trade throughout the interwar period. The special relationships between the HSBC and German finance and the German merchants was not due to any a priori decision by the Bank to favor a certain race of people. The interests of the Bank and the Germans just happened to coincide in a way which contrasts sharply with the discord which characterized the relations between Germany and England as political EASTERN BANKING states. Does this mean that the HSBC was not really a "British" bank after all? Or does it show that at least some of the conflicts which led to the two disastrous world wars between the Germans and the British were due to the inability or unwillingness of these two great Powers to recognize their own underlying mutual interests? The Hamburg Branch under Julius Brussel The earliest source to mention the proposed establishment of a branch of the HSBC in Hamburg comes from the minutes of the Board of Directors of February 14, 1889: "In view of a German bank commencing business in China, the desirability of opening a special agency in Hamburg was discussed." The Chief Manager, G E Noble, stated that both Thomas Jackson and Ewen Cameron, the Bank's Manager and sub-Manager in London respectively, were in favor of the new agency and suggested appointing as agent a German, Karbe, who had just ceased working for the British firm Reiss & Co in Shanghai. The decision that the agent should be a national of the country and not a member of the Bank's regular staff is consistent with the precedent in which the Bank's Lyons Agency was initially entrusted to a Frenchman. On February 28, 1889, on the urgent recommendations of the London manager and also the two German members of the Board, it was decided to appoint Julius Brussel instead. Karbe was subsequently appointed assistant manager of the Deutsch-Asiatische Bank's [DAB] Head Office in Shanghai. Julius Briissel was born on the June 11, 1846, the son of the clothes merchant, Salomon Brussel.2 He had experience of trading in the East as an apprentice and later as a junior partner of the Hamburg firm Behn, Meyer & Co. In Batavia he was one of the co-founders of a German athletic club, and in Singapore he was also very active in the German Teutonia Club. Brussel appears to have had a somewhat more speculative and energetic approach to trading than Arnold Otto Meyer, his senior partner in Hamburg. Although there was no question of his ability, this difference of approach led to disputes between them. Where Meyer wished to limit his produce trade to consignment business, Brussel wanted to anticipate demand and buy goods on the firm's account. "Brussel has good ideas, but he is always urging to take great risks, and I have no inclination to do that," Meyer wrote, and, in another letter, "Brussel, may he excuse the comparison, reminds me of a chained-up housedog. As soon as you loosen the chain he starts working all over the place like a madman. ... He may be very clever, but for me he is too clever."^ Brussel was married during a European leave in 1879, and he eventually gave up his partnership in Behn, Meyer & Co in September 1881, as his wife was ill and unable to stand the climate in the East. He then went to Lon. don, where he became the manager of the International Bank of London Ltd, founded in January 1880, with a subscribed capital of ￡400,000. This ^Information supplied by the Hamburg Staatsarchiv. ^The early protocol books of the Teutonia Club are held by the Ost-Asia- tische Verein [OAV] in Hamburg. ^Quoted in [Behn, Meyer & Co.], pp. 68-69. Translations are my own. THE HONGKONG BANK IN HAMBURG bank, which did exchange and acceptance business and acted as agent for an impressive list of Continental and American firms, does not appear to have had any special concentration of business with the Far East. However as the successor of the International Bank of Hamburg and London it maintained close links with Germany. It is from this Bank that Jackson and Cameron, now joint-managers of London Office, hired Brussel on a two-year contract beginning May 1, 1889, to establish an HSBC "agency" in Hamburg. His sal. ary was fixed at ￡1,500 per annum, which is ￡500 more than had been offered Karbe for the same position.^ Note that L Ewaldt, the first candidate put forward for the position as the Bank's agent in Lyons, had similarly been the manager of the London branch of a French bank, the Comptoir d'Escompte de Paris. BrUssel was granted a power of attorney by the Board of Directors on July 11, 1889. He at first established his own firm in Hamburg, Firma J Brussel, to act as an independent agency for the Bank. This firm was regis. tered on September 20, 1889.^ The "Standing Orders" book of the Bank gives September 24, 1889, as the date the Branch began business, and a circular letter dated October 4, 1889, suggested to all managers that they send Briissel all drafts on Germany, and not only those on Hamburg, in order to save two days' interest.^ On October 31, 1889, the Board of Directors decided that a full branch of the Bank should be established at Hamburg instead of Brussel's independent agency, and that Brussel should become its manager with a full power of attorney of the Bank. The reasons for upgrad. ing the agency to a full branch are not given, however it may have had something to do with the Bank's experiences with E Morel's independent agency for the Bank in Lyons. ^ Also, at about this time, the Bank was reviewing the legal limitations on where it could establish branches according to its statutes. There is a reference to this new branch in a protocol to the Hamburg State Senate of January 24, 1890, in which its author, Senator Petersen, suggests that the HSBC's motive in establishing the Hamburg Branch was to forestall the planned German Asian Bank (the DAB) and make it difficult for the new Bank to become established by giving special concessions to the customers. He also mentions that the Hamburg agency was already publishing daily its rates for exchange on Berlin. The senator forwarded his state. ment to the responsible government department for comment, but the govern. ment saw no reason to intervene and prevent the establishment of a foreign bank in Hamburg. The HSBC became the first foreign bank to establish a branch in Hamburg. On March 7, 1890, the Branch was registered in Hamburg's Handels- register by Brussel with the legal support of Dr G T Hertz, whose law firm has advised the Hamburg branch ever since. Unfortunately, as the Semi-Official [S/0] letters for the period ihe Banking Almanac Directory, 1881 to 1889. See also The Times, Dec 18, 1879, p. 7b. ^From the minutes of the Board of Directors. information supplied by the Hamburg Staatsarchiv from the Handelsregister. RIn the archives of the Hongkong Bank in Quarry Bay. ^See the memo by Moutrie in J R Jones, Appendix III. EASTERN BANKING before the first World War were destroyed when the Hamburg Branch moved to its present location in 1970, little is known about Brussel's business practices. The first agent/managers in Hamburg and Lyons were unusual in the Hongkong Bank's network, in that they had not worked their way up through the ranks in the Bank and had not been trained in the HSBC's style of banking. Morel, the Lyons agent, was dismissed at about this time for using Bank funds to cover his losses from speculative investments. He was replaced by F de Bovis, a member of the Bank's regular staff. It is inter. esting to note the parallels between de Bovis' background and that of F T Koelle, Brussel's successor in Hamburg. De Bovis' father was French and his mother English, as Koelle's father was German and his mother English. De Bovis, unlike Koelle, knew that he was a French national, however, as we shall see below, Koelle, after unsuccessfully attempting to acquire British citizenship, became a naturalized German (although he had unknowingly always held German citizenship). They both entered the Bank as juniors in the ordinary way and became managers in Lyons and Hamburg respectively only after they had reached that level of seniority in their careers. Contrary to the practice at this time in most of the Bank's Eastern branches, both de Bovis and Koelle appear after an initial trial period to have taken for granted that they would remain as manager until they retired. In May 1890 a power of attorney [P/A] was granted by the Board of Directors for the first accountant of the Hamburg Branch, A J Harrold. In many ways Brussel must have run the Branch as a German branch of an "international" (as opposed to "British") bank, and he naturally had German interests, the interests of his constituents, at heart. In an S/0 to Came. ron in 1893, for example, he complained about the difference between the buying and selling rates for German Marks, which involved an extra "squeeze" of 4%: "I do not see," he wrote, "why buyers of Mark remittances should be thus handicapped." This is not to say that he ever put the interests of German firms before the interests of the Bank. His argument was that the extra payment was bad business, that sooner or later someone would offer a better rate, and that the Bank would lose business. Brussel established himself firmly in the Hamburg business community. In 1892 he became a Burger of Hamburg, a special class of citizenship re. served for citizens of a certain status and income.^R In 1896, he requested a raise in his salary to bring it into line with offers he had received from a German bank, but the HSBC decided that it could not comply with his request as the volume of business in Hamburg did not justify it. However they reminded him that he would soon be receiving a bonus for his role in negotiating the 1896 Chinese Indemnity Loan.^ After the HSBC's 1895 Agreement to cooperate with the DAB in Chinese Government business, one of the tasks of the Hamburg manager before the first World War was to act as the HSBC's representative in negotiations with the German Finance. In 1900 German merchants in Hamburg and Bremen with interests in East Asian trade joined together and founded an organization called the Ost- asiatischer Verein [OAV]. Brussel was very active in this organization from the beginning. He signed its first membership list as manager of the ^Information supplied by the Hamburg Staatsarchiv. ^References available in the Hongkong Bank archives in Quarry Bay. THE HONGKONG BANK IN HAMBURG HSBC and when he was elected its first treasurer, he naturally placed the organization's funds in the HSBC.^3 Quite often the meetings of the Board of Directors of the OAV took place in the offices of the HSBC in the first four years of its existence. However as the treasurer was required to read out the account book at every meeting, it is easy to notice that Brussel began to be absent more and more often as his health declined. Although he was already very sick, he was re-elected treasurer in January 1904, but on the September 6, 1905, Brussel wrote to the Board to announce his resig. nation due to ill health. He was replaced as treasurer by the representa. tive of Carlowitz & Co, Paul Sachse, who however kept the organization's funds with the Hongkong Bank. He had been on the Board of Directors of the HSBC in Hong Kong from 1898 to 1901. The DAB opened its Branch in Hamburg in 1906, however its manager, Kochen, only became treasurer of the OAV in 1909, at which time he transferred some of the organization's funds to his own bank. The Board thanked the HSBC for its handling of the funds to that time. Still the DAB did not handle all the OAV's funds until the beginning of 1910. Brussel's health was very bad, and he suffered for a long time from a very serious nervous condition. In November 1904, C S Addis visited Ham. burg and made a trip to visit Brussel at his sanatorium near Berlin. In his report to Cameron, he advised taking steps to prepare for the eventual. ity of Brussel's death or at best only partial continuance in his office. F T Koelle, the new accountant in Hamburg, was, as we have noted, like Brussel, (though he did not know it) from birth a German citizen. But, unlike Brussel, Koelle had been educated in England, and, as in addition his mother was English, he considered himself English. However English citizenship could not be transmitted through the female line, and Koelle, having failed three times to acquire it on technicalities connected with the residency requirement (which it was very difficult for an employee of a Bank like the HSBC to fulfill), he chose to become a naturalized German subject upon his arrival in Germany. Addis wrote that Koelle would be able to carry on if Brussel should no longer be able to, but that, as his P/A had been granted on Brussel's au. thority alone, it would lapse on Brussel's death. Therefore Addis suggest. ed that Koelle be granted a full P/A by the Board of Directors in Hong Kong, and that at the same time G W Butt in London Office be granted one, so that, in case something should happen to Koelle, he could deal for him from London. In addition Addis suggested that the three senior German staff members be given a joint P/A, any two of them to be authorized to sign together. The alternative to placing Koelle in charge of the Branch, Addis felt, would be to look for someone from outside the Bank to take over from Brussel, which he felt would be difficult. Otherwise a member of the German staff of the Branch could be promoted, however, although Addis felt one of the German staff, Caspar, did have the necessary ability, he was junior to two others, and Addis did not think that it would be right to promote him over the heads of his seniors. It is interesting to note that 12The Protocol books of the board meetings are in the OAV, Hamburg. 13Addis to Cameron, Nov 4, 1904. Among Addis' private papers, now trans. ferred to SOAS. EASTERN BANKING Caspar left the Bank soon afterwards. Addis did not feel that Brussel was right in insisting that a good knowledge of German was a necessary qualification for working in Hamburg. Indeed Addis stated that an intelligent man, who had had some knowledge of German from school should be able to pick up enough to function effectively in a year or two.l^ However he at no time suggested that a member of the Eastern staff be sent to take over control in Hamburg. The Board of Directors followed Addis' advice on December 6, 1904, and granted Koelle and Butt full P/A, while granting the three German staff members a joint P/A. At the same time it was decided that the Branch should be re-registered in Hamburg under the name "Hongkong and Shanghai Banking Corporation (Hamburg Branch)". On August 15, 1905, a telegram was read at a meeting of the Board in Hong Kong from London Office saying that Brussel had resigned due to his continued ill-health, and the Board voted him 20,000 Marks in lieu of six months salary and a retiring gratuity of 60,000 Marks. Brussel's nervous disorders did not get better, and he finally committed suicide by jumping into the Alster on December 16, 1908. On Brussel's resignation in 1905 Koelle was appointed acting-manager, a position he had been exercising de facto for some time due to BrUssel's illness. His salary was increased from ￡450 to ￡1,200, and the increase was back-dated in recognition of his previous services on Brussel's behalf. There is no explanation why he was not made a full manager until July 21, 1908. However the Bank presumably saw no reason why the account. ant should necessarily "inherit" the manager's position on the latter's retirement and was still considering alternatives. It may have also had to do with his age, as Koelle was only 35. F T Koelle, a biographical introduction Friederick Theodor Koelle was born on August 20, 1870, in Constantinople, the youngest of the ten children of the Rev Dr S W Koelle. His father, who was born in WLirtemburg before the unification of Germany, had been trained by the Basle Mission and had spent thirty years in the service of the Church of England Missionary Society in various places in the Middle East. F T Koelle's mother was English and through her he is listed in The Plan- tagenet Roll of the Blood Royal. His name, spelled in a slightly less Germanic way, is followed by the indication "(Hongkong and Shanghai Banking Corporation, Hamburg)": he was a distant descendant, mainly by the female line, of Edward III (1312-1377).15 Soon after Koelle was born, his family was forced to leave Turkey, due to the controversy that arose over his father's collaboration in a project ^Addis had strong views on language generally and encouraged members of the Eastern staff to learn Chinese. When he became a Director of the German Reichsbank after the war, he himself learned German in order to be able to better fulfill his duties. ^Marquis of Ruvigny and Raineval. The Plantagenet Roll of the Blood Royal. London: T C & E C Jack, 1907, p. 419. THE HONGKONG BANK IN HAMBURG to translate the Bible into Turkish. His father had been imprisoned, and it had taken a full-scale diplomatic intervention by England to set him free again. The Koelle family then settled down permanently in England; F T Koelle did hot discover until the mid-1920s that his father had had him registered at the German consulate in Constantinople, thus bestowing on him German citizenship. Koelle always assumed that he was stateless, until, in 1903 he became naturalized a German, having been unable to fulfill the long residency requirement for British citizenship. He was educated in a private school in Cheshire and then at Marlbor. ough College before beginning his apprenticeship at age 17 with the Molsens Bank in Canada. In 1890 he began his career with the Hongkong Bank quite normally as a junior at the London Office. As he wrote in his diary: "I received two telegrams from England . . . one from Donald Stewart: 'Congratulations' the other from father 'Come home.' ... I worked at the L 0 from August 5, 1890, till Friday, December 29, 1893, when I got my orders. ... I won't try to deal with these three years as I would need three volumes!"^ He went East with two other juniors from the Bank. They took the train to Brindisi and sailed from there. When their ship stopped in Colombo, he records that the Bank's agent, Mr C H Wilson invited them to breakfast. He had sent a boy down to the ship to meet them and bring them back to the office. When Koelle arrived in Singapore on February 5, 1894, R R Hynd met him at the wharf and took him to the Bank to meet P E Cameron (sub-mana. ger), G W Butt (manager) and McLennan (accountant) before taking him over to the Singapore Club for tiffin. "The entrance fee is $100," Koelle wrote of this Club, "so it is practically confined to managers, accountants and partners . . . Afterwards we went to the new bank building, which will probably cost ￡20,000. Hynd then took us to the Singapore Cricket Club, where we had some drinks and some practice at the nets." [cf the description of the first trip East and the way Bank people were met, in oral history essay No. 12.] In 1897 Koelle was transferred to Batavia, where he served until 1899, when he came due for home leave, but before returning home to England he was sent to Shanghai, where he recalls being met at the M M Pier by Mr and Mrs Wade Gardner (manager and wife), Mr and Mrs C S Addis (sub-manager and wife), [I] Turner and Newton [later Sir Newton] Stabb. He records that Stabb then took him back to the English Concession and to the Club. On his trip home he stopped in Hong Kong on March 27, 1899. The HSBC launch Wayfung [sic], built a year before, met the ship, and he was as usual taken to meet Sir Thomas Jackson (the Chief Manager), VAC Hawkins (the sub-manager), and other Bank officers. "The garden in front of the bank must be worth a million dollars," he noted. When he was about to leave, the sub-manager said to him, "If you have any choice of destination on your return, write me a private note when you have been at home about six months, as we like to meet fellows' wishes when we can." Koelle adds: "I mentioned China in thanking him." On his return from Europe, he was sent to Colombo. 1 ^For this information on F T Koelle, which comes from his various diaries and other papers, I am indebted to his son, Dr W Koelle. EASTERN BANKING From 1900 he served in Colombo until he received his orders on January 22, 1903, to go to Hamburg as accountant where he began work on March 2. This was the first time he had ever been to Germany, however he did speak German, as his father had brought up all his children to be bi-lingual. At this point, as it seemed unlikely that he would be able to fulfill the residency requirements for British citizenship in the near future, he decided to apply for naturalization as a German. He consulted Cameron, the Bank's London manager, and received a reply on the March 16, 1903, saying that he [Cameron] could see no chance of Koelle's acquiring British citi. zenship, and that he should therefore go ahead and become a German. "The fact of your becoming a German would make no difference to your career in the bank." Thus in 1903, Koelle took on the citizenship he already in fact possessed. But naturally he remained essentially English. He married an English girl and was active on the Committee of the Church of England in Hamburg. The Pre-War Hamburg Branch under Koelle The first detailed information that survives concerning the business done by the Hamburg branch is contained in an Inspector's report of 1911. Un. fortunately as the Branch had been inspected only the year before, this report did not as was usual go into a detailed analysis of the balance sheets. The earlier report has been lost. Instead the Inspector in 1911 discusses certain ideas for increasing turnover and gives more general analysis of the Branch's success in keeping pace with the great expansion in German Far East trade. The Inspector noted that it was difficult to estimate what proportion of German trade was coming through the Hongkong Bank as so much of German trade was financed via London, and furthermore it was not possible to determine whether the Branch was keeping up in terms of the bills actually handled directly with Hamburg. The Inspector commented that the German staff, all except one of whom had been hired and trained by Brussel, though "thoroughly loyal and hard. working", used certain methods which were started under Brussel and were rather unusual due to "his mercantile training, though sufficient for effi. ciency." As we have noted, Brussel had not been trained by the HSBC, how. ever his background was not entirely mercantile, as he had spent several years as manager of a bank in London. However when the Inspector noticed deviations from the norm, he automatically attributed them to Brussel's years working for a merchant firm. These deviations, he added, were being eradicated by Koelle. The staff at this time consisted of twelve Germans, the British accountant, a London junior and the manager. It appears the Branch was less dependent on funds from London before the war than it was to become in the inter-war period. Koelle however began the practice of keeping a large overdraft with the London Office in about 1908, in order to avoid having to discount bills received on the German market. The rate of 4% current in Germany for discounting bills was considered a perfectly acceptable average return for these funds borrowed from the London Office. The Inspector also saw that, if watched carefully, there might be scope for the use of more London funds on the local German THE HONGKONG BANK IN HAMBURG market. This had been hampered by the arbitrary cross rates used by the Bank, which made the business appear less favorable in the Profit and Loss [P/L] accounts of the Branch, while it would not be possible to distinguish the profits from this activity from the interest regularly charged by London Office on the Branch's overdraft. At the time of the report, the Branch only drew money on London Office when it was actually required and remitted any surpluses immediately back to London. The Report also noted that the Branch maintained a minimum credit balance of approximately 100,000 RM as was customary with the Reichsbank, although no interest was allowed. This was to serve as a reserve fund and informal guarantee to the German Government bank of the Branch's financial position and was more than amply compensated for by the useful services and information granted by the Reichsbank. In addition, the Branch maintained deposit accounts with the Deutsche Bank, which granted them interest at 2% below the bank rates regardless of the condition of the money market. The Branch also lent money to first class brokerage firms against the deposit of approved acceptances and maintained small credits with various corre. sponding banks. Altogether the Branch maintained between 800,000 and 1,000,000 Marks disposable at short call to meet demand liabilities. In general the Report was optimistic: German trade was growing rapid. ly, and the Inspector felt that if reasonable rates could be offered for D/P [Documents against Payment] bills, more of this business could be seduced away from the London discount market, as the German firms were willing to pay slightly more for a direct draft, as it saved them a lot of paper work and lessened the use of their name in London. However he also noticed problems. Since the Branch was established in 1889, several other banks with links to the East, including the DAB, had opened branches in Hamburg. As he wrote the Yokohama Specie Bank was planning to open a branch, threatening the HSBC's previous domination of Japanese business which made up more than half of its total outward finance. He also felt that some of the Bank's methods were unnecessarily conservative, that the Manager would be justified in, for example, accepting drafts without neces. sarily having full knowledge concerning the drawees, if the drawers are strong and the business appeared sound, until he received specific informa. tion to the contrary from an Eastern agent. Also he felt that the Branch must serve as an information service for its better constituents; he had been surprised to discover that Koelle had not been receiving a full set of Semi-Official correspondence in which the officers of the Bank exchanged confidential information on trade conditions and the Bank's customers. On the whole he felt the Branch's future was promising and felt that Koelle was justified in proposing a move from their current, rather cramped, quar. ters, into one of the new office buildings then being constructed. The Hamburg Branch during World War I Although the build-up of tension among the Powers had been observed closely in Hamburg, England's actual declaration of war on Germany on August 4, 1914, came as a surprise and a shock. Many Hamburg merchant firms were inextricably tied up with the English, whether because they were dependent EASTERN BANKING on the London discount market for the financing of their trade or because they were involved in shipping English goods or in trade with England. Only on July 31 did the order come through to the Hamburg Branch of the Bank that the Eastern banks had decided that all insurance policies must now cover "war risk".^ Until that time things had been perfectly normal. Similarly it was only during that week that the Deutsch-Asiatische Bank [DAB] had decided to stop drawing bills on London, and that the London banks had withdrawn their credits to the German bank.^ There had been no time to withdraw the British staff and no recognition of any need to do so. The British staff of the Hamburg Branch at that time, disregarding Koelle, who was in fact a German citizen whatever his sympathies, and REN Padfield (the accountant), who was in England on vacation, only included St G H Phillips, the London Office junior. On July 31 Koelle received instructions from London Office to continue discounting and remitting freely, and London Office even offered to send Padfield back if he was required. Koelle replied that he did not yet need him, as he felt that "with our business entirely stopped, as appeared likely, it would be a pity to recall him when London Office might be glad of his services."^ The first hint of the changing conditions came on July 31 when the Branch was instructed by the German authorities only to cable in German and without using codes. They wired to London Office to request that the other HSBC branches also be instructed to send their wires to Hamburg if possible in German and certainly without code to ensure delivery. On August 1 mail was returned with instructions that it was to be sent with the covers open, however even in this way most mail was never delivered overseas. On August 4, Koelle sent' a wire, which was later returned undelivered by the military authorities despite having been previously passed by the German censors, in which he advised London Office of the DAB's urgent request for ￡50,000 to be sent to Calcutta, for which the DAB had conditionally deposited one mil. lion Marks at the Reichsbank to the joint credit of the Hamburg Branch and the Chartered Bank. Also on August 4, the DAB made a proposal to the HSBC that they agree to attempt to safeguard each other's interests; the DAB would undertake without responsibility to help the HSBC in Hamburg and Tsingtao, while the HSBC would do the same for the DAB in Calcutta, Singa. pore and Hong Kong. Koelle's advice on this matter was that, in his law. yers' opinion, it was out of the question that the Hamburg Branch would be closed by the Germans as the calling in of the Bank's assets would cause grave hardship to several important German firms. These firms were other. wise protected by the Foreign Bills Moratorium of August 10, 1914, the Pro. hibition of Payments against England of September 30, 1914, and subsequent l^For this account of the Branch during the First World War I am dependent to a large extent on a "War Report" written by Koelle, the manager of the Hamburg Branch, which he sent to London Office as soon as it was possible after the War. It contains a running account of his activities in the name of the Bank during the War. It has been possible in many cases to verify details contained in this account from other sources, and there is no indication that Koelle was trying to mislead in any way. 1 %uller-Jabusch, 1940, p. 240. -^Koelle's War Report, p. 2. THE HONGKONG BANK IN HAMBURG legislation. He therefore had refused to pledge the Bank in any way. This cable too, however, was never delivered, but the DAB advanced a similar offer to the Bank in Hong Kong, where it received a similar rejection. Correspondence with London during the War was naturally difficult. From the beginning, it was hampered by regulations and from mid-August 1914 mail began to be returned to the Branch. But when the Branch was put under the control of German trustees, they were allowed to communicate regularly with London, although, as the letters had to be sent open, and the contents were censored so as not to prejudice German interests (e.g. by giving information which might lead to claims against German firms, or concerning the location of German ships), naturally much could not be said. There is however no record that these letters were ever delivered in London, and they are not to be found in the S/0 files in the London Office archives. German banks claimed in February 1916 that they were unable to get any information from their branches in England, and this led to still further restrictions.20 The Branch also received only sporadic correspondence from London Office, and complained that the Chartered Bank was permitted to communicate more regularly.21 Most correspondence was sent via Hope and Co in Amsterdam, but in November 1917 they heard that this link might soon be closed. At the end of 1914, it had been possible after much debate to convince the German authorities that it was in German interests that Bills of Lading for goods against which HSBC drafts had been drawn should be sent to London when the relevant ships were in hostile (i.e. to the Germans) ports in order to allow the HSBC a chance to make a claim for these goods in the Prize Courts. To help the plight of refugees trying to leave the country who could in any way prove their respectability, the five British Banks with branches in Hamburg--the HSBC, the Anglo South American Bank, the British Bank of West Africa, the Chartered Bank, and the Standard Bank of South Africa - each deposited 500 Marks into a guarantee fund at the Hamburg Branch of the HSBC to allow the Branch to advance money, thereby relieving the heavily overworked American consulate. (Koelle notes that the Branch was clear of that liability!)22 These funds were reclaimed after the war.23 At the same time the Church of England building was placed at the disposal of the Red Cross, and again the five British banks acted together in donating money to fit up the Church with hospital beds. Later, as it turned out, the Church was not used, but this act did much to enhance the goodwill towards the banks in the local press.2^ Koelle also served English inter. ests during the war (for as a German citizen he was not interned) by making enquiries regarding British officers, by assisting wherever possible in safeguarding the personal property of interned British citizens, and by 20Ibid, p. 30. 2^-Ibid, pp. 29-30. 22ibid, p. 4. 23Saville of the Board of Trade to the London Office, Dec 2, 1919, in the Archives of the HSBC, London Office, now in Quarry Bay, Hong Kong. 2^Koelle's War Report, p. 4. EASTERN BANKING visiting them in the camps. He also tried to arrange the exchange of the interned manager of the Standard Bank of South Africa for Karbe, manager of Disconto-gesellschaft in London, who was released without the exchange in 1917.25 Koelle's policy from the beginning (in the absence of instructions of any sort from London) was to continue the Bank's pre-war policy of unbiased loyalty to the firms it served regardless of nationality. His first con. cern was to maintain enough liquid funds to be able to meet any liabi. lities, thereby hoping to avoid giving the Germans any excuse to close down or liquidate the Branch or even to submit it to the control of trustees.2^ In this last aim he was not successful, as the German authorities appointed a controller for the Branch on September 5, 1914, although there had been no complaint concerning its activities. Koelle also kept in close touch with the managers of the other British banks in Hamburg for as long as they were free to function and discussed his ideas for financing the Branch with them. On August 5, for example, he transferred 100,000 Marks of the Bank's funds into a Reichsbank account in his own name after discussing the move with them, to serve as an emergency fund for the payment of salaries, charges, etc, should the Bank no longer be able to handle its own funds. However, he withdrew the money again on September 7 without waiting to be ordered to do so by the trustee.27 From his account of his activities during the war, the accuracy of which is not questioned and is corroborated wherever there is any other evidence, there is no reason to doubt his continued loyalty to the princi. ples the Bank stood for before the war. During that whole period he had to act for the most part without any form of communication with his superiors and was thus unable to appreciate the growing anti-German attitude in the Hongkong Bank, which never again allowed it to take as "neutral" or "cosmo. politan" a position as it had before the war. In keeping with this policy, Koelle loyally kept up payments on the Bank's demand liabilities as they became due. To the British this may have seemed like "Trading with the Enemy" (although no new business was under. taken during the war), but to Koelle it was merely a question of maintain. ing the Bank's good name with its traditional customers despite the trans. ient impediment of the war. Moreover Koelle had little choice but to com. ply, as the Branch was subjected to first one and then two trustees. By thus winding up his business in a fair and honest way, Koelle was able to maintain the Branch largely under his own control. If he had simply refused to make payments to enemy nationals, the trustee would naturally have done so in his name, and there was always the possibility that the Branch might be liquidated. On the question of paying the customary annual staff bonus, Koelle does indeed appear to go against the orders of the Board of Directors in the interests of his German staff. In 1914 and 1915 he granted the bonus without instructions, but could excuse this as he had assumed that he would o c # ZJIbid, p. 27. Note this is the same man who was once considered for the position as the first agent of the HSBC in Hamburg in 1889. 26lbid, pp. 24-25. 22Ibid, pp. 5-6. THE HONGKONG BANK IN HAMBURG have received the instructions had it been possible. But in 1916, he was in possession of the speech by the Chairman of the HSBC's Board of Direct. ors quoted in the Economist, in which was stated that "needless to say, the Hamburg Office is not included in the bonus, but British members of that staff will receive their share in due course Koelle considered this statement to have been intended to protect the Directors from the charge of making a gratuitous payment to enemy employees and felt justified in grant. ing the German staff a "scarcity allowance" in lieu of the bonus—something which in any case the other banks had been granting because of the rising cost of living in Hamburg. Furthermore, he stressed that, had he not found this solution, the trustees would have been able to force him to pay the bonus anyway. When reports were received concerning the dividends paid by the Bank to shareholders in allied territory, the trustees insisted that German shareholders also be accommodated. Koelle assumed that the dividends owed to German shareholders would be held in special accounts by the Bank until after the war, and therefore arranged to "advance" the equivalent amount in Germany, charging the same amount of interest as would be allowed to accrue on the special accounts in the Bank.29 However he later learned that the HSBC was required to pay these dividends into an account with the Public Trustee which received no interest. This in effect meant that the Bank paid these dividends twice, in Germany and again to the Public Trustee in allied territory. Therefore Koelle attempted to have a clause added in making dividend "advances" to German shareholders which would allow the Branch to charge 6% interest if the dividend funds in allied territory had been taken out of the HSBC's control and were not allowed interest compen. sation. But the German authorities would not allow this clause to be added.^0 Koelle was careful in such cases to get written evidence that he was only complying with express orders from the German controllers, as this would put the Bank in a position to make a claim for compensation after the war. In this particular case Koelle did not feel that the Bank was losing interest on the Hamburg funds "advanced" against the dividends, as it was impossible for a foreign bank to place funds at interest during most of the war. In 1916 Koelle received a communication from London asking for infor. mation concerning these dividend payments, but the German controllers would not allow him to send more than the total amounts paid out. The control. lers felt that to give the names of German shareholders in the Bank and other such details would give the British information which might put German shareholders at a disadvantage if it should come to a confiscation of German property. Thus Koelle could not send sufficient information to London to make it possible for the Bank to reclaim the dividend funds which had been paid over to the Public Trustee.31 This problem was not adequate. ly cleared up for some time after the war. 28Ibid, p. 31. 29Ibid, pp. 27-28. 30Ibid, pp. 27-28. 31Ibid, p. 47. EASTERN BANKING German Trustees of the Hamburg Branch during WWI Eugen Guttmann J H Garrels H Borner Sept 4, 1914 - July 23, 1919 Sept 23, 1914 - Jan 22, 1917 Jan 23, 1917 - Dec 10, 1918 Koelle's relationship with the German trustees appointed to oversee the Branch during the war remained cordial throughout, so much so that at one point the trustees agreed voluntarily to reduce the salaries the Branch was forced to pay them. The trustees had the right to examine anything in the Branch, but, Koelle reported, never abused this to gain access to con. fidential S/O's or materials not directly connected with the carrying out of their supervisory functions. At various times Koelle protested that the Hamburg Branch was burdened with two controllers whereas other enemy banks, e.g. the Chartered Bank, never had more than one. But the German authorities claimed that this was necessary as the volume of the HSBC's business with Germany justified the extra supervision.33 in 1916, Garrels, one of the supervisors, who had been chairman of the Deputation for Trade and Shipping, resigned his position to become a Hamburg State senator. He was replaced by his business partner Borner, of the firm Garrels & Borner-- a long-standing constituent of the HSBC. The treatment of the British banks in Germany depended to some extent on reports received concerning the treatment of the German banks in Eng. land. Suspecting that the obverse would also be true in England, Koelle at various times sent messages to England to stress that they received good treatment from the German authorities, that private property was being respected, and that the British in Germany might be subject to reprisals if this were not also the case in England. 4 However, although it was known that German bankers, with a few exceptions, were still exempt from intern. ment in England, the German authorities did not exempt British bankers from the order in November 1914 that all enemy males between the ages of 17 and 55 be interned. On November 6, 1914, Phillips, the London Office junior, was ordered to report to the police and was then taken to an internment camp at Ruh- leben, where, with one short break from April to July 1915, he remained till the end of the war. In 1917, Koelle wished to apply for Phillips' temporary release so that he could help prepare the Branch's half-yearly balance, as by this time most of the Branch's German staff had been called ‧ ‧ . O C up for military service.The British staff of some of the other banks in Hamburg had been granted such permission under similar circumstances; however Koelle was not permitted by the trustees to forward his applica. tion. Phillips had chosen voluntarily to remain at his post at the Branch rather than try to escape back to England while that was still possible at 33Ibid, p. 36. 33Ibid, p. 54. 34Ibid, p. 11. 33lbid, p. 52 . THE HONGKONG BANK IN HAMBURG the beginning of the war. Similarly the question of what salaries should be paid by enemy banks to local staff members drafted into the army was resolved with reference to the arrangements made by the German banks in England in 1916. In England a system had been established whereby fixed percentages of the regular salar. ies were paid depending on whether the employee was married and the number of his children. This information was brought to Germany by Karbe, the manager of the Disconto-gesellschaft in London who was allowed to return to Germany at this time. The Branch had no choice but to accept the system. In addition Koelle decided to raise the salaries in the face of the rising cost of living. He appears however to have been very conservative in this, seeking only to alleviate real hardships, as he was very conscious of the fact that the Branch was making no profits and had very limited callable assets. Koelle managed to keep the Branch liquid until 1917, but it was a difficult task. Various regulations limited his ability to present or dis. count bills, although some companies voluntarily chose to pay their bills punctually even though they were not compelled to legally. However, natu. rally, the main flow of funds was in the other direction. Koelle had dis. counted as many bills as he could before the restrictions were imposed and had been able to work out an arrangement whereby in 1914 the Reichsbank granted the Branch credits against the remaining bills which had been drawn to the order of Hamburg Branch directly, however they would not accept those which had been endorsed over to the Branch by other branches of the Bank or by enemy firms. In addition the Branch had received a large depo. sit in current account on August 1, 1914, of 1,823,000 Marks from the Siam. ese Government, but this proved more of an embarrassment than a boon as Koelle could never be sure when it might be withdrawn.36 The Reichsbank had, as we have seen, never allowed the Branch interest on current account, but in 1914 the other German banks also agf'e>ed among themselves not to allow interest on deposits from English bank's. This decision was modified later, however, and some British banks, though appar. ently not the HSBC, had also been allowed 1% on the credit balances they had shown at the outbreak of war. In May 1916, after consulting with the other banks, the Deutsche Bank agreed to pay the Branch 3i% per annum (the amount offered to the liquidators of foreign firms) on funds taken in after the Branch had been put under control. Koelle was then able to place funds again at interest not only with the Deutsche Bank but with the Dresdner and Norddeutsche banks as well. 37 Koelle also tried to supplement the Branch's income by subletting a portion of the Branch's premises to a Government department (potatoes); however, their landlord, a Herr Kramer, objected on the grounds that the large crowds which would have gathered at such an office would damage the reputation of the house and make his other renters give notice.3R The threat that the Branch might be liquidated became more real after ordinances were passed in July and August 1916 expressly excepting bills, 36Ibid, P- 7. 37jbid , P- 32. 38Ibid, P- 37. EASTERN BANKING if collected by a liquidator, from the protection of previous ordinances regarding payments to enemy banks.Therefore at the request of the German staff and with the approval of the trustees, Koelle paid the staff their Officers' Provident Fund (retirement fund), which would not have constituted a priority claim in the event of a liquidation. Koelle also consulted his lawyers as to the advisability of applying to be appointed liquidator himself, but they advised him not to agitate in this direction until the situation developed. Various firms made representations in Ber. lin to protest against any liquidation of the British banks in Hamburg. Koelle pointed out that, aside from the office furniture, the Bank had few realizable assets in Germany. A liquidation would have amounted to in effect a transfer of funds from German drawees to German drawers causing great hardship to the former, who were for the most part not in receipt of the goods in question.43 A further threat to the Branch's financial position came from the pos. sibility that German firms might attempt to "arrest" funds belonging to the Hamburg Branch proportionate to the amounts which the British Custodian of Enemy Property had confiscated from them from their assets with the HSBC elsewhere. In fact only a few firms attempted this, however from the amounts involved, it is clear that the Branch could not have accommodated many further suits. The first and most important case of this sort was brought by Leopold Cassella & Co.(Frankfurt). On April 22, 1915, they were successful in obtaining a court order to arrest 900,000 Marks of the Branch's funds at the Reichsbank for amounts held in a suspense account for their correspondent firm Sander, Wieler & Co. in the HSBC in Hong Kong. Koelle decided not to protest this decision, but made sure that the Bank would retain the right to file a protest after the war. He feared that a protest at that time would only stir up the issue, making other German firms nervous and possibly bringing on more similar arrests.43 In January 1916, a Munich customer of the Standard Bank of South Afri. ca had a similar arrest put on that Bank for his securities in safe custody in London. Koelle protested that the Standard Bank had been allowed to communicate this embargo to London, whereas they had not "in spite of the HSBC's German connections, shareholders and directors".43 The trustees said they would look into the matter, but the Branch was never allowed to inform London of the "arrest". The only other attempt to arrest funds from the Branch was made in 1915 by Speidel & Co. for 390,000 Marks. Koelle decided not to protest this case either at the time, feeling that in any case the money could not be more profitably used elsewhere and that there was a serious doubt about whether the Bank had enough evidence to win the case in court. Leopold Cassella & Co., mentioned above, finally agreed in 1916, after much correspondence, to place the "arrested" 900,000 Marks in a joint account with the Norddeutsche Bank at 3per annum. 39qbid, p. 48; the two Ordinances were No 5365 of July 31, 1916, and No 5406 of Aug 24, 1916. 4^Ibid , pp. 35-36. 4^In a notebook with the heading "Manager's Notes" in the Hamburg Branch. 43Koelle's War Report, pp. 16 and 34. 43Ibid, p. 29. THE HONGKONG BANK IN HAMBURG During the war, the Branch was subject to various taxes. It is note. worthy that, in the case of the Wehrsteuer—or Imperial Defense Tax—of 1913, KoelLe was able to convince the German authorities to reduce the tax assessment on the Branch from 18,255 to 9,600 Marks.44 The authorities used a different method to assess the Branch's income tax for 1915 than was usual, allowing deductions for expenses during the previous two instead of the usual three half-years.* 4^ This was necessary in order for the Branch to show any taxable profit at all. The Branch's "profit" for this period was thus established at 50,000 Marks for tax purposes on the basis of which 6,000 Marks were payable in tax. In September 1917, an extraordinary tax was levied on the assets of enemy banks and firms. The Branch was assessed for 141,110 Marks and paid under protest in October.4^ The Branch also engaged in several law suits during the war, in order either to establish the basis for a claim by the Bank after the war or to set a precedent. One such court decision in 1915 declared that it was not necessary for a bank to protest the non-payment of a bill in court immedi. ately in order to establish the right to make a claim later. This spared the Branch much expensive litigation, however the Branch's trustees had already decided not to allow them to forward any more such protests in any case. In another case, a lower German court decided in favor of the Branch against Ludwig Burchard, concerning his claims for the enhanced value of a shipment of Wolfram ore that had been sold in Paris. However the Branch, in order to persuade the German firm not to appeal, agreed to pay l/8th of the costs in Hamburg and the Berlin costs totalling about 600 Marks in a case involving (beside the precedent) 7,000 Marks. Koelle, as a German citizen, was not subject to internment, but, at age 44 (in 1914), he was still subject to the German military service. On December 18, 1914, he was registered for the draft and on April 30, 1915, he was examined medically and declared fit for infantry field service. He made several successful applications for deferment, but was constantly in suspense as he might be called up on any day. On February 15, 1916, the trustees no longer found it in their consciences to support his applica. tions for deferment. Carstens and Spandau, two senior members of the German staff of the Branch who held a joint P/A, would remain in Hamburg however, as the former at age 47i was too old and the latter had a consti. tutional defect and was thus not subject to the draft. In December 1916, Koelle was finally called up for training, but it had been arranged that this should be done near Hamburg, so that he could occasionally check back at the Branch. His first duty was also in Hamburg at the Hauptbahnhof (main railway station). Only in December 1917 was he transferred away from Hamburg and sent to the island of Sylt, but even there he was able to keep in contact with Branch business by mail and when he returned to Hamburg on furlough. After the "revolution" of November 8, 1918, Koelle was, on November 20, one of the "patriarchs", the first to be disbanded from the army, and he immediately returned for duty at the Branch. 44Ibid, p. 18. 4^lbid, p. 32. 46Ibid, p. 44. EASTERN BANKING The Aftermath of the War Germany ratified the peace agreement ending the First World War on July 9, 1919, and censorship of the postal service was gradually withdrawn by the end of July. Koelle began to send the more important documents to London Office, soliciting information which would allow him to begin the job of clearing up the overdue claims on German firms so that business at the Hamburg Branch might begin again as usual. But London Office remained uncommunicative except to tell him that he could expect Padfield (who had been the accountant in Hamburg before the War) to arrive in Hamburg as an Inspector as soon as this was possible. This Koelle attributed to an inability to get the necessary information to answer his questions.^ But attitudes had changed in England and in the Bank far more than Koelle could have imagined. When Padfield returned to Hamburg, it was not simply to make arrangements to pick up "business as usual" where it had been left off before the war with some long-standing customers of the Bank (who happened to be German). He came instead as an "inspector"—thus ranking now as Koelle's superior, in itself a humiliation by the Bank's standards of seniority—to determine the Branch's status, to see what could be salvaged of its assets and to form an opinion as to whether the Branch should be kept open. During this period there is curiously little reference to Koelle in the S/O's. The fact that Koelle still retained his position as manager is confirmed in an S/0 addressed to him by Padfield on December 15, 1919, informing him that he was going back to England over Christmas and instructing him not to undertake any new business in the interim.1^R The question of whether or not Koelle had served the Bank loyally during the war is not raised. On December 15, 1919, Padfield presented a detailed report in an S/0 to Head Office in Hong Kong concerning the assets of the Branch and giving some information concerning the events of the war in Hamburg. In it he noticeably avoids any praise or criticism of Koelle's handling of the situ. ation. None of the information in his report at all conflicts with that given in Koelle's running 'War Report'. At the same time he wrote various memoranda and letters concerning his opinion of what should happen to the Branch in the future. The immediate problem was naturally the winding up of the pre-war accounts and bills, but this promised to be a long and difficult task and one which would be delayed until the terms of the Peace Treaty became known and the Board of Trade in England and its French equivalent came to a deci. sion as to the status of the Hamburg Branch. Here the Board of Trade seems to have ignored the very clear evidence that the Germans certainly consi. dered the Branch English and treated it that way throughout the war In ^Koelle's War Report, p. 56. ^%ote that letters between members of the staff of the Bank are presumed to be Semi-Official [S/0] letters unless otherwise noted, and, if the date is given in the text, will not otherwise be noted. The S/0 files used for this paper are the ones found in the London Office archives, now transferred to Quarry Bay. ^Padfield to Jones, Oct 18, 1919. THE HONGKONG BANK IN HAMBURG the interim Padfield suggested the staff could be reduced. On November 15, 1919, Padfield wrote a memorandum in which he urged that the Branch be kept open, as he saw there would still be a large trade with Germany. A country with a population of 70 million, he felt, could not simply be disconnected from world trade and the Bank should not, solely on the grounds of nationality, refuse to consider the finance of sound business transactions which one of its customers might have with a German firm. He noted that German firms were confidently trying to re-establish their links with Asia [although they had only just been expelled from China], and that although they were still debarred from trading directly with British colonies, there was still indirect trade between these colo. nies and Germany. Furthermore American, French and Japanese banks were already seeking to re-establish or indeed to set up for the first time in Germany, and, if the Hongkong Bank withdrew, British public opinion might see this as a failure to hold up British trade interests. On the whole he expressed the opinion that the other HSBC branches would feel the repercus. sions if the Hamburg Branch were closed.50 Throughout his letter, Padfield writes as to an audience already decided not to maintain the Hamburg Branch, and indeed, on November 18, the Board of Directors in Hong Kong unanimously decided that steps should be taken to close the Branch on the grounds that prior to the war the Branch had not been profitable and that, if it were left open, the Bank would have to incur considerable expense without compensating advantages.51 On December 3, Padfield wrote to Addis, the London Manager, admitting that in writing the optimistic report mentioned above, he had not realized that the Branch had been unprofitable in the past. But this sounds incred. ible, as Padfield had been the accountant in Hamburg for several years just before the war and must have known better than anyone else how the Branch was doing. But what constitutes a profitable Branch? Certainly no one was going to claim that the Bank's management of the finance of German trade as a whole before the war had been unprofitable. However it would be diffi. cult to calculate how much of this business, which would otherwise have been taken elsewhere, was given to the Bank because of the facilities offered by the Hamburg Branch. In the same letter to Addis, Padfield noted that the Branch's charges had amounted to less than 1/1000 of its total turnover. Following the methodology of determining "profits" used by the Branch in its Profit and Loss accounts after the war, the Bank only made a profit during one half-year period (and then only due to a technicality), but this method of figuring was based on the totally arbitrary interest rates charg. ed on the Branch's overdraft with London Office, and the Branch's own pro. fits were deliberately kept low in order to minimize the amount of income tax payable in Germany. Padfield suggested to Addis in his letter that it was possible that the Bank's domination of the Eastern exchange markets would be sufficient 50"Memo on the future of the Hamburg Office", by R E N Padfield, Nov 15, 1919. In the archives of the HSBC, London Office. 51From the Minutes of the Board of Directors' Meeting of Nov 18, 1919. In the archives of the HSBC, Quarry Bay. EASTERN BANKING to make the influx of rival banks on the Hamburg market no real threat, however the HSBC would be the only bank in Hamburg not to fear this compe. tition. Finally, he said, the British Government could not expect the Bank to maintain its office in Hamburg if it did not appeal for business rea. sons. But these arguments sound deliberately hollow after the concrete arguments used to support the maintenance of the Branch in his earlier memorandum. On January 14, 1920, Sir Newton Stabb, the Chief Manager, wrote to Addis agreeing to let the question of the Hamburg Branch stand for the time being. In Hong Kong, he added, they [the Board of Directors?] were convin. ced that there was no point in keeping it open, but, as London Office held a different opinion, he would let it pass. In any case it would be some time before the outstanding business of the Branch could be cleared up, so that there was no need to make a hasty decision. The question of what was to be done about Koelle, because of his German nationality, was first raised in a letter (which does not survive) from Addis to Stabb of February 13, 1920, and in Stabb's reply on April 9. Stabb had not yet reached a final decision concerning the Hamburg Branch, but, he wrote, "in any case we cannot retain a man of German nationality in an executive position in the Bank's services." Stabb went on to recognize that this was a harsh decision in Koelle's case, but, he said, the Bank had no option but to ask him to resign. The Bank was, however, in view of his long service, prepared to pay him a gratuity on his resignation. On May 15, 1920, Stabb responded to Padfield's report of December 15 and appears to have misconstrued its intent. Padfield does not say so explicitly, but his report shows a fairly honest handling of the Branch's funds by the German authorities. Stabb wrote, "the [German] authorities appear to have helped themselves generously to the Bank's funds and it is a wonder they overlooked making an allowance to the Kaiser," but, he admit. ted, the total amount of money involved when converted into sterling was small and could be covered by the funds the Bank was holding from the liquidation of the DAB in Hong Kong (which, it should be noted, had been far more severe than anything that was done to the Hamburg Branch). The attitude displayed in this letter tallies with the view expressed in a letter by Edmonston in 1938 (with reference to again granting P/A's to the senior members of the German staff) that Koelle had been forced to resign in the period of "Hang the Kaiser!" enthusiasm. Although it was against his principles, Addis requested Koelle to hand in his resignation on June 2 without giving any explanation of the reasons behind it. Koelle obeyed on the 8th, but also wrote a private letter to Addis at the same time expressing his bewilderment and dismay at the decision which he had not expected. He was aware of rumors that were circulating about him, one of which stated that he had taken on German nationality during the war in order to escape internment, whereas in fact he had taken on German citizenship in 1903 with the full cognizance of the Bank. He could not believe that he was being dismissed on the basis of these rumors. Koelle's resignation is noted in the minutes of the Board of Directors in Hong Kong, as was usual, with no further explanation than a comment in parenthesis that he was a German subject. He was voted a gratuity of ￡6,000, and his Officers' Provident Fund was adjusted to total THE HONGKONG BANK IN HAMBURG ￡7,150 at Addis1 recommendation.-^ The Board however could not permit him or any of the German Hamburg staff to participate in the war-time bonuses (in this they do not appear to take into account the fact that Koel le had already paid the equivalent of these in the form of cost-of-living allow. ances. Stabb, in reporting the Board's decision to Addis, again mentioned that he felt sorry for Koelle. "He was placed in an awkward position and no doubt acted in what he considered was the best interests of the Bank," however Stabb felt that he had been dealt with generously.53 On Koelle's resignation, Padfield was given a P/A to deal with the winding-up of German pre-war affairs. In July the Board took special steps to formally withdraw the P/A's that had been granted to all Germans (i.e. the joint P/A's to the three senior members of the local staff of whom one, Caspar, had resigned and Koelle's own). It was only on December 7, 1920, that the Board of Directors finally resolved on the recommendation of London Office to keep the Branch open permanently, using as arguments essentially those which had been advanced by Padfield in November the year before.54 Padfield returned to England in January 1921, leaving D C Edmonds ton in charge, from which point the Branch can be considered as again operating routinely. In June 1921, the Board of Directors agreed to again include the Hamburg Branch in the advertisements for the Bank.55 The postscript on Koelle is not a happy one. He was 51 when he was forced to retire, i.e. not much younger than the normal retiring age in the Bank, but his financial circumstances did not allow him to stop working. He had, of course, not been able to save any money during the war, and much of the Bank's gratuity to him was lost in the Great Inflation in Germany, while his Provident Fund, when it finally reached him through the Clearing House amounted to only ￡280 rather than ￡7,150. He was also unfortunate in the various business ventures he undertook after the war. In 1924 he was forced therefore to again turn to the Bank, at which time he was granted a pension of ￡200 p.a. to be continued at the pleasure of the Board of Directors. However as time passed, the bitterness seems to have disappeared and Koelle maintained social contact with the various foreign staff members who took charge in Hamburg. During the Second World War, in accordance with general Bank policy, Koelle's pension was cut off along with those of all other enemy nationals. After the war he was again destitute, his business ventures having been destroyed during the war and his landholdings cut off in the Russion zone of occupation. The Bank agreed to renew his pension and remained in cordial communication with him until his death in 1959. The Hamburg Pre-War Account When Koelle was asked to resign as manager of the Hamburg Branch, Padfield 52prom the Minutes of the Board of Directors' Meeting of June 22, 1920. 53s/0 56/104, Stabb to Addis, June 25, 1920. 5^From the Minutes of the Board of Directors' Meeting of June 7, 1920. 55Fr om the Minutes of a Board of Directors' Meeting in June 1921. EASTERN BANKING took control with a special P/A to deal with the winding up of German pre. war affairs. Even after Edmondston became manager in Hamburg, Padfield remained responsible for the supervision of the Hamburg Branch from London Office and for the handling of this clearing procedure. The Hamburg "pre. war account", which was kept separate from the new business undertaken by the Branch, was thus always centered in London. Padfield expressed the Bank's policy on the liquidation of pre-war business in a letter to Edmond. ston in 1922: Our view is that German firms should endeavour to arrive at a prompt settlement of their pre-war debt with us. Many show a desire to do so, while there are those whose attitude does not encourage us to consider further business with them.56 As we have seen, certain firms had, despite regulations allowing them to avoid doing so, continued to pay their bills as they came due during the war. But many others were unable or unwilling to do so, as the condi. tions of the war made it difficult for them to part with funds where this was not absolutely necessary. After the war a large proportion of this sort of settlement passed into the control of government authorities and the Clearing House, with whom the London Office was often in a better posi. tion to negotiate than the Hamburg Branch. Therefore the control of this winding up passed to London, Hamburg only being asked for information con. cerning firms, and often not even being informed when business was finally cleared up. ^7 However, immediately after the war, the most important problems to be dealt with were the "arrests" mentioned above of Branch funds by Leopold Cassella & Co. (Frankfurt) and Speidel and Co. (Saigon). These amounts, came to a total of approximately 1,300,000 Marks and were held at between 3 and 3i% interest p.a., while at the same time the Branch had had to borrow over a million Marks at 5% from the Deutsche Bank in order to cover current expenses. The "arrests" were finally withdrawn on July 13, 1920, and the funds were used mainly to reduce the debt with the Deutsche Bank. Next was the problem of the almost two million Marks in "advances" granted to Germans against their share dividends. Under the Treaty of Versailles all HSBC shares in the hands of German subjects passed under the control of the Custodian of Enemy Property along with the dividends accru. ing to them and any other rights (such as the right to purchase new shares in a preferred issue, as for example in 1921).-^8 The Bank sought the refund of the dividends paid to the Trustees, rather than to try to arrange concerning the German firm Otto 56s/0 from Padfield to Edmondston #58/38, Wiesinger, Dec 22, 1922. -^Cf; the S/0 from Padfield to Brent (Hamburg manager) of Nov 9, 1927, re- Brent's complaint that he had not been informed that some of business had been liquidated, Padfield explained that London dealt with the Hamburg pre-war account and the pre-war other branches of the Bank from the beginning. would be entitled to pur- to Morat, Jan 26, 1921. sponding to the pre-war Office had accounts of 5&MO rat, a German shareholder, had enquired if he chase shares in the new preferred issue. Addis THE HONGKONG BANK IN HAMBURG the repayment of the "advances" from the shareholders in Germany, on the grounds that the Branch had only advanced the money on the express demand of its German controllers. Already in December 1919, the Bank had received authorization from the British Board of Trade to seek reimbursement of the funds advanced to the British refugees during the war. Before the war, the Hamburg Branch had maintained credit balances also with banks in other countries and its account with the Credit Lyonnais in Paris had been blocked during the war as "enemy property". In November 1921, Padfield requested the Branch's German lawyer. Dr Hertz, to draft a legal declaration that the HSBC was a Hong Kong (i.e. a British) bank, and that the Hamburg Branch had been treated throughout the war as a branch of a British organization. 69 In March 1922, the Credit Lyonnais finally released the Branch's funds. When a firm split up and the partners formed firms in other combina. tions, the Bank's policy, regardless of the legal possibilities for re. course, was to only consider doing business with the new firms if they felt that sufficient effort had been made on the part of the debtor to clear up his old debts. 60 The fact that two of these firms had been represented on the Board of Directors before the war does not seem to have entered into the calculations.in 1925, thirty-five German firms still had debts out. standing in the Branch's pre-war account, although in some of these cases the fault lay more with the Clearing House than with the firms. Of these thirty-five, H D C Jones (who had taken over Padfield's position as overseer of the Hamburg Branch in London Office) only recommended that the Bank discriminate against two, and it is significant that five of the most important German firms were still on the list.62 The Hamburg "Pre-War Account" was kept open until 1930, when it was closed with only a very small amount outstanding which had not either been repaid or written-off by the Bank. Acknowledgements In the preparation of the report from which the above extracts were drawn, I had support throughout from officers of the Hongkong and Shanghai Banking Corporation, the Centre of Asian Studies of the University of Hong Kong, and from the archivists and librarians whose collections I used. I would, however, like to make certain specific acknowledgements. In Hamburg I am indebted to the assistance of the Branch of the Hongkong Bank, particularly the Manager, P W S C Brockman, and E H Albers. Dr Brunhild Staiger at the Institut fur Asienkunde, Senator Jan Albers (re 69padfield to Edmondston, Nov 8, 1921. 6°Padfield to Edmondston, Nov 18, 1924. S/0 60/87, concerning W Melchers, who was about to form Melchers, Rowaldt and Company and still had a debt of approximately ￡535 plus interest outstanding to the Bank. 6 ^Melchers & Co (see preceding note) and Arnhold, Karberg—the German partner joined the new firm of Lieb, Rummler & Co after the war. 62jones to Brent, Jan 20, 1925. EASTERN BANKING Kunst & Albers), Dr Gabrielsson of the Hamburg Staatsarchiv, and Dr W F J Koelle were generous of their time and expertise. I am grateful for the assistance of Dr Maria Keipert at the Auswartiges Amt. In England G G Plastow made material from the HSBC's London archives available. Sir John and Miss Robina Addis kindly entertained me at Frant while I consulted Sir Charles Addis' papers, and I had the advice of Sara Joynes of the Institute of Commonwealth Studies. In Hong Kong I worked in the Hongkong Bank's Group Archives and had the guidance of the Controller, B J N Ogden. In Washington Governor Henry Wallich of the Federal Reserve Board provided me with a collection of the private papers of his grandfather, Hermann Wallich. Select List of Other Works Consulted Ahrens, Karl. Die deutsche Auslandsbanken. Wiirzburg-Aumuhle: K Triltsch Verlag, 1939. [Behn Meyer and Co. ] Zur Geschichte der Firmen Behn Meyer & Co und Arnold Otto Meyer. 2 vols. Hamburg: Hans Christian Verlag, 1957. Collis, Maurice. Wayfoong: The Hongkong and Shanghai Banking Corporation. London: Faber and Faber Ltd., 1965. Diouritch. L'Expansion des Banques allemandes ￡ 1'Stranger. Paris: A Rousseau, 1909. Milller-Jabusch, Maximilian. Fiinfzig Jahre Deutsch-Asiatische Bank, 1890- 1939. Berlin: Otto von Holten, 1940. Ostasiatischer Verein Hamburg-Bremen zum 60-jahrigen Bestehen. Hamburg, 1960. Pohl, Manfred. "The Deutsche Bank's East Asian Business, 1870-1875: Proposals and preparations for establishing branches in Shanghai, Hong Kong and Yokohama", in Studies on Economic and Monetary Problems and on Banking History, 15 (1977) Frankfurt/M: Deutsche Bank im Selbstverlag. Stingl, Werner. Der Feme Osten in der deutschen Politik vor dem ersten Weltkrieg (1902-1914). 2 vols. Frankfurt/M: HAAG + HERCHEN Verlag GmbH, 1978. Stocker, Helmuth. Deutschland und China im 19ten Jahrhundert. Berlin (East): Riitten & Loening, 1958. Wallich, Hermann, "Aus meinem Leben", in: Zwei Generationen im deutschen Bankwesen. Schriftenreihe des Instituts fiir Bank-historische Forschung e.v. Vol II., Frankfurt/M: Fritz Knapp Verlag, 1978. Whale, P Barrett. Joint Stock Banking in Germany. London, 1968. 24. FINANCING HONG KONG’S EARLY POSTWAR INDUSTRIALIZATION: THE ROLE OF THE HONGKONG AND SHANGHAI BANKING CORPORATION by Y C Jao Introduction The purpose of this paper is to investigate the role of the Hongkong and Shanghai Banking Corporation (HSBC) in financing Hong Kong's industrialisa. tion during the period 1950-1966. It is often taken for granted, particularly in popular mythology, that HSBC, as the largest bank founded and headquartered here was, and still is, responsible for providing Hong Kong's enterprising industrialists and entrepreneurs with the necessary finance for creating and expanding the territory's manufacturing industries. However, there has so far been no serious documentation or quantification of the Bank's role in the industri. alisation process. The opening of the Bank's Archives to scholars there. fore offers a welcome opportunity to undertake research that will hopefully fill a gap in this area. Apart from this obvious historical interest, there is also a related theoretical and intellectual perspective; whether HSBC's historic role con. forms to what in the economic literature is known as the "Gerschenkron Hypothesis".-*- Named after the distinguished economic historian, Alexander Gerschenkron, the hypothesis states that for a backward country, or a late. comer to the industrialisation process, where the capital market is poorly developed and entrepreneurial talent is in short supply, reliance on the banking system is much greater than in a country like England, where not only the Industrial Revolution started earlier, but also that industriali. sation could afford to proceed at a more leisurely pace instead of in a "sudden spurt", and where consequently, capital accumulation on a smaller scale was sufficient. Drawing on his encyclopaedic knowledge of European history, Gerschenkron notes that the "investment banking" concept embodied in the Pereire brothers' Crddit Mobilier was carried over and perfected in the German "Universalbanken" (universal banks). He extols the "truly momentous role of investment banking of the period for the economic history of France and of large portions of Europe", and argues that "the continen. tal practices in the field of industrial banking must be conceived as specific instruments of industrialisation in a backward country."* 2 ^See Cameron (1972), passim, especially pp. 9-15. 2Gerschenkron (1962), pp. 12-14. In its purely theoretical form, the "Ger. schenkron Hypothesis" was anticipated by Schumpeter (1911, 1934) who emphasised entrepreneurship and bank credit as the two engines of modern economic development. The German "universal banks" are so-called because their business runs the whole gamut of commercial and investment banking, from deposit-taking and short-term lending to long-term lending, under. writing and equity participation. EASTERN BANKING Although the "Gerschenkron hypothesis" originates as a generalisation of European history experience, its central message has considerable appeal to non-European, less developed countries (LDCs) as well. Two events serve to underline its contemporary significance. First, the concept of "univer. sal banking", or "multi-purpose banking", has now received official blessing by leading international agencies, like the World Bank and Inter. national Monetary Fund (IMF), as being more appropriate for LDCs.^ Second, the Philippines became a recent convert to this approach when in 1980 bank. ing laws were amended to allow the formation of "universal banks". Bearing in mind HSBC's towering position in Hong Kong, the obvious success of the territory's industrialisation in the Fifties and Sixties has naturally prompted the questions: Was HSBC the Credit Mobilier of Hong Kong? Did it practise the "cradle-to-grave" type of "universal banking"? Answers to these questions will be of more than parochial interest. The Economic Setting The economic development of Hong Kong during the period 1950 to 1966 has been intensely studied by other scholars, virtually without any reference to HSBC.^ Here it is proposed to give a brief sketch of the economic environment in which the Bank found itself, in order to appreciate better its role in financing and fostering Hong Kong's postwar industrialisation. By the end of 1948, postwar reconstruction had been successfully com. pleted. Indeed, some leading economic indicators, such as external trade, had already surpassed the prewar 1940 level. In 1949-50, however, Hong Kong was badly shaken by two momentous events: the victory of the Communist Revolution in China and the outbreak of the Korean War. The annual reports of the Chairman and Chief Manager, Sir Arthur Morse, for 1946 to 1949 were already full of foreboding about the deteriorating situation in China. In his report for 1950, however, Sir Arthur had had to go further and speak on two sensitive topics. China's intervention in the Korean War and its hostility towards the United States and the United Kingdom had given rise to considerable apprehension about the status of Hong Kong. Mindful of the widespread sense of gloom, Sir Arthur declared: Finally as regards Hong Kong's future I want just to remind you that His Majesty's Government have not wavered in their determi. nation to maintain the position which you and I and our forbears In other words, the tradition of separating commercial from investment banking in Anglo-Saxon countries has never been followed in Germany. However, during the past two decades, as a result of rapid economic and technological changes, the distinction between commercial and investment banking has also blurred in Anglo-Saxon countries, but this process has stopped short of adopting wholesale the German model. For recent discus. sions of "universal banking", see Christians (1977) and Krummel (1980). -^See Khatkhate and Riechel (1980). ^See inter alia, Szczepanik (1958), Yu (1967), Riedel (1974), Cheng (1977) and Chen ( 1979). FINANCING HONG KONG'S INDUSTRIALIZATION have built up with such hard work and persistence over the past century. Perhaps you remember what His Majesty the King said in his broadcast last Christmas when he reminded us of Bunyan's 'Pilgrim's Progress' and urged the British peoples to resist any temptation to take 'Faint-heart' as their friend and guide. I am convinced that here those who form the staunch backbone of Hong Kong will stand firm against this temptation.^ In December 1950 the US Government imposed a ban on the shipment of strategic goods to China, Hong Kong and Macao, and totally prohibited with. out licence the carriage to, or discharge at, Hong Kong or any goods of any origin, which might be suspected of being in transit or ultimately directly or indirectly to any point in China. The American embargo was followed by the United Nations in May 1951. Meanwhile, US currency assets of residents in mainland China were also frozen. Commenting on these developments, Sir Arthur said: The sudden application of these measures without warning led to the disruption of contracts already made and a good deal of uncertainty and chaos. It also upset the industry of the Colony by depriving it of cotton and other raw materials essential for its own needs and for its exports to markets outside China, and it jeopardised the livelihood of its workers and the indispen. sable functions served by this great port. ... We have endeavoured to the best of our ability and with the utmost frankness to comply with the strict terms of these regulations. I trust, however, that I shall not be deemed lacking in appreci. ation of the urgent motives which impelled our American friends to apply these measures if I stress the vital danger of under. mining confidence in the absolute obligation and ability of banks to honour their commitments under commercial credits on which the whole vast system of the world's trade has been built. To plunge the sword into the delicate texture of inter. national trade and finance may cause irreparable injury and shatter faith in the sanctity of contract. We cannot therefore see eye to eye with the United States Authorities in regard to the embargo or freeze.^ In 1950-51 there was a transient boom in entrepot trade caused by the Korean War and Chinese stockpiling. The nominal value of total external trade reached its first postwar peak at HK$9,303 million in 1951, which was more than four times as high as in 1946. In the next three years, as a direct result of the trade embargo, total trade declined by 37% to $5,852 million in 1954. Recovery began in 1955, but it was not until 1960 that the 1951 level was surpassed. Adjusted for price changes, however, the first postwar peak occurred earlier in 1950, but was also not surpassed until 1960. According to Szczepanik, the trade recession in 1952-54 ^Proceedings of the Annual General Meeting dated 10 March 1951, p. 6. 6Ibid, p. 7. EASTERN BANKING caused by the loss of China trade "might have produced a reduction of the Colony's national income by about one-third; this actually did not occur, thanks to a rapid switch towards manufacturing industries."^ This transition to manufacturing as Hong Kong's economic mainstay was greatly facilitated by the Korean armistice in 1953 and the institution of the Comprehensive Certificate of Origin (CCC) system in the same year, under which Hong Kong manufactured goods using non-Chinese materials were allowed entry into the United States market. This new arrangement proved to be of crucial importance to Hong Kong's industrialisation, as the United States was to become the largest export market for Hong Kong in the next three decades. As over eighty per cent of the output of manufacturing establishments in Hong Kong is for export, statistics on domestic exports are used by economists as a leading indicator of the territory's export-led industrial. isation, particularly as there is still no comprehensive index of indus. trial production here.^ Prior to 1959, domestic exports and re-exports were not distinguished in official trade statistics, but Chung (1969) has made private estimates of domestic exports for the years 1948 to 1958. Using these estimates for our period, it can be shown that from 1950 to 1966, domestic exports in value terms grew at a compound rate of 17.7% per annum from HK$420 million to HK$5,730 million. Using the official time series, the annual growth rate during 1959 to 1966 was 16.6%. Moreover, prior to 1969 export prices were remarkably stable, so that for the period 1959 to 1966 at least, export growth in nominal and real terms were approx. imately equal. By any standard, this record of export growth must be regarded as phenomenal. Hong Kong's industrialisation can, of course, also be shown by the rapid expansion of industrial undertakings and work force, as well as the diversification of industries. In 1950, the number of registered and recorded factories was 1,752, with a workforce of 91,986. By 1966, the number of industrial undertakings had increased to 10,413, while workers employed had increased to 424,155.^ In 1950, apart from traditional indus. tries serving the port, such as shipbuilding and ship-repairing, other major industries consisted of textiles, enamelware, aluminiumware, rubber shoes, ginger and torches, while clothing and plastics were still in their infancy. By 1966, entirely new industries, including electronics (ranging from transistor radios to computer memory cores), electrical appliances, air conditioners, clocks and watches, optical and photographic equipment, hair wigs and machine tools, had been established. Plastics and clothing had by then grown to be the two major pillars of the manufacturing sector. Even within the textile industry itself, there had been significant diver. sification from spinning, weaving and knitting into dyeing, printing and finishing, and from cotton into man-made fibres. The clothing industry ^Szczepanik (1958), p. 48. RSee Hong Kong Government, Census and Statistics Department (1972). ^These figures are taken from Commissioner of Labour, Annual Departmental Report, various years, and Hong Kong Annual Report, various years. It is often said that official statistics, particularly in the early Fifties, tended to underestimate the amount of industrial employment. was also moving around that time into high-fashion lines instead of merely producing basic items like shirts and underwear. A note of caution should be sounded here. Most writers on the postwar industrialisation have tended to emphasise the catalytic role of historical circumstances, such as the Communist takeover in China and the Korean War, in compelling Hong Kong to switch from entrepot trade to manufacturing industries, as though the latter were created overnight in the late Forties and early Fifties. This view is now being disputed as being too simplis. tic. Using Chinese-language business directories, Leeming is able to show that a substantial manufacturing sector existed well before 1941, to which official statistics have done scant justice.111 While one need not accept his more extreme claim that "Hong Kong had already reached in 1846 a stage in industrial development very like that which is conventionally attributed to it in 1946," there can be little doubt that the beginnings of Hong Kong's modern industries can be traced back at least to the early Thirties, when a number of light industries were established under the protective aegis of the Ottawa Agreements of 1932, which introduced the imperial pref. erence system. Moreover, during the prewar entrepot era, Hong Kong built up an extensive network of commercial ties abroad, which stood it in good stead in the export-oriented industrialisation of the Fifties and Sixties. Thus, Hong Kong's industrialisation process should better be seen as a relatively long continuum rather than a sudden spurt concentrated in a few years. Nevertheless, it is probably still true to say that the export- propelled mechanism accelerated after the early Fifties due to the special historical factors already mentioned, leading to the relative eclipse of the entrepot trade. It is not easy, however, to interpret Hong Kong's industrialisation during 1950 to 1966 in terms of national income data. Official estimates of Gross Domestic Product (GDP) begin from 1961 only. Estimates for the period prior to 1961 were made by scholars who were handicapped by lack of access to confidential material. Using the limited information available, it appears that Hong Kong's GDP grew at an annual compound rate of about 8.3% in nominal terms or about 7% in real terms from 1950 to 1966. It is even more difficult to explain industrialisation in terms of the share of the manufacturing sector in GDP. Official estimates of GDP by industrial origin start from 1970 only, while private estimates of GDP for 1947 to 1950, such as those by Ma and Szczepanik, do not contain this information. However, Szczepanik's "guesstimate" that in 1954-55 manufacturing accounted for no less than one-third of GDP is rather implausible.11 Lim's study shows that for the period 1960 to 1968, the combined share of mining and manufacturing fluctuated between 26.1 and 31.2%.1^ Technical discussion of this topic is beyond the scope of this paper, but available data suggest that Hong Kong's industrialisation is still very much a riddle as far as the distributive share of manufacturing industries in GDP is concerned. HSBC's net profits reflected the changing fortunes of the period. From 1949 to 1953, the Bank's net profits remained virtually stagnant at ^See Leeming (1975). ^Szczepanik (1956a), p. 649. ^See Lim ( 1969), Table 6.1. EASTERN BANKING around HK$17 million. Indeed, the net earnings for 1953 represented a slight decline on the previous year, reflecting not only the liquidation of branches in China, but also the embargo-induced recession. From 1954 onwards, however, with Hong Kong's industrialisation gathering momentum, the Bank's net profits began to show a pattern of uninterrupted growth and by 1966 they had exceeded HK$67 million.^ The accounts of the Bank's Mongkok branch, which was heavily involved in industrial financing, also confirmed this trend. Established in 1948, the branch sustained continuous losses until 1950, when it began to make a modest profit. However, the real take-off in profit growth did not start until 1955.^ Financing Industrial Development Against the economic background sketched above, we can now proceed to the discussion of HSBC's role in financing industrial development during the period indicated. The present writer has been given access to the Bank's Archives and other relevant materials, from which documentary evidence can be produced to ascertain the Bank's role. (a) Lending Practices It is said that "finance is the lubricant of the process of economic growth, and the banking system is the chief dispenser of finance."^ How. ever, a bank can either actively support promising entrepreneurs by taking the necessary risk or sit back and be content with the safest loans and investments. Its attitude and behaviour are best revealed in its lending practices. The present writer has been provided sufficient data for study of these practices, but since space consideration does not allow detailed discussion of each case, a sample of loans and advances to twenty firms during 1950 to 1966 is summarised in Appendix I. To respect the confidential nature of bank-customer relationship, the identities of the clients are not revealed. From the information contained in the table, some general observations can be made on the Bank's lending pr ac t ic es . 1. The Bank expects full information from its client concerning its business and financial position. A new client is required to fill in an elaborate form (the "pink form"), providing not only details about the firm's latest balance sheet and net worth, but also names of partners and directors, nature of business, facilities required and their purpose, security offered, turnover during the past twelve months, foreign exchange business generated through various documentary credits (L/C, T/R, D/A, D/P, etc) and last but not least, facilities received from any other bank or financial institution.^ The branch manager or lending officer in receipt l-^These figures are taken from the Bank's balance sheets and profit and loss statements for 1950 to 1966. l^Mongkok Office Annual Results, 1948 to 1961. HSBC Group Archives. ^Cameron (1967), p. 2. ^Appendix II is an explanation of abbreviations used in the Bank Archives. of the request then makes his recommendation for approval by senior manage. ment, usually a manager or sub-manager in Hong Kong Office. Before repay. ment is due, another form (the "green form") along similar lines is com. pleted for internal review as to whether loans/advances should be renewed or terminated. Again the branch manager/lending officer makes his recom. mendation on the basis of the client's past performance, for the approval of senior management. 2. As a rule, loans and advances for financing working capital are granted for a period of one year (though cases of six months are not unknown) subject to annual review. However, unless the borrower is obviously a bad credit risk, renewal is normally granted. Quite often a request for additional facilities is approved along with renewal of exist. ing facilities, provided the client's performance is satisfactory and business is expanding (see cases 15 and 16 in the Appendix). Formally, the Bank in its letter approving a request for loans and advances reserves "its overriding right to repayment on demand," though this is seldom if ever exercised. 3. For working capital the most convenient form of finance is the Manufacturing Advance (M/A), sometimes also called Packing Credit (P/C), which may be extended up to 80% of the face value of the Letter of Credit or confirmed order the manufacturer has received.^ The purpose of this loan is to enable the manufacturer to buy raw materials, pay wages and overheads so as to facilitate the manufacture and delivery of goods. For the manufacturer who has to import raw materials or intermediate inputs from abroad, an important facility is the Trust Receipt (T/R), which is often used in connection with L/C opened by the Bank on behalf of the manu. facturer, often with little or no margin, provided the latter's credit standing is good. The manufacturer can take delivery of the goods even before the bills are retired by signing a T/R in favour of the Bank. As the name implies, the granting of T/R facility indicates a high degree of trust in the borrower. 4. For financing fixed capital on a medium- or longer-term basis, the most important facilities are those for the construction of factory build. ings and the purchase and installation of machinery and equipment. As soon as the manufacturing firm has purchased a piece of land, whether in cash or by instalments, the Bank is, as a rule, prepared to finance the greater part of the cost of upperstructure, on the understanding that it is to be used for industrial purposes only. Repayment normally starts after the building has been completed or occupation permit has been issued, over a period of three years or more. For smaller firms which lack the resources to construct factories of their own, but wish simply to purchase a floor or several floors of a multi-storey building, hire-purchase terms are ^Strictly speaking, Manufacturing Advances are loans extended to the manu. facturer to finance the initial stage of production, while Packing Credit is a loan to the exporter for packing finished products for shipment, who in turn may finance the manufacturer. Where the manufacturer and the exporter are one and the same party, there is of course no distinction between the two kinds of loans. However, in Hong Kong the term Packing Loan is often used to cover both cases. EASTERN BANKING available. Similarly bank credit is available for the purchase and instal. lation of machinery and equipment, with repayment spread over a number of years. But this form of finance is usually handled by the Bank's wholly- owned subsidiary, Wayfoong Finance Limited. 5. An acceptable collateral is required from the borrower in the form of real property, debenture over the assets of the firm (in the case of an incorporated company) or Bill of Sale (in the case of an unincorporated company), marketable securities, time deposits, inventory, personal guaran. tee by the firm's owner or Chairman or guarantee by another reputable firm. However, in exceptional cases unsecured loans and advances may be granted, if the facilities are of a self-liquidating nature (e.g. export and import trade) and the credit standing, future prospects and cash-flow position of the borrowing firm are beyond doubt (see Cases 4 and 11 in Appendix I). For the secured loans, Appendix I shows that the average ratio of banking facilities to collateral offered was 51.5%. 6. The lending rate charged on loans and advances vary with the type of facilities and the credit standing of the borrower. Generally speaking, the rate on import and export bills is closest to the best lending rate; the rate on Manufacturing Advances or overdrafts is somewhat higher by between 0.5 and 1%, while the rate on building and machinery loans is higher by another 0.5 to 1%. (During the period under review, the best lending rate of the Bank varied between 6 and 7.5%.) In theory, the lending rate is subject to "fluctuations without notice", but since inter. est rates in those days were remarkably stable, the impact of rate changes was minimal. 7. In considering or reviewing a loan proposal, the Bank not only carefully scrutinises a client's financial statements and uses a conserva. tive method of estimating assets, but also carries out periodic inspections of the client's factory premises to assess the current state of production and makes sure that bank credit is properly used.lR We wiH return to this point in the next section. 8. While the past and current performance in honouring obligations, financial position and business prospects are obviously the overriding criteria for the approval or rejection of a loan request, there are other considerations as well. An important one is the foreign exchange turnover generated by the client's business and his willingness to give a major, if not exclusive, share of this turnover to the Bank, since the spread between the buying and selling rates of foreign exchange is one of the most lucra. tive sources of bank profit in Hong Kong. Indeed, the Bank sometimes stipulates exclusive control of exchange business as a condition for grant. ing loans. 19 The Bank is also sensitive about competition from other banks.20 l^The Bank uses a concept called "Estimated Conservative Asset Value" (ECAV) in appraising a customer's net worth, which heavily discounts non-cash and non-liquid assets like buildings, machinery, fixtures and furniture, receivables and investments, l^in Appendix I, Case 5, Co E's loan request was granted on condition that "all their exchange business comes our way". HSBC, 1962. ^Thus, in Case 14, Co N's request was approved, subject to its agreeing Still another consideration, though perhaps somewhat residual, is the desire to help local industry.21 9. It follows from the above that an unsatisfactory balance sheet or lack of financial information, poor business prospects, overlapping in loan requests (e.g. a subsidiary asking for a loan when "umbrella" facilities have already been arranged with the parent company), unwillingness on the client's part to switch business from other banks, and suspected improper use of banking facilities are the most often cited reasons for refusal.^2 The behaviour pattern that emerges from these observations is clear: HSBC adopts a very hard-headed, prudent and shrewd lending policy towards Hong Kong's manufacturing industries, tempered, however, with flexibility, pragmatism and a general desire to assist local industrial development. While this policy stance is hardly surprising for a profit-motivated private commercial bank, it is also quite different from the idyllic picture painted in the official centenary volume.^3 (b) Internal Organisational Changes To cope with the strong and growing demand for banking services resulting from Hong Kong's rapid industrialisation, HSBC made a number of internal organisational changes during 1950-1966 designed to enhance its operational capacity and efficiency, with special reference to industries. One important change concerned the opening of branches. Prior to 1948, the Bank had, apart from its head office on Hong Kong island, only one branch in Kowloon, established in 1929. In 1948, an important decision was made to set up a branch in Mongkok. Strategically located in the densely-populated centre of the peninsula, it could provide services not only to the whole population there, but also more important from our point "all future business must be confined to us." HSBC 1963. Also, in Case 17, Co Q's application for LAI was approved as "this could be the initial step in getting [the client's] account over from [another bank]." HSBC, 1964. ^Thus, in Case 2, the lending officer commented "while we do not stand to gain much by way of exchange business by granting the required accommoda. tion, we will be assisting local industry." Also, in Case 3, a similar recommendation was made: "We receive no exchange business from [the client], but the advance would help Hong Kong industry, and in the cir. cumstances I recommend it." 2^see Cases 7, 8, 13. Concerning Case 7, Hong Kong Office's decision was stated as follows: "The visible profits would not enable them to pay a rent of $25,000 a month and I do not wish to take a chance on the market for factory property in a year or so. However, the main reason is that there is something indefinably wrong with the whole matter and I do not wish to be involved in it." HSBC, 1963. The file reveals that the client also refused to divert all its business from another bank. 23in the centenary volume, HSBC's role in postwar industrialisation is sum. marised in one sentence: "With admirable boldness Morse financed this new industrial Hong Kong." See Collis (1965), p. 247. EASTERN BANKING of view, cater to the needs of the emerging industries in various parts of Kowloon. The decisions could not have been more timely, as around 1948 some spinning mills began moving from Shanghai to Hong Kong, which were to become the forerunners of postwar industrialisation.^4 From the start the Mongkok office was heavily involved in industrial financing. As noted earlier, the branch suffered losses in the first few years, but these were turned into sustained profits from 1952 onwards. By 1953 the branch's business volume and profits had grown to such an extent that it was decided to build a new ten-storey building to accommodate the expansion. This took one year to complete, but such was the rate of growth, that by 1966 it was thought necessary to build another skyscraper, which was completed two years later, to house the branch.25 In the next six years, the Bank did not add any more branches until the North Point branch was opened in 1956, to specialise in hire-purchase business. But the great campaign to build up a Colony-wide branch network did not really begin until 1960, when four branches were opened in a single year, including two in the industrial townships of Taipo and Tsuen Wan. Subsequently, other important industrial areas such as Aberdeen, Sham Shui Po, Shaukiwan, San Po Kong, Kwun Tong and Hung Horn were also covered. By 1966, the Bank had established a network of forty-eight branches and sub. branches all over Hong Kong, Kowloon and the New Territories. Another important development was the establishment of a factory inspection unit under Mongkok Office in 1959. This unit was later renamed Industrial Banking Department (IBD) in 1962, whose principal function was to provide back-up services for senior management in the area of industrial lending. Although administratively IBD was under the control of Mongkok Office, it was rather unique in that it served all offices and branches of the Bank on a colony-wide basis, and that it was the first functional department of its kind ever to be set up in any bank in Hong Kong. Initially IBD concentrated on the manufacturing sector, but as banking business expanded, its work also became much more complex and diversified. By the mid-Sixties, IBD's functions had expanded to include the following: 1. Factory Inspection: the main objectives of a factory inspection were to observe the operations of a manufacturing business so as to assess its production capacity and level of utilisation, management efficiency, financial position and business prospects. 2. Stock Inspection/Valuation: the purpose of this job was to check the inventory list and appraise the current market value of stocks in the fac tory. 3. Machinery Inspection/Valuation: the objective of this function was two-fold: to appraise the realisable value of the machinery under specific charge to the Bank, and to check whether the right kind of 2^See Hong Kong Cotton Spinners Association (1973), Mok (1968) and Wong (1979). 2^The importance of Mongkok Office can be seen from the fact that in 1965, it was given the authority to exercise business operational control over thirty branches and offices in Kowloon. HSBC Archives, 1965. During the credit squeeze following the banking crisis, however, this authority temporarily reverted to Hong Kong Office. machinery and equipment was in use for a given manufacturing activity. 4. Property Valuation: this refers to the appraisal of real proper. ties offered as collateral for industrial loans. Generally, IBD used a conservative approach that emphasised the "quick sale" value of the proper. ty rather than its market value. 5. Feasibility Study: in considering factory building loans, the IBD was often asked to look into the viability of the proposed project with respect to its date of completion, cash-flow prospects and amortisation plan. 6. Financial Analysis: as a follow-up of inspection and valuation, it was IBD' s job to examine the manufacturing client's financial state. ments, in order to assess the firm's profitability, liquidity and manage. rial efficiency. The more relevant accounting ratios were prepared on both a cross-section and time-series basis for the management. 7. Investigation: IBD may be required by the management to investi. gate a doubtful client's business affairs, which may involve a full audit. ing of the firm's financial accounts. 8. Information and Advice: although these functions were somewhat peripheral, IBD regularly collected business information and market data through a variety of sources, including direct enquiries to and interviews with customers. It also provided advice to clients on matters relating to prospects in local manufacturing industries and industrial property devel. opment . 9. Miscellaneous Duties: in carrying out its main functions, it was essential for IBD to conduct searches at the Business Registration Office, Companies Registry, Land Offices and law courts. While trivial in them. selves, this work was extremely time-consuming. A considerable amount of translation work was also handled by IBD, as the accounts and correspond. ence of many manufacturing concerns, especially the smaller ones, were done in Chinese. IBD started with one Resident Officer in charge and one or two Indus. trial Assistants, but by 1965 its staff had expanded to one Resident Officer and nine Industrial Assistants. Even so, the Department was always hard-pressed in coping with the mounting pressure of work, since requests for inspection and other jobs came not only from Mongkok, but from other branches as well. The frequency of inspection was variable and at the discretion of the management; roughly speaking, industrial concerns whose credit was beyond doubt were inspected annually; those with lesser standing were inspected quarterly, while the doubtful or marginal cases were inspected monthly or even weekly. It was the latter "emergency cases" that created the most pressure for the Department, particularly during the recession of 1964 and the aftermath of the 1965 banking crisis. As an illustration, Table 1 gives a statistical breakdown of jobs done by IBD in 1964.26 2^The present author has drawn heavily on the annual reports of the Officers-in-Charge of the IBD from 1962 to 1981. EASTERN BANKING Table 1 IBD Work Statistics for 1964 1. Full inspections of factories and firms of which a/c other branches 43 249 2. Simple Visits: re order position 24 machines 26 stock checks 33 searches at Land Office attendance at auctions 50 (to follow land values) expediting payment of 57 Inward Bills 73 mi seel laneous 103 364 3. Property Valuations 159 4. Revaluations of Property 88 5. Factory fires investigated 15 6. Resulting fire reports 13 7. Translations (letters, accounts, 255 newspaper reports, etc) 8. Total number of jobs done 1,143 As with many other departments of the Bank, IBD was staffed by gener. alists rather than specialists, but as the Bank became more sophisticated and international in outlook and orientation, it was thought that many of IBD's functions should be performed by professionals. Consequently, the Department was dissolved in June 1981, with most of its functions hived off to other departments. Thus, factory inspection and financial analysis were taken over by the Credit Department; property valuation was absorbed by a wholly-owned subsidiary firm of professional surveyors; and trade informa. tion and market survey were transferred to the Market Research Department. However, in its day IBD played a very valuable role as an effective link between the Bank and the industrial community. It must not be assumed that IBD served only the interests of the Bank, for in its constant contacts with the manufacturing industries at the grass-roots level, it acted as a conduit through which the industrialists' problems and difficulties could be relayed to the Bank. Through this continuous feedback, the Bank was able to appreciate better the trials and tribulations of Hong Kong's developing industries, and thus devise a more flexible approach in financ. ing their growth. Moreover, in the early stage of Hong Kong's postwar industrialisation, the Government pursued a full-blooded laissez faire policy, and statutory bodies like the Hong Kong Trade Development Council, Hong Kong Export Credit Insurance Corporation and Hong Kong Productivity Centre, etc were not established until the late Sixties; in their absence it was the private trade associations and bank departments like IBD that struggled manfully to promote domestic export products abroad and attract new industries to Hong Kong. Some innovations in the staffing system, initiated during the period, should also be briefly mentioned. At around the time IBD was formed, the Bank also began to appoint Business Promotion Officials (BPO), later re. named Business Representatives (BR). These were local Chinese employees charged with the task of keeping existing clients happy while attracting new clients whenever possible. Some of them were assigned to Mongkok to specialise in liaising with industrial firms in close co-operation with IBD. The advantage of appointing these officials was that effective com. munication between the Bank and its clients was enhanced through more personal contacts and the elimination of the language barrier. In January 1964, the Bank attracted wide publicity by the appointment of H J Shen as a Joint Manager in Hong Kong Office. Shen, a former ranking central banker in Nanking and Shanghai under the Nationalist Government, came to Hong Kong in 1950 and subsequently became a prominent businessman and industrialist. Before he joined the Bank, he was Managing Director of East Sun Textiles Company Limited. Thus the Bank's links with the industrial community were furthered strengthened through Shen's intimate ties with the Shanghai-born industrialists. ^7 His appointment was also important in that it was the first time in the Bank's history that a Chinese was appointed to a senior managerial position, marking the demise of the old compradore system. (c) The Quantitive Evidence Having described the lending practices and internal organisational changes designed to assist local industrial development, it remains for us to quan. tify the actual loans and advances to the manufacturing industries by the Bank, and to ascertain their importance in terms of their relative share of total loans and advances by the banking system to the manufacturing sector. This is the most difficult part of the present exercise. Previous publications on the subject either do not have any quantitative information at all or contain only vague assertions without substantiation. The Econ. omist Intelligence Unit of London reported in 1962 that "so far as we could discover, the Hongkong and Shanghai Banking Corporation and the Chartered Bank are responsible for at least three quarters of advances to industry, possibly more," but without further elaboration.^ In an article published in 1970, J A H Saunders, then Chairman of the Bank, claimed that "the 2^The pioneering role of the Shanghai entrepreneurs in Hong Kong's cotton spinning industry is fully documented in Wong (1979). ^Economist Intelligence Unit (1962), p. 17. EASTERN BANKING Hongkong Bank has led this process of financing promising industrial ventures, often on knowledge of, or confidence in, the ability of the entrepreneur concerned rather than on physical security, and at one time it was thought that well over half of all industrial advances in Hong Kong were provided by the Hongkong Bank Group."29 Again, this tantalising guesswork stops short of full documentation. One would have thought that this opening of the Bank Archives would enable scholars to solve the quantification problem satisfactorily. Unfor. tunately, this is not the case. Some earlier records were destroyed as a matter of Bank policy. Furthermore, it was only in 1965 that banks were required to report their loans and advances to the Banking Commissioner with details about the borrowing sectors or industries. Prior to that year, the Bank's own records do not contain such a breakdown. The existing records in the Treasury Department of the Bank show that total loans and advances more than tripled from HK$449.4 million at the end of 1959 to HK$1,697.3 million at the end of 1969, representing an annual growth rate of 14.2%. The records, however, give no clue as to the borrow. ing sectors. The only source containing such information is the quarterly analysis of loans and advances required to be submitted to the Banking Commissioner as from 1965. Unfortunately, the earliest file extant in the Bank's Credit Department on these quarterly returns is for the year 1972. In the Banking Commissioner's Office, the Bank's original returns for the period prior to 1970 had, quite coincidentally, also been destroyed, but thanks to further strenuous searching, copies of the returns for some quar. ters from June 1966 to March 1970 have been retrieved from other files. 30 While these returns are still incomplete (e.g. there is nothing for 1967), they nevertheless constitute the only available data on the basis of which one can ascertain the Bank's role in financing Hong Kong's manufacturing industries in those years and make inferences about the earlier period. Table 2 presents HSBC's loans and advances by category for five quar. ters between June 1966 and March 1970. During that period, loans and advances to the manufacturing sector increased by 7%, while the Bank's total loans and advances grew by 37.1%. The relative share of the manufac. turing sector in the total loan portfolio therefore dropped from 33.5% to 26.1%. However, manufacturing still accounted on the average for over 30% of the Bank's loan portfolio and remained the largest sector in terms of credit allocated, leading other major sectors like transport, building and construction, and general commerce. Within the manufacturing sector itself, textiles used to account for well over half of the loans and advances, but by March 1970 their share had declined to 28%. Reflecting the changing industrial structure and diversification, other industries, like wearing apparel and electrical and electronic, had grown in importance both absolutely and relatively as the recipients of bank credit. An even more important indicator of HSBC's role in financing postwar industrialisation is the Bank's relative share in loans and advances 29saunders (1970), p. 759. 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Q, textile L/C facilities of ￡43,691 Guarantee by another large Request granted, as this factory to import 100 automatic weaving factory could be the initial step looms from Japan in getting the company's business from another rival bank CUSTOMER/BUSINESS BANKING FACILITIES REQUESTED COLLATERALS & TERMS BANK DECISION & REASON EASTERN BANKING CD X 1 Ttf SP 0) CO a p 0 X CD p CD P -P p -P p P P P 0 p 0 p o O X TJ p p p p S u p 10 0 TJ 4-1 rtf O rtf u p P O Q) 0 P rtf P rtf ft -p ft XI ft P CP 4-1 CP P rtf p rtf P CO 10 -P x ‧H 1—1 .d i—1 CD i—1 X rH X to -p u rtf CD 0) ￡ rtf P rtf P d) p >1 P 0 ￡ rtf rtf P p rtf 0 P co CO P P ft P rtf s ‧rH ■H ‧rH X P P 0 rH O O CD p P i—1 P ft CD rtf rtf rtf CO o U P r3 u ￡p rtf p rH rtf d) ft P dP > rtf dJ rtf u CO P O Jo o O P O U *H a) JT* LT) CO CO P 0 ‧rH P (D ‧*. ‧H ‧H >1 d) d) P ft o a) u> rtf ft o CO p P O CD P i—l i—1 ft u p CD (/) rtf p *> H p p Q) CD ft P P rtf ‧H ‧H ￡ P P < 4-1 rtf ‧rH ft ft p P P P ￡ P rtf rtf P O X ‧H 4H X O P X rtf O P -rH M X P P p P rtf P u ft P O P P C ■s CO CO ‧H d) -H O P P (D ft >i p ft 0 ‧ *> CD X T5 i—i >1 x; CO p S CO TJ 0 P ￡ o p P P ‧rH P > P i—1 P P ‧H p CO d) P P O ‧rH d) O CD rH rtf O TJ rtf ‧ ‧H P P p CO 0) 1—1 d) dP P o p p ￡ P P i—1 g P i—l P O P ‧H p P ft o > CO P ‧rH ‧H 0 P ‧rH p P rtf T3 P ￡ d) g cu CD P ‧H O d) p o X O p d) ￡ ‧rH 0 P O P P dP X CO rtf X XJ X d) d) u CO o i—1 rtf < n3 P CD vO P dJ rV ft rtf i—1 rtf VO X dP X rtf CO m rtf ft CO Q rtf O > O rtf Q 0 CO ￡ rtf 4-1 rtf O P"- P P P p p P 0 0 0 0 0 0 x X X ‧rH X ‧rH O o o o X 1—1 i—1 i—1 i—i i—1 P O o o o '—l X i—i X i—i i—1 O O o o o *H ‧rH X X ‧rH X ￡ ￡ ￡ ￡ ￡ ￡ P O o o o rtf CO o o in in in o o o o O ft CN ft m CO ft ‧ ‧ ‧ ‧ ‧ ‧ rH P 1 o i—1 P rtf u X p rtf CQ U ft u P O rtf ‧H P c3 *p rtf X P ‧H ‧rH o - ￡ X TJ A S 1—1 Tl H X CO X p in CD *H P (0 CD X P cn < s X O CN P O CD \ CD rtf > p X P ft P CD p rtf 0 P o d) X P o o P O P - P ‧k rtf & rtf CO 0 p & p P ‧ ￡ . o ‧ P o O 0 rtf 0 (J u CJ P u ￡ CO ft o X i—t CN 25. THE ASIAN DOLLAR MARKET, ASIAN BOND MARKET, AND THE HONGKONG BANK GROUP by S Y Lee The Asian Dollar Market (ADM) and Asian Bond Market (ABM) should be studied from the macro-economic approach as well as the micro-economic approach. The Hongkong Bank Group (HKBG) comprising the Hongkong and Shanghai Banking Corporation (HSBC), Wardley Limited and Marine Midland Banks Inc, has been very active in the ADM/ABM. HSBC is a full-licence commercial bank in Singapore; Wardley, a merchant bank; and Marine Midland, an off-shore bank. The three types of banks with ACU (Asian Currency Unit) licences (see Table 2) together would present a unique and varied feature from the micro-economic approach, because they work under somewhat different circum. stances or constraints, as determined by government regulations.^ It would be interesting to see how the activity of the banking group reflects that of the market and how the market affects the course of action of that banking group. ASIAN DOLLAR MARKET The Asian Dollar Market (ADM) and Euro-dollar Market (EDM) are in fact two windows of the same off-shore banking system because funds flow freely between the two markets, interest rates are very close together and borrow. ers of funds would invest in an area where the rate of return is high and the capital is safe. In Singapore, the off-shore banking system and the national (or ordinary) banking system progress side by side and are comple. mentary to each other. The Asian Dollar Market is primarily a short-term money market (see Table 3) whilst the Asian Bond Market, a long-term capi. tal market (see Table 8). Basic Principles of the Off-Shore Banking System Banking regulations and stringent monetary policies in the USA and Western Europe had favoured the development of the off-shore banking system (ADM/ EDM) in the 1960s and early 1970s. With the easing of credit since 1974, the removal of control against capital outflow in January 1974, the aboli. tion of Regulation Q and other regulations for the ceiling deposit rates in 1973 and 1974 and the remission of the interest-equalization tax in 1975, the previous factors for boosting the off-shore banking system have been ^For an explanation of an off-shore bank, see Note in Table 2. ^For an explanation of ACU licence, see Note 2 in Table 1. EASTERN BANKING removed or reduced by the United States. But the requirement of recycling the petro-dollar gave a new stimulating impetus to the expansion of the system. On the supply side of the market, there are the massive inflow of funds from OPEC countries to the Euro-Currency Market and the increase in Euro-Currency deposits by oil companies. On the demand side, many oil. importing countries borrowed from the market to finance their deficit bal. ance of payments. Besides, exchange rates tend to enhance the demand for foreign exchange cover by business corporations. The banks have to accom. modate their customers' need by covering themselves through a combination of spot exchange transactions plus Euro-Currency lending or borrowing. Hence, floating exchange rates help to boost the off-shore banking system. The Euro-Dollar Market plays an important role in the recycling of petro dollars. The Asian Dollar Market plays only a minor role with the spilt-over effect, as some funds flow from London and West Asia to the Asian Dollar Market to finance investment in the region of Southeast and East Asia; Singapore serves mainly as a "funding" centre and Hong Kong as a "booking" centre for lending. The international monetary crisis and the depreciating US dollar did not have a hindering effect on the Asian Dollar Market (see Table 1), because the importance of the US dollar as a trading and reserve currency in the world has not declined, or even increased, and depositors in the ADM have some practical difficulty in switching large amounts of their funds from US dollar to other currencies, such as Deutsche Mark, Swiss Franc and Japanese Yen. Switzerland, West Germany and Japan had various measures to discourage the inflow of funds into their countries and to pay no interest on bank deposits with respect to such foreign funds. There are two basic principles in establishing a financial centre and consequently the Asian Dollar Market: (1) free flow of funds (2) minimum taxation. The free banking policy of Singapore provides a favourable background for the Asian Dollar Market.^ The full liberalisation of exchange control as effective from June 1978 implies the free flow of funds in and out of Singapore for investment and payment purposes. This is to help develop Singapore as a financial centre and to boost the Asian Dollar Market and the Asian Bond Market. When the Asian Dollar Market was established in 1968, the Singapore government had the policy of separating the national banking system from the Asian Dollar Market, but it had guaranteed the free movement of funds with respect to the operation of the Asian Dollar Market. Singapore resi. dents (including individuals and corporations) were not allowed to deposit their Singapore dollars into the ADM unless they had already got foreign exchange in hand or they had the approval of foreign exchange control. ^since July 1975, banks have been free to offer their lending rates and deposit rates. Furthermore, as effective from September 1981, banks are allowed to fix their own rates for large domestic transactions ($40,000 or over), such as letters of credit, loans and overdrafts, securities trans. actions and mail and telegraphic transfers—a partial removal of regulated charges of the Association of Banks in Singapore. THE ASIAN DOLLAR MARKET Singapore residents were not permitted to borrow from the ADM to finance trade and investment in Singapore. Gradually, the demarcation line between the national banking system and the ADM has been reduced. As a matter of fact, the flow of funds from the ADM into Singapore contributed a part to the great credit expansion and hence inflation in 1972-1974 and also to the booming of the stock market and property market in Singapore in that period. Today, Singapore residents are liberally permitted to deposit funds in the ADM and to borrow from it with the approval of the Monetary Authority of Singapore.^ In order to develop the Asian Dollar Market, taxation has to be reduced to the minimum. Actually, this is against the principle of equity in taxation, but in economic development, the incentive aspect of taxation has dominated over the equity principle of taxation. In 1968, prior to the establishment of the ADM, the income tax rate on interest from bank depos. its was 40%. This withholding tax was then abolished for the sake of launching the Asian Dollar Market. Furthermore, the income tax on interest from loans (ie, tax on the lending banks) has been reduced from the normal rate of 40% to 10%. As from March 1976, non-residents' holding of Asian dollar bonds and their deposits with ACUs are exempted from estate duty. Since February 1977, the 10% concessionary tax has been extended to cover all off-shore income of ACU operation, other than exchange profits and income from transactions in the national banking system. In order to encourage the signing of ACU loans in Singapore, the ad valorem stamp duty of i% on ACU off-shore loan agreements has been limited to a maximum of S$500, since November 1976. However, international banks and corporations tend to channel their funds to Hong Kong for lending or investment purposes and hence switch their profit or interest earned to Hong Kong. According to Hong Kong inland revenue law, income arising outside the territory of Hong Kong would not be subject to tax. In contrast, the income tax of Singapore is on a global basis, i.e. income arising anywhere in the world would be subject to tax if it is repatriated back to Singapore. Hence shrewd bankers and businessmen find it most advantageous to have investment operations at Hong Kong and to collect ADM deposits at Singapore (because there is no withholding tax on interest from deposits in ADM, whereas there is a withholding tax of 15% in Hong Kong).^ In particular, loan syndication is conducted more in Hong Kong than in Singapore. ^ Thus ^After the abolition of exchange control in June 1978, all restrictions on Singapore residents' deposits and borrowings in the Asian Dollar Market have gone. ^This can be illustrated clearly in the following table: Singapore Hong Kong Tax on interest from deposits 0 15% Tax on interest from loans 10% 0 Although the Hong Kong Legislative Council passed an Amendment to the Inland Revenue Bill for the tax on off-shore income at 17% in 1978, the Hong Kong Government seemed to have a second thought about it and has yet to implement the proposal. ^The advantage of Hong Kong over Singapore with respect to loan syndica. tion, has been subject to debate. It has been argued that in Hong Kong EASTERN BANKING Singapore is primarily a funding centre, whilst Hong Kong is a "booking" centre for lending. Funds are booked together in Singapore and then rechannelled to Hong Kong for on-lending to non-bank borrowers. Banks take advantage of the zero withholding tax on deposit interest in Singapore, as well as the zero off-shore income tax and the low business profits tax in Hong Kong. Growth in Aggregate Assets In the early years, total assets/1iabilities were multiplied by two to three times every year from 1968 to 1973. In the subsequent and more mature years 1974-1981, the average annual growth rate was 38.6% (Table 1) which surpassed the growth rate of the Euro-Dollar Market. The number of ACUs operating in the Asian Dollar Market was increased from a few foreign banks in 1968/69 to one hundred and thirty-two at the end of 1981 (Table 1). In recent years, the increase in ACUs is mainly with respect to the off-shore banks and merchant banks (Table 2). The number of off-shore banks was increased from seven in 1973 to fifty-nine in 1981, and the number of merchant banks with ACU licences from nine in 1973 to thirty-seven in 1981. The commercial banks with ACU licences increased in number only slightly in this same period. At the end of 1980, the net size of the ADM was estimated to be about US$44.4 billion, if we exclude the inter-ACU redepositing. The net size of ADM was about 6% of the narrowly-defined Euro-Dollar Market as measured by the Bank of Inter. national Settlements.^ The factors contributing to the rapid growth of the Asian Dollar Market and Asian Bond Market include the increasing number of ACU units, the favourable change in taxation and exchange control regulations in 1976-1978, the rapid development of money and capital markets in Singapore, the recycling of the petro-dollar, and above all the political and economic stability of Singapore. Freedom from banking regulations and reserve requirements and the lower income taxation in the off-shore banking system contribute to its growth greater than that of the national banking system. In recent years, lending in the international capital markets has been more active than that in the national capital markets. This world-wide pheno. menon may be one of the contributing factors to the growth of the Asian Dollar Market and Asian Bond Market. there are more international lawyers and accountants with specialised experience in the negotiation and formation of loan agreements, and also a sophisticated printing industry which can print prospectuses, loan agree. ments and other documents speedily. In fact, Singapore is catching up in these aspects. Probably the long history as a financial centre, the greater number of international banks and financial institutions operating in Hong Kong, the relatively more advanced financial structure, the rela. tively freer markets in Hong Kong than in Singapore, and the lower busi. ness profits tax in Hong Kong contribute to the competitive edge of Hong Kong over Singapore. ^See Monetary Authority of Singapore, Annual Report 1980/81, p. 43. Consolidated Assets and Liabilities of Asian Currency Units, 1968-1981 (US $ Million) THE ASIAN DOLLAR MARKET 0 ‧H P 4-> 0 -H X -H 4-1 -H °-s 4-1 0 cn co < i—i id ■P O E-t p CO 0) -P x: iJ 0) CO 5 co < O w 43 | ￡ * § ' 5 § M c 44 O P co 0 D r. 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H ‧H ‧H O 0 CO X o -p 0 O X X o t) O -P CO 0 TJ ‧H G\ 0 4h TJ CO H TJ -P 4H 0 r- 0 co X O S (T> ‧* 0 r* in 00 CN r- 1 vo -rj O H 0 ‧H rH rH ￡ x H X > rH H u r—1 >i p 0 0 G 0 H 0 P 04 0 G cu ’ p 0 ‧ 0 X XI P 0 0 0 0 ￡ X P G s 0 c H O 0 x p 0 0 O 0 G u X TJ G 0 e'. o 1 1 I 1 P *H -H G CP er* 1—1 rH 0 >i x 0 0 G G i—i G 0 0 0 0 O 0 0 cu 0* 0 * H X s 0 0 P i 0 X 0 X d) 0 P 0 ‧H ‧H ‧H O U o 0 X P O *H ‧H G CO CP ‧H O G g P rH 0 X U) G t—1 X 0 X < U G M -H ‧H X G rH ‧H 0 D u *H G G O G ‧H (d 0 a) o H H O 0 G 0 < Ch o p p c C4 H O X 0 X o o 0 'd u X 0 rH 4h 1 x -P 0 0 0 P X 1 X >i 0 x P t—l 0 0 Eh ‧‧ 1 1 ‧H G o 0 o 0 X X 0 1 1 0 H- ￡ ?3 ‧H CP X c X 0 % 0 Q* P G CO 0 0 G m c 0 X s/ CO ￡ X ‧H 1 ‧H 0 (cr rU U fO X Sr* 0 0 > 4H X T5 ￡ X G X) rd X o 0 0 4H 0 G 0) X rd CO O G 0 rH o rH X X ‧ ‧ 0 ‧H 0 0 G * H- rH CN *H i—1 ‧H P X d) O O O c s ‧‧ P rH P x 5 4-> 0 0) rH m 0 x CO ‧‧ U E 0 S i u 0 0 P E Eli g X p > -p G O O 4-1 d) G O 0 L) u o s M z CO Maturity Structures of Assets and Liabilities of Asian Currency Units THE ASIAN DOLLAR MARKET s se. en Source: Monetary Authority of Singapore, Monthly Statistical Bulletin, Aug. 1981 p. 30, and various issues. EASTERN BANKING Sources and Uses of Funds One characteristic feature of the Asian Dollar Market is the predominance of interbank funds, which constitute a much greater proportion of deposits and loans than that in the national banking system. The reason is that with freer banking, greater flexibility and efficiency, funds would be channelled through interbank depositing and lending, to the most efficient borrowers. Moreover, volatile interest rate movement in the Asian Dollar Market contributes to the increased arbitrage operations by banks and other participants, and to the expansion in interbank transactions. To illus. trate, as at the end of October 1981, loans to non-bank customers consti. tute only 23% of total assets, whilst interbank funds, 72% (Table 1). 71.6% of the interbank funds is outside Singapore; 25.7% inter-ACU, and 2.7% in Singapore.R Similarly, deposits of non-bank customers constitute only 17% of total liabilities, whilst interbank funds 76%. 72.2% of the interbank funds is outside Singapore; 24.2% inter-ACU, and 3.5% in Singapore. Deposits as a source of funds can be categorised into deposits of non-bank customers and interbank deposits (Table 1). With respect to the deposits of non-bank customers, Hong Kong, Singapore, Indonesia and Taiwan are the principal sources of funds, in that order of importance. The Asean countries provide about 40% of the deposit funds and Asian countries about 88%. Hong Kong serves to a certain extent as a transmitter of funds from other countries. Europe contributes about 8% of the source of funds. Surprisingly, the Middle East contributes only about 1% and the United States about 2%. If we take account of interbank funds as well, the composition of the source of funds would be somewhat different, as deposits of non-bank customers are less than one-fifth of interbank deposits. Thus London, the centre of the Euro-Dollar Market, provides more than one-fifth of the total deposits (including deposits of non-bank customers and interbank deposits); Singapore, more than one-quarter of the total; other countries include Japan, Indonesia, Taiwan, U.S.A., France and the Philippines, in that order of importance. EEC countries- take an active part in the interbank depos. iting and lending and funds flow freely between the Asian Dollar Market and Euro-Dollar Market. The U.S.A. and Canada are not too important as a source of funds, as they channel their funds mainly to the Euro-Dollar Market. The Middle East started to deposit and to borrow from ACU at the end of 1972. By June 1979, total deposits (including interbank funds) from the Middle East constituted less than 4% of total deposits; and loans (including interbank lending) to that area were less than 2% of total loans. Thus, the Middle East is not an important source of funds directly; perhaps the recycling of petro-dollars is mainly channelled through London. However, the importance of the Middle East as a source of funds has been increasing in recent years. With regard to the area distribution of loans of non-bank customers (uses of funds), it appears superficially that Hong Kong, Indonesia, RFor further details, see Monetary Authority of Singapore, Monthly Statis. tical Bulletin, Nov 1981, p. 29. THE ASIAN DOLLAR MARKET Singapore, the Philippines, Malaysia, Thailand, Australia, South Korea, Japan and Taiwan have received the most loans (as at June 1979) in that order of importance. The Asean countries received about half of the total loans and the Asian countries received about 83%. Europe (mainly EEC) took up about 3%; Brazil, Panama and other countries took up small percentages. Many of the loans to Hong Kong are in fact rechannelled to other Southeast and East Asian countries. Indonesia is undoubtedly the biggest borrower. Similarly, if we take account of interbank lending, we would find that Asian countries took up more than three-quarters of the total loans by the end of June 1979, Asean slightly less than 40% and Singapore more than one-fifth. Hong Kong, Japan, the United Kingdom, Indonesia, the Philip. pines, South Korea, Thailand, Taiwan and Malaysia came next, in that order. Thus in both lending and depositing, the Asian Dollar Market has assumed a regional characteristic, with the predominant percentages for the Asian and Asean countries. ACU loans are mainly denominated in U.S. dollars. The principal industry groups financed included non-bank financial institutions, manufac. turing, transport, storage and communication, general commerce, building developers, real estate agents and construction, and mining and quarrying, in that order of importance. It is a characteristic feature that the ACU fund is not as much used for financing trade in the Asian Dollar Market as in the Euro-Dollar Market. The broad industrial group, including manufac. turing, mining, quarrying, construction, transport and communication, gains more than half of the ACU funds. Slightly less than one-third of the ACU funds is diverted to non-bank financial institutions, and this is a help to the development of the money and capital market in Singapore. Moreover, in view of the predominance of interbank funds, the finance to non-bank finan. cial institutions is a logical supplement to the development of the finan. cial system. Small amounts of funds were diverted to agricultural, mining and quarrying. As the agricultural sector is less dynamic than the manu. facturing sector and cannot afford to pay high interest rates in open competition, it seems inevitable that not many funds are diverted to agriculture. However, in view of the urge for Asean economic co-operation, it is hoped that more attention will be paid to the finance of primary production, as Indonesia, Malaysia, the Philippines and Thailand are primary producing countries and require funds for such activities. Maturity Structures of Loans and Deposits Table 3 shows clearly that the Asian Dollar Market is principally a short. term market. At the end of the second quarter of 1981, assets (comprising mainly loans) up to one month constituted 33.7% of the total assets, one to three months 27.5%, three to twelve months 20.7%, one to three years 4.7%, and over three years 13.2%. The bulk of loans is therefore within twelve months. Some loans are 'rolled-over' from period to period; hence the statistics understate in fact the actual maturities of assets. It is interesting to note that over time, the maturity structure of loans has been changed. For example, in 1976 the loan amount of US$2,346.8 million (13.5%) was for over three years' financing, whilst there was no such EASTERN BANKING category in the previous years. Loans up to one month were increased absolutely and relatively from US$680 million (23%) in 1972 to US$23,022 million (34%) in 1891, second quarter. At the end of the second quarter of 1981, the liabilities (predomi. nantly deposits) up to one month constituted 43%, one to three months 31%, three to twelve months 21%, and over one year 5%. Deposits within three months took up 74% of the liabilities. The maturity structure of deposits has also undergone some changes particularly in 1976, as deposits up to one month increased from US$3,076 million (25%) in 1975 to US$8,540 million (49%) in 1976; and deposits of three to twelve months declined from US$5,087 million (41%) to US$3,364 million (19%) in 1976. The anticipated rates of interest and inflationary expectation and the alternative finance through bond issues will affect the maturity structures of both loans and deposits. It is a common contention that banks borrow short and lend long. As a matter of fact, banks have the function of transforming short-term deposit liabilities into longer-term assets. Obviously, the liabilities structure is shorter than the asset structure (Table 3). The degree of transforma. tion is greater in an off-shore banking system than in a national banking system, because of the absence of statutory minimum reserve requirements and of the free banking character. The transformation is desirable from the social stand-point, because fundamentally, depositors desire liquidity whilst investors desire longer-term borrowing to finance trade and invest. ment . Interest Rate Movement Deposit rates are reported daily in newspapers and journals and are more uniform than loan rates, which are rather heterogeneous in nature. Bankers usually mark up 1-1.5% from the deposit rates to formulate the loan rates. Sometimes, multi-national corporations have deposits at the Asian Dollar Market and at the same time borrow the same amount from the bank; this is to avoid bringing money back to the United States, inducing income tax liability. In this case, the mark-up may be as small as 0.25%. Sometimes the head office places deposits at the ADM in order to enable the branch office in the region to have the overdraft facility. Similarly, an entre. preneur in Indonesia may deposit money in the ACU, so that the bank may lend the equivalent amount to the company operating in Indonesia. It is a characteristic feature that interest rates in the Asian Dollar Market are very volatile because of the nature of free banking, with keen international competition and without statutory reserve requirements. They follow closely the money and capital markets in New York, London and other financial centres. The deposit rates in the Asian Dollar Market and Euro- Dollar Market are almost identical. Typically, the three-month deposit rates rose to a peak in the second half of 1969, declined in 1970 and the first half of 1971, rose to a second peak in August 1971 (after President Nixon's announcement of the package measures), became steady in 1972, rose to a third peak in March 1973 (after the second U.S. dollar devaluation), rose to a fourth peak in mid-1974, and declined steadily from the end of THE ASIAN DOLLAR MARKET 1974 to the first half of 1978, due to the recession or slow recovery. In line with the world-wide increase in interest rates and the U.S. dollar depreciation, interest rates in the Asian Currency Market rose persistently from the second half of 1978 to a height of about 19.5% in March 1980! They dropped sharply to about 8.8% in June 1980, but rose to the all time high of 22% in December 1980. They came down to around 14.25% at the end of January 1982. The spread between deposit rates and loan rates is the banker's margin which, after allowing for administrative costs, the cost of maintaining reserves and the risk of default of the borrowers, is the profit margin. As competition in the off-shore banking system is greater than that in the national banking system, as there is no minimum reserve requirement, and as the risk of default is smaller (most of the borrowers being internationally well-known big corporations), the spread between deposit rates and loan rates is smaller in the former than in the latter.^ A comparison of the interest rates in the national banking system and off-shore banking system shows that the average deposit rates of banks in Singapore are lower than those in the Asian Dollar Market, whilst the average lending rates of the former are at times lower or higher than those in the latter. Recent Development and New Financial Instruments There is an obvious trend that the off-shore banking system is spread over Hong Kong, Tokyo, Manila, Jakarta and Bangkok. Bahrain in the Middle East has grown in the last two years even faster than the Asian Dollar Market; tax-haven and the geographical location between London and Singapore are the major cause of its growth. The two financial centres of Singapore and Hong Kong are more complementary than competitive in nature, as the prog. ress or prosperity in one centre tends naturally to spill over into the other centre. The US$ NCD (Negotiable Certificate of Deposit) was introduced in November 1977, in order to develop the money and discount market in the off-shore banking system, hence helping to boost the Asian Dollar Market. The amount of FRCD issues was increased from US$355 million in 1978 to US$900 million in 1981. From November 1977 to the end of 1981, there were altogether one hundred and twenty-four issues amounting to US$2,663 million (Table 8). The abnormally high interest rate in recent years has encouraged "floating rate financial instruments", such as FRCD (Floating Rate Certifi. cate of Deposits) and FRN (Floating Rate Note) in the Asian Bond Market. For detailed statistical analysis, see Lee Sheng-Yi, "Recent Development in Asian Currency Market and Asian Bond Market", Occasional Paper No 32 of the Institute of Economics and Business Studies, Nanyang University, April 1979, pp. 17-18, particularly Table 3. For a discussion with statistical analysis, see S Y Lee and Y C Jao, Financial Structures and Monetary Policies in Southeast Asia, London: MacMillan Press, 1982, Ch. 3 & Graph 3.1. EASTERN BANKING There are fewer issues of fixed rate US$ NCD in recent years. The total fixed rate US$ NCD issued since 1977 up to the end of September 1981 was US$8,866 million. A new development is that the ACU of the Development Bank of Singapore started to accept deposits in SDR in October 1979 with the idea of stabil. ity in currency value. After successive revision by the International Monetary Fund, an SDR (Special Drawing Right) today represents a basket of five major currencies, i.e. U.S. dollar, Deutschemark, Japanese yen, pound sterling and French franc. The volume of SDR deposits is, however, not too great. The Development Bank of Singapore further introduced the NCD denom. inated in SDR in July 1981. The new financial instrument has not become popular yet, although it offers flexibility, liquidity, a good return and a hedge against foreign exchange risk. Comments on the Asian Dollar Market The Asian Dollar Market has demonstrated its flexibility or ability to prosper under different circumstances—oil crisis, recession, inflation, international monetary crises, and decline of the U.S. dollar. Nevertheless, some criticism can be made. It is often alleged that the off-shore banking system can transmit inflation easily in the world, because there is little legal reserve requirement and no fixing of maximum deposit rate and minimum lending rate. Hence the credit multiplier, in the off-shore banking system is greater than that in the national banking system, by virtue of the fact that banks in the off-shore banking system maintain their reserves against deposits by their own "prudential reserve ratios", instead of the statutory minimum reserve ratios as in a national banking system. The multiplier effect can be crudely formulated as follows: New cash (deposited in the ADM/EDM) X Prudential Reserve Ratio Furthermore, taxation on the Asian Dollar Market is less than that in the national banking system. Free banking with a potentially large credit multiplier, together with international capital mobility, would naturally spread inflation throughout the world, if a major country, say the U.S.A., has inflation. Inter. national capital mobility would reduce the influence of monetary policy on domestic interest rates and level of income. The off-shore banking system which facilitates capital movement would indirectly reduce the effective. ness of monetary policy in restraining inflation in a country. It is also alleged that the off-shore banking system would favour the development of big corporations and big banks. Most of the borrowers in the ADM/EDM and issuers of bonds in the Asian Bond Market/Euro-Bond Market are big corporations, particularly the multinational corporations. It would be difficult for small or medium-size corporations to borrow or issue bonds on the markets because of the lower credit-standing and of the THE ASIAN DOLLAR MARKET complicated legal procedure and the required minimum amounts. Similarly, big banks can operate in the off-shore banking system more effectively than small banks, because of their world-wide connections, their financial resources and their efficiency in collecting deposits and lending out to big corporations.^ Thus in the long run, the off-shore banking system would have the effect of favouring big corporations and big banks. What is the social cost of developing Singapore as a financial cen. tre? What is the effect of the Asian Dollar Market, Asian Bond Market and other financial developments on the economy of Singapore? Obviously, Sin. gapore has thus become more and more open financially; the national banking system and the ADM/ABM are closely linked together with freer flow of funds between them. Hence the cost of a financial centre can be viewed with respect to the fact that small local businessmen and manufacturing indus. tries sometimes find it difficult to borrow in the market because of the high and fluctuating interest rates and the non-availability of credit in times of monetary stringency abroad. To alleviate this problem, the Gov. ernment in 1974 allocated S$100 million credit through the Development Bank of Singapore to help finance export bills and pre-export packing loans and another S$100 million credit through the Economic Development Board to finance manufacturing industries for the modernisation of capital equipment at low interest rates. The Monetary Authority of Singapore now provides special rediscount facilities for exports and pre-export credit at a low rate of interest. There is also the "Small Industries Finance Scheme" which is funded by the Economic Development Board and managed by the Devel. opment Bank of Singapore. EDB has the "Capital Assistance Scheme" and provides technical aid to industries. It should be noted that Singapore is basically an open economy, with or without the Asian Dollar Market. With the free flow of funds in and out of Singapore, some business may be brought to Singapore and there may be more foreign investment in manufacturing industries. The so-called "cost" of a financial centre is often exaggerated. On balance, the advantage of developing Singapore as a financial centre and of having the ADM far out. weighs the disadvantage. One noteworthy effect of the ADM/ABM on the Singapore economy is that international banking is progressing rapidly in Singapore; many local banks have joint ventures with international banks and financial institutions and even the national banking system has become more competitive and effi. cient. In the last decade, many branch offices of international banks and financial institutions have been opened in Singapore, directly or indirect. ly for the operation of the ABM.-*-2 l^This was evidenced in the Recession, 1974-76, when the total deposits in small banks in EDM could not be greatly increased in amount. The re. cycling of petro-dollars was mainly in the hands of big banks. l^See Lee Sheng-Yi, The Monetary and Banking Development of Malaysia and Singapore, Singapore Univ Press, 1974, pp. 91-97 & Appendices 5.1, 5.2, 5.3 and 5.5, pp. 367-71. EASTERN BANKING THE ROLE OF THE HONGKONG BANK GROUP IN THE ASIAN DOLLAR MARKET The Hongkong and Shanghai Banking Corporation (HSBC) obtained the ACU (Asian Currency Unit) licence from the Monetary Authority of Singapore to operate in the Asian Dollar Market in September 1969.^ Indeed, the first licence was granted to the Bank of America in October 1968. About twelve to fourteen licences were granted to this batch of applicants in the early phase of development (see Table 1). Wardley Limited, a wholly-owned subsid. iary of HSBC, obtained the licence on 7 July 1977. Fifty-one per cent of the shares of Marine Midland Banks Inc was acquired by HSBC in 1980. It obtained the ACU licence on 17 September 1973. Thus the Hongkong Bank Group (HKBG) has three units operating in the Asian Dollar Market. The Hongkong and Shanghai Banking Corporation has four hundred offices in forty countries.!^ Marine Midland has two hundred and ninety-five branches in New York State, U.S.A., and twenty-four overseas branches. After the merger, the Group has over eight hundred offices in fifty-three countries around the world; the combined assets amount to about US$45 billion.^ With such a wide network of branch offices, the Group can contribute much to the activity of the Asian Dollar Market and Asian Bond Market. The Hongkong and Shanghai Banking Corporation In the early phase, 1969 to 1971, the HSBC followed the market trend of collecting deposits in this region and remitting them to London or New York for lending or investment. The HSBC has begun to operate actively in the ADM since 1975, when the ADM assumed a regional character, i.e. most of the funds are collected in this region and invested or lent out in this region. Table 4 shows the key items in the balance sheets of HSBC with respect ^Information kindly provided by Singapore Branch, HSBC. l^For the principal subsidiaries and associates, see HSBC, Annual Report 1980, pp. 23-24. They include banking, merchant banking, finance and investment, investment management, corporate management, insurance, export credit, leasing, airlines, shipping, property and various other companies. The commercial banking group includes HSBC, Marine Midland Banks, Inc (51% share), the British Bank of the Middle East, Mercantile Bank, Hang Seng Bank (61% share), the British Bank of the Lebanon Sal, the Saudi British Bank and the International Commercial Bank. Other notable companies include the Wardley Group (Wardley Ltd, the principal company, Wardley Australia Ltd, Wardley Thailand Ltd, Wardley Canada Ltd, Wardley Middle East Ltd, Wardley (Vila) Ltd, Wardley International Management Ltd, Wardley Investment Services Ltd, Wardley Nikko Management Ltd, Wardley Insurance Co Ltd, Wardley Swire Assurance Ltd, Wardley Gibbs Ltd and Wardley Data Service Ltd), Wayfoong Finance Ltd, Antony Gibbs Holdings Ltd, Cathay Pacific Airways Ltd, World Shipping and Investment Co Ltd, South China Morning Post Ltd, etc. See also the brochure of Ward ley Ltd, p. 1 . l^See Marine Midland Banks, Inc, Annual Report, 1980, p. 87. THE ASIAN DOLLAR MARKET to Singapore operations, which include the operation of their ACU.16 From 1975 to 1980, deposits grew at the annual rate of 29%, loans and advances at 20%, and' aggregate assets/liabilities at 25%. More spectacular still is the growth rate of net profit after tax, which is 60%. It is a characteristic feature of HSBC that it serves actively in the deposit-base funding operation, because most of the deposits are from non. bank customers, rather than from the interbank sector. As explained above, in the ADM, about three-quarters of the deposits are interbank funds and less than one-quarter is deposits from non-bank customers. But in the particular case of HSBC, its deposits are predominantly deposits of non. bank customers. About 60% of HSBC's deposits come from Southeast Asia, predominantly Hong Kong (50%) and secondarily Indonesia and Brunei. Some deposits come from the Middle East (Abu Dhabi). Funds from London are insignificant. Again this pattern of the source of funds is somewhat different from that of the general market; HSBC's deposits from Hong Kong are mainly deposits of non-bank customers and not merely a transmission of funds from other countries or interbank funds. In contrast to deposits, lending is mainly to banks, financial insti. tutions, agents and branches, rather than to non-bank customers. The percentage of lending to other financial institutions exceeds that in the whole ADM. HSBC lends mainly to the Philippines, Indonesia, Singapore and South Korea. Lending to Hong Kong is, however, not significant. The loans are to finance projects of industry and construction and other financial insti. tutions. The finance of trading seems to be insignificant. HSBC takes an active part in syndicated loans in the ADM as well as in the national banking system in Singapore. Wardley Limited Wardley Limited was established in Hong Kong in 1972, and is specialised in corporate finance, investment services and other merchant banking activi. ties. A branch was opened in Singapore in 1976 and started operation in the ADM in 1977. Most of the merchant banks have small capital funds, as they are more specialised in arranging syndicated loans and corporate finance than in providing loans themselves. But Wardley Limited has an exceptionally large paid-up capital and reserve of HK$400 million and total assets in excess of HK$9 billion. 17 This explains why Wardley is so active in lending in the ADM, syndicated loans, corporate finance and underwriting of new issues in the national banking system (Table 10) as well as in the Asian Bond Market (Table 9). 16The bal ance sheet of the Bank in the Annual Report shows the operation of the Bank on a global basis, which is not appropriate in this specific analysis. l^See the brochure of Wardley Ltd, p. 1. Further information was kindly provided by the Singapore Branch, Wardley Ltd. EASTERN BANKING Project financing and bridging finance for property development, manufacturing industries and others are the major lending activities of Wardley. Borrowers, mainly multinational companies, invest the funds in Indonesia, Singapore, Australia and other countries. In line with the whole ADM, apparently the investment funds are diverted mainly to the Asian countries, particularly the Asean countries. With respect to the sources of funds, the deposits come mainly from Singapore, Indonesia, Brunei, Malaysia and others.^ Interbank funds from London have become more significant in recent years. Apparently, more than 60% of the funds come from the Asian countries. To complement the activity of the ACU, Wardley also has active foreign exchange dealings, money market dealings and finance, and investment ser. vices. The Wardley Investment Services Limited was incorporated in Hong Kong in 1973 and is a wholly-owned subsidiary of Wardley Limited. It offers service of discretionary management of equity, bond and cash port. folios to individuals, pension funds, investment trusts, government and semi-government bodies and other institutions. A branch has been estab. lished in Singapore and is expected to be fully operational in 1982. Marine Midland Bank The investment in Marine Midland Banks, Inc, by HSBC was in several stages—at first 25% of the shares of Marine Midland, reaching 41% in March 1980 and 51% in October 1980.19 Three members of the board of directors of HSBC sit on the board of directors of Marine Midland and similarly three directors from Marine Midland are also directors of HSBC. 20 The two giants after merging operate in separate identities in the international banking network. After merging, the equity capital of Marine Midland was increased by US$236 million, to become US$762 million by the end of 1980.21 Marine Mid. land operates in wholesale banking in Asia, although it functions actively in retail banking in New York State, USA. It established a representative office in Singapore in 1971, which was converted into an off-shore bank, with the approval of the ACU licence on 17 September 1973. Interbank funds and funds from the branches of Marine Midland in Tokyo, London, Paris, Panama, the Bahamas and other centres constitute the l^As the deposits are related to both Hong Kong and Singapore offices, Wardley is unable to present figures with respect to its ACU in Singapore only. Likewise, the loan amounts are related to both ACU and Singapore operations and are not appropriate to the study of ACU. l^See HSBC Annual Report 1980, with the Chairman's statement, pp. 4-5; further information was kindly provided by Singapore Branch, Marine Midland Bank. O A Namely Michael G R Sandberg, chairman, John L Boyer, deputy chairman, and Ian Macdonald, executive director of HSBC; and Edward W Duffy, chairman, John R Petty, president, and Robert W Hubner, director of Marine Mid. land. See Marine Midland Annual Report, 1980, p. 5. 21-Marine Midland, p. 4. THE ASIAN DOLLAR MARKET predominant part of deposits. Since its inception, the ACU deposits have grown from about S$240 million at the end of 1974 to about S$929 million at the end of 1980; loans/bills were increased from S$ 131 million to S$421 million, and total assets/liabilities were increased from S$439 million to S$1,755 million (Table 6).22 The growth rates of deposits, loans/bills and total assets/liabilities were 25.3%, 21.5% and 26% respectively. Marine Midland has project financing in industries and construction, but not much in property development. A unique feature is that it actively finances international trade, whereas trade financing is not predominant in the ADM.Marine Midland participates in some syndicated loans. Lending is mainly directed to Asian and Asean countries. The International Treas. ury Management is centred at New York, London and Singapore branches to provide money market rates and world-wide information services. This unique position is a help to the ACU. ASIAN BOND MARKET The Development Bank of Singapore and the Government of Singapore pioneered the first three issues in 1971 and 1972, signifying the deliberate govern. ment action to develop the ABM.2^ The growth was rather sluggish in the early stages, 1971 to 1975, particularly during the world-wide recession of 1974 to 1975 (Table 7). There was no issue at all in 1974, when the inter. national capital market was dull. In 1975, there were only three issues, amounting to US$47 million. The Asian Bond Market has become active since 1976, in consonance with the Euro-Bond Market (EBM) and the world capital market. 1980 saw a high level of activity with eighteen issues, amounting to US$659 million. In 1981, there were sixteen issues, amounting to about US$881 million; the level of activity in 1981 was even higher than that in 1980: to date (up to end 1981), there have been eighty-six issues, amount. ing to about US$3,125 million. The Asian bond issues represented only 0.5% of Euro-bond issues in 1975, 1.8% in 1976, and 1.7% in 1980.25 The issuers and underwriters of Asian dollar bonds are from different countries on a world-wide basis. They include companies, banks, financial institutions, governments and regional institut ions.26 in particular, 22aCU figures are estimated by taking 95% of figures in Table 7. in Table 7. in the ADM project financing or investment See note 23(;enerally speaking, important than trade 2^For a detailed list "Financial Structure . . is more finaneing. of issues of Asian Dollar Bonds, see Lee Sheng-Yi, and Monetary Policy in Singapore", Occasional Paper of the Institute of Economics and Business Studies, Nanyang Univ, No 35, Dec 1979, pp. 44-47. 25Euro-bond and foreign bond issues were US$38.3 billion in 1980, see Bank for International Settlements, Annual Report 1980/81, p. 100. E.g. the 1triple-A' rated European Coal and Steel Community, two Latin American Governments, the Philippine Government and an Italian public 26 EASTERN BANKING Japanese banks and financial institutions play a very active role in the ABM. Of the eighty-six issues, seventy-four are lead-managed or managed by Japanese banks or their joint ventures. In Table 7, the coupon rates of interest refer to U.S. dollar bonds only. The rates in strong currencies, such as Deutschemark and Japanese yen, are usually lower. The coupon rates for U.S. dollar bonds were 9-9.5% (averaging 9.33%) in 1975, 6.5-9.5% (averaging 8.44%) in 1976, 6-8.625% (averaging 6.73%) in 1977, and 9.5% or floating rate in 1978. The world interest rate rose sharply from 1979 to 1981. Since 1976, it has been a common practice to offer floating rates on the basis of LIBOR or SIBOR, as there is less risk to both issuers and subscribers in view of the world. wide fluctuating interest rates. It has been commented that there is a lack of an active secondary market for Asian dollar bonds. It is important to develop the secondary market, so that bondholders can obtain liquidity, if need arises, and the flow of funds in the financial system can be more effectively regulated and utilised. The Monetary Authority of Singapore has conscientiously strived to that end. Although the Asian dollar bonds are listed in the Stock Exchanges in Singapore, Malaysia, Hong Kong, Tokyo, London and New York, there are in fact few transactions. However, it is a common phenomenon that the primary market for new issues is more active than the secondary market. Even in the Euro-Bond Market, Euro-bonds are not much transacted. The more important objective in the capital market is to provide a channel for investors to obtain finance effectively. What is the possibility of making use of the Asian Currency Market and Asian Bond Market to strengthen the Asean economic co-operation? At pre. sent, the ADM is based on Singapore. Thailand allows people to deposit certain amounts of foreign currencies in banks, subject to approval of the Bank of Thailand. This is a miniature of the ADM. The Philippines tried hard to develop off-shore banking units (OBUs and FCDUs) at Manila, and is also active in ACU depositing and borrowing in Singapore. Jakarta hopes to develop an off-shore banking system. But the real rivals to Singapore as a financial centre are Hong Kong and Tokyo. To what extent can Asean countries make use of the Asian bond issue or syndicated loans to finance Asean development projects? It can be sug. gested that Asean countries may have preferential access to the ACU funds, or facilities for floating Asean bonds in the market. At the recent Asean meeting, Singapore was entrusted with the task of seeking capital funds for the development of agriculture and agro-based industries in the Asean coun. tries. The Asian Dollar Market and Asian Bond Market are still in the youth. ful stage, with high potential growth. The Asean economic co-operation may provide a new impetus to expansion. The full liberalisation of foreign exchange control and the vigorous measures of financial and industrial development of Singapore will boost Singapore as a financial centre and consequently will accelerate the growth of the ADM and ABM. statutory board. THE ASIAN DOLLAR MARKET THE ROLE OF THE HONGKONG BANK GROUP IN THE ASIAN BOND MARKET Neither HSBC nor Marine Midland operates in the Asian Bond Market, but Wardley is very active as one of the managers of ten Asian dollar bond issues (Table 9) out of the total issues of eighty-six in the ABM (Table 7). In an issue there are usually a lead-manager, joint-lead manager (sometimes) and several managers. The decision, and often negotiation, of participation in bond issues and corporate finance are taken at the Head Office in Hong Kong, whereas the Wardley Singapore branch serves as a liaison office.^ Being specialised in corporate finance, Wardley has underwritten four new issues and five rights issues in Singapore (Table 10). In 1981 it acted as the financial adviser to the Board of Haw Par Brothers Inter. national Limited in connection with the Cash Offer by Morgan Grenfell (Asia) Limited on behalf of United Overseas Securities Limited to acquire all of the issued ordinary shares of Haw Par Brothers International Limited. Haw Par did not accept the offer finally and so the transaction did not go through. In this case, Wardley succeeded in defending their clients from being taken over. In 1981, Wardley acted on behalf of Hong Leong Holdings Limited to acquire the whole of the share capital of Hume Industries (Far East) Limited in cash. The initial acquisition was 97% and so the deal was successfully concluded. THE FUTURE OF THE HONGKONG BANK GROUP A 'global' bank approach, as stated by the Chairman of HSBC, will probably be the keynote of development strategy in the coming decade. ^ With the increasing importance of international lending, the off-shore banking system and consortium banks, coupled with the advance of communication technology and computers, international banking with links to different parts of the world is a necessary condition for rapid progess. The effort of HSBC to seek partners in international banking has been manifested in several significant events. The acquisition of the Mercantile Bank in 1959 has strengthened HSBG's position in India, Thailand, Japan, the United Kingdom and Mauritius, as the Mercantile Bank has a large network of branches in those countries, particularly India. ^9 The British Bank of the Middle East, having branches in Bahrain, Djibouti, Qatar, U.A.E., Yemen, Oman, Jordan, Lebanon, India, the United Kingdom and other countries, ^information kindly provided by Wardley, Singapore. 2RSee Michael Sandberg, Chairman, HSBC, "The Need to be a Global Bank", Euromoney, Oct 1981, pp. 56-58. 2^Mercantile Bank operates as a separate identity in some countries such as India and Thailand, but in Singapore and Malaysia it was merged into HSBC. EASTERN BANKING provides an important link to the oil-rich Middle East and is instrumental in the recycling of the petro-dollar through the Euro-Dollar Market and Asian Dollar Market. In January 1980, a year of celebration for the Group, the Head Office of the British Bank of the Middle East was relocated in Hong Kong in order to improve co-ordination of the Group. Other banking subsidiaries and associates include the British Bank of the Lebanon Sal, the Saudi British Bank, the International Commercial Bank and Hang Seng Bank. The Wardley Group provides a strong merchant banking arm for corpor. ate finance. The acquisition of Marine Midland in 1980 is symbolised by "the Pearl of the Orient meeting the Big Apple", or "Hong Kong meeting New York", which is illustrated in the visual motif on the wallet cover of the HSBC Annual Report 1980. "The completion of the transaction with Marine Midland happily coincided with the Centenary of the opening of our [HSBC] first branch in New York in 1880."30 This double significance of HSBC's connec. tion with New York during 1980 is a milestone on the road of international banking. Historically, HSBC caters for retail banking in Hong Kong, China and Southeast Asia. But with the merger with Marine Midland and other banking groups, HKBG serves both retail and wholesale banking in a widened network in the world. The Chairman remarks: "a retail deposit base will remain a most powerful resource."^ With internationalisation of banking and rapid expansion of organisa. tions, decentralisation is the answer to the complicated problem of a global bank. There is a need to form a federation of banks to work to. gether. Historically, major decisions of HSBC were centralised at the Head Office at Hong Kong. The Chairman has now called for decentralisation so that a branch or banking group in a certain region can enjoy local autonomy to a certain extent and can make more important decisions or policy.32 However, the relocation of the Head Office of the British Bank of the Middle East at Hong Kong seems to indicate the process of centralisation, rather than decentralisation. Perhaps the Chairman's concept of decentral. isation means a higher_ loan limit for a chief executive of a branch, a greater liberty in decision-making for local authorities and other general operations. In fact, there must be a reporting system and some co-ordina. tion work at the Head Office. Decentralisation depends sometimes upon the personality of a chief executive officer. The chief executive may recom. mend some measures to the Head Office. Whether or not the measures are accepted depends, inter alia, upon the strong or weak personality of the chief executive, or the trust of the Head Office in the executive. Hence how the HKBG achieves the objective of decentralisation remains to be seen in the coming decade. The Hongkong and Shanghai Banking Corporation serves "unofficially" as the central bank of Hong Kong. The question arises as to whether a bank can function effectively from a social welfare standpoint as a commercial bank as well as a central bank and whether the economy of Hong Kong can be -^Quoted from the Chairman's Statement, HSBC Annual Report, 1980, p. 4. -^Euromoney, p. 58. 32lbid^- THE ASIAN DOLLAR MARKET better served by establishing a separate central bank. The argument in favour of a central bank is that sometimes there is a conflict of interest between commercial banking and central banking—i.e. between profit motive and social reponsibility—and that a central bank without any commercial banking activity can command more respect from banks and financial institu. tions because of the absence of competition in business. As the financial system of Hong Kong has been developing into a sophisticated stage with numerous licensed banks and deposit-taking companies, perhaps a monetary authority with fuller power of supervision may be necessary for orderly growth in the future. Thus from the standpoint of the Hong Kong economy, there is a good case for setting up a separate monetary authority or a central bank. From the standpoint of HSBC, it may also progress better toward the sole goal of commercial banking, without the occasional conflict of interests between commercial banking and central banking. This may be an important problem for both the Hong Kong Government and HSBC to consider. As a matter of fact, the introduction of new regulations with respect to banks, merchant banks and finance companies, and the licencing measures have already eroded the function of HSBC as a "central bank"; the Exchange Fund acquires foreign exchange in the market in the course of currency issue and has been attempting to support the Hong Kong dollar with HSBC as its agent in the operation. ^3 in this way, the HSBC acts merely as an instrument, whereas the decision of monetary policy lies in the Financial Secretary, or the Hong Kong Government. Nevertheless, the implicit central banking function has raised the social status or influence of HSBC. In conclusion, with the progress towards a global bank and decentralisation, HSBG is expected to play a bigger role in the Asian Dollar Market and Asian Bond Market in this coming decade. -^Under the present system, the note-issuing banks issue new banknotes against interest-free Certificates of Indebtedness which are the obliga. tion of the Exchange Fund. Before 1972 (floating of Sterling) banks credited the Fund's London account with sterling. Now they credit the Fund's accounts with the amount of new issues in Hong Kong dollars. The Fund in turn uses the proceeds to acquire from the market a variety of foreign currencies. The amount of Hong Kong dollars held by the Fund and the timing and volume of foreign exchange acquired by the Fund would affect considerably the liquidity of the banking system and the money and foreign exchange markets. The institutional framework implies that the money supply in Hong Kong is mainly determined by her balance of payments or net external transactions. See Lee and Jao, Ch. 2. EASTERN BANKING Table 4 The Key Items in the Balance Sheets of HSBC with Respect to Singapore Operations (in S$ millions) 1975 1980 Annual Growth Rate (compound) % Cash & Balances with Banks 197 1,175 42.9 and Agents* Demand, fixed and savings 643 2,333 29.4 deposits of customers** Loans and advances* 336 851 20.4 Bills receivable 99 335 27.6 Aggregate assets/liabilities 1 ,074 3,314 25.3 Net Profit after tax 3.2 42.8 68.0 Note: *includes ACU interbank lending. **includes ACU deposits. Source: HSBC, Singapore Branch [Table 5 of original essay omitted. Ed.] Table 6 Marine Midland Bank, 1974-1980 (S$ millions) 1974 1978 1980 Annual Growth Rate (compound), 1974-80 % Deposits 252.5 297.3 977.9 25.3 Loans/bills 137.6 184.7 442.4 21.5 Total assets/ 1iabilities 462.4 685.8 1,847.3 26.0 Note: Singapore operations include the ACU operations and lending to a limited extent in Singapore. Approximately 95% of the above figures are related to the ACU operations. Source: Marine Midland Bank, Singapore Branch THE ASIAN DOLLAR MARKET Table 7 Asian Bond Issues 1971-1981 No of Issues Amount, Mil lions Coupon Rate of Interest* % Maturity, Years 1971 1 US$ 10 8.50 10 1972 2 US$ 20 7.75 10-15 1973 3 US$ 100 DM 100 5.75, 6.50, 8.75 9-15 1974 0 1975 3 US$ 47 9.00, 9.50 5-7 1976 9 US$ 247 DM 50 6.50-9.50 or Floating rate+ 5-15 1977 14 US$ 315 DM 100 A$ 10 6.00-8.625 or Floating rate+ 5-15 1978 12 US$ 220 SDR 25 Y 15,000 DM 40 A$ 15 9.50 or Floating rate+ 5-15 1979 8 US$ 315 DM 70 7.00 or Floating rate+ 7-15 1980 18 US$ 659 7.25-12.00 or Floating rate+ 3-8 1981 16 US$ 725 +Y 35,000 5.00-15.50 or Floating rate"1" 3-15 Total 86 US$3,125 Note: ^Coupon rates of interest refer to US$ bonds only. +Floating rates are usually 0.25% above 6 months LIBOR or SIBOR. Source: Monetary Authority of Singapore, Annual Report, 1980/81, p. 42 and information from DBS-Daiwa International Securities Ltd. EASTERN BANKING Table 8 Floating Rate US$ Certificates of Deposit Floated in Singapore, 1977-1981 Year No of Issues Amount Millions US$ Maturity 1977 2 30 3 years 1978 19 355 18 issues - 3 years 1 issue - 2 years 1979 30 578 21 issues - 3 years 8 issues - 5 years 1 issue - 2 years 1980 34 800 30 issues - 3 years 1 issue - 2 years 1 issue - 4 years 1981 39 900 26 issues - 3 years 9 issues - 4 years 4 issues - 5 years Total 124 2,663 Average amount per issue = US$20.7 million Note: The interest rate is usually 3/16-1/4% (mainly) above SIBOR (Singapore Interbank Offer Rate) for 6 months US$ deposits. The total amount of Fixed rate US$ NCD issued since 1977 up to end Sept 1981 is US$8,866 million. Source: Monetary Authority of Singapore, Annual Reports, 1979/80, p. 67, and 1980/81, p. 62 and some other information; DBS-Daiwa Secur. ities International Ltd; and Singapore-Nomura Merchant Bank Ltd. 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ORGANIZATIONAL AND STRUCTURAL CHANGE IN THE HONGKONG AND SHANGHAI BANKING CORPORATION, 1950-1980 by S G Redding In 1950, the Hongkong and Shanghai Banking Corporation recorded a profit after tax of HK$17.2 million. In 1980, the figure was HK$1,431 million. Over the same period the number of managerial staff in Head Office had grown from 8 to 212. The purpose of this paper is to trace the changes in strategy and structure which have accompanied, and to a large extent accounted for, this most fertile period of growth. In doing so, it is hoped to transmit not simply the basic information describing structural change, but also to convey some of the less tangible but crucial aspects of the organization's character, and to assess the implications of the inter. play between that character and the forces of growth and change. The focus of interest will be Head Office, and details of operations outside that will only be brought into the account when they can illuminate aspects of Head Office functioning. The plan for the analysis will be as follows: 1. Brief chronology of the growth process. 2. Presentation of a model for organizational analysis. 3. Changes of strategy during the period. 4. Changes of structure during the period. 5. Changes in the organization's overall character. 1. The Growth Process At the beginning of the period with which we are concerned, the operations of the company were characterized by a major disturbance and a consequent regrouping. The disturbance was the ejection from China, the process of extrication being described by Sir Michael Turner as his start in life before he assumed the role of Chief Manager in 1953. The loss of the China trade was serious and new sources of business were actively sought, for instance, Borneo and the United States. By 1956, the organization operated in twenty locations. Some idea of their relative importance is given by the number of foreign staff assigned to them and Table 1 (overleaf) indicates the importance of Hong Kong, Sing. apore, Malaysia, Japan and India. Profit figures during the period 1950 to 1955 were stable at around HK$17 mil lion. 1 But they began to climb slowly towards the end of the decade, the three year growth in 1958, 1959 and 1960 (profits of HK$23.5, ^Profit figures referred to are after tax and after transfers to inner reserves. Because of the unknown transfers to (and possible withdrawal from) inner reserves, these profit figures are likely to be a smoother index of the company's activities than is normal. They are nevertheless EASTERN BANKING Table: Distribution of Foreign Staff, 1956 Location Number of foreign staff Location Number of foreign staff Head Office 10 South Vietnam 6 Hong Kong 50 Sri Lanka 6 Singapore 26 Burma 6 West Malaysia 24 UK 5 Japan 21 Shanghai 2 India 20 Phnom-Penh 2 East Malaysia 13 Germany 2 Philippines 10 France 2 Thailand 7 New York 2 Indonesia 6 San Francisco 1 28.1 and 42.2 million) being significant. In 1958 a serious sortie into North America was begun, with the launch of the Hongkong and Shanghai Banking Corporation of California, although this was later to be described as an unsuccessful venture on balance. In 1960, foreign staff on the strength of the Head Office establish. ment still numbered only ten. During the second half of the fifties, total foreign staff numbers grew only slowly from 221 in 1956 to 238 in 1960. The decade, however, was closed with two dramatic acquisitions, of the Mercantile Bank in 1959 and the British Bank of the Middle East in 1960, mergers which almost doubled total assets from ￡227 million at end-1958 to ￡445 million at end-1960. Because of the Hongkong Bank's policy at the time, of non-interference in the operations of such acquisitions, it would be some time before their impact on the structure would be felt. It is also worth noting at this point that the acquisition of these two major components was not the result of an active search for areas of growth, but the response to opportunities brought in for consideration. In both cases they were acquired at least in part to prevent anyone else buying them; while the acquisitions were not then part of a previously-conceived and conscious market strategy, in the event, the decisions did become carefully considered ones. In 1962, Sir Michael Turner retired and Sir John Saunders became Chief Manager to preside over a period of further strong growth, interrupted only in 1967 when the devalution of sterling and the civil disturbances in Hong Kong caused the only setback in a record of thirty years of annually increasing announced profits. By the end of the Sixties Head Office had grown to include 30 foreign staff, whereas the decade only saw a growth from 238 to 254 in the foreign staff as a whole. There were no dramatic changes of emphasis during taken as suitable indicators of the long term trends which are the main concern of this paper. the sixties and only minor modifications to distribution of activities. Rangoon was nationalised in 1963, Phnom-Penh and Jakarta (for five years) in 1963, and an Australian venture began in 1965.^ Some rethinking of Head Office operations was, however, evident and an EDP centre was staffed from 1968. Increasing specialization also became evident with the setting up of Wayfoong Finance Limited in 1960 and a Property Department in 1969. Per. haps the most significant development during this period was the expansion of branches in Hong Kong, a movement which had started in response to the growth in demand for basic banking services from an increasingly prosperous community, and which received great stimulus from the advent of the com. puter . In 1969 a major restructuring resulted in the creation of an executive board with the consequent elimination of the position of 'chief manager', whose role was, in any case, no longer understood in the banking world at large. Saunders, chief manager since 1962, had become chairman in 1967; he was from 1969 the Bank's first Executive Chairman, a position to which Guy Sayer succeeded in 1972. The subsequent five year period was one of substantial change and accorded with an increase in declared profits from the HK$218 million announced for 1972 to the HK$522 million announced for 1977. The growth of Head Office during the early part of the seventies is difficult to trace owing to a change in the make-up of staff lists with the addition of regional officers from 1972, but from 1972, when 48 foreign staff and regional officers were assigned to Head Office, the numbers grew to 104 in 1977. The period of 1972-1977 is significant for the way in which the integration of Mercantile was largely achieved. That of BBME was to take longer. Branch growth in Hong Kong continued. Wardley was launched in 1973. New branches were opened in the Solomons, Chicago (1974), Seoul, Channel Islands (1975) and a representative office in Brazil (1976). Saigon was closed in 1975. And, lest we forget, the Shanghai branch remained manned by one officer throughout the whole decade. In 1977, Michael Sandberg became Chairman of the Board and has pre. sided over a period of even more dramatic growth revealed in the statistics given in Figure 1. Branch expansion has continued apace in Hong Kong, with executive staff in the Hong Kong operation rising from 194 in 1977 to 307 in 1981. A forceful expansion also took place in Wardley, executive numbers increasing there from 27 in 1977 to 68 in 1981. The purchase of 51% of the shares of Marine Midland Banks Incorporated saw a major shift of assets. Growth, although at a more steady pace, is noticeable in most of the organization's other operating areas. In February 1981, the 212 Head Office executives were responsible for guiding and controlling the work of 1400 colleagues throughout the world. ■^Dates for these events are taken to be in accordance with the allocation of foreign staff to these posts, as given in the staff lists. The sequence of staff lists is broken by inconsistency in its make-up. Between 1962 and 1965 the lists include 'local staff officers'. After 1972 the lists include regional officers. Since 1977 the listing is of 'group executive staff'. EASTERN BANKING Fig 1 Profit Growth: Group Net profit of the Group for 1981 at HK$2,003 million represents an increase of 39.97% compared with the profit for 1980. Since 1967 the profit of the Group has increased at a compound annual rate of 25.75% ASSETS (in HK$ millions) 1967 13,583 1972 32,595 1977 68,710 1968 15,813 1973 38,060 1978 84,881 1969 18,669 1974 41,503 1979 109,463 1970 22,719 1975 47,967 1980 242,953 1971 26,142 1976 55,289 1981 304,206 Compound rate of growth 1967 to 1981 = = 24.86% Fig. 1. Company Performance Data In the e arly fifties, Head Office accounted for 4.5% of executives. Th 1981 figure was 14.3%. 2. A Model for Organizational Analysis It is necessary, for our purposes, to adopt a model of organization struc. ture which will allow the pattern of structural change in Head Office to be observed, and at the same time allow some understanding of the implications of such change for the organization's overall character. It is proposed to use the framework proposed by Mintzberg (1979) which serves as a vehicle for a comprehensive theory of organization structure. It need hardly be added that such a framework is only one of many that could be chosen. It is chosen because of its relatively easy access for the layman, for the graphic way in which the nature of organization can be perceived, and for the respect accorded it in the organization theory literature. It remains nonetheless a conceptual tool allowing this organi. zation to be compared with others, a convenient vehicle to reach a mental destination, and not some final absolute explanation. In brief, the elements of this theory are as follows: Any organization can be analysed as a set of five structural compo. nents : (i) the strategic apex, ie, head office. (ii) the middle line, ie, those middle managers responsible for vertical and horizontal co-ordination of main line operations. (iii) the operating core, i.e. the organization's main line activities of producing goods or services. (iv) the technostructure, i.e. the analysts who affect the work of others by designing it, planning it, changing it, and usually exercising some form of standardization. (v) the support staff, i.e. those who provide indirect support outside the operating work flow. Some indication of the way the model can be used to illuminate an organization's functioning is indicated in the following figures:- Fig 2: The basic components Fig 3: Typical departments Fig 4: A standard organization chart Fig 5: The flow of regulated activity Fig 6: The flow of informal communication Fig 7: Work constellations (or departments) Fig 8: The total functioning. As organizations grow they change their structures in response to the nature of the environment and the complexity derived from internal prolife. ration. This process does not take place according to some entirely predictable determinism, but is mediated by the impact of managerial values, beliefs and traditions, particularly those of the strategic apex. Nevertheless, organization theory is able to make reasonably confident probability statements about the nature of the growth process and a summary of what is entailed is given in Fig 9. From this it is evident that there are five main organizational types, each one characterized by an emphasis on one of the five key parts. The mechanism which causes this is the impact of the process of co-ordination. In simple terms, the co-ordination of the work of subordinates is achievable via (a) mutual adjustment, in which a small group of people accommodate to each other and keep each other informed; (b) direct supervision, in which a superior co-ordinates the work of others by personal control; (c) the standardization of work in which behaviour is predetermined and repetitive; (d) the standardization of outputs, in which behaviour as such is not EASTERN BANKING Fig 2 The Five Basic Parts of Organizations Fig 3 Some Members and Units of the Parts of the Manufacturing Firm STRATEGIC APEX Fig 5 Source: Mintzberg (1979), used with the permission of the author. Fig 6 The Flow of Informal Communication (Adapted from Pfiffner and Sherwood, 1960, p .291) Fig 7 The Set of Work Cons tellations Fig 8 A Combined Overlay: The Functioning of the Organization Source: Mintzberg (1979), used with the permission of the author. EASTERN BANKING Pull of Strategic Apex to Centralize (Coordination through direct supervision) ft ^ J Simple Structure ./} c.. Nc& o C/3 + 1 1 1 > O E o y— o E 0) 03 C 8 o If) 8 o If) -C (/) 13 CT ED O O CM T— (13 _c O if) O o 8 || 8 F <-> ‧ 3 -2 & 03 ID C CL > C O LL 3 (0 3 35 O co OtO Z z << UO TECHNOSTRUCTURE HONG KONG OFFICE ORGANIZATIONAL AND STRUCTURAL CHANGE c o OJ x— o i o O CD C c 05 GO ' P s CD -p si CO CO CD > aS G ■P w O X T3 g 1 T3 CO hH ‧P as H o X P l-H al G Q *H 0 Z T3 CO W G as A. M 03 A < CQ < as .H rH o ‧H -P h S H aJ O g P g 0) P S CO as o E-* X X in < x u >—t >. 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II .. II o H rH II r—i II x to II to- II O dP dP O CM r- o X CM X Eh ‧> X o X dP X X X CM CM < (T. — ■—' CM w rH w ‧ X o O O II O O o o 3 O II X w o O O II o O o o M O II X Ui z (N X r- II ■'T X X X z X II X 3 D . * * II .> w .k ‧. o II a. < *3 rH1 X ,d" II X o rH X II ■'T X X X II X X X II rH O CN CM II CM X rH II X x ‧* *. II II o H H II rH II X to- II to- II o o a\ o o 01 to to 01 o bX) 8 X f" rH X cd CM o dP OS rH X rH CN CN < X X '— -— CM 0) p rH ‧ > o o O II o o o O .J o II CM CJ O o O || o o o o H o II CM < Ch 2 X X r- II r* X o z X II r- 3 2v II II .H < .3 X X II r- X o ■> Ch to- II to- II O E-. H OS < (Tv W rH S3 I < >3 X _ o OS x O tu X o II X r- X o v-3 rH II o r- X II o rH X o H CM II X X X II CM X X X z X II II II X X II X rH r* X II CM X II rH X o II CM CM II rH o (N II a * II ‧‧ a. II rH rH II rH rH II to- II to II C 0) M 3 (J (fl 0 cl T3 ‧H (1) u c id 3 0 CL id CP c a) o c a H l .J H <1) W in U C 0) 0) 0 X ‧H W ‧H (d Ll 0) 4J +j ‧0 u .d in C ‧*H 4J 0 3 Oh X CL X $9,444 $18,365.35 $17,223.36 $19,352.78 $19,095.81 $21,921.90 EASTERN BANKING m i—i H < W a I o co rH CO co O' co CO vO ■^r o iO co co O CN CO r- CM in cn m iD O' co .—i m CM CM CT> O II O II O II - II r* ll co II II AT u co 5 < o m n kd ll cr. ll - ll kd ii II X M P z w p p (1) bD CT' rH < < u 3 co 5 a m rH Eh cd r < W iH 3 in § cd o p p rH E-* < W Cd X) ‧H g X3 3 C o CO M p ‧rH .H P O O rH P XT ‧3 P - ^ Eh rH a < cd P W CO z CQ o a § n 0 o rH u CO ‧H cd -P g S3 s cd 3 o w CO CO O in u P 0 c ,—. 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CD H § -p CO < to 0) X > X co G i—i O Cm ■a G O a ￡-‧ CO X CO (1) O u 3 o CO a) cn <*> ID co ID ■O’ II C* rH O rH - N ll x r~ CN ON CO r- X ‧ dP dP X X (N w '—' — CN N X o X rH rH X ii in ll X X X CN ■^r X ll in II X X o ll II ll CN II X t"* X X X X ll ON II X r. o X o n ll rH rH X r* n t/> ll < o II X X X X rH X H X rH X X II rH X X X ll X X X rH ll rH CN o CN o r- II rH II ll X X 'O’ II o X X rH X CN II X X II o X rH X rH II rH r- II rH CN X r- ll II II CN co co n* (X co O Cm X co O O o || X r- X X X rH CN ll o CN CN II X X X ■^r X ll X X o II X rH X rH rH o X ii II ii X r- II X X r- r- X X X ll CN CN II X rH X X ii X X II rH CN ii l/> II ll O'' co CN O VD CO O CO CN X ro CN 0) u & (/) a) W X cn ‧H 0 X ‧H ‧H U ‧H c0 P H <0 P P JZ tJ u rH c0 in X C \ ITJ P 0 ‧H 3 < X W CL X Cfl || CO Q) 3 bo iD CO ID II CM || II N II II O' CJ o < o ro cn X r- o ‧ H T) < w C 5 cd < ID O II c■ H O H CM CO o O in CO II in in r- H CM o rH GO CO II CM rH ‧H vD o> II II ro ^7 T—i CO CM vD in II rH CM rH n v> - N CM N II <1> o o o < p c c 0) c Q -H CJ -H 0) c CL w c Vi rH c 0 c U c c D CL 2 c P cn c Q Vi M 3 -r| < U c o *H 4H CJ CJ Eh w ■H 43 >4 MH P c c c c C UH 0 o o c o o 0 Eh O U □ wS TJ U ‧a < c c c c ‧o 'O X c c > > .w > c c P c c rH -H *H 0) o ‧H ‧* c EU 04 X c 0) 0) c \ c o o 3 X o U ‧H o o c u < O rH rH 0 P u c c s 2 Vi E* > c 2 rH < rH < u o X 3 Ed rH CJ c 2: P P P R o ‧H P P P < o Eh 3 01 0) 0) O' c 0) c 0) cn ￡ c c c c c c V u Vi c H U V4 Vi O' M Eh 3 0) c c ￡ G c W c c Vi Eh Eh P p P o g P in P P c o D C c c X o c w c c er X ￡* M M M w u M .4 M M 6 X in NUMBER OF CURRENT ACCOUNT (ORD) 194 233 281 35 7 366 4 34 Ihe Mercantile Bank of India Ltd - Singapore Summary of Average Total Available Resources Compared with Average Total MERCANTILE BANK IN EAST-COAST MALAYA O P u . o> I rH Id 43 u o Cm i

i O' ‧ 1 rH O' P O' rH a) . a* - 1 rH CM CO rH d) in id C * 43 3 *“3 CO M O O Cm co O O o o II o O o o 1! in O' O' CO II II dP 00 00 rH o> II CM CO C" r* CO 00 II ‧. II rH CM II <*> CM vo vo oo in o i cp I *H M O O Cm co o o o O 1 in o o o o | CM in cp cn r- i CO dP r- O' rH 00 | H CM O rH vo 1 r* oj in oo co vo I CM rH CM I CO dP CM VO dP CM 00 Q) ^ >i O' I rH U O O Cm co in co p- in CM in CM co VO CO CM CO vO CO CO m 00 rH in dP C' O' rH CO rH 00 in 00 q 'd P id ‧.H CP ID 3 V O' rH 'O Cm a> p c 0) A 0) 0) a) w H M 9 O' W P >1 u rH a) u cn id M .d rH a) C O Q A o 0) 4: ￡< c p ‧.H 0 a> c cb Id >i o CQ id c H (0 0) 3 a) cp O' ‧.H o c id id rH c u < 0 M < c id (/) a) rH P id Id VM w CL H > 0) o> id q 0 p 9 4-1 Q) a> >1 w < M < 0) A O M M 43 EASTERN BANKING APPENDIX VIII PARTICULARS OF THE STAFF OF THE BRITISH EASTERN EXCHANGE BANKS IN MALAYA AND THE STRAITS IMMEDIATELY PRIOR TO THE PACIFIC WAR Particulars of staff European Menials Name of Place Name of Bank officers Clerks & others Alor Star Chartered 1 4 2 Ipoh Chartered 6 44 15 Hongkong 3 13 7 Mercantile 2 15 10 Johore Hongkong 2 9 4 Klang Chartered 2 18 7 Kota Bharu Mercantile 1 9 7 Kuala Lipis Mercantile 1 3 3 Kuala Lumpur Chartered 12 86 33 Hongkong 4 24 14 Mercantile 3 22 13 Kuala Trengganu Mercantile 1 4 3 Kuantan Mercantile 1 5 2 Malacca Hongkong 3 16 8 Muar Hongkong 1 6 3 Penang Chartered 7 58 30 Hongkong 5 28 16 Mercantile 4 32 22 Seremban Chartered 2 25 11 Singapore Chartered 20 149 62 Eastern 3 24 11 Hongkong 21 109 40 Mercantile 10 77 38 Sitiawan Chartered 1 3 3 Sungei Patani Hongkong 1 5 3 Taiping Chartered 2 16 5 Totals : 119 804 372 1 ,295 Summary Chartered Bank of India, Australia & China 53 403 168 624 Eastern Bank Ltd 3 24 11 38 Hongkong and Shanghai Banking Corporation 40 210 95 345 Mercantile Bank of India Ltd 23 167 98 288 1,295 APPENDIX IX MERCANTILE BANK OF INDIA LTD KOTA BHARU, KELANTAN AGENTS 1912 Muir 1931 Soul 1953 Taylerson 1913 Wilson 1932 Rodger 1954 Aird 1914 Ferrier 1933 Robbin 1955 Macdonald 1915 Buckley 1934 Pontifex 1957 Baker 1916 Waddel1 1935 Wichers 1959 Rees 1917 Rickey 1936 Parsons 1960 Boag 1918 Thorougood 1937 Stocks 1961 All in 1919 Sutherland 1938 Pow 1962 Sim 1920 Hurst 1940 Winslow 1964 Johnson 1921 Rambert 1941 Murray 1966 Wallen 1923 Benson 1946 Philps 1968 Warburton 1924 Stocks 1947 Braine 1969 Imlack 1926 Gibbons 1949 Dargie 1969 Cheng Ewe Cheng 1928 Wardle 1950 Atterbury 1971 Yap Yuke Choy 1929 Shepherd 1951 Tipton 1972 Mohamed Adam 1930 Hartel 1952 Anderson THE HONGKONG AND SHANGHAI BANKING KOTA BHARU, KELANTAN CORPORATION 1974 Mohamed Adam 1978-80 J B Lee 1974-75 Low Cheng Kean 1980-81 Abdul Ghaffar A Maj id 1975-78 Leong Swee Yew 1981 Noordin Ali Mohd Sher APPENDIX X LIST OF AGENTS/MANAGERS KUALA TRENGGANU BRANCH 1941 Stocks 1953 Phillips 1968 Dobby 1946 Soul 1955 Brown 1970 Cooke 1946 Bawden 1956 Muirhead 1971 Langley 1947 MacDonell 1957 Fleming 1971 Head 1947 Braine 1959 Pratt 1972 Goon Kok Phoy 1949 Gregoire 1961 Fleming 1973 Dzulkifli Bin Ibrahim 1950 Graham 1962 Chadwick 1975 Mohd Noh Bin Rajab 1951 Allan 1964 Unsworth 1976 Mohamed Ross Bin Mohd Din 1952 1952 Cowie Else 1967 Campbell 1981 Rahim Selamat Shah 29. THE MERCANTILE BANK IN MADRAS AND FINANCIAL ANTECEDENTS by N S Ramaswami* The Madras branch of the Chartered Mercantile Bank of India, London and China, the original predecessor of the Mercantile Bank Limited, was opened in 1854. The parent company had been founded in Bombay in October 1853 under the title of the Mercantile Bank of Bombay. In two months it was enlarged and reconstituted as the Mercantile Bank of India, London and China, a partnership of two Indian and four British proprietors. Its authorised capital was Rs5 million. It opened for business on 3 January 1854. It established an office in London immediately after. The Madras branch was opened the same year and the Calcutta one the next year. The advent of the branch in Madras gave a fillip to joint stock bank. ing in this part of the country, but it also meant the gradual disappear. ance of the indigenous system of banking. The banking policies of the Madras Government in the preceding decades had been fluctuating, and it was by a process of trial and error that the authorities realised the fact it was private enterprise, and not Government control, that was suited to the conditions. Indigenous banking had no future and was bound to disappear. The vacuum could be filled only by private banks. Both these developments need to be studied in some detail to understand the great changes that private banks, of which the Madras branch of the Chartered Mercantile Bank of India, London and China was one, produced. Indigenous banking, as was to be expected, had been well established. It was suited to what the merchants and others of the day needed. William Preston, at one time Chief Manager of the Chartered Bank of India, Austra. lia and China and a member of the Royal Commission on Indian Currency and Finance, 1926, wrote: It may be accepted that a system of banking eminently suited to India's then requirements was in force in that country many cen. turies before the science of banking became an accomplished fact in England. It is true that the methods of old in force in India were vastly different from the European ideas of banking today and partook more of money lending, money changing and later of the hundi business; nevertheless, as applied to the conditions then existing in India, they admirably acted their part and must be recognised as having rendered immense services to the country as a whole, particularly when we keep in view the enormous agricultural interest of India.^ ^Editor's Note: Mr Ramaswami was commissioned to locate historical sources for Mercantile Bank history in Madras; his search proved that little information has survived. Nevertheless, this summary of early Madras banking history is of considerable interest. ^Quoted in Three Hundred Years of Banking in Madras by S T Sadasivan, in MERCANTILE BANK IN MADRAS But the indigenous banker was beginning to outlive his usefulness. Money changing was an important source of his profits. There were a large number of mints in the country and many metallic currencies of varying sil. ver content. Exchanging one form of currency for another was lucrative to the indigenous banker. But in the nature of things, he was bound to lose ground after the advent of European traders in the seventeenth century. In the first place, there was almost unceasing fighting in many parts of south India in that century. Secondly, while the Portuguese and the Danes made little headway as traders, the Dutch lost ground after starting well, and the French, the most serious competitors to the British, were hampered by inadequate resources. The British themselves plied a thriving trade, considering the difficult circumstances. The Directors of the East India Company realised as early as 1677, less than four decades after the founding of Fort St George, the nucleus of Madras and, in fact, of the British Indian empire, that the local factors, or their employees, should learn the business of the indigenous banker. That year they directed the Fort St George authorities to offer inducements to the factors to learn the language and the methods of working of the indigenous banker. In 1835 the indigenous banker suffered an almost fatal blow. That year a uniform currency was established throughout British India. The Madras rupee was adopted as the standard. Approximate in value to the Bombay and the Farrukhabad rupees, it weighed 180 grains, of which 165 were pure silver. The indigenous banker was deprived of an important source of income. The future obviously belonged to joint stock banking on the European model. The first intimation of modern banking in Madras is dated to 1682, when the Directors asked its officials in Fort St George to constitute themselves "into a Bank for the receipt of fixed deposits". But this turned out to be a false start, for the notification which followed was little more than the issue of a Government loan. All that resulted was "the raising of a banke of money to the vallue of One hundred Thousand pounds att six per Cent".^ Towards the end of the eighteenth century financial constraints com. pelled the Madras Government to act again. As in the previous century, in this one too there was perpetual fighting. The Madras Government was involved in a heavy deficit. It met it by loans and overdrafts upon the Supreme Government in Calcutta, which collected its revenue from the richer province of Bengal. The financial scandals involving the Nawab of Arcot, which produced a spectacular incident in the arrest by his own Councillors of the Governor, Lord Pigot, and his subsequent death in confinement, must be viewed in this light. Although, towards the end of the eighteenth century, British power was firmly established in south India with the death of Tippu Sultan of Mysore in 1799, there was danger of Napoleon Bonaparte, who was then in Egypt, The Madras Tercentenary Commemoration Volume, edited by C S Srinivasa- chari, Madras, 1939. ■^This quotation and the details of the beginnings of banking in Madras are from the records in the Tamil Nadu Archives, Madras. The Madras Records by Henry Dodwell has also been drawn upon. EASTERN BANKING attacking India. The Supreme Government in Calcutta was concerned to reduce expenditure and public indebtedness in Madras. Appointing a Commit. tee of Finance in 1798, it asked it to examine the state of Government finances in Madras and to suggest measures for improvement. The committee sat for two years and discussed a variety of topics ranging from the management of the lottery fund, the condition of the Company's junior servants and the reorganisation of the post office, to the establishment of a Government bank. It recommended a sinking fund. This was set up and it operated for some years. But its report did not improve matters. There was a spectacular reverse in 1805 when the Madras Government attempted to raise a ten per cent loan. It was a great failure. The same year the Government appointed another Finance Committe to consider why, in the first place, the first committee's recommendations had failed and, in the second, why the loan too had failed. It was also to suggest means of overcoming the Government's financial difficulties. Reporting in November that year, the committee said that these diffi. culties were due mainly to an "extraordinary dearth" of specie, or current coin, in Madras due to exports to China, Manila, Mysore and Hyderabad. The first committee too had made the same point. The second urged strongly that the acute scarcity could best be moderated by a bank set up on a large scale and by the issue of bank notes. These would help not only the Government but also the people. There were three private banks in Madras by 1805. The oldest was the Carnatic Bank set up in 1788 for the "receipt of money, the issue of bills, notes and other securities after the manner of the most respectable Banks in London". It was authorised to issue notes to the value of thrice its capital, which was 1,200,000 star pagodas. (A star pagoda was worth, in modern terms, about Rs3.75.) The other two banks were the Madras Bank, set up in 1795 , and the Asiatic Bank, founded in 1805. But all three banks were largely ineffective. They did not operate on a large enough scale, and they were so obsessed with competing with each other that they could not derive full benefits from their resources. With good management and policies they could have succeeded, for the commerce and trade of Madras were ample enough. Not many banknotes were in circulation. Possible entrepreneurs were reluctant to open new banks in the Presidency because there was a notion that economic theories which had been found applicable to European society could not be safely followed in India. The second committee asserted that this notion was erroneous, and that the principles could be applied to every country with suitable local modi. fications. It recommended that a bank "on an ambitious scale" be set up, but said that the Government should not take a direct part in it. The Government could support it by liberally investing its securities in it to enable it to issue banknotes and by retaining power, as a measure to build up public confidence, to investigate its affairs and regulate its proceed. ings when necessary. But it should not take shares. This suggestion might have been induced by the knowledge that, at that time, there was a strong demand in Britain for the withdrawal of the East India Company's commercial monopoly. MERCANTILE BANK IN MADRAS The Governor in Council was divided in opinion over these proposals. Lord William Bentinck, the Governor (1803-07), agreed that a general bank should be set up but asserted that it should be completely owned and man. aged by the Government. It was the Government that should establish the bank on its own credit and with its resources, without associating itself with any other institution or person. Declaring that the Presidency's financial embarrassments were due to want of coin or specie or a substitute for coin which would enable the people to buy their necessities and that the Company's credit had never stood higher, he argued that a paper cur. rency would meet the needs and remove the stagnation in commerce. The largest issues should be allowed against the minimum of deposits. Because the Government's credit was always superior to that of any private individ. ual, the bank which issued the notes should be a Government bank. It could draw upon the public treasury and it would be able to borrow on better terms than private individuals. In fact, Bentinck proposed almost something Ike a central bank with powers of note issue. The Government bank of his conception would not transact ordinary banking business like discounting bills. It would only issue bank notes against a certain amount of specie in deposit. Its initial deposit would be eight lakhs of pagodas. (An ordinary pagoda, as distinct from star pagoda, was worth about three rupees.) This would be increased gradually. Against this deposit, the Government would issue bank notes worth twelve lakhs of pagodas. There is something naive in the Governor's argument that, by this, the Government would have four lakhs of pagodas in its hands. In other words, it would, receive an interest-free loan of four lakhs of pagodas. Apart from this gain, when the currency became popular, Government notes would circulate throughout the Presidency like Bank of England notes in Britain. The majority in his Council voted against the proposal, and yet the Governor decided to go ahead. The bank opened its doors in January 1806. Bentinck was the sole Director. Notes were made receivable at all public treasuries. But Bentinck was recalled the next year, in 1807, and his acting successor, Wiliam Petrie, who had, when he had been a member of the council, voted against the Government Bank, said that he could not be Director. Four ex officio Directors were then appointed, all Government officials. In November of the same year the Madras Government received a sharp order from the Court of Directors to "wind up and terminate the concerns of the Bank with all convenient expedition and put an end to that institution with no other delay than to prevent too sudden a shock to the circulation and business of the Presidency". The Directors' point was that the bank should not be a Government one. "We by no means concluded, however, that the establishment of a private bank may not be useful and practicable at Madras, but the bank should be formed by the association of individuals not dependent in respect to its capital or management nor even essentially for its credit on Govern. ment ." This was clear enough, but the practical steps the Directors wished the Madras Government to take were uncertain. They instructed Madras to follow the regulations framed for the Bank of Bengal, a non-Government EASTERN BANKING institution. But this bank was set up only in 1809. At the same time the Government Bank in Madras was allowed to continue, pending other arrange. ments. For two years it existed only on paper. There were protracted discussions on many issues, including the extent of the Government's sub. scription. Further, the Directors were reluctant to sanction Presidency Banks in Madras and Bombay. By 1810 the Madras Bank was again reorganised as a Government bank. It was almost a Government department, managed by Government officials in all respects. Its progress was chequered. At the end of nine years, an investigation into its working revealed that it had succeeded in accumu. lating specie in the treasury and in withdrawing from circulation a large number of Government promissory notes bearing interest at eight to ten per cent. It had purchased bullion for the Government mint and had also managed the bills of the Bengal Government. In its first year, 1806, its notes in circulation had averaged 8.5 lakhs of pagodas. Thus it was rendering a good service. But, after some years, the merchants of Madras complained that, in the absence of a well-constituted banking establishment, commerce and trade were languishing in the Presidency. In 1840 the Presidency Bank of Bombay was established. The Madras merchants demanded a similar institution in Madras. They asked that the Government Bank be made a corporate bank, with public participation in subscription and management. At a meeting of the inhabitants of Madras a provisional committee was formed. It resolved to fix the capital of the proposed bank at Rs30 lakhs, of which the Government would subscribe Rs3 lakhs. The remainder was fully contributed by the public. The Governor in Council supported the request. Lord Elphinstone, the Governor (from 1837 to 1842) said that the Directors had already approved the principle of a joint stock bank in which the Government had shares in both the other Presidencies of Bengal and Bombay, and that this principle could be applied to Madras as well. The only obstacle was the existence of the Government Bank. The Directors and the Supreme Government approved the proposal, only stipulating that the capital be reduced from Rs30 lakhs to Rs20 lakhs. The Act incorporating the new Bank of Madras was passed by the Governor in Council on 14 June 1843. By this the Government Bank was automatically dissolved.^ It is necessary to recall these details to serve as a background to the advent of the Madras branch of the Chartered Mercantile Bank of India, London and China in March 1854. The authorities had experimented with Government control and found that it would not answer. Private enterprise was eminently suitable. The new institution's prospects were quite fair. In 1640, the year Fort St George was founded, the value of piecegoods exported was only Rs25,000. But in the two centuries since, Madras trade had increased enormously. In 1739 the turnover was Rs2.5 million and in 1839 Rsll.5 million. Textiles were the main article of trade. Clearly the field lay open to private enterprise, in banking quite as much as in ^Some details have been taken from East India Company and South Indian Economy by C Ramachandran, Madras, 1980. MERCANTILE BANK IN MADRAS other fields. W R T Mackay opened the Madras branch. He had been a coffee planter, owning large estates in the Nilgiris. In December 1855 he was transferred to Singapore and John Innes Geddes came from Britain to succeed him. Geddes' Accountant was R C Walker. The bank was located in Moore Street, also called Second Line Beach, the rather narrow road immediately parallel to First Line Beach, where its present buildings stand. Incidentally, the Madras branch of another exchange bank, the Chartered Bank of India, Australia and China, was set up in the same year. The records available in Madras concerning the working of the branch are meagre, and its historian is considerably at a loss. The records available in the Tamil Nadu Archives pertain to the Government's financial arrangements. The information available of the beginnings of banking in Madras has been summarised above. An examination of the books in the city's libraries adds little information. The branch itself has no records more than fifty years old. In consequence, the conscientious historian must, much against the grain, content himself with recording a few stray facts here and there. The year 1863 is the first in which some figures, but not very illu. minating figures, are available in Madras. That year the bank's capital is returned at ￡500,000 and its reserves at ￡60,000. (These may be compared with the other chartered bank's capital of ￡644,000 and reserves of ￡10,000. Walker was a leading figure of the early years. He became Manager in 1861, but he had been connected with the branch since 1853. Prior to this he had spent two years in Gujarat and one year with the Bank of Bombay. In May 1854 he was transferred to Colombo. He opened a branch in Kandy on 29 August 1854. Next year, in November, he returned to Madras as Accountant. On 14 October 1857 he left for Hong Kong, but came back to Madras in 1860. When Geddes died the next year, Walker became Manager. Three years later Walker left the bank to join Shaud & Company, later becoming a broker. He died in Madras in January 1909 at the age of 91. Another outstanding personality in the first half-century of the branch's existence was William Gordon. He was in charge of the branch from 1876 to 1899. There is a monument to his memory in St Andrew's, the Scotch Kirk in Madras. Beyond these facts, there is nothing to record of the branch's career in the nineteenth century from the records available in Madras. There is very little more in the twentieth. In 1900 the capital was ￡561,000 and the reserves ￡30,000. By now the bank had shifted to premises in First Line Beach, a more commanding location, just in front of the developing harbour and a railway line. The bank must have had its share of the financing of the export and import trade, but the actual figures are not available. But, because it was, along with the branch of the other chartered bank, the leading exch. ange insitution in Madras, it may be deduced that its share must have been not inconsiderable. The value of total imports of piecegoods and yarn into Madras in the years from 1902 to 1917 was as follows: EASTERN BANKING 1902 Rs 76,743 1910 Rs 65,994 1903 Rs 77,993 1911 Rs 88,147 1904 Rs 87,808 1912 Rsl04,260 1905 Rs 84,618 1913 Rs120,416 1906 Rs 76,830 1914 Rsl06,854 1907 Rs 76,824 1915 Rs 66,268 1908 Rsl23,521 1916 Rs 68,020 1909 Rs 66,062 1917 Rs 53,161 In 1892 the Chartered Mercantile Bank of India, London and China was reconstituted as the Mercantile Bank of India Limited, and the Madras branch assumed the new name. Banking activities, naturally enough, suffered during the war years of 1914-1918. This fact can be deduced from the virtual halving of piecegoods imports into Madras in 1917 as compared to 1914. But trading was quite satisfactory during the immediate post-war period, so much so an Indian writer, in the Encyclopaedia of the Madras Presidency and the Adjacent States says that the most important of the exchange banks were the Mercan. tile Bank of India and the Chartered Bank of India, Australia and China. He adds: They attract large deposits and supply the banking capital which India is so much in need of. These exchange banks have tended to increase Indian trade by negotiating bills drawn against shipments of merchandise from India. Documentary credits are largely allowed and money is remitted by telegraphic transfers. At some of the important centres they succeed in obtaining large cash balances, which in turn are loaned out to traders and mer. chants for financing their exports and imports. They also do considerable business in discounting bills, loans on produce, stocks and shares, and especially in Government paper. There is yet another class of business which these Banks are accustomed to do, viz, Exchange.^ Of the effects of Britain's suspension of the gold standard and the great Depression no details are available. But what a historian of Euro. pean banking in India says of this period is instructive. He writes: It is commonly believed that the present Exchange Banks in India are financed from their Headquarters abroad and they devote their resources to foreign trade. It is not generally known, however, that during recent years (after the First World War) they have been attracting deposits in India in an increasing degree, making advances against Indian Stock Exchange securities and doing many other types of business which used to be the special preserve of Indian Joint Stock Banks. The amalgamation of the Peninsular and Oriental Banking Corporation with the Allahabad Bank shows that Exchange Banks are anxious to employ ^Edited by V I Sastri, Madras, 1920. MERCANTILE BANK IN MADRAS their funds in new directions. The recent tendency of the 'Big Five' to establish connections in India through amalgamations shows that the keen competition for business is driving British Banks with huge resources to 'fresh fields and pastures new'.^ In 1930 the capital of the bank was ￡1,050,000 and the reserves ￡1.5 million. The next year the reserves fell to ￡1,050,000 while the capital remained the same. The fall was due to the suspension of the gold stand. ard. The authorities had to provide for non-recurring exchange losses arising from the suspension. They had also to write down the investments to the market prices. It was in 1923 that the branch moved to its present imposing build. ings. Erected in a "conventional English Renaissance" style, they are of two blocks. The first is of four storeys, the rear of three. The banking hall on the ground floor is a large one, measuring about one hundred feet by one hundred feet. The Second World War gravely affected the working of the branch. During this period the Bank had to restrict its activities to its branches in India, Sri Lanka and Mauritius. But conditions in Madras were very unsettled; the city was virtually evacuated in 1941 when a Japanese bomber attacked it. Besides, of course, the shipping shortage, which was often very acute, considerably restricted exports and imports. India's staple exports—tea, sugar, jute, hides and rubber—were no longer financed by bills of exchange. The Supply Ministry of the British Government bought these in bulk and paid for them in the currency of the exporting country. In the result, the business of the branch in Madras, as in other cities, suffered . A picture of exchange banks in India during the period after the war is to be found in a contribution by B K Madan to Banking Systems: They constitute the oldest and in some ways the most closely knit sector in the Indian banking structure . . ., their busi. ness being primarily concerned with the financing of foreign trade. In recent years, however, they have been opening up branches in upcountry centres as well. The larger resources of these banks and the cheaper terms offered by them have naturally attracted a large clientele, and it is probably not wrong to say that a considerable part of their resources is used to finance f) internal trade. With India's independence in 1947, the branch, like the others, entered a new era. The Managers continued to be British until 1971, when N C Shahani took charge. The present official is C J G Mathias. In 1957 an era ended when the company's name was changed to the Mercantile Bank Limited, to take effect on the last day of the year. Two years later, in 1959, the Mercantile Bank became a wholly-owned subsidiary of The Hongkong and Shanghai Banking Corporation. ^Early European Banking in India by H Sinha, n d. ^Edited by B H Beckhort, 1954. EASTERN BANKING Though it has been found impossible, from the acute paucity of records in Madras, to indicate more than a few little details of the working of the branch since 1854, it can be confidently said that it holds an honoured place in banking and commercial circles in Madras. Conditions, political, economic and other, have changed fundamentally, and yet the branch has been more than holding its own. MANAGERS OF THE MADRAS BRANCH 1853-54 W R T Mackey 1926-29 W A Cruden 1855-60 J I Geddes 1929-30 H Provis 1861-64 R C Walker 1930-33 W A Cruden 1865 I A Robinson 1934-35 A P Powles 1866-67 W K Nicholson 1936-39 H Graves 1868-69 R Ferguson 1940 R N Drake 1870 S D Grant 1941-44 H Graves 1871 I H Davidson 1944 K Robertson 1872-76 S D Grant 1945-46 H Graves 1877-80 W Gordon 1947 J Pearson 1881 w R Robilliard 1948-50 M Shephers 1882-87 w Gordon 1950-51 R A H Bland 1888 I M Skinner 1951-53 E R West 1889-91 w Gordon 1953 A C M Cumming 1892 p T Evatt 1954 M J McCarthy 1893 w Gordon 1955-57 G I F Bamford 1894-95 I W R Taylor 1958 A B S Richardson 1896-98 w Gordon 1959-60 G I F Bamford 1899-02 I W Lyon 1961-62 H Maitland 1903 I Murdoch 1962 D H Ritchie (acting) 1904-05 H I Padday 1962 R Faircloth 1906 R C Nicoll 1963 F A Fitzpatrick 1907-10 H I Padday 1963 R Faircloth 1910-11 F H Yeats 1964 W K Dargie 1912-15 H I Padday 1965 J A Graham 1916 R D Young 1967 F A Fitzpatrick 1917-19 H I Padday 1967-68 J A Graham 1920 G Marshall 1968 S R Stevenson 1921-23 J Main 1970 A R Kelly 1924-26 R D Cromartie 1971 N G Shahani 1926 W Osgerby 1976 B R La Bourchardiere 1979 C J G Mathias 30. HANG SENG BANK LIMITED: A BRIEF HISTORY by Y P Ngan Hang Seng Bank was founded on 3 March 1933 and incorporated as a private limited company on 5 December 1952. In the past twenty-eight years follow. ing incorporation, the bank's net profit has increased from HK$642,000 to over HK$437 million, general reserves have increased from HK$500,000 to HK$870 million and capital from HK$5 million to HK$481,250,000. This remarkable growth, achieved through intermittent disruptions caused by political and economic turbulences in Hong Kong and neighbouring countries, has made the bank one of Hong Kong's leading financial institutions today. The Hang Seng Bank became a 51 per cent owned subsidiary of the Hong. kong and Shanghai Banking Corporation in 1965 when the banking sector experienced a major confidence crisis. Since then its profits have grown at an average annual rate of 23 per cent even though there was a drop of 11 per cent in 1967 when the local economy suffered badly from disturbances. Throughout the 1930s Hong Kong's population expanded rapidly as people in China sought refuge from civil war and the Japanese invasion. Banking and financial services sprang up to meet the needs of companies opening up in the British territory. Among the many new financial institutions was Hang Seng Ngan Ho (Evergrowing Native Bank) which opened for business on 3 March 1933. Hang Seng Ngan Ho was founded by two enterprising local businessmen, Mr B Y Lam and Mr S H Ho, who were well experienced in financial matters, including the gold trade. Their partners in this native banking venture were Mr C W Leung and Mr T L Sheng. Mr Lam was the senior partner until his death in 1949 and was succeeded by Mr Ho, who is now Chairman. The initial paid-up capital was HK$100,000 which was soon increased to HK$125,000 to cater for new partners who came to recognise the potential of the new company. There were eleven on the payroll the day the bank opened for business at 70 Wing Lok Street, near Central District, home then of Hong Kong's financial services. The co-founders chose the right time to enter the banking field. Business was brisk and there was a steady stream of remittances between Hong Kong and major cities in China. The so-called "triangular trade" among Hong Kong, Shanghai, Wuhan and Guangzhou was particularly buoyant. The Hang Seng Native Bank attracted much of the remittance trade. Soon after the outbreak of the Pacific War in December 1941, Hong Kong came under Japanese occupation. The bank closed its doors and the princi. pals and staff moved to the neighbouring Portuguese province of Macao, which remained neutral throughout World War II. No sooner had the war ended in August 1945 than the bank reopened for business at 181 Queen's Road Central. The local economy which originally came to a standstill during the war recovered rapidly and Hong Kong quickly reassumed its traditional role as an entrepot centre. The breathing space, however, was unexpectedly short. Political EASTERN BANKING conditions in post-war China were marred by the civil war between the Com. munists and the Nationalists. Rampant inflation coupled with civil strife resulted in a great exodus of refugees from China to Hong Kong, which plac. ed social resources under severe strain. There was also a massive shift of capital and technical know-how to Hong Kong and this laid the foundation for industrialisation in the 1950s. The civil war ended in 1949. The consequent change in political regime in China terminated the role of Hong Kong as an entrepot serving its hinterland, and the once flourishing remittance business came to an entire hal t. Like most native banks in Hong Kong at that time, Hang Seng Bank was active in the gold market. The local bullion market was represented by the Chinese Gold and Silver Exchange Society, of which Mr Ho was a leading fig. ure. With Mr Ho's skill in, and knowledge of, the commodity market, the bank benefitted greatly from gold trading and related exchange transac- t ions. Shortly after China entered the Korean War, the United Nations passed a resolution in May 1951 banning all strategic shipments to China. This was disastrous for Hong Kong whose trade with China in 1950 constituted a third of its total trade. The embargo slashed Hong Kong's trade by 30 per cent in 1952, but there was a substantial amount of unrecorded trade still going on with China and prices of some commodities, like pharmeceuticals, spiralled. Apart from banking, Mr Ho had many other business interests. One of his companies, which dealt in edible oil, sugar, pharmeceuticals and other merchandise, bought a shipload of penicillin in 1951. In about two weeks it came out with a 100 per cent profit of almost HK$200,000 which was then quite a substantial amount. Mr Ho, however, ordered that this windfall profit be donated to charity because he believed the sudden spurt in prices had no doubt caused inevitable hardship to many people, particularly the poor. The United States was enforcing its foreign assets control regulations under which goods pr&sumed to be of Chinese origin were denied entry to the Anerican market. After lengthy negotiations a special arrangement was finally worked out to permit Hong Kong products covered by a comprehensive certificate of origin to be shipped to the United States. This special certification method later proved to be of great significance to Hong Kong's economic survival, as the United States subsequently emerged as the biggest buyer of local industrial products. Meanwhile, the bank's executives realized that future development would depend on their ability to come to terms with the changing face of Hong Kong's economy. The export-oriented economy called for a change of policy direction in commercial banking, with more emphasis on international trade. New ideas had to be formulated and new capital had to be called in. In preparation for the change, Mr Ho and Mr Q W Lee, who joined the bank in 1946, travelled abroad to study the latest banking techniques. Between 1950 and 1952 they visited the United States, Canada, South America, Europe and South East Asia. They also sought advice from their banking friends, notably those in The Hongkong and Shanghai Banking Corpo. ration. HANG SENG BANK on 5 December 1952 as a private limited company engaged in commercial bank. ing. With a paid-up capital of HK$5 million and an authorised capital of HK$10 million, Mr S H Ho was unanimously elected Chairman and Mr C W Leung Vice-Chairman, while Mr Ho Tim, who is now a Managing Director, became General Manager. The bank began to add savings and current accounts to its traditional money-changing business. It moved to its own premises at 163-165 Queen's Road Central in October 1953. The move was well timed and the new commercial bank began to expand steadily right from the start. A courtesy campaign was pioneered by Hang Seng in the promotion of retail banking. The emphasis was on the quality of service to the public. Moreover, the bank also tried to cultivate bank. ing habits among the younger generation. In the early 1950s, the local economy was spurred by the Korean War and the Hang Seng Bank found a ready market for its services. In October 1959, the paid-up capital was increased to HK$15 million and the authorised capital to HK$30 million. In the same year the bank purchased a 15,000 sq ft site at 77 Des Voeux Road Central for redevelop. ment into a 22-storey building to house its headquarters. The foundation stone for the building was laid in December 1961 and the bank moved into its new premises on Christmas Eve 1962. The bank was ready to expand and branch out. The busy Yaumati Dis. trict was selected as the location of the first branch, which was opened in January 1960, followed by another branch at Mongkok in September of the same year. In 1963, two more branches were opened, at Tsimshatsui and Shamshuipo respectively, and the Mongkok branch moved to a new 14-storey building owned by the bank. In the following year more branches were opened at prime sites in Causeway Bay, Tsuen Wan and Kowloon City. In 1964, the bank's paid-up capital was increased to HK$22.5 million. The retail banking market was expanding rapidly during those years, due to people's growing awareness of banking services and the aggressive promotional efforts of some banks. Being a sales-oriented institution, Hang Seng adopted a progressive policy of attracting deposits and other banking business, including the provision of non-financial services. This market penetration strategy proved rewarding and by 1965 Hang Seng had become virtually one of the largest—if not the leading—private Chinese bank in Hong Kong in terms of deposits and assets. It was unfortunate, however, that Hong Kong was about to be plunged into a heavy economic set-back. The trouble started in the property market in late 1964 when the supply of new accommodation suddenly ran ahead of demand. Construction went into a sharp decline and failures occurred. Rumours abounded and these culminated in a run on several banks, as anxious depositors withdrew their funds. The authorities moved quickly to avert the crisis and arrangements were made to help banks meet demands. Fresh cash supplies were rushed from the United Kingdom. But two banks—the Ming Tak and the Canton Trust—had already closed their doors and were subse. quently wound up. The Hang Seng Bank did not escape the rumour-mongers and found itself under pressure like so many others. In one of the most dramatic events in the financial history of Hong Kong, an agreement was concluded within a day with The Hongkong and EASTERN BANKING Shanghai Banking Corporation, whereby Hang Seng Bank became a 51%-owned subsidiary of the Hongkong Bank. After the bank runs, tighter statutory control was introduced and banks entered a period of consolidation, after several years of rapid expansion. Having become a member of The Hongkong Bank Group, Hang Seng had the benefit of participating in the Group's computerisation of banking services when the Hongkong Bank Group took the initiative to install computer-based online services in 1968. The Hang Seng Bank played a significant part in helping to get the Hong Kong economy moving again after the 1967 disturbances. In a move to help lift the property market out of a four-year slump, the bank introduced a home-ownership scheme which, for the first time in Hong Kong, enabled middle-income earners to purchase their own homes. Although other banks followed suit, the Hang Seng Bank today still plays a leading role in this market. With the return of business confidence in the late 1960s, the stock market turned active and the bank introduced a service for the investing public. This was a share price index known as the Hang Seng Index. This stock market indicator was officially released in November 1969, but to give a more detailed historical background to the Hong Kong stock market, the base date was set at 31 July 1964. Its computation is based on the weighted market capitalisation method, and the number of stocks selected as constituents is currently thirty-three. The Hang Seng Index is now accepted around the world as the leading indicator of the Hong Kong stock market. It is as well known as the Dow Jones Average in New York and the Financial Times Index in London. To supplement the Government's efforts in measuring the rate of infla. tion in Hong Kong, the bank has been compiling a consumer price index since 1974. The Hang Seng Consumer Price Index, as it is called, complements the CPl(A) and CPl(B) compiled by the Census and Statistics Department. The present Hang Seng CPI is based on the expenditure pattern of households living in private dwellings and spending $6,500 to $19,999 a month, using 100 as its base figure for 1979/80. The bank also publishes an Economic Quarterly to monitor and analyse economic developments in Hong Kong. In March and April 1972, the capital structure of the bank underwent considerable changes. After a ten-for-one stock split and further issues, the paid-up capital was raised from HK$45 million to HK$100 million. In the month following these changes, the bank offered one million shares of HK$10 each for sale at a HK$90 premium or a total of HK$100 each. The offer was over-subscribed twenty-nine times and the shares were listed on the Hong Kong Stock Exchange in June. In September 1981, the bank made a breakthrough by further extending its branch network from the traditional surface branches to underground banking outlets. Under an agreement signed between the Mass Transit Rail. way (MTR) Corporation and the bank, seventeen mini-banks, or outlets manned by tellers and supplemented by Automatic Teller Machines, are to be estab. lished in all the existing stations of MTR's Modified Initial System by the end of 1981. Another ten MTR outlets are planned for the Tsuen Wan Extension (TWE) in mid-1982. The rapid growth of the bank's branch network and staff establishment in recent years can be illustrated by the following HANG SENG BANK data: when the bank celebrated its 40th anniversary in 1973, it had 19 branches and employed about 2,000 staff, and now it has 70 branches and a work force of more than 5,300 three hundred employees. (See Appendix 1) The bank has four major subsidiaries operating in the financial sec. tor. Hang Seng Bank (Trustee) Limited was established in January 1964 to handle share and property transactions as well as property management for customers. Hang Seng (Nominees) Limited was also formed in 1964, followed by Haseba Investment Management Company Limited in 1970 and Haseba Inter. national Management Limited in 1981. An overseas subsidiary—Hang Seng Bank (Bahamas) Limited—was opened for business at Nassau, Bahamas Islands, in September this year. Like most other foreign bank subsidiaries or branches in the Bahamas it is restricted to offshore transactions only. The 1970s was undoubtedly a period of very successful operation for the bank. Published profits grew more than ten-fold from HK$38 million in 1970 to HK$437 million in 1980. The average annual growth rate of 28 per cent may be considered remarkable by any standard. (See Appendices 2, 3 and 4.) Great importance is attached to recreation and sporting activities for the staff and for the past twelve years a special section has been assigned the task of holding regular sports, cultural and social events. On 25 October 1971 the Chinese University of Hong Kong conferred on Mr S H Ho, the Chairman, the Degree of Doctor of Social Sciences (Honoris Causa). In the following year, Mr Q W Lee was conferred the Degree of Doctor of Laws (Honoris Causa). Mr Ho was made Officer of the Order of the British Empire (OBE) in 1978, while Mr Lee was made a Commander, Order of the British Empire (CBE) in 1977, in recognition of their contributions and services to the public and the banking community. The significant role played by Hang Seng Bank in the overall progress of the Hongkong Bank Group was reinforced in December last year when Mr Lee joined the Boards of both The Hongkong and Shanghai Banking Corporation and the Mercantile Bank. The bank's training centre, established eight years ago and originally occupying 6,000 sq ft, has undergone continual expansion. The centre was re-accommodated in Kowloon in 1979, occupying a floor space of 12,000 sq ft and equipped with modern audio-visual teaching aids and other advanced facilities. The centre is now in a better position to cater for all modes of training for the bank's staff. It comprises a number of lecture rooms and seminar rooms, a model bank, a theatre, a studio, a conference hall and a computer terminal room for online simulated practice. The bank is also keen on promoting commercial and banking education for the young people of Hong Kong. This interest is traceable to 1963. In that year an Elementary Banking Program, based on an idea originally con. ceived by Mr S H Ho, Chairman of the bank, was initiated as a community service. During the past eighteen years, it has grown in popularity and stature and has been highly commended by the public. The Program is con. ducted free of charge, and classes are held in Kowloon and on the Island in the evening for day-time employees and, during the summer vacation, in the day for the benefit of secondary school students. So far a total of 73,000 people have attended the Program. Inspired by the success of the Program, Mr Ho gave serious thought to the concept of founding the Hang Seng School of Commerce about twelve years EASTERN BANKING ago. The School was, and still is, designed as a non-profit-making co-edu- cational institution offering basic full-time training at post-Form V level, free of charge, to students who intend to take up a career in the commercial and financial fields, but who for one reason or another are unable to further their studies at the University or the Polytechnic. The Vice-Chairman and General Manager of the bank, Mr Q W Lee, then approached the Government for a free grant of land to the proposed school. In 1974, the concept moved towards its realisation when the Government agreed to the sponsors' request for the grant of an appropriate school site at nil premium. Such a site, with an area of over 15,000 square metres, was eventually found in Sha Tin New Town Area 54A, which has a splendid natural setting, and plans for the design construction of the School were commissioned. From the beginning, the sponsors of the School had decided that they would not require any recurrent financial aid from the Government. The School's financial basis was established firmly by the creation of a School Fund, comprising generous donations from the Hang Seng Bank Limited, the S H Ho Foundation Limited, the Dah Chong Hong Limited and some founding shareholders of the Hang Seng Bank. In September 1980 the long-cherished project, involving a capital cost of some HK$50 million, became a reality and classes started at the new campus with an enrolment of two hundred and ten first-year students. On 2 November 1979 the School's foundation stone was laid by H E The Governor, Sir Murray Maclehose, who also officially opened the School on 12 February this year. The establishment of this institution is a fitting example of the bank's contribution to the general economic and social progress of Hong Kong. In addition, the bank has since 1966 been conducting an Education Advisory Service for high-school graduates who wish to study abroad. It helps the students by advising on school selection, admission and visa requirements, and arranging passage and remittances. The bank has produced a series of publications on educational facilities in the United States, Canada, Australia and Britain. Although the bank has shown its capacity to extend its operations into diversified fields, it remains firmly rooted in Hong Kong. HANG SENG BANK Appendix 1 Appendix 2 EASTERN BANKING Appendix 3 Appendix 4 31. MARINE MIDLAND BANK IN AN ANALYSIS OF REGULATORY ENVIRONMENT AND CORPORATE STRUCTURE by Arthur B Ziegler* An overview from a historical perspective of the ways banking regulation in the United States has affected corporate organiza. tional structure, and how corporate executives by their actions in turn changed the regulatory operating environment thereby causing a new round of organizational change. Introduction Marine Midlands Banks, Inc became a subsidiary of The Hongkong and Shanghai Banking Corporation in October 1980 when The Hongkong Bank completed the acquisition of 51.1% of Marine Midland's outstanding common shares through a tender offer for 3.1 million shares in the market place and the purchase of 6.6 million shares directly from the Corporation. Consequently, Marine Midland's history within the Hongkong Group is deminimis compared to most others represented in this conference on the Hongkong Bank's history. However, that is not to say Marine Midland is a complete youngster. It traces its roots back to 1812 in New York State, which by measures of population and economic vitality has been "The Empire State" of the United States for most of its two hundred year history. On the other hand, the legal charter for Marine Midlands Banks, Inc as a bank holding company is only fifty-two years old, and for its principal subsidiary. Marine Midland Bank, only six years old. In each instance, 1929 and 1976, Marine Midland's corporate structure was largely determined by regulatory restrictions. During its existence, Marine Midland's corpo. rate organizational structure has shifted between being impacted primarily by external regulatory restrictions to being impacted primarily by the internal drive of management which, through its actions, modified the very regulatory environment that initially had determined the company's struc. ture and prevented Marine Midland management from organizing itself in a structure which it believed better able to serve the public need and the profitability for the shareholders. Regulatory control is all pervasive in United States banking. Over. all, the United States for at least the past eight decades has not deserved to be known as a laissez-faire business environment. Happily, many now believe that the heavy hand of governmental regulation may be lightening, happening in part because managers continue to find legal loopholes through *The author notes with appreciation work by Dr Gerald C Fischer in draft. ing "Wall to Wall Banks", an unpublished history of Marine Midland, 1929-1956, and by James Conmy, a research associate. EASTERN BANKING existing regulation. Now legislators are beginning to recognize that archaic and obsolete laws, out-of-step with the pressures of the market, tend more nearly to restrict the average financial institution than the innovative financial manager. It may surprise some of you from other countries who believe that the United States is a major bastion of free enterprise, that in approximately the last decade and a half, there have been enacted at the federal level more than thirty-five new regulatory programs. These new regulations cover everything from flammable pajamas and pill bottle caps to factory smoke and car seat belts, from interest rate ceilings on what banks may charge for credit to limitations on what banks may pay for deposits in the domestic market. Unfortunately, many of the restrictive laws which apply to banks do not apply to other companies which offer the same type of services or products. This is particularly true as to limitations on geographic expan. sion. Some of the legislative battles over banking rules in the United States go back to the early days of the Republic, back to the First Bank of the United States (1791-1811) and its successor the Second Bank (1816— 1836).1 The former had as many as twenty-seven branches running from Phil. adelphia, Pennsylvania to New Orleans, Louisiana, which in those days would be a comparable geographic spread greater than New York and Hong Kong today. However, those two pioneer banking organizations failed to survive the public fear of monopoly and the jealousy and power of State chartered banks. It should be noted that the Hongkong Bank was influenced by United States banking law when it opened agencies in the United States over one hundred years ago and in the Philippines over currency issues in the early 1900s. Today's style of United States federal regulation of business can be traced to about the turn of the twentieth century, spurred in part by a spate of "muckraking" articles about what the public came to regard as cal. lous, unsanitary and unsafe business practices.^ Then in the early 1930s a collapse of financial markets and the United States' worst economic depres. sion, prompted yet another round of federal regulation, much of it aimed at governing the very structure of whole industries. President Franklin D Roosevelt, in his election campaigning in 1932 and early action as Presi. dent in 1933, clearly intended to control the structure of banking, appar. ently reflecting a concern over various banking conditions, including the aggressive bankers who were linking banks together through the common ownership of their capital stock via a corporation or as a group of persons acting in concert. Despite the long direct relationship between corporate form and government regulation, the interplay between them may not have received as much attention as the issue deserves. It can be a critical analysis in ^Weldon Welfling: Money and Banking, American Institute of Banking, 1975, pp. 182-90. zSee, for example, Upton Sinclair's 1903 study of the Chicago meat-packing industry, a classic in the genre. For a more recent example of the same genre, see Ralph Nader's 1966 study of the Corvair automobile: Unsafe at Any Speed. MARINE MIDLAND BANK evaluating and chronicling a corporate history. United States banking, for example, has labored almost from its infan. cy in a tight regulatory environment, at both state and federal levels. In 1981-82, however, it stands on the brink of widespread deregulation, and questions about the extent to which the regulatory climate has influenced or shaped past corporate strategy and structure are suddenly of increased importance. To a major degree, the analysis may best be done by histori. ans, yet those who can most quickly benefit from a full understanding of the historical record as a useful business resource are the planners look. ing ahead as the corporate guides for their industries. Corporate history is seldom a haphazard collection of unrelated events, but it often takes an insightful, disciplined evaluator to develop the common linkages and flow of events which can be useful in planning for the future. (it is vital that corporate historians position their efforts in ways that provide eco. nomic benefit to the enterprises they chronicle.) Corporate planners obviously are not sketching their strategies on clean sheets of paper devoid of corporate style or company memory. Suc. cessful planning takes full account of matters of historic organization and management—not only the way a company adapted to changes in the past, but also the way the company's management recalls those changes and how they came about. As historians George David Smith and Laurence E Steadman sug. gest in their recent Harvard Business Review article, "Corporations, like individuals, have more than skeletons in their closets. . . . Managers can look at the history of an organization and find ways it adapted in the past. If, for example, a corporation's style and structure appear to be largely the creation of a strong management, then the management's action likely changed the environment, challenging that management then to cope with a new environment to continue the success of the business. On the other hand, if a management is quiescent and conforms its organization's style and structure to the regulatory environment, the structure may remain stable until competitors or other factors change in that environment. When that occurs, the organization may flounder with an obsolete structure or find it a difficult struggle to conform to a new regulatory environment. Clearly, managers who themselves press for change are generally better able to accommodate change, whether self-engendered or from outside forces. Relatedly, in Alfred D Chandler, Jr's highly regarded Strategy and Structure, he reviewed the history of four major United States corporations (General Motors, DuPont, Sears Roebuck and Standard Oil of New Jersey) and came to the conclusion that corporate structure logically follows strat- 4 egy ‧ Strategy, in turn, Chandler wrote, is generally determined by the bus. iness environment and changes in that environment. When new markets open up or new business opportunities present themselves, companies alter their strategy to take advantage of the opportunity and subsequently build a ^George David Smith and Laurence E Steadman: "The Present Value of Corpo. rate History", Harvard Business Review, Nov-Dec 1981, p. 163. ^Alfred D Chandler, Jr: Strategy and Structure, 1962, MIT Press; Anchor Books Edition: 1966. EASTERN BANKING structure to carry out that strategy. Chandler gave less attention in his book to any effect the regulatory environment might have on corporate structure. In fact, he dismisses it as negligible. According to Chandler: The market, the nature of their resources, and their entrepre. neurial talent have, with relatively few exceptions, had far more effect on the history of large industrial firms in the United States than have antitrust laws, taxation, labor and welfare legislation, and comparable evidences of public policy.^ Revision Sets In Yet Chandler's views lately have been strongly challenged by economic real. ity. In a recent speech to the American Petroleum Industry, entitled "Looking Back at Regulation", Robert B Reich, former director for policy planning at the Federal Trade Commission, issued a warning that "business is asking for trouble again.According to Reich, the current regulatory climate in the United States is costing business untold billions of dollars and much of the regulation could have been averted if the business commu. nity had been less defensive or indifferent to public concerns. In other words, if business had better recognized how its actions were perceived to be affecting the general environment, then there might not have arisen public pressure to enact regulations adversely changing the business environment within which business operates. It should be noted in Chandler's defense, that he wrote Strategy and Structure in 1962, well before the latest wave of regulatory controls flooded the United States business community. He also wrote several years before the latest rash of banking regulation. Further, compared to the banking industry, he focused his historical analysis on industrial concerns which were relatively unfettered by regulation. Because United States banks have long been regulated more stringently than most other industries, changes in the regulatory environment appear to have had a far greater role in determining bank strategy and consequently structure. In fact, it's interesting to note that, partly in reaction to the recent frenzy of regulation and partly in recognition that bank manage. ments have developed strategies and structures which obviate the effects of long-enacted laws, a counter-cyclical move toward deregulation has begun to capture the attention of Congressional lawmakers and interested observers. Most striking about the effort to deregulate is that, so far, it has been industry specific. In other words, rather than a shotgun blast at the whole range of rules governing business conduct or practices, it has been a rifle directed at only certain industries: air carriers, motor carriers and now banking. That these three industries should be targets of deregulation is not ^Ibid., p. 477. ^Robert B Reich: "Looking Back at Regulation", Petroleum Institute, New York Times, 22 Nov 1981, speech p. B-2. to the American MARINE MIDLAND BANK coincidental. All three were subjected to strict and detailed regulation in 1933 and 1934 while other major industry groups were not. Yet by 1978, Congress became convinced that regulation had long since served its purpose in stabilizing the airline industry and legislation to deregulate air car. riers was approved and signed by President Jimmy Carter that year. In 1980, somewhat similar legislation to deregulate the trucking industry was also voted by Congress. In the same breath, Congress also approved an omnibus bill to begin phasing out certain regulatory restrictions on the banking industry, including such things as the interest rates that may be paid on passbook savings and the types of services offered by savings and loan associations and other non-commercial banks. Still, the push to deregulate the banking industry continues, largely because its traditional fields of endeavor have been invaded by stock bro. kers, retail stores and insurance companies who are able to offer the public products which a banking industry, bound up in obsolete regulation, cannot. Very interestingly, while much regulation for some industries centered primarily on price and geographic limitations, banking is controlled as to price, territory and product. Currently pending before the Congress are a number of bills whose passage would have a far-reaching impact on the banking industry.^ They would, in effect, do away not only with much of the regulatory structure established in the National Banking Act of 1933, but would also erode other of the regulatory concepts that govern, protect and restrain the United States banking industry today. In the face of this regulatory upheaval, both actual and potential, leading United States bankers are scrambling to revise strategy and struc. ture. But, as suggested before, corporations are not a tabula rasa on which any structure can be scratched in response to changing strategy. The corporate structure that banks eventually achieve, as they alter their strategies to compete in the brave new world of deregulation, will also be determined by or reflect the bank's management, its perceptions of the shifting environment, and its own style. Corporate style, in fact, can have a major impact on how well a restructuring takes place. A company whose style is simply "business as usual", with little attention to change and lacking entrepreneurial instincts, may founder when radical structural changes are necessary to carry out a different strategy. The personal style of management is a significant determinant of how well or how quickly and effectively change takes place. Even when top management sees the necessity of changing, if the company's general style has not been one of change and flexibility, the senior managers will have to drag the rest of the company with it until a new style and structure emerge. Thus, those managers who have by their earlier actions altered the environment, are far better conditioned to react to changing environment than those who are sim. ply carried along by the winds of change. And, the faster the pace of change, the more that is true. ?See legislation number S 1720, introduced 7 Oct 1981, by U.S. Senator Jake Garn. EASTERN BANKING The Past as Prologue Abstract as they are, these are important questions as Marine Midland Bank prepares both to operate in a less regulated environment and, within that environment, to take full advantage of a partnership with The Hongkong and Shanghai Banking Corporation. Mindful of Carl Becker's maxim that "The past is a kind of screen upon which we project our vision of the future," Marine Midland's corporate history is under review. The objective is two. fold. First, to see how strong management previously may have altered the regulatory environment in years past; secondly, to examine the interplay between United States banking regulation and Marine Midland's corporate strategy or structure. All three can influence the shaping of a successful strategy; so managers drive their own future rather than find themselves driven primarily by the environment. The first historical development which emerged as helpful in this study was the 1929 organization of Marine Midland into a bank holding com. pany. That development happened in reaction to a restrictive regulatory climate, and it is evident that Marine Midland over the next three decades, by its management style, created an environment that changed banking law and thus enabled Marine Midland to change its structure to a more fitting form. That in turn, led to a bank worthy of interest to The Hongkong and Shanghai Banking Corporation, which itself was by United States law much restricted as to its organizational form in the United States. The 1929 Organization Marine Midland Corporation, now known as Marine Midlands Banks, Inc, was officially chartered in September 1929, just a few days before the collapse of the United States stock market with its resulting financial chaos of several years duration. That the new corporation survived its early years, a period in which numerous United States banks failed, is a testament to the men who organized it and kept it going. Of some fourteen bank holding companies formed in ffew York State between 1924 and 1931, only four sur. vived and continued to operate after 1934.R As background, it should be explained that three forms of banking organization are characteristic of the structure of American commercial banking. These are: 1 The single office or unit bank, which limits its operations to one geographic location. Historically, this is the structure most favored by United States law, but an organizational form more suited to the past than the future. 2 The branch bank, which conducts business at multiple branch loca. tions as well as at its main office. 3 The holding company, which holds controlling stock interests in one or more banks and bank-related businesses. Because many holding companies hold stock in a group of banks, the name "group banking" is often used as a description, RFischer, p. 4:9. MARINE MIDLAND BANK Although the advantages of group banking—greater pooled capital and broad geographic dispersion—seem strong in themselves, the genesis of bank holding companies was much influenced by restrictive regulation. In fact, the management strategy to create bank holding companies was often used as a way around regulatory restrictions. Stepping back to as early as the 1830s, popular sentiment in New York State feared financial control by large banks. This prompted laws allowing rather liberal entry into banking, so called "free banking". Almost anyone who could raise the capital could organize a bank and receive state approval. Carrying this concept to the extreme, the New York State legis. lature subsequently passed laws forbidding branch banking. As a result, numerous small unit banks sprang up over the years as towns grew and new towns came into being. Wildcat paper currency, worthless bank stocks and usurious interest rates causing financial panic such as occurred in 1837, tested the mettle of many banks and they were found wanting. Despite the weaknesses of unit banking, branch banking did not become extensive in New York State cities until the twentieth century, and not statewide until 1976. New York State's free banking laws became a model for numerous other states. One of the few states to ignore the New York model was Califor. nia. Consequently, for more than fifty years, California has had many more branches than any other state, including New York State, despite the fact New York's economic statistics exceeded California's until the 1960s. California's decision to permit branch banking has produced the largest bank in the United States, the Bank of America, whose initial growth came mostly from its ability to branch freely throughout the state. Nearly one hundred years after the initial enactment of free banking laws in New York State, the State was dotted with hundreds of small, sepa. rate unit banks serving single communities, and branch banking was restricted to within city limits. Counterbalancing the hundreds of small banks were larger financial institutions. Anchoring each end of the State were the truly large branch banks: The Marine Trust Company in Buffalo at the western end of the State, and the major New York City banks at the eastern portion. Already, however, the prohibition against branch banking beyond a single city's boundary was causing problems for bank regulators. Small communities, which might have been quite adequately served by a branch bank, could not get one because of anti-branching laws and regulators often approved charters for unit banks that were sometimes inadequately capital. ized or lacking in experienced bank management. As a result, in the 1920s, a number of rural New York banks failed and others teetered close to the brink. What had come to pass was a weakened structural situation, nega. tively impacted by banking regulation which prevented geographic diversity. Stronger banks were eager to find a way around the prohibition against branching. Entrepreneurial bankers pushed for change. Gradually, the reg. ulators were receptive to new developments in order to help save institu. tions whose problems stemmed largely from the regulations themselves. Not incidental, of course, was the booming stock market, which also promised considerable gains for both shareholders and underwriters of a new company. In this situation, the concept of linking unit banks together through EASTERN BANKING common ownership began to take shape. The concept was a way around branch restrictions and a way to unite banks with both state and federal charters within the same confederation. What began as gentlemen's agreements for loose banking associations became formalized and only a short step to the bank holding company idea. In other words, the bank regulatory environment prospered and then nurtured a specific structure, the bank holding company, to carry out the strategy of providing banking over broad geographic regions. It is beyond the scope of this paper to make anything more than pass. ing reference to the phenomenon that has allowed any bank organizer in the United States for well over one hundred years to choose either a state charter or a federal charter. The powers under the charters vary, and banks have moved back and forth between the two charters depending on which charter was considered to offer the most liberal powers at the time.^ Marine Midland Banks, Inc, as a holding company, has owned both state chartered and federally chartered institutions. The present bank, Marine Midland Bank, NA, chose a state charter in 1976. Then, when the New York State Superintendent of Banks seemed unlikely to approve the acquisition by The Hongkong and Shanghai Banking Corporation of Marine Midland Bank's stock, Marine Midland switched the charter of its bank to the federal form. When that charter change was approved, control over the pending acquisition by The Hongkong and Shanghai Banking Corporation passed totally to the federal level and was accomplished. Marine Midland's activities at the time of the creation of the bank holding company bear on Marine Midland's strategic direction today. According to George F Rand, Jr, who was the chairman of The Marine Trust Company in 1929 and then chief executive officer of the new holding com. pany, the holding company itself was regarded simply as a transitional form. He expected the prohibitions against branch banking to fall within a few years and considered the holding company a vehicle to keep the various banks together until they could be transformed into branches. In fact, he said exactly that in his testimony to Congress during the 1930 Hearings on Branch, Chain and Group Banking.^ As it turned out, of course, New York State laws governing statewide branch banking were not relaxed until more than thirty-five years later. That lesson has not been lost on Marine Midland planners today. As current strategy is devised around laws which limit branches to a single state, the bank seeks to implement its geographic coverage through a structure that will stand by itself if interstate banking does not become a reality at the quick pace current events seem to portend. Ultimately, however, what helped the Marine Midland Banks, Inc, stand the test of time as a holding company was probably the management's own outlook and strategy as much as the inherent capital strength of the holding company itself. As the largest multi-bank holding company in New York State for three decades, and among the largest in the country, its 9 Federal Reserve Board, Committee Reports: "The Dual Banking System", p. 14. ^U. S. Cong., House, Committee on Banking and Currency, Hearings, April 1930, p. 1182. MARINE MIDLAND BANK that there banks with was formed management style created a favorable atmosphere among the public, competi. tors and regulators, many of whom were initially skeptical about the pur. poses and powers of bank holding companies. Unlike the ten bank holding companies in New York that fell apart under the economic pressures of the period from 1929 to 1934, Marine Mid. land's management used the holding company from the very beginning as more than an expedient way to sell stock and raise capital. Rand and his asso. ciates had had some experience in dealing with multi-bank management from their days as part of a chain bank prior to 1929.11 They came to recognize was talented management and operational skill among many of the which they had been associated. Once the bank holding company they were eager to draw on that talent and utilize the various skills of their member banks. They considered those things another form of capital and hoped to use it to upgrade the operation of all the banks in the group. Rand said as much in his testimony before the House Committee on Bank. ing and Currency in 1930.^ He argued that the holding company form of organization would provide exceptional safety for the depositor, more experienced investment counsel, and better credit information. He felt it would offer stability, efficiency, and diversity to the local bank, while permitting each of the affiliates to retain its local color and local influence. Elsewhere, he also cited factors such as economies of scale, improved research, conservation of correspondent balances, and more com. plete banking services.^ He took the only organizational structure open to him under the law, a form viewed with jaundice by many, and operated in such a way as to change the attitudinal environment. Holding company managements in other states operated likewise. If Marine Midland operated so effectively, a natural question, therefore, might be: Why was Marine Midland the only major, multi-bank, statewide holding company to survive and prosper in New York State? Others formed in the same period had less success, and Marine Mid. land's larger competitors in New York City had the holding company form of organization open to them, but did not choose to use it. As to the other holding companies, the answer would appear to rest with their objective: were they to be investment-oriented or management- oriented companies? Most of the sizable holding companies followed the former course, viewing the bank stocks they held as investment holdings. They usually planned no active role in the longer-run management of their banks. As to the New York City banks, several explanations can be found for their frequent opposition to, and general lack of participation in, holding company banking. This general position could be summarized quite simply on the basis that leading New York City institutions had become important bankers' banks and did not want to take actions nor did they want others to take actions which might disturb their profitable correspondent relationships. The New York City banks preferred to confine their offices to the city—a preference that seemed reasonable in view of the abundance ^Fischer, p. 5:3. l^U.S. Cong., op. cit. ^Business Week, 16 July 1930, pp. 20-21. EASTERN BANKING of business which came to them without any out-of-town branches.^ On the other hand, Marine Midland aimed to improve the performance of its affiliated institutions through increased functional specialization, and it found that its bank network was a value in serving as a correspond. ent bank for smaller unit banks. This is not to ignore that potential investment profits also played a major part in the decision to organize Marine Midland, but the manner in which the firm's founders hoped to achieve this objective was certainly atypical. While other investment companies at the time relied heavily on the existing management skills to produce gains for their shareholders, Marine Midland expected the new efficiencies and "expertise" introduced by the holding company to raise the affiliate banks' income and dividends and to increase the price of the holding company's shares being used for additional acquisitions. Marine Midland was planned and operated as a management service hold. ing company, not just as an investment company, and this, along with signi. ficant capital strength, contributed immensely to the longevity of the enterprise. The enlightened strategy served Marine Midland well and did much to allay fears in the State legislature that bank holding companies were mini. monopolies and against public interest. Even at the Federal level, when Congress eventually passed the basic 1956 legislation that still governs United States holding company banking, the federal legislators refused to outlaw the bank holding company concept. Finally, it should be recorded that Rand's management approach of impacting the environment affected the style for his successors after his untimely death in 1942 and can still be seen within the Marine Midland organization today. There are a number of noteworthy situations within Marine Midland's later history which support that view. But before examin. ing them, it is worth-while to examine the most significant change occur. ring in New York State banking law during the Rand years of 1925-1942. Branch Banking comes to New York State Five years after Marine Midland was chartered, banking legislation was enacted in New York State which divided the State into nine districts, and branch banking was permitted within each of the geographic districts. ^ New York State has an irregular shape, but approximately three hundred miles by three hundred miles. Some of the nine districts were as large as small states. Fifteen years earlier, in 1919, the New York law had been relaxed to permit State chartered banks to branch within cities of over 50,000 persons, and in 1927, under the federal McFadden Act, parallel powers were granted to national banks. But Rand's genius in owning banks across the State paid off when the regional branching approach legalized in 1934 reflected a major change in philosophy in the Empire State, and a coup l^For a good discussion of the general approach to the formation of bank holding companies, see Gerald C Fischer's Bank Holding Companies. 1-’Laws of the State of New York, 157th Session of the Legislature, Vol II, Chapter 666 (16 May 1934). MARINE MIDLAND BANK for Rand. Actually, the 1934 New York State banking legislation represented a compromise between the views of those who favored allowing statewide branch banking and the advocates of unit banking, who wanted to contain branching to major cities. Considerable support for broader branching came from the bankless communities, particularly those which had banks already closed by the effects of the Great Depression. Despite the apparent need to do something to overcome the weaknesses of the unit system, there were still powerful interests which fought expanded branching, presumably because this could mean that large metropol. itan banks might control banking in smaller communities to the detriment of the local communities. Marine Midland actively engaged in promoting broader branch banking. A former vice governor of the Federal Reserve Board was hired as a Marine Midland group vice president. He was particularly active in New York using his "powers of persuasion", which were considerable, in support of branch. ing in the Empire State. The Corporation supported an association of group bankers, which was attempting to expand branching via federal law. Further, its officials also acknowledged that so far as the Marine Midland group was concerned, a state law would be just as satisfactory as a federal law, as eighteen of its twenty-two banks were state chartered.^ Marine Midland gave its unqualified endorsement to expanding branch banking in New York, and when the 1934 law, called the Stephans Act, was enacted, Marine Midland responded quickly. The first branch office to open under the new law was a subsidiary of Marine Midland Banks, Inc, and five of eleven branches which were opened that year in bankless towns were offices of Marine Midland banks. Yet, Marine Midland still strongly empha. sized retaining local banks with local Boards of Directors despite its branch banking efforts, and it did little to consolidate its affiliate banks within banking districts. In fact, between the 1934 passage of the law and the end of the Rand administration (November 1942) the only intra. group consolidations among banks already in the system involved four subur. ban Buffalo banks which were merged into its lead bank, The Marine Trust Company of Buffalo.^ It has been reported that there were at least two factors which delayed mergers within the group during the 1930s. First was the unstable economic situation in the U.S. during the period, and second was the new. ness of the holding company form and the time it would take Marine Midland to have the concept broadly accepted. As a result, the general consolida. tion of the system banks by District would not begin until Mr Rand's successor, Charles Diefendorf, became chief executive. ^Letter from Edmund Platt to U.S. Senator Copeland, Dec 1932. ^Fischer: "Wall to Wall Banks", p. 7:12. l^Ibid, pp. 7:13. EASTERN BANKING The Diefendorf Era At Rand's death, the selection of Diefendorf as the new president and chief executive office of the Corporation over the other contender, a New York City investment banker, is interesting in that it may provide some insight regarding a basic philosophy underlying Marine Midland's structure. The question considered was whether the staff of the holding company could be based in New York City some four hundred miles from Buffalo. The conclu. sion was that the headquarters and the man in charge of the Corporation should be located in Buffalo. This was one of the basic principles established by George Rand, Jr and his associates when Marine Midland was organized, for they felt that there were at least two reasons that the firm should be an Upstate corpora. tion and not an appendage of a New York City Wall Street bank. First, it was considered to be undesirable for Marine Midland to be a New York City holding company from a political viewpoint because of the "big business" stigma which was then often attached to New York City banking interests. And second, it was felt that it would be easier to maintain the "local bank flavor" of the affiliates in the Group, particularly in smaller commu. nities, if the holding company group was directed from Buffalo. It might be added that, to a degree, this general philisophy influences Marine Midland's structure to this day. In naming Charles Diefendorf there was little doubt that the basic orientation of the holding company remained Upstate, for he had been a Buffalonian all of his fifty-two years. Diefendorf's principal attention initially was to continue the rebuilding of the system following the depression decade, after which he moved to developing branch systems within seven of the nine banking districts. During his era, 1942-1955, Marine Midland added twenty-six banks to the twenty-one owned in 1942, moving from ninety-one offices to one hundred and forty-eight. Assets had grown from $730 million to $2,000 million. Coupled with his acquisition program was a strategy to merge its banks together so that in 1955 there would be only twelve separately chartered banks within the system, each centered on a major city in the State, and better able to handle larger credits than the smaller units could.^ There is an interesting sidelight to the consolidation, for under New York banking law, a bank could not enter a new community by establishing a de novo branch if the principal office of another bank was already head. quartered there. Therefore, by converting small bank headquarters to branches of larger affiliates, some communities in which Marine Midland had almost exclusive facilities were opened to branching by outside banks. This action forced Marine Midland to render quality service or face the prospects of having a competitor enter its domain. It also helped blunt the argument that Marine Midland displayed a monopolistic attitude as the only major holding company in the State. R l^Ibid p. 8:5. z It is difficult to say whether or not this was a conscious strategy to help defuse continued scrutiny of the bank's competitive position by regulators. It certainly had that effect, however. MARINE MIDLAND BANK It was indeed fortuitous that Diefendorf selected Baldwin Maull as his successor. Maull, as brilliant a man as ever managed the company, served as a Wall Street lawyer prior to being elected a vice president of Marine Midland's New York City bank in 1935. Diefendorf saw the benefits of bringing a non-Buffalo intellect to the helm, and well he did. In retro. spect, Rand years were "formation", Diefendorf's "consolidation" and Maull's were to be "innovation", not unlike the general scheme Chandler outlines in Strategy and Structure. The Maull Period, A Changing Legal Environment Marine Midland had operated for over a quarter century without any serious question about its activities by the New York legislature.^ 1 This span included the early 1930s when the branch banking act was debated and ulti. mately permitted, yet the group had operated in a manner that no serious effort was made to enact holding company legislation. Then within two years of Maull's assumption of Diefendorf's role as chief executive of the holding company (March 1956) and following the passage of the federal Bank Holding Company Act, a major New York City bank, the forerunner of Citicorp, First National City Bank, filed an appli. cation to form a bank holding company with the largest bank in an area adjacent to New York City. The general view was that the new subsidiary would in practice operate as a branch system of the New York City giant. The State's Governor claimed the proposal employed an "ingenious device" to accomplish indirectly what was prohibited by the Law regarding banking district lines. He charged this action presaged a general movement toward group banking by the large Manhattan banks, and that its timing was inappropriate since a Legislative Committee was reviewing the question of banking district lines and banking structure in the State.^2 He called for legislation to temporarily "freeze" bank holding company acquisitions pending the completion of a study of the problems arising from the enactment by the Congress of the Bank Holding Company Act of 1956 and the First National City application. The legislature responded on 29 Janu. ary 1957 with a stopgap measure prohibiting for three months all acquisi. tions by holding companies, but not acquisitions by banks within their own banking district. When quick agreement was not reached in the Legislature on bank holding company bills, the "freeze" was extended to May 1958. Bills to change the State's banking structure were unable to be approved by the Legislature in 1958 and 1959, so the "freeze" kept being extended. The "freeze" had limited effect on Marine Midland. While it was unable to purchase the stock of additional banks, its existing affiliate banks were not prohibited from acquiring additional branches by merging smaller banks and that activity continued. During the "freeze" some criticism was voiced as Marine Midland ^George C Letchworth: "Holding Companies and Acquisitions of Small Banks", Address at Meeting of Banking Law Section, New York State Bar Associa. tion, 14 Oct 1960, p. 32. ^Fischer: "Wall to Wall Banks", p. 10:4. EASTERN BANKING enjoyed virtually a holding company monopoly in the country's top state while other banks could not enter the field. These individuals were labeled "Johnny-come-latelies" by Maul 1, who emphasized that every one of them could for thirty years have done what Marine Midland had inaugurated. Nevertheless, he still argued strongly for an end to the "freeze" and indi. cated he would welcome competition from other bank holding companies.23 Finally in 1961, a new law eliminated the "freeze" and opened the entire State to group banking, as Marine Midland had desired. Thus, Marine Midland had operated in a fashion that enabled it to see satisfactory leg. islation which on balance produced a New York bank holding company statute of benefit to Marine Midland, despite the fact that the new legislation removed Marine Midland's statutory protection and in the ensuing years most major New York City banks would adopt a holding company structure and move across New York State with offices and influence. Parenthetically a decade later, such major banks as Citibank, Chase Manhattan and Bankers Trust began retrenchment programs in upstate New York, having been unable to gar. ner from Marine Midland and other competitors adequate business to produce satisfactory profitability from their upstate networks. During the "freeze", Maull frequently repeated the view that the whole State should be combined as a single region. These remarks strike a famil. iar chord, for they are reminiscent of the observations of George Rand, Jr in 1930 when he described the Empire State as a single trade area and envisioned statewide branching throughout New York. Though Maull was unsuccessful in persuading the New York State Legis. lature to permit statewide branching before he transferred his chief execu. tive duties 1 January 1968, he did lay the framework for a successor man. agement to reap the fruits of his labors. During his management, the system grew from $2 billion in assets to $5 billion and in offices from 148 to 225 domestically and five overseas. The company was recognized as a leader among United States bank holding companies. Years of Reorganization Maull's immediate successor, J Fred Schoellkopf, IV, met an untimely, health-related death and it was his successor, Charles A Winding, who pre. sided over the company in 1971 when the Legislature voted to open the State to statewide branch banking effective 1 January 1976. Presumably the five- year delay was to give small upstate banks adequate time to sort out their corporate destinies in a new regulatory environment. In fact, it enabled Marine Midland to lay careful plans for its own reorganization. Winding quickly had Marine Midland's Board name a committee to analyze the holding company's structural options and to recommend a configuration for 1976 and later. The committee studied the company's history, the competitive milieu and the question of what lay ahead for the banking industry. After consid. ering a variety of options, it recommended that a single, corporate entity to manage a statewide branch network could produce better service for ^Marine Midland Corp: Minutes of the Board of Directors, 14 Feb 1958. MARINE MIDLAND BANK customers and greater profits by the holding company Directors. From the Configuration Study Committee was selected a new chief execu. tive, Edward W Duffy. Then, effective 1 January 1976, ten separately char. tered banks four national and six state chartered—merged together into the first statewide bank in the history of New York. Marine Midland was now the twelfth largest commercial bank in the United States, with assets of $11 billion, and 316 offices in 47 countries. The Rand, Diefendorf, Maull and Winding eras had successively woven an environmental mosaic that led to an altered regulatory environment. Change had been evolutionary, not revolutionary. But the fact is clear that the multi-bank holding company was to be a structure of the past in New York State and Marine Midland had both led the way and been swift to alter its structure to be more effective in the new environment. The Years Ahead In closing this paper on Marine Midland's latest structural move to shape the 1980s' banking environment, one more look to history is warranted. George Rand's original organization plan for the system stated that the purpose of the corporation after acquiring the initial group of banks, was to obtain "control of other banks and trust companies in New York State and elsewhere throughout the United States".^ The printed organization plan noted its shareholders will ultimately be part owners of a nationwide group of financial institutions with a com. bined size and strength far transcending any now in existence. Early plan drafts specifically named the cities of Cleveland and Detroit as likely locations of prospective affiliates, as well as mentioning that banks in other parts of this country would probably be acquired. Negotiators with a group of sixteen North Carolina banks reached a point where some parties were so convinced that these institutions would be a part of the initial Marine Midland system that the story was released to the press.^5 Marine Midland's officers were literally besieged with requests from lawyers, bank brokers, realtors and owners of banks, wanting to affiliate with the holding company. Records indicate that Marine Midland was con. tacted by banks in eighteen different states, the district of Columbia, and three foreign countries—Canada, Denmark and Panama as well as forty-one banks in New York State. However, the economic crisis of the period diverted the resources of Marine Midland away from out-of-state expansion to the much more pressing problem of preserving its existing affiliates and aiding in the restoration of the financial system of the Empire State. Consequently, no interstate acquisitions occurred and Marine Midland did not look outside New York State until the Maull regime, and then, except internationally, the federal holding company act closed the door to direct branching in other states.^6 2^Copy of "Plan for Organization of Marine Central Corporation" (a forerun. ner name for Marine Midland Banks, Inc). ^^New York Times, 26 Sept 1929, p. 35; and 27 Sept 1979, p. 36. ^Fischer: "Wall to Wall Banks", p. 5:5. EASTERN BANKING But there is a slight loophole in the 1956 federal law which generally limits holding companies to a single state. While it is illegal for a bank holding company to acquire "control" of a bank in a new state, it may acqu. ire up to 5% of the stock of a bank or banks any place in the United States without regulatory approval and without violation of the law. Consequently, Marine Midland has announced an "enriched correspondent" strategy by which it is purchasing 4.9% of banks in other states, with a clear understanding that the investment is a prelude to larger holdings if or when the federal and state laws change. In the meantime, Marine Midland is sharing its management expertise, parallel to the posture of George Rand when he organized Marine Midland fifty-two years ago: a clear extension of the management style that helped direct the corporation from its beginning. The chapter has yet to be written whether Marine Midland's current efforts will influence the national banking environment, as it has long done in its home state. There are many who believe it will, for to the extent market place structure does not conform to statute, under pressure from innovative bankers, it is the statute over time that changes. In summary, then, this brief review of Marine Midland's first half century encourages the view that, in the United States, regulation may be a dominant force as to corporate structure at a corporation's genesis, but banking executives dissatisfied with legislated restrictions on structure can manage in a way that changes the regulatory environment, thereby enabl. ing them to restructure their organization for a new era. MARINE MIDLAND BANKS, INC (thousands of U.S. dollars) December: Total Assets Total Capital Net Operating Income 1929 $ 523,851 $ 22,025 $ 8,089 1934 440,386 54,421 4,035 1939 538,488 56,657 3,693 1944 1,037,596 64,123 5,149 1949 1,185,741 81,922 5,561 1954 1,798,743 114,823 8,628 1959 2,383,252 175,492 18,549 1964 3,660,253 228,858 26,318 1969 6,599,464 492,130 63,381 1974 12,664,652 426,724 39,078 1979 15,728,156 480,331 62,400 1981 18,682,474 821,551 87,251 Note: (1) Acquired banks included only from date of acquisition. (2) The statistics were extracted from the individual year's annual reports. No restatements have been made for changes in accounting practices. 1929 — NEW YORK STATE COVERAGE MARINE MIDLAND BANK Tk. r. /.* H Y" 1975 — COVERAGE PRIOR TO MERGING 10 BANKS EASTERN BANKING Marine Midland Bank— 7 Marine Midland Bank— 10 Marine Midland Tinker Rochester Eastern, N.A. National Bank 32. WELLS FARGO AND CHINESE CUSTOMERS IN NINETEENTH- CENTURY CALIFORNIA by Harold P Anderson In March 1852, Henry Wells and William G Fargo, two well-known eastern United States businessmen, met with a group of associates in New York City's historic Astor House and founded an enterprise that carried their names westward into American frontier history. Wells Fargo & Company, their new firm, was organized to provide express and banking services to the mass of humanity that had surged westward to California at mid-nine. teenth century in search of fortune and the fulfillment of dreams.^ The glittering enticement that had made California attractive was gold. Deposits of this universal medium of exchange and adornment were discovered in the foothills of the Sierra Nevada, two hundred miles inland from San Francisco, in January 1848. Official announcement of the event was made to the United States Congress by President James K Polk in Decem. ber. Such news, however, hardly needed official publicity. It had moved by word-of-mouth like swirls and eddies along the era's watery routes of trade and travel, and thousands of latter-day Argonauts were already head. ing for the golden hills of California. Within another year, tens of thousands of strike-it-rich-quick hopefuls—dubbed the '49ers—were west. ward bound. By 1850, California was admitted to the Union as the thirty- first state. Within a decade, hundreds of millions of dollars in gold were mined, hundreds of thousands of persons populated the state, and a major market for goods and services had been created. California was transformed from a pastoral backwater territory into a congeries of political, social, reli. gious and cultural institutions in which English-speaking "pioneers" were predominant.^ ^The basic works on Wells Fargo's history, to date, are: Noel Loomis, Wells Fargo (New York, 1968); Edward Hungerford, Wells Fargo: Advancing the American Frontier (New York, 1949); Lucius Beebe and Charles Clegg, U.S. West—The Saga of Wells Fargo (New York, 1949); W Turrentine Jackson, "A New Look at Wells Fargo, Stagecoaches and the Pony Express", California Historical Society Quarterly, (December 1966), pp. 291-394; idem, "Wells Fargo: Symbol of the Wild West?" The Western Historical Quarterly (April 1972), pp. 179-196; Ralph Moody, Wells Fargo (Boston, 1961); and [History Department, Wells Fargo Bank NA] Wells Fargo & Company: A Brief History (San Francisco, 1976). ^Among the best introductions to California history are: Walton Bean, California: An Interpretive History, revised edition (New York, 1972); Warren A Beck and David A Williams, California: A History of the Golden State (New York, 1972); Warren A Beck and Ynez D Haase, Historical Atlas of California (Norman, Oklahoma, 1974); T H Watkins, California: An Illus. trated History (New York, 1973); John Caughey, California, revised edition EASTERN BANKING Wells, Fargo & Company entered into the world of triumph and tragedy that was Gold Rush California in 1852. Following the organization of the Company in March as a joint stock association with a capitalization of $300,000, the first office was opened in July on Montgomery Street in San Francisco, the major city and port in California and the egress point for miners bound for the gold fields. Samuel P Carter, an experienced express- man, and Reuben W Washburn, a New York banker, were appointed to be the Company's principal agents in California.^ Shortly after opening, the Company advertised its banking services in a San Francisco business directory: Wells, Fargo & Co. Bankers and Exchange Dealers W. F. & Co., In connection with their EXPRESS BUSINESS, will also transact a general BANKING, EXCHANGE AND SPECIAL COLLECTION BUSINESS. GENERAL AND SPECIAL DEPOSITS RECEIVED. COLLECTIONS AND REMIT. TANCES made in all parts of California, Oregon, the Atlantic States and Europe, with promptness and dispatch. GOLD DUST, GOLD AND SILVER COIN, AND BULLION, BOUGHT AND SOLD. Money advanced on GOLD DUST DEPOSITED for transmission or coinage. SIGHT EXCHANGE ON NEW YORK AND BOSTON, FOR SALE AT CURRENT RATES. DRAFTS ALSO DRAWN PAYABLE . . .4 (Los Angeles, 1970); the older Robert Glass Cleland, A History of Cali. fornia: The American Period (New York, 1922); the classic Hubert H Bancroft, History of California, 7 vols (San Francisco, 1886-1890); and the indispensable Mildred Brooke Hoover, Hero Eugene Rensch and Ethel Grace Rensch, Historic Spots in California, 3rd edition revised by William N Abeloe (Stanford, California, 1966). O # , # 9 * The principal founding document of Wells Fargo, the "Articles of Associa. tion and Agreement", March 18, 1852, is in the Wells Fargo & Company Cor. porate archives, San Francisco. The new company's first public financial transaction was a "first of exchange" issued in San Francisco, July 13, 1852, also in the Corporate Archives. The early months of Wells Fargo's history are recounted in: Ruth Teiser and Catherine Harroun, "Origin of Wells, Fargo & Company, 1841-1852", Bulletin of the Business Historical Society (June 1948), pp. 70-83; and idem, "Wells, Fargo & Company: The First Half Year", Bulletin of the Business Historical Society (June 1949), pp. 3-11. 4 The San Francisco Directory for the Year 1852-53 (San Francisco, 1852) WELLS FARGO During the years that followed, Wells Fargo agencies were established in almost every large town and noteworthy mining camp in California. Of course, the names of certain sites, like Camp-Stick-in-the-Wind, suggested that even their founders were dubious of their longevity. As prospectors, merchants and camp followers fanned out through the foothills of the Sierra Nevada, Wells Fargo provided the convenience of a nearby express and banking house at which they could exchange their gold dust for coinage, deposit it for safekeeping, have it assayed, send sight drafts to relatives or business contacts in other towns, cash checks, for. ward and receive mail, packages and freight of all kinds.^ By horseback, wagon, stagecoach, sidewheel steamer, train, and in some cases by ski and dogsled, Wells Fargo's secure express service followed and assisted the commercial expansion of California and the West. To keep pace with mining booms and population growth, Wells Fargo pro. moted communication and transportation systems through its mutually suppor. tive banking and express operations. The Company held a controlling inter. est in the Overland Mail and, for a time, the Pony Express. By 1866, it owned and operated the largest stagecoach system in the West. Its coaches carried people, treasure shipments, express goods and the United States Mail from the Missouri River to the Pacific Coast.^ facing 103. This work was commonly known as "Parker's San Francisco Directory" after James M Parker, the publisher. ^ These activities are well described in the works listed in note 1. In addition, contemporary city directories and broadsides document the numerous services Wells Fargo offered during the gold rush era. Typical is an ad in Colville's City Directory of Sacramento for the Year 1834-5, which indicates the Company would among other things: Forward daily expresses, in charge of experienced and faithful messengers to all the towns and mining camps in California; Semi-monthly to Oregon and intermediate points on the Northern Coast; Port Townsend and Olympia; to San Diego and intermedi. ate points on the Southern Coast; and by every vessel to the Sandwich Islands. By the mid-1850s. Wells Fargo had established over fifty offices in Cali. fornia and Oregon. On the early decades of Wells Fargo's development in these areas, see also: Oscar Osburn Winther, Express and Stagecoach Days in Califor. nia (Stanford, California, 1936, 1938); idem, Via Western Express and Stagecoach (Stanford, California, 1945); Neill C Wilson, Treasure Express: Epic Days of the Wells Fargo (New York, 1936); and W Turrentine Jackson, "Stages, Mails and Express in Southern California: The Role of Wells, Fargo & Co in the Pre-Railroad Period", Southern California Quar. terly (Fall 1974), pp. 233-72. 6 On the Overland Mail, Pony Express and Wells Fargo's role in stagecoach. ing, see: Jackson, "A New Look..."; W Turrentine Jackson, "Wells Fargo's Pony Expresses", Journal of the West (July 1972) pp. 405-36; Le Roy Hafen The Overland Mail, 1849-1869 (Cleveland, 1926); Charles Outland, Stage. coaching on the El Camino Real: Los Angeles to San Francisco, 1861-1901, (Glendale, California, 1973); Roscoe P and Margaret B Conkling, The EASTERN BANKING With the completion of the transcontinental railroad in 1869, the Company gradually used rail carriers as its main means of conveyance. In 1888, Wells Fargo became the first "ocean to ocean" express firm with a through line from San Francisco to New York.^ The banking side of the business expanded as well. In addition to San Francisco, major Wells Fargo banking houses were established in: Los Angeles; Portland, Oregon; Carson City and Virginia City, Nevada; Salt Lake City, Utah; and New York. Banking, express and exchange services existed side by side in many of the Company's other offices throughout California and the West.R In a word, Wells Fargo was successful amidst the uncertainties of the prosperity and panic economy of the nineteenth-century western United States because its express and banking operations complemented each other; its lines of communication for the exchange of business intelligence were secure; and its agents and messengers garnered a reputation for fast, reli. able and secure service. As Samuel Bowles, a prominent nineteenth-century journalist, noted of Wells Fargo in 1866: It is the omnipresent, universal business agent of all the region from the Rocky Mountains to the Pacific Ocean. Its offices are in every town far and near; a billiard saloon, a restaurant and a Wells & Fargo office are the first three ele. ments of Pacific or Coast mining towns; its messengers are on every steamboat, and railcar and stage, in all these States. It is the Ready Companion of civilization, the Universal Friend and Agent of the miner, his errand man, his banker, his post office. It is much more than an ordinary express company; it does a general and universal banking business, and a great one in amount; it brings to market all the bullion and gold from the mining regions—its statistics are the only reliable knowledge of the productions; and it divides with government the carrying of letters to and fro.^ Eventually, with the decline of the western mining economy, changes in the nature of banking laws and the emergence of the railroads as a dominant factor in American economic life, Wells Fargo's operations changed. During Butterfield Overland Mail, 1857-1869, 3 vols (Glendale, California, 1947); and Roy Bloss, Pony Express: The Great Gamble (Berkeley, Califor. nia, 1959). 7 Official Wells Fargo directories of offices and agents in the Company's Corporate Archives carry the slogan "ocean to ocean" from 1888 until 1904. They list the miles of rail routes, stage routes, and inland and ocean steamer routes over which the Company's business was conducted. R Company directories, newspaper ads, statements of condition and business records give a year by year listing of offices and services. ^ Samuel Bowles, Across the Continent (Springfield, Massachusetts, 1866) pp. 294-95. Bowles was the distinguished editor of the Springfield Republican. WELLS FARGO the last quarter of the nineteenth century, the railroad-dependent express business gradually separated further and further from commercial banking activities; and dramatic events marked Wells Fargo's passage into the twen. tieth century. In 1905, Edward H Harriman, one of America's shrewdest railroad mag. nates, gained a controlling interest in Wells Fargo through a takeover of the Southern Pacific Railroad, Wells Fargo's largest stockholder. Harriman formally separated Wells Fargo's express and banking operations, working out an agreement with Isaias W Heilman, a prominent California financier, for the merger of Wells Fargo & Company's Bank with the Nevada National bank. The resultant Wells Fargo Nevada National Bank, headed by Heilman, remained headquartered in San Francisco (as it still does). Wells Fargo & Company Express, on the other hand, was located in New York, with Harriman in control. Each followed a separate and distinct course of development in the twentieth century.H ‧k k k k To return to the nineteenth century, let us pose a difficult question: how, then, did Wells, Fargo & Company, the "Universal Friend" with a decidedly eastern United States and European predilection, relate to China and more immediately to the Chinese in California? To understand why this is a difficult question to ask of any American institution, it is necessary to look at one of the most emotionally-charged, least attractive and least adequately studied aspects of nineteenth-century American history: the per. ception and treatment of the Chinese in America. Though the California gold rush profoundly hastened the movement of Americans westward across a continent, it also inspired a lesser known, but numerically large passage of Chinese eastward across the Pacific Ocean. Thousands of Chinese were carried via clipper ship to California, or, as they knew it in the vernacular, Gum Shan, the Golden Mountain.^ ^Loomis, Wells Fargo, pp. 245-90; Hungerford, Wells Fargo, pp. 151-88; Alvin Harlow, Old Waybills (New York, 1934); unpublished reminiscences of Frederick L Lipman (president of Wells Fargo Bank, 1920-1935), Wells Fargo & Company Corporate Archives; Stuart Daggett, Chapters on the His. tory of the Southern Pacific (New York, 1922); and Oscar Lewis, The Big Four (New York, 1935). l^The banking side of Wells Fargo remains headquartered in San Francisco as Wells Fargo Bank, NA, the principal subsidiary of Wells Fargo & Company, a bank-holding company established by the Bank in 1968. Wells Fargo Bank is currently the third largest in California and the eleventh largest in the United States. The domestic express side of Wells Fargo eventually became part of a government-sponsored consolidation of major U.S. express companies in 1918. Residual parts of the business were subsequently acquired by the American Express Company. Then in 1969, Wells Fargo & Company (San Francisco) reacquired from American Express all the remain. ing rights to the Wells Fargo name, thus reuniting the original elements of the Company's history. l^The history of the Chinese in America and California, a story that for EASTERN BANKING The lure of California gold worked its magical influence in the Celes. tial Empire much as it had in the eastern United States, Mexico, Chile, Europe and Australia. As the Picayune, an early San Francisco newspaper, noted in 1852: In China, the California fever seems to have reach[ed] an unpre. cedented height, and the long-tailed and curious denizens of that strange world evince as great eagerness to reach our magic land, as ever exhibited by the most excitable of our own coun. trymen, in the most exciting period of the emigration from the Eastern states. They are flocking in upon us by the hundreds, every ship arriving from thence bringing from one hundred and fifty upwards. The number of Chinese in California during the early Gold Rush climbed from fewer than 100 in 1848 to over 700 in 1849, over 4,000 in 1850, over 7,000 in 1851, and over 25,000 in 1852. Subsequent increases, fluctuating with the vicissitudes of a mercurial political, economic and legal environ. ment, led to a nineteenth-century high-water mark of more than 110,000 in 1882. According to official figures (such as they are) as of 1860, the Chinese comprised about nine to ten per cent of California's population, making them the second largest group in the state.^ years was relatively unexplored and, consequently, subject to facile treatment, has finally begun to receive serious scholarly attention dur. ing the past two decades. Among the works which form a starting point for those interested in the subject are: Thomas W Chinn, H Mark Lai and Philip P Choy (eds) A History of the Chinese in California: A Syllabus (San Francisco, 1969); H Mark Lai and Philip P Choy, Outlines—History of the Chinese in America (San Francisco, 1971); Betty Lee Sung, Mountain of Gold (New York, 1967); Gunther Barth, Bitter Strength: A History of the Chinese in the U.S. 1850-1870 (Cambridge, Massachusetts, 1964); Victor G and Brett de Barry Nee, Longtime Californ1: A Documentary Study of An American Chinatown (New York, 1972); California History Special Issue: "The Chinese in California" (Spring 1978); Stan Steiner, Fusang: The Chinese Who Built America (New York, 1979). Pictorially interesting and informative are: Arnold Genthe and Will Irwin, Old Chinatown (New York, 1913); Laverne Mau Dicker, The Chinese in San Francisco: A Pictorial History (New York, 1979); and H Mark Lai, Joe Huang and Don Wong, The Chinese of America: 1785-1980 (San Francisco, 1980). Bibliographically, a highly useful work is: Gladys C Hansen and William F Heintz, The Chinese in California: A Brief Bibliographic His. tory (Portland, Oregon, 1970). ^A subs tantial part of the Daily Evening Picayune, an important though short-lived San Francisco paper, has been reprinted in Kenneth M Johnson (ed) San Francisco As It Is: Gleanings from the 'Picayune' (Georgetown, California, 1964). This quote from April 17, 1852, appears on page 268. ^Population figures are always a puzzle. Usually the only thing clear WELLS FARGO At first, the "Celestials", as they were called, were generally wel. comed with curiosity, amusement and resignation into California's fluid and polyglot society. To quote the Picayune again: That a great part of the Chinese immigration will become a per. manent American population, all seem to expect; if they would introduce a few more of their country women we think it would. . . . It is important that the immigration of a people so industrious, so quiet, and here at least, so honest, should be encouraged in every way, and we should suggest to our leading politicians to make it the subject of at least some of their stump speeches, The Daily Alta California, one of the most important early Califonia newspapers, even speculated in 1852 that: We shall undoubtedly have a very large addition to our popula. tion, and it may not be many years before the Halls of Congress are graced by the presence of a long queued Mandarin sitting, voting, and speaking beside a Don from Santa Fe and Kanaker from Hawaii.^ That same year, Governor John McDougall recommended that the Chinese be given land grants to further stimulate their settlement in the state; and, soon after, State Senator George Tingley promoted a "coolie bill" to create a state-controlled contract labor system. about them is that nobody knows exactly where they came from, or how they were originally derived. In this case, the numbers came from U.S. Census figures, California census figures (as, for instance, in Thompson & West's Historical Atlas Map of Santa Clara County, San Francisco, 1876, pp. 16 1/2, 18-18 1/4—perhaps the oddest numbers of all—which break down the population by race within county); Chinn, History, pp. 18-23; and John S Hittell, A History of the City of San Francisco and Inciden. tally of the State of California (San Francisco, 1878), pp. 491-92. The best comprehensive compilation is probably the Statistical His. tory of the United States from Colonial Times to the Present (Stanford, Connecticut, 1965). l^June 4, 1851. Reprinted in Johnson, San Francisco, pp. 145-46. l^Daily Alta California, May 12, 1852. The same article notes that: Many letters pass to and from between China and California and at each departure of ships for the Celestial Empire, its chil. dren here send off to their friends, beyond the Pacific great numbers of California papers. It may be seen from this how intercourse is increasing and knowledge extending. The day of fencing the world and information out of China has forever passed away. The glitter of our gold has passed the gates of the cousin of the sun and moon, and the disciples of Confucius are coming and have come to qualify his philosophy with the wis. dom of Washington and the utility of Franklin. EASTERN BANKING At almost the same time, however, sentiment against the Chinese was also emerging. John Bigler, McDougalls' successor in the office of gover. nor, after touring the California mining districts, decried the danger he felt the Chinese posed to the welfare of the state. Sporadic violence occurred in the gold fields as American miners vied with foreign miners, particularly the Chinese, over strikes and claims.^ Foreign miners were discouraged with a series of state-supported license taxes. Since most of the foreigners in the fields were Chinese, there was little question about whom the laws were intended for. Ironi. cally, this tax, though repealed off and on between 1850 and 1870 (when it was finally declared unconstitutional) apparently provided upwards of a third to a half of the revenue received by the mining district counties in the state.^ l^These events and the subsequent anti-Chinese sentiment in California are recounted in Chinn, A History, p. 26ff; Lai, Outlines, p. 48, passim; Elmer C Sandmeyer, The Anti-Chinese Movement in California (Urbana, Illinois, 1939) pp. 12-56; Mary Roberts Coolidge, Chinese Immigration (New York, 1909) p. 21, passim, and Rodman Paul, "The Origins of the Chinese Issue in California", Mississippi Valley Historical Review (1938) pp. 181-96. An interesting and important early defense of the Chinese is con. tained in William Speer, An Humble Plea Addressed to the Legislature of California in Behalf of the Immigrants from the Empire of China to this State (San Francisco, 1856). Though the author notes that the Custom- House statistics he cites are not perfect, they present an early look at the China trade in relation to Chinese immigration and emigration. To wit (p. 7): STATEMENT OF IMMIGRATION OF CHINESE TO CALIFORNIA Year 1849 1850 185i 1852 1853 1854 1855 Total Vessels Tonnage Passengers 13 3,700 323 22 7,708 447 35 11,700 2,716 84 43,144 18,434 54 25,535 4,316 52 28,021 15,063 37 15,527 3,212 297 135,335 44,511 STATEMENT OF EMIGRATION OF CHINESE FROM CALIFORNIA Year 1849 1850 1851 1852 1853 1854 1855 Total Vessels - - 96 120 89 113 92 510 Tonnage - - 51,241 75,596 53,349 85,689 73,093 335,977 Passengers — — 261 2,056 4,405 2,386 3,328 12,436 l^Lai, Outlines, p. 50; Coolidge, Chinese, pp. 26-80. See also: Rodman W Paul, Mining Frontiers of the Far West (New York, 1963), pp. 34-36; and WELLS FARGO Foreign miners taxes were followed in 1855 by a capitation tax levied on shipmasters, owners, or consignees for each person arriving in port on board their vessels who were ineligible to become citizens (i.e. the Chinese).^ In 1858, a state law banning further Chinese immigration was enacted. Though it was soon declared unconstitutional, it served as a warning about the depth of feeling involved in the issue of Chinese entry into the California labor market. During the 1860s, the original motivating force that brought the Chinese to California, the opportunity for economic advancement, still remained, but the means of attainment had broadened considerably. Work in the mines was no longer the only possibility. A Chinese merchant class was on ‧ established and in place, primarily in San Francisco. Chinese laborers had found other possibilities in a broad set of occupations in textile. manufacturing enterprises, farming, railroad construction, the reclamation of tule lands, and in fishing and other maritime pursuits. These economic successes were generally greeted with less and less enthusiasm by displaced or unemployed American workers.21 Despite continued efforts by certain segments of the populace in Cali. fornia, and other western U.S. states, to limit, or eliminate altogether, Chinese immigration to the United States, the federal government provided three major barriers to such action. First, the Fourteenth Amendment of the United States Constitution ratified in 1868, extended "due process of law" and "equal protection of the laws" to all persons. Secondly, the Burlingame Treaty of 1868 between the United States and China recognized free immigration, trade and travel between the two countries—though recip. rocal rights of naturalization (i.e. the right to become a citizen) were not conferred. Thirdly, the Civil Rights Act of 1870 provided that all persons in the United States would have the same right to give evidence and would have full and equal benefit of laws.22 idem, California Gold: The Beginning of Mining in the Far West (Cam. bridge, Massachusetts, 1947), p. 43, passim. l^The Chinese were indirectly excluded from citizenship by Congressional legislation in 1790 which provided that only free white persons were eli. gible. U.S. Statutes at Large 1 (1790), p. 103. The California statute of April 28, 1855, was officially entitled: "An Act to Discourage the Immigration to this State of Persons Who Cannot Become Citizens Thereof." California, Statutes, 1855, pp. 194-95. Many of the laws, statutes, and other documents relating to the Chinese in America are reprinted in Cheng-Tsu Wu (ed) , "Chink!"—Anti- Chinese Prejudice in America (New York, 1972), which, despite the sensa. tional title, is quite useful. 2RSee: Dicker, The Chinese; Charles C Dobi, San Francisco's Chinatown (New York, 1936); William Hoy, The Chinese Six Companies (San Francisco, 1942); Alexander McLeod, Pigtails and Gold Dust, (Caldwell, Idaho, 1949). 2lLai, Outlines, pp. 82-87; Chinn, A History, pp. 23-27; and Stanford Lyman, "Strangers in the City: The Chinese in the Urban Frontier", reprinted in Roots: An Asian American Reader ([Los Angeles], 1971), pp. 159-87. 22()n the federal government's role, one can begin with: Edward Conrad Smith EASTERN BANKING Up to 1870, the most notable accomplishment of Chinese laborers in America was undoubtedly the completion of the western leg of the transcon. tinental railroad over the Sierra Nevada to Promontory Point, Utah.23 Unfortunately, the driving of the Golden Spike in May 1869 which completed the rail linkage of east and west did not bring the economic boom and rise in western land value that was expected. Rather it brought stiffer compe. tition from eastern manufacturing firms, and continued unemployment in the West. A contraction of the economy following the panic of 1873 further aggravated problems; and a severe break in the mining securities market in 1876 symbolized the precipitous decline of the western mining economy. None of this boded well for the Chinese.2^ Political agitation, particularly among unemployed American workers in the cities, created a popular movement whose battle cry was "The Chinese Must Go". The mounting pressure was translated into political action in California during the rewriting of the state's constitution in 1878-1879. Further restrictions on the employment of Chinese laborers were written into the document.25 More importantly, the federal government responded to growing complaints from western states by renegotiating the Burlingame Treaty, and 23 24 25 (ed), The Constitution of the United States with Case Summaries, revised edition New York, 1972); Christian Fritz, "Bitter Strength (k'u-li) and the Constitution: The Chinese before the Federal Courts in California", The Historical Reporter (Autumn 1980), pp. 2-15, which draws heavily on Hudson N Janisch, "The Chinese, the Courts, the Constitution: A Study of the Legal Issues Raised by Chinese Immigration to the United States, 1850-1902", unpublished JSD dissertation, University of Chicago Law School, 1971; Federal Archives & Records Center (San Bruno, California) Chinese Studies in Federal Records ([San Francisco], 1975). Lai, Outlines, pp. 55-60; Chinn, A History, pp. 43-48; A brief and lively contemporary account of the Chinese as railroad builders is contained in Charles Nordhoff, California: For Health Pleasure and Residence. A Book for Travellers and Settlers (New York, 1873). A recent, highly detailed account of the accomplishment of the Chinese construction crews working on the transcontinental railroad is contained in: U.S. Department of the Interior, Bureau of Land Management, Utah State Office, Cultural Resource Series No 8, Anan S Raymond and Richard E Fike, Rails East to Promontory, the Utah Stations (Salt Lake City, 1981). On economic conditions during this period see, for instance: Beck and Williams, California, pp. 244-97; and Ping Chiu, Chinese Labor in Cali. fornia, 1850-1880: An Economic Study (Madison, Wisconsin, 1973). The most comprehensive documentary treatment of the attitudes of this period is contained in: U.S. Congress (44th) Senate Report 689, Report of the Joint Special Committee to Investigate Chinese Immigration (Washing. ton, 1877). This work reprints the testimony of pro- and anti-Chinese factions heard in San Francisco, October 17 to November 17, 1876. On the new constitution, see: Sandmeyer, The Anti-Chinese, pp. 57-77. Another perspective is presented in: Cheryl L Cole, "Chinese Exclusion: The Capi. talist Perspective of the Sacramento Union 1850-1882", California History (Spring 1978), pp. 8-31. WELLS FARGO enacting the first federal Chinese exclusion law in May 1882, a law which prohibited new immigration by the Chinese to America for a ten-year period. This law was amended in 1888 to prevent reentry by Chinese labor. ers who had temporarily left the country. In 1892, the exclusion law was extended another ten years, and amended in 1893 to make it more difficult for businessmen—who had been exempted under the first exclusion law—to immigrate. Finally, in 1904, President Theodore Roosevelt extended the Chinese exclusion law indefinitely. Though the Chinese were resilient and resourceful in adapting to the narrowing opportunities, increasing restric. tions and popular hostility they faced, their numbers in California and the United States entered a period of decline.26 Suffice it to say that the nineteenth-century experience of the Chinese in America, particularly in California, was mixed. Though the gold that originally brought American argonaut and Chinese sojourner together in the western United States never tarnished, relations between the two groups did. California was a promised land, a Gum Shan, an El Dorado, an economic dream. Unfortunately, the price of admission for the fulfillment of the economic dreams was high. Wells, Fargo & Company arrived in California, as previously mentioned, in 1852, precisely at the time that anti-Chinese sentiment and attempts to segregate the Chinese into clustered groups became overt. Despite continual talk by American diplomats and mercantile interests of the "China trade" and the use of the Chinese as a source of labor (in a labor-scarce western economy) obstacles to their realization were formi. dable— both in China and America. Trade and emigration restrictions, the language barrier, racial prejudice, cultural differences—in customs, dress and diversions—sense of community among the Chinese and, perhaps most importantly, perception of the Chinese as economic competition (first in the gold fields, then in the labor market) all contributed to problematic relations for almost any company doing business with the Chinese. Then, too, Chinese merchants emerged as the dominant social and econo. mic class in Chinese communities in America--in sharp contrast to their relatively low status in China. As such, they managed the economic affairs of their compatriots through a familial and clan infrastructure that was organized into district associations or companies, historical outgrowths of the hui-kuan (guild) system in China.2? Central to the Chinese merchants' 26 Ironically, another Roosevelt, Franklin D, began the repeal of the exclu. sion laws in 1943. The laws are reprinted, or abstracted, in Cheng-Tsu, Chink, pp. 70- 103, 217-20. See also: Chinn, A History, pp. 26-28; Lai, Outlines, pp. 88-97; and David L Anderson, "The Diplomacy of Discrimination: Chinese Exclusion, 1876-1882", California History (Spring 1978), pp. 32-45. The Chinese population in the U.S. had declined to about 61,000 by the 1920s. Lai, Outlines, pp. 44, 11-118; Hoy, Chinese, p. 8, passim. Also: Rose Hum Lee, The Chinese in the United States of America (Hong Kong, 1960). EASTERN BANKING control of affairs were their shops, institutions which served as a source of supplies and news, an exchange and depository, and a social center. Nevertheless, survival and success in any economic system depends upon the interplay of disparate, even whimsical factors and relationships. The transportation of people and goods, the safekeeping, lending and investment of money, the communication of business information, the securing of mail routes, and the handling of collections and remittances were some of the important factors that governed the economic life or death of nineteenth- century western American communities. It was precisely in these lifeblood areas that Wells Fargo and the Chinese met on common ground, one as supplier of services, the other as user. Wells, Fargo & Company supplied to both the Chinese merchant and laboring classes access to its express, transportation, communication and financial network. The Chinese made use of it. Though the full extent of Wells Fargo/Chinese relations will never be known—a result owing largely to the disastrous earthquake and fire of 1906 which destroyed not only a large part of San Francisco, but also the City's recorded heritage, including a sizable portion of Wells Fargo's corporate records—enough pieces of the documentary jigsaw puzzle have survived to afford an intriguing look.28 The most often repeated, though scantily documented story of why the Chinese in San Francisco favored Wells Fargo with their business relates to architectural history. John Parrott, an American diplomat turned banker, in 1852 undertook to construct the first major cement, stone and granite block buildings in San Francisco. He contracted with architect Stephen Williams to design a fire. proof structure on the northwest corner of Montgomery and California Streets that could withstand the periodic conflagrations that beset the city. The twenty-inch thick granite used to construct the building was imported from China via Hong Kong. The stones were, in fact, cut and laid out prior to their arrival in San Francisco. Unfortunately, the Chinese stonemasons who arrived to participate in the construction discovered that the stones were inadvertently designed for the opposite corner of the street where no "evil spirits" resided. Parrott resisted requests for an exorcism rite and the Chinese in San Francisco subsequently refused to enter the building, which happened to house two of Wells Fargo's major banking and express rivals. Instead, they patronized the building on the opposite corner, which housed the newly arrived Wells, Fargo & Company.29 Ironically, three years later, Adams & Company and Page, Bacon & Company, the rivals, went bankrupt during the panic of 1855, and Wells Fargo moved across the street to become the major tenant in the Parrott Building. The events and symbolism were not lost on the Chinese community, 2RWhat remains in Wells Fargo's possession is currently being arranged in the Company's Corporate Archives in San Francisco. An additional quan. tity of material on the Chinese exists in private collections. The story is told with style, if not full documentation, in McLeod, Pigtails, pp. 86-92; and Hungerford, Wells Fargo, pp. 12-13. See also: Barbara Donohoe Jastres, John Parrott, Consul, 1811-1884: Selected Papers of a Western Pioneer (San Francisco, 1972), pp. 105-09. WELLS FARGO particularly since Wells Fargo had the building exorcised.30 In mid-nineteenth century California, "banking" carried a highly- fluid definition. There was considerable antipathy toward banking corpora. tions, owing in large part to the attitude of many transplanted easterners towards such institutions. In fact, the California state constitution of 1849 specifically prohibited banks of issue and the chartering of banks. However, it did permit, under general laws, the formation of associations for the deposit of gold and silver, as long as they did not issue any form of paper money. California, as it turned out, remained a "hard-money" state right down to World War I. Paper money was accepted by institutions only at considerable discount, despite continual efforts of the federal government to the contrary.3^ California banking developed along two lines in the nineteenth cen. tury. On the one hand, there were commercial banking services rendered by individuals and private firms which were engaged in either the mercantile or express business—such as Wells, Fargo & Company. On the other hand, beginning in the mid-1850s, there were savings institutions, patterned after English building fund societies which were created principally to pool funds for lending purposes. THe first of these, the San Francisco Accumulating Fund (established in 1854) was the earliest predecessor of one of Wells Fargo's primary merger partners, the American Trust Company.33 Wells Fargo's initial experience in banking grew out of its acceptance of gold dust, coinage and bullion for safekeeping, deposit and transport, and the selling of exchange notes, drafts and letters of credit payable at Wells Fargo offices throughout the west and in distant geographic loca. tions. In the 1850s in particular, gold was the pre-eminent medium of exchange, standard of value and basis of payments for Californians, and it flowed readily out of California through San Francisco. To cite one example, in 1852 San Francisco Customs House manifests show gold shipments to be about $45,800,000. Of this, seventy per cent was bound for New York; ten per cent for London, and the remaining twenty per cent for New Orleans, South America and China.33 Since it has been loosely estimated that only 30The panic of 1855 is treated by: Loomis, Wells Fargo, pp. 72-92, and Hungerford, Wells Fargo, pp. 26-33. See also: Roger Lotchin, San Fran. cisco, 1846-1856: From Hamlet to City (New York, 1974). ^Banking history has certainly not been overexposed as far as California is concerned. The two classic works remain: Leroy Armstrong and J 0 Denny (eds), Financial California: An Historical Review of the Beginnings and Progress of Banking in the State (San Francisco, 1916); and Ira B Cross, Financing an Empire: History of Banking in California, 4 vols (Chicago, 1927). These works may be supplemented for the period after 1878 with the annual reports of the California State Bank Commissioners and, subsequently, the Superintendent of Banks. In California, the state constitution's prohibitions against banking corporations were reinforced by legislative acts until the mid-1860s. 33Wells Fargo Bank and American Trust Company merged in March 1960. 33Armstrong, Financial, pp. 38-42. See also: Frank Soule, John H Gihron and James Nisbet, The Annals of San Francisco (New York, 1855); and Hittell, A History. EASTERN BANKING about one-half of the total California gold production and movement was ever recorded during this early period, the size and attraction of the commodity in question was readily apparent. After 1859, with the great Comstock Lode strike in Nevada, silver became exceedingly important in the western economy and especially in the growth of San Francisco. Though no comprehensive analysis has yet been carried out on them, signature books for certificates of deposit in Wells Fargo's nineteenth- century San Francisco banking office suggest regular and sustained dealings between Wells Fargo and the Chinese community.^4 When these volumes are compared with existent express receipt books for the shipment of valuables, including gold dust and coin, throughout California, the pattern is clear. Wells Fargo's role as an express company provided the means for the movement of money; its role as a bank provided for its safekeeping in specie or dust form, or for its exchange into non- metallic financial instruments.^ The volume of business with the Chinese was, as might be expected, heavier where there were substantial Chinese communities. To cite one ran. dom example from an area outside of San Francisco, an examination of the business of Wells Fargo's Knights Ferry agency is revealing. Taking three- month sample segments of valuables shipped out of this mining town and trading post on the Stanislaus River over an eight-year period, the follow. ing turns up: Total No of Shipments - By Chinese 1869 (Oct-Dec) 167 32 19 1871 (July-Sept) 201 26 13 1877 (Oct-Dec) 104 25 24 The value of Chinese shipments in these instances ranged from $5 to $800, with most in the $20 to $300 range; in other words, items of some conse. quence given economic conditions in the 1870s.^6 The 1870s provide a number of other remarkable activities on the part of Wells Fargo in relation to its Chinese business. In the Company's 1871 Instructions to Agents and Employees for Wells, Fargo & Co.'s Express with Tariffs and Lists of Offices and Agents, the names and addresses of the principal Chinese merchants in San Francisco were produced in both Chinese and English.^ This was followed by separate comprehensive directories of Chinese -^Wells Fargo & Company Corporate Archives. Signature Books. Used to verify the signatures of customers. o c JJWells Fargo & Company Corporate Archives. Most of the early receipt books which remain are for towns outside of San Francisco. ■^^The Knights Ferry receipt books which provide a look at the business of a Wells Fargo agency over an extended period of time are in a private col. lection in California. 37()n an annual basis, Wells Fargo produced instruction manuals, lists of offices, and schedules of fees for the use of its agents. An extensive collection is maintained in the Company's Corporate Archives. WELLS FARGO businesses in major cities in California, Oregon, Nevada and British Colum. bia in 1873, 1878 and 1882. In these instances, the types of business which the merchants were engaged in were generally listed. The value of these directories was undoubtedly enhanced by the fact that Chinese busi. nesses were not regularly recorded in city directories of the period which were intended for English-speaking audiences. In fact, it appears that Wells, Fargo & Company was one of a very few, perhaps the only business in San Francisco to underwrite such publications.RR Another remarkable item from this same period is an English-Chinese Phrase Book that contains a complete list of Wells Fargo offices throughout the western states and territories. Compiled in 1875 by Wong Sam and his assistants, it was obviously intended for the use of Chinese customers. A phrase book, as such, was rare enough during this era; that it contains a listing of Wells Fargo business offices makes it extraordinary, especially when one considers that it was produced during the height of anti-Chinese sentiment in California.R^ All of these devices, though seemingly ordinary in the context of daily life, were exceedingly important in facilitating the communication of business information. That the Chinese availed themselves of Wells Fargo services is clear. In addition to the litany of Chinese names or designa. tions in receipt, statement and signature books, Wells Fargo franked enve. lopes addressed in both English and Chinese characters bear witness to the lines of communication that stretched across mountains, rivers and wilder. ness paths. The correspondence contained within some of the letters that escaped the ravages of frontier life, testifies to the hard times that Chinese sojourners and immigrants faced in their search for a livelihood not only for themselves, but for their families back in China.^ The capacity to send things to China was available to Wells Fargo via the Pacific Mail Steamship Company, whose side-wheel steamers made trans. pacific crossings as of 1867. Wells Fargo cash books of the era show regu. lar payments for services rendered on PMSS steamers, such as the China, though details on the nature of the shipments are lacking.^R RRA copy of the 1873 directory is located in the Bancroft Library, Univer. sity of California, Berkeley. Copies of the 1878 and 1882 directories are held in the Wells Fargo & Company Corporate Archives. R^Wong Sam (comp) An English-Chinese Phrase Book Together with the Vocabu. lary of Trade, Law, etc. Also a Complete List of Wells, Fargo & Co, 's Offices in California, Nevada, etc. (San Francisco, 1875). ^Wells Fargo1 s letter express was an important postal function that the Company offered in the second half of the nineteenth century, frequently in the absence of U.S. service, and eventually in conjunction with it. Characteristic of Wells Fargo markings on letters were pre-printed franks, cancellation marks and, in the case of the Pony Express, colored stamps. A number of these postal covers are in the Wells Fargo & Company Corporate Archives, while the Wiltsee Memorial Collection of Western Stamps, Franks and Postmarks is on permanent display in the Wells Fargo History Room, San Francisco. ^RFor instance, Wells, Fargo & Company Cash Book, 1867. On the Pacific Mail Steamship Company see: John Kemble, Sidewheelers Across the Pacific EASTERN BANKING Occasionally, official Company advertisements also referred to the China connection. The San Francisco Directory for 1867, for instance, noting that Wells Fargo was capitalized at $10,000,000, indicated that one of the services offered was: EXPRESS LINES To all parts of California, Nevada, Utah, Colorado, Montana, Nebraska, Oregon, Washington and Idaho Territories, British Columbia, Lower California and Mexican Ports, New York, Atlantic States and Europe, Yokohama, Hong Kong, Shanghae.^ Another advertisement from the same period, this one in a San Francisco newspaper, refers in part to: A General Express Business promptly attended to throughout the United States, Canada, Europe and the China coast. Bullion, coin and articles of special value shipped on the most favorable terms; issued if desired, under our Open Policies, with the best home and foreign companies. Charles McLane, General Agent for California Philip K Dumaresq, General Agent for China^ With such an expansion of its business, Wells Fargo occasionally lost shipments to highwaymen, or simply missent them. The reward circulars that were issued on such occasions are sometimes quite revealing in describing the nature of business. To cite an unusual example, one such letter from 1876 reads: Wells, Fargo & Co.'s Express General Superintendent's Office San Francisco, Jan. 13th, 1876 LOST - $70 REWARD To Agents: Missent or lost by Wells, Fargo & Co., Nov. 4th, or there. after, a box containing Opium, valued at $150; say 15 inches long, 6 inches wide, 4 inches deep, marked Hee Wo & Co., Helena M[ontana] Territory]. A reward of $50 will be paid to the (San Francisco, 1942); idem, A Hundred Years of Pacific Mail (Newport News, Virgina, 1950), extracted from The American Neptune (April 1950); and Robert A Weinstein, "North from Panama, West To the Orient: The Pacific Mail Steamship Company, As Photographed by Carleton E Watkins", California History (Spring 1978), pp. 46-57. ^The San Francisco Directory for the Year Commencing September 1867 (San Francisco, 1867) , fT! viii. Known as "Langley' s Directory" after pub. lisher Henry G Langley. ^Daily Alta California, January 1, 1867. WELLS FARGO finder, employe or otherwise, upon return of the box with con. tents intact, to this office. Also, Nov. 9th, a 10 lb. Tea box containing Chinese wearing apparel, valued at $15, marked Fook Lee, Reno [Nevada], for which a reward of $10 will be paid. Also Nov. 13th, a Chinese Trunk, 3 feet 6 inches long, 2 feet 1 inch high, 1 foot 6 inches wide, yellowish white color, copper handles on ends, locked with Chinese padlock; valued at $20, and marked Tong Lee, Washoe [Nevada], for which a reward of $10 will be paid. J. J. Valentine, Gen. Sup't.^ Despite these occasional miscues, Wells Fargo's Chinese customers appear to have maintained their faith in the Company's service network, as a letter from San Jose, December 3, 1888, reads: To Wells Fargo & Co. Gentlemen It is our desire, and wish, and we request that you deliver to Richard Healy, all letters, money packages, and all documents and parcels that come through your company for any Chinese in what is known as the Ah Fook Chinatown, located near the end of San Pedro Street in the City of San Jose. We are the Chinese merchants of that Chinatown. Respec t fully Quong Yee Chong, Chinn Shang Tong, Sing Cheny Wo Kee, Dr Y Chinng Lee, Quong Tuck Kee, Kim Cook Yuen, Mei Kim^ In addition to providing express and banking services to the Chinese, Wells Fargo, according to nineteenth-century cash books and expense ledgers, also employed Chinese personnel. Though the nature of their job functions is unclear, presumably they were active in handling the Company's contacts with Chinese customers.^ To sum up the nineteenth-century relationship of Wells Fargo to China and the Chinese: the Company, because of its role and structure as a bank, an exchange company, a mail service, a transportation company—and perhaps even as Samuel Bowles suggested "the ready companion of civilization"— provided a matrix of services which far-flung sojourners needed and could rely on. The fact that Wells Fargo was long-lived and eventually outlasted all of its early competitors in the West, where the largest numbers of Chinese were located, presumably was not overlooked by the Company's poten. tial customers. Nor, presumably, were the special marketing aids in the Chinese language that the Company produced. Long before anyone ever heard the expression "market segmentation" or "market penetration", Wells Fargo apparently was doing them with relation to Chinese customers. ^Original in Wells Fargo & Company Corporate Archives. ^Original in Wells Fargo & Company Corporate Archives. ^Cash books in Wells Fargo & Company Corporate Archives. EASTERN BANKING Epilogue Following the 1905 merger of Wells Fargo's banking business with that of the Nevada National Bank, Wells Fargo began to use correspondent relation. ships with financial institutions in Asia, the Pacific Basin and the Indian subcontinent to carry on its international banking business. Consistently listed among the Wells Fargo Nevada National Bank's correspondents in these areas of the world are the Hongkong and Shanghai Banking Corporation's offices in China, the Philippines, the Netherlands, East Indies (today, Indonesia), part of British India (today's Sri Lanka and India) and Japan. Though the exploration of the history of these relationships will have to await another day, a single souvenir of the meeting of Hong Kong and Cali. fornia might be of interest. 33. LOMBARD STREET ON THE RIVIERA: THE BRITISH CLEARING BANKS AND EUROPE, 1900-1960* by Geoffrey Jones I The history of British overseas banking in the nineteenth and twentieth centuries is largely unwritten. It is a sad reflection on the underdevel. opment of banking history that the work of A S J Baster remains the only acceptable general account of the subject.1 studies of specific overseas banks have accumulated over the years,2 but they have rarely approached the authoritative and multi-archival standards now being set in the Hongkong Bank History Project. This paper examines an even more neglected field: the foreign activities of the leading British domestic banks. It focuses on the generally unsuccessful attempts during the first half of the twenti. eth century by four of the Big Five clearing banks to extend their branch network to the Continent.3 It will soon become obvious that the story presents many interesting comparisons with the experience of the specialist overseas banks, and hopefully it may help to define some of the questions that we should be asking as we approach their under-researched histories. The pre-history of the involvement of British financial institutions with Europe stretched back for several centuries. Many merchant banks had traditional links with Continental countries. Joint stock banks had begun to take an interest in the late 1850s and the 1860s. This period saw the *1 would like to thank Barclays Bank International, Lloyds Bank Interna. tional, Lloyds Bank Ltd, the Midland Bank and the National Westminster Bank for permission to consult their archives. Edwin Green, Leslie Hannah and Leslie Pressnell, the archivists of the above banks and an anonymous referee made some very helpful comments on earlier drafts of this article. 3A S J Baster, The International Banks (London 1935). ^Sir Compton Mackenzie, Realms of Silver: one hundred years of banking in the East (London 1954); D M Joslin, A Century of Banking in Latin America (Oxford 1963); M Collis, Wayfoong: the Hongkong and Shanghai Banking Cor. poration (London 1965); Sir Julian Crossley and John Blandford, The DCO Story (London 1975). For a critique of the methodology adopted by many of these histories, see F H H King, 'British Chartered Banking: Climax in the East', in F H H King, Asian Policy, History and Development (Centre of Asian Studies, Hong Kong, 1979). -^It is regrettable that the official histories of the banks say very little about their Continental activities. See R S Sayers, Lloyds Bank in the History of English Banking (Oxford 1951), p. 251; T Gregory, The Westmin. ster Bank through a Century (London 1936), II, pp. 13-14. The subject gets most coverage in A W Tuke and R Gillman, Barclays Bank Limited (Lon. don 1972), pp. 56-73. EASTERN BANKING formation of a number of Anglo-European banks. The records of most of these banks was dismal. British banks in France, Spain, Italy and Germany were floated, and promptly sank. A partial exception was the Anglo-Aus- trian Bank, which failed as a deposit bank, but managed to survive by turn. ing itself into a typical European mobilier bank.^ During the second half of the nineteenth century a new feature was an influx of Continental banks to London. At first these were in effect merchant banks, but later in the century leading commercial banks also came. In 1879, the Dresdner Bank, Credit Lyonnais, the Comptoir National d'Escompte and other leading Continental banks followed. These banks were attracted by London's pre-eminent position in world finance, and particu. larly by the dominant role of sterling in the financing of international commerce. A contemporary estimated that there were thirteen 'first class' foreign banks with offices in London in 1898: by 1911 the number had grown to twenty-six. These banks soon secured a strong hold on the currency exchange business, which had previously been monopolised by the London merchant bankers. It was this aspect of the activities of the foreign banks which prompted a response from the British banks. The first response came from the Midland Bank, which perceived a threat to its 'correspondent' business. From the 1830s, and perhaps earlier, various British and foreign banks had entered into agreements whereby the British banks could draw on their foreign "correspondents", up to an agreed limit, when operating overseas. The foreign banks were granted the same facilities in London. One of the leading correspondent bankers was the City Bank, whose customers included a large number of merchant houses engaged in foreign trade. In 1898 the City Bank merged with the Midland Bank and this, combined with the transfer of Midland's Head Office from Birmingham to London in 1891, led Midland to emerge as a major 'correspondent' bank. A Foreign Banks Department, dealing with the correspondent banks' business, was established in 1902. Since the Midland Bank held its correspondents' accounts in sterling, easy and reliable access to foreign exchange was essential to this business. Therefore in order to avoid dependence on the foreign banks for foreign exchange, the Midland Bank in 1905 decided to open a foreign exchange department.* * * 8 This development was regarded by many, including the Bank of England, as highly unorthodox.^ Within a few years, however, two of the other clearing banks embarked on the far more unorthodox step of taking the battle against the foreign banks into their opponents' territory. In 1911 Lloyds purchased Armstrong & Company of Paris, formerly agents of important English banks. This bank was established as a foreign subsidiary of the Bank under the name of Lloyds Bank (France) Limited. The Bank, the General Secretary later observed, "was established mainly for the purpose of deal. ing with English-speaking people."8 To emphasise the point the Bank 4-Baster, pp. 40-50. 8W F Spalding, "The establishment and growth of foreign branch banks in London", Journal of the Institute of Bankers, November 1911. 8E Green, The Making of a Modern Banking Group (London 1979), pp. 66-71. ^Ibid, p. 72. ^General Secretary to R E Lambton, 3 Nov 1914, Lloyds Bank Ltd Archives proudly proclaimed—in English—that it was 'A British Bank conducted on British lines'. In September 1913 the London County and Westminster Bank joined Lloyds in France by establishing a subsidiary in Paris. This was also conceived as a British bank for British clients in France. Neverthe. less, the Westminster Bank was determined to make an impact in the French capital. The Bank purchased the property of a bank in liquidation in the Place Vendome, "in the heart of the Parisian fashion and jewellery world".9 These moves by Lloyds and the London County and Westminster Bank aroused even more public comment than the Midland Bank's foreign exchange department. Fears were expressed in the banking journals that the Conti. nental branches of British banks might lock up British deposits in long. term loans abroad, or lead the banks to abandon their 'safe' banking tradi. tions, or make London even more vulnerable to foreign banking crises.^ These issues were still being debated when the First World War broke out. II The next few years saw a substantial expansion of the activities of the British clearing banks on the Continent. Four factors encouraged this development. Firstly, the presence of large numbers of British troops on the Continent offered an immediate and attractive market for British depos. it banks. Secondly, the expulsion of German banks from Allied cities led to gaps in banking facilities which the British banks could fill. A third factor was that the British banks were led to believe by their representatives in foreign countries and by foreign bankers that there existed a considerable demand for their services. In 1911, a representa. tive of the Bank Franqaise told the Chairman of the Midland Bank, Sir Edward Holden, that "the French Banks were now desirous that English banks should go to Paris.The Midland Bank's representative in Petrograd in 1917 reported that it was "more certain every day that we are very much in request".In the early 1920s, Barclays' representative in Italy informed his Head Office that there was "little doubt that a British Bank would be heartily welcomed in Rome".13 it was unfortunate that all these represen. tations were very imprecise about why the British banks would be welcome in Paris, Petrograd and Rome. These invitations were strangely reminiscent of the joint stock bank's branch extension policies of the 1830s and 1840s. In that period a petition from an assortment of local dignitaries was often (hereafter LBL) File: Lloyds Bank (France), 28 July 1911-31 December 1914. 9 History of the Foreign Bank, n.d. National Westminster Bank Archives (hereafter NW) File: 1494. 10h V Burrell, "The opening of foreign branches by English Banks", Journal of the Institute of Bankers, January 1914. ^Green, p. 72. 12D A Miller to E Holden, 18/31 May 1917, Midland Bank Archives (hereafter MB) File: Petrograd Branch. 1% o Stevenson's Report on his recent visit to Rome, n.d. (71924), Barclays Bank International Archives (hereafter BBl). EASTERN BANKING taken as sufficient grounds to establish a branch office. This policy of expansion-by-invitat ion, based on the belief that a branch might survive on a few prestigious private accounts, had proved to be the downfall of some early banks. A fourth influence on the clearing banks was the Government and the Bank of England. During the War there was anxious debate over what was widely felt to be the unfavourable comparison between the industrial and commercial activities of British banks with those of the great German investment banks.^ in 1916 the President of the Board of Trade. Walter 1 Cr Runciman, urged British banks to be "a little more venturesome". J Later in that year an expert Committee chaired by Lord Faringdon recommended the formation of a British Trade Bank. This bank was to assist in the financ. ing of British overseas trade, and also to operate a foreign exchange department. "If industry is to be extended," the Committee reported, "it is essential that British products should be pushed, and manufacturers, merchants and banks must combine to push them."^ The resulting British Trade Corporation, however, did little "pushing" and soon expired. A related venture lasted longer, but was to end more disastrously. This was the British Italian Corporation, which was formed in July 1916 by a group of twenty-three British banks, including Lloyds, National Provincial and the Westminster Banks. It was supported by a State subsidy of ￡50,00 per annum for the first ten years, to be repaid without interest out of any profits over five per cent. The aim was to be "the development of the economic relations between the British Empire and Italy".^ The clearing banks were informally encouraged by the authorities to expand their branch network to the Continent. In 1917 the Government suggested to the Westminster Bank that it should open in Spain with the aim 1B of challenging the commercial supremacy of Germany in that country. A Barclays official in Italy in 1924 reported that "the British Embassy has been urging the entry of a British bank for considerable time past".^ The banks, with business booming, the Government encouraging, and the Continentals welcoming, rapidly expanded their European investments. Lloyds briefly transferred its branch to Bordeaux after the outbreak of War, but after the Battle of the Marne returned to Paris. By the end of 1915 it had moved to new premises in the Place de l'Opera, "possibly the most prominent site in any European capital".^0 The business grew rapid. ly. In 1917 the National Provincial Bank decided to acquire a half share in the bank. The new company was named the Lloyds Bank (France) and National Provincial Bank (France) Ltd. By the end of 1917 the Bank had branches in Paris, Biarritz and Bordeaux, Le Havre, Marseilles and Nice. S Foxwell, "The Financing of Industry and Trade", Economic Journal, December 1917. l^Baster, PP‧ 193. i6Re port of the Departmental Committee on Financial Facilities for Trade, 31 Aug 1916, Cmd 8346 (1916). ^Baster, pp. 194-98. l^Rae, Report on Spanish Branches, 10 Mar 1922, NW File: 1642. ^Stevenson. ^Notes for Cunnick by Bell, 29 June 1917, NW File: 4243. In 1919 and 1920 branches were opened in Belgium in Brussels and Antwerp, in Germany in Cologne, and in Switzerland in Zurich and Geneva. In 1921 new French branches were opened in Cannes, Roubaix and St Jean de Luz. By that year the Bank, with a capital of ￡480,000, had a staff of 1,073 employed in France. The Westminster Foreign Bank followed a similar pattern of expansion. New branches were opened at Bordeaux and Madrid in 1917, Barcelona in 1918, Bilbao, Antwerp, Brussels, Lyon, Marseilles and Nantes in 1919, and Valen. cia in 1920. By the following year the staff numbered 1,660.21 Barclays followed Lloyds, National Provincial and Westminster into Europe after the end of the War. Barclays' association with France origi. nated in the activities of Cox & Company, the Army Agents. Cox & Company followed the British expeditionary Force to France in 1914. In 1915 a separate company, Cox & Company (France) Limited, was incorporated, to which the London and South Western Bank soon subscribed half the share capital. In January 1918 the London and South Western Bank merged with London and Provincial Bank, and in the following October this new combina. tion merged with Barclays. By then Cox & Company had branches in Paris, Boulogne, Le Havre, Rouen, Marseilles, Lyons and Amiens. During 1919 branches were opened in Cologne and Algiers, during 1920 in Nice, Menton and Cannes, and during 1921 in Monte Carlo. In 1922 the business was completely taken over by Barclays, which formed Barclays Bank (Overseas), renamed Barclays Bank (France) in 1926. Barclays also acquired half the share capital in the Banque de Commerce of Antwerp.22 The motives of Barclays in these years were ambitious, even perhaps grandiose. The Chairman, F C Goodenough, shared some of the philosophy of the Faringdon Committee. In August 1917 he wrote of the "coming struggle for the markets of the world". Bankers, Goodenough argued, were to play a key role in this struggle, providing "not only, or even principally, finan. cial help, but rather the hearty co-operation of the Banker in discovering fresh outlets for the manufacturer's wares". If this was to be achieved, Goodenough concluded, it was essential "that the Bank should have not only what is usually termed a "Correspondent" in the principal centres, but rather a Branch or the nearest approach to a Branch that can be arranged".23 The expansion of Lloyds and National Provincial, Barclays and Westmin. ster on the Continent was both rapid and ambitious. By the early 1920s, however, it began to dawn on the parent banks in London that perhaps it had all been rather too rapid and ambitious. After the end of the War the Westminster Bank, which had undergone the greatest expansion, began to take stock of its Continental investment, and its officials did not like what they saw. In 1919 Charles Lidbury, a tough young Bank Inspector who was later to become first superintendent of Foreign Branches and subsequently 2^Rae's Report on the Position and Prospects of the Foreign Business, 15 May 1923, NW File: 1642. 22xuke and Gillman, pp. 56-58. File Cox & Co London and Cox & Co France Ltd, BBI. 23Memorandum by F C Goodenough, 31 Aug 1917, BBI File: Private Papers of F C Goodenough. EASTERN BANKING Chief General Manager of the Westminster Bank for seventeen years, con. ducted an inspection of the Paris branch. His highly critical report outlined the adverse consequences of the Bank's rapid, but ill-planned, expansion on the Continent.2^ The other banks experienced similar prob. lems. Large staffs and expensive premises had been purchased, but the lack of knowledge of local banking and financial conditions, and the lack of guidance from Head Office, was soon leading to a worrying failure to earn profits and a growing number of bad debts. By the early 1920s the Board of the Lloyds and National Provincial Foreign Bank were also concerned about the performance of their Continental branches. In 1921, in an attempt to improve the quality of the Managers, the Board decided that "an endeavour be made to find a number of young Public School men for service in the Bank".^ They proved of little help. In 1922 the Zurich branch was closed, and it was decided that the Bank would not expand into any country where it was not already represented. There was, however, no Lidbury-type scourge on the Bank, with the result that the organisational and personnel legacy of the early years was left to hang over the Bank until it nearly ruined it in the early 1930s. The Midland Bank was the only member of the "Big Five" clearing banks which had stood apart from the extension of branch banking to the Continent during the War. This was at first more by accident than design. Holden, the Chairman, called publicly in 1914 and 1917 for the British Government to assist British bankers in securing the lifting of the alleged legal and fiscal discrimination against British bankers in France, Spain, Italy and other countries. 26 The implication was that the Midland Bank would have been interested in going to those countries if it could be assured of fair treatment. It was perhaps providential for the Midland Bank that the two European countries it was most interested in, Russia and Spain, offered the least hospitable conditions for an expansion of the Midland's branch banking. Before 1914 Midland had built up a valuable business in municipal loans in Russia. In 1913 one of the clerks at the Foreign Exchange Department was sent to work at a Bank in* St Petersburg (soon to be renamed Petrograd), and in 1917 it was decided to acquire property in that city for an agency.2? Holden, however, was never convinced of the wisdom of this step, and he was exceptionally cautious after the February 1917 revolution. In May the Mid. land Bank's representative in Russia reported that Lenin, "the pro-German provocateur and down-with-everything sort of gentleman", had disappeared from Petrograd.28 Holden, however, rightly perceived that Lenin would not remain hidden for long, and no branch was opened in Russia. Spain seemed almost as unwelcoming as Russia in 1917, and it took a Midland representa. tive in Madrid barely a month to decide that the Bank should not interest ^^History of the Foreign Bank. Lloyds and National Provincial Foreign Bank Board Minute Book, Minute 27 Jan 1921, Lloyds Bank International Archives (hereafter LBl). ^chairman's Report to Annual General Meeting of Midland Bank, 23 Jan 1914 and 26 Jan 1917. ^Midland Bank Board Minutes, 2 Feb 1917, MB. 28d A Miller to E Holden, 24/7 May 1917, MB File: Petrograd Branch. itself in that country.^9 Midland got nearest to opening a Continental branch in Paris, but again providence took a hand. In 1917 the Midland Bank tried to buy Lloyds Bank's old property in Paris. When Lloyds discov. ered the identity of the would-be purchaser—"the greatest rival of the Lloyds Bank"—they refused to sell. This episode brought to a discouraging end Midland's schemes to enter Continental branch banking.30 A virtue was soon made of this abstinence from Europe. The Midland Bank began to emphasise the advantages, both to the bank and the British economy, of concentrating on the 'correspondent' business. When Holden gave evidence to the Standing Committee on Bank Amalgamation in January 1918, he spoke against the Joint Stock Banks opening branches in foreign countries, "with the exception perhaps of France". Instead he suggested that British industry could best be helped by "cultivating a connection with foreign bankers themselves". "By adopting these methods," Holden continued, "we retain the use of our own Deposits to further our own indus. tries instead of sending them abroad to develop the industries of other countries to compete against our own".^ Holden, however, did not share the insularity and parochialism of many businessmen of this era. He was probably more concerned with Continental affairs than any of the other chairmen of the joint stock banks. In his speeches he repeatedly made comparisons between the British, French and German economies, and he berated the parochialism of some of the financial institutions in London. "Any view of the financial situation which is con. fined to local occurrences in Lombard Street," Holden observed in 1914, "is worse than useless, owing to the growing international character of the world's money markets."^2 In 1918 the correspondent business of the Midland was greatly rein. forced by the merger with the London Joint Stock Bank. This was perhaps the most experienced of all the banks in overseas business, possessing by the time of the merger seventy foreign agencies and total acceptances of over ￡2.5 million.33 After Holden's death it became the orthodoxy in the Midland Bank that the correspondent business was infinitely preferable—and more profitable—than foreign branch banking. The growing number of Euro. pean banks which banked with Midland was ascribed to the fact that the Bank had, as the new Chairman put it in 1921, "refrained from competing with our foreign friends in their own country". This view was probably well- founded. Both Lloyds and National Provincial lost French and Belgian busi. ness when their Continental subsidiary was established.^ ^Midland Bank Board Minutes, 2 Feb 1917 and 16 Mar 1917, MB. 30S B Murray to E Molina, 27 Apr 1917; Molina to Murray, 23 July 1917, MB File: 30/213-7. 3^Sir Edward Holden's Statement to the Standing Committee on Bank Amalgama. tions, 12 June 1918, MB. -^Chairman's Report to Annual General Meeting of Midland Bank, 23 Jan 1914. J~>Green, p. 67. -^Chairman's Report to Annual General Meeting of Midland Bank, 28 Jan 1921. The new chairman was the Rt Hon Reginald Mckenna. 33C Jones and H Barrelet, Report on Investigation Carried out in Paris, 25 Apr 1938, NW File: 4246. EASTERN BANKING III The years from the early 1920s to the outbreak of the Second World War proved traumatic for all three of the subsidiaries of the British clearing banks on the Continent. Beginning with a trade depression and ending with the Nazi occupation of most of Europe, the two decades proceeded through inflation, deflation and depression. The British banks, still suffering from the legacy of their ill-planned and over-ambitious origins, did not fare well against these general economic trends, sinking badly in the troughs and failing to take advantage of any remaining opportunities. The original reasons for the banks' European role evaporated one by one in this period. The British Army finally withdrew from the Continent in 1925 when the Cologne garrison was evacuated. The foreigners proved far less welcoming than had been supposed. Moreover, the banks began to meet official hostility, rather than support, for their Continental ventures. From the early 1920s the Bank of England sought to discourage the clearing banks from operating in foreign countries. The banks' commitments in South America and Africa received most attention. In 1925 the formation by the merger of three overseas banks of Barclays Bank (Dominion, Colonial and Overseas) was followed by a Bank of England decision to close down the accounts of the overseas banks controlled by the clearing banks. The Bank of England refused to open an account for Barclays (DCO) right up to the Second World War. This policy did not prevent Barclays and Lloyds, in particular, from expanding their overseas activities, although it did inconvenience them.3^ The relatively small European operations of the clearing banks attracted only marginal hostility from the Bank of England. In the late 1920s, however, the Bank was forcefully reminded of the dangers of Continental entanglements by a crisis affecting its own part-creation in Italy. The Banca Italo-Britan- nica, which was wholly owned by the British Italian Corporation, had been allowed to go its own way during the 1920s with very little control from its British owners. "Irregularities" occurred in the Bank after 1926, and three years later it was hit by a series of large losses. It was discov. ered that ￡2 million was required immediately to save the Bank. The Bank of England was obliged to put up ￡250,000, which it did on condition that three clearing banks who were among the shareholders put up the remaining sum. In 1930 the bank was sold off to the American Blair-Giannini group, with total losses to its British shareholders of ￡3 million. The Bank of England eventually wrote off its ￡250,000 loan, which did not endear the Bank to the Continental adventures of the clearing banks.37 The Lloyds and National Provincial Foreign Bank fared worst of the three subsidiaries of the clearing banks in the interwar period. The Bank was unclear what kind of business it wanted. During the 1920s hopes were still high that there were sufficient British people on the Continent for the Bank to justify itself merely by serving them. During the middle 1920s a string of new branches were opened on the Riviera, in Mentone, Monte Carlo and Le Touquet. A business also developed in the accounts of the 36r s Sayers, The Bank of England 1891-1944 (Cambridge 1976), II, 243-48. 37Ibid, pp. 259-63. Continental subsidiaries of British companies, most of whom banked with the parent banks. The foreign bank held the accounts of the Continental sub. sidiaries of the Anglo-Persian Oil Company, Dunlop, Rolls Royce, Debenhams, Liptons and Schweppes. The Bank was slow in deciding to do business with French and Belgian companies. In November 1918 a proposal that the Bank should advance large sums to Belgian industrial concerns was rejected on the grounds that it "would not suit the Bank".3R It took nearly another decade before the Bank decided that there simply was not enough "British" business on the Continent to justify its existence and that it had become seriously involved in local commerce. In 1927 the Board recorded its general opinion "that it would be better to open up in large commercial towns rather than in seasonal places".39 Only exceptional managers, how. ever, had the ability to build a foothold in local business. At Roubaix a dynamic manager did establish a firm base in the local woollen industry, but this was the exception rather than the norm. Most of the branches in the 1920s made significant profits only on exchange dealings. The Monte Carlo branch made money from the casino business. Geneva built up a good profit from the dollar and sterling balances received from the League of Nations, which were let out to other banks. By the end of the 1920s Lloyds and National Provincial Foreign Bank appeared to have established only a diffuse and rather precarious busi. ness. There were fundamental managerial problems, a difficulty which was to affect all the British clearing banks in Europe in the inter-war years. A report on the Paris-based Head Office and General Management in 1931 found "a general absence of any organised control of the business and policy of the Bank as a whole".^ Individual managers and departments went their own way. Lending was not properly supervised. While the total number of accounts in the Bank fell from 32,089 to 31,707, and the total number of staff from 1,277 to 1,271 between 1928 and 1930, salaries and allowances increased from ￡255,728 to ￡283,172 and "expenses" from ￡121,494 to ￡149,861 over the same period.43 After 1928 an increasing number of unwise, and unsecured, advances were made, which had the effect of temporarily boosting the Bank's profits in those years. The onset of the Depression in 1930, however, turned these advances into Bad Debts. On one Paris account the Bank eventually lost ￡484,000. By January 1931 a further ￡40,000 had been lost in the Antwerp diamond trade, including ￡33,400 on one account.4^ The Parent Banks came to their subsidiary's rescue. In 1931 ￡450,000 of the bad debts were guar. anteed by subsidiaries of the Parent Banks. A further ￡450,000 guarantee was given between 1932 and 1935.43 During 1936 the guarantee was can. celled, and the Parent Banks "gave" the subsidiary ￡900,000. Lloyds and National Provincial Foreign Bank was left with a large frozen debt. In 3RBoard Minutes, 28 Nov 1918, LBI. 39Ibid, 16 May 1927. ^Report by F A Bease and C W Riches, 11 Mar 1931, NW File: 4245. ^llbid. ^Board Minutes, LBI. 43Lloyds and National Provincial Foreign Bank, Report 20 Dec 1935, NW File: 4248. EASTERN BANKING June 1935 the proportion of non-revenue producing assets to total deposits had reached twenty per cent. Table 1 provides a rough indication of the Bank's financial perform. ance in the inter-war years, although these figures do not incorporate the "special payments" made by the Parent banks to the foreign subsidiary during the 1930s. Table 1 Lloyds and National Trading Results Provincial Foreign Bank:^ 1911-1942 (￡ sterling) Years Cumulative Profit after all expenses and appropriations Dividend Paid Bad Debts (Provision less releases) Cumulative Profits in Exchange 1911-14 70 — 1,600 — 1915-18 11,740 15,945 43,368 22,456 1919-22 67,006 75,681 128,073 837,911 1923-26 56,673 75,600 63,037 1,408,619 1927-30 28,261 91,800 331,924 1,583,448 1931-34 22,515 — 325,483 1,947,241 1935-38 29,961 - (815) 2,318,667 1938-42 101,153 — (839) 2,439.051 Source: NW 4252. The cumulative profit figures show that the Bank's fortunes peaked in the early 1920s and that the performance was extremely bad during the 1930s. Some ￡637,000 had to be charged to profit and loss as provision for Bad Debts in the years 1930 to 1936. In the summer of 1931 London changed the General Management in Paris. Although the new management was rather more conscientious, the business did not prosper, and the Bank survived only because of the continued support of the Parent Banks. By the early 1930s the Riviera business was almost non. existent, and one by one the Riviera branches were closed. Only Monte Carlo stayed reasonably profitable in the 1930s, living off the deposits of French and British visitors to the Casino, these visitors' transactions on ^The capital of the Bank was $40,000 in 1911. This was raised to ￡64,000 in 1913, ￡240,000 in 1914, ￡480,000 in 1917 and ￡1.2 million in 1929. The published reserve (there were also other reserves) was ￡3,011 in 1919. This was raised to ￡9,257 in 1920, ￡100,000 in 1921, ￡150,000 in 1924, ￡240,000 in 1926 and ￡250,000 in 1929. It was reduced to ￡150,000 in 1930 and stayed at that level for the rest of the decade. the British and American Stock Exchanges, and a growing amount of refugee money. The closing of the Riviera branches was a part of a new strategy devised by the Bank's Chairman, Colin Campbell (of the National Provincial Bank). The aim, Campbell wrote in 1936, "was to concentrate [the] business in France in as few places as possible and to work in commercial and indus. trial centres rather than in residential and luxury ones".This new policy was only a very limited success. The Roubaix branch developed its position in the woollen business of the area and earned an average of ￡10,000 per annum between 1928 and 1937. Le Havre developed a large acceptance business in the port's cotton trade, and had connections with the coffee and other produce markets. Antwerp developed rather on the lines of a merchant bank, building a well-spread commercial business. The branch financed the grain, timber, coffee, wool, meat and canned goods trades, and had connections with the Verviens spinning and wool weaving industries. The problems in securing local commercial business, however, were considerable, and only the ablest managers achieved it. Local banks were often intimately connected with local business interests. The Lille branch was faced with inter-locking directorates between the local cotton and flax spinning industries and local banks. The Bank almost always found itself at a disadvantage when competing with local banks "both as to commercial and local knowledge, and because the type of native business will be second rate and frequently dangerous".^6 Moreover, strong cartel arrangements between banks in France considerably restricted the freedom of manoeuvre of the Foreign Bank. Table 2 provides a profile, by nationality, of the sources of deposits of, and the advances made by the Lloyds and National Provincial Foreign Bank by the end of 1937. The greater part of the deposits were in ster. ling, a fact which was to contribute greatly to the Bank's difficulties in the mid-1930s. By the end of 1937, following a period of declining franc deposits, 12.3 per cent of the Bank's deposits were in French francs, 5.9 per cent in Belgian francs, 5.1 per cent in Swiss francs, 13.6% in U.S. dollars, and almost all the remainder in sterling.^ Thus the Bank, although its principal field of activity was France, was in a situation where its French franc deposits were less than one fifth of the total of its deposits in sterling. The sterling could not be employed for advances, while the francs regularly proved insufficient even for current requirements. Moreover, the franc deposits showed high vola. tility, partly because they were held by relatively few people. In Decem. ber 1937 twenty-two per cent of the franc deposits were in twenty-four hands. During one week in May 1936, when the Popular Front Government was formed, some F35 million (￡240,067) were withdrawn. The Bank, by contrast, could not dispose of its sterling deposits, of which less than nine ^Colin Campbell to Cecil Jones, 30 July 1936, NW File: 4244. “^Report by Riches, 10 Dec 1935, NW File: 4247. Report of the Investiga. tion by J Penny Edwards and W B Mayles, 31 Mar 1938, NW File: 4251. ^Edwards and Mayles. The British total for advances in Table 2 includes ￡222,000 advanced to French companies under foreign (mainly British) control. EASTERN BANKING Table 2 Deposits and Advances of Lloyds and National Provincial Foreign Bank, by Nationalities, December 1937 (in ￡ sterling) Deposits % Total Advances % Total British 2,139,000 15.6 611,000 31.0 French 5,552,000 40.6 489,000 24.8 American 1,323,000 9.7 21,000 1 . 1 Belgian 1,381,000 10.1 669,000 34.0 Swiss 479,000 3.5 1 ,000 0.1 Others 2,799,000 20.5 178,000 9.0 Total 13,673,000 — 1 ,969,000 — per cent was lent.48 The main profits of the Bank were derived throughout the period from exchange earnings. Table 1 provides an indication of their importance to the earning capacity of the exchange profits. The Riviera branches, Paris, Brussels, the London branches of the Bank in the City and Haymarket, were all heavily dependent on exchange earnings. Even at a commercial branch such as Le Havre, exchange earnings contributed forty-two per cent of the total working profit in 1936.49 The difficulty with this situation was that these earnings were highly unpredictable and varied widely from year to year. The Paris branch, for example, made a total profit in exchange of ￡677,025 between 1918 and 1933. The mean was ￡42,314 per annum, the lowest earnings ￡4,819 in 1919, and the highest ￡202,330 in 1921.^0 The Bank could never take a level of earnings for granted from one year to the next, and throughout the period the management longed for profitability to be based on 'ordinary' or 'normal' banking business. In 1935 and 1936 the Bank was badly hit by a crisis of the French franc. The Bank's accounts were always greatly influenced by fluctuations in the rate of exchange, for the simple reason that its capital and reserves were held in sterling. By the early 1930s a general pattern had emerged that the French branches made an overall loss, while the London end of the business made a profit. Every year, when the Profit and Loss account was drawn up in sterlng, it was necessary to remit from London profits a sufficient number of francs to liquidate the deficit in the French Profit and Loss account. Fluctuations in the exchange rate made a significant impact on the size of these transactions. In 1931 the rate was 48Ibid. 49Ibid. ^Paris, Profit and Loss figures Cl J1Balance Sheets and AGM Papers, 1947, NW File: 4252. from 1918, NW File 4252. 1923, LB1, Profit and Loss 1946, JEH, May 115 francs to the pound. It fell to F83 in 1935, and then rose to F124 in 1937. These movements affected the Bank's overall "profitability". In 1935, for example, the Bank made a loss in francs of Fll,317,000. At the prevailing exchange rate of 75 francs to the pound, London had to transmit ￡151,000 to France. During the same year, total profits in London amounted to ￡121,000 and branches in other countries earned ￡15,000, so the net result was a declared "loss" of ￡15,000. A lower exchange rate would have transformed this "loss" into a "profit".52 During 1935 Lloyds and National Provincial Foreign Bank began to be seriously affected by the growing crisis of the French franc. The "Poin. care franc", established in 1928, came under increasing attack on the exchange markets. From the early 1930s the lack of confidence in the currency led to increasing franc withdrawals as depositors switched to dollars or sterling securities or cash. During 1935 this trickle became a flood. French franc deposits in the Bank fell by thirty per cent during 1935.^3 The Bank, already short of francs and with many of its assets frozen in bad debts, was faced with a liquidity crisis. The Bank was reluctant to buy francs in London and transmit them to France, for if devaluation occurred the francs sent over would have had a smaller sterling value than the sterling resources used to purchase the francs. So the Bank resorted to raising francs on the "forward" exchange market. As the market was working at a discount of some 6/16 per cent throughout 1935, a heavy loss on each transaction resulted.5^ The Foreign Bank was unable to meet this heavy cost, and at the end of 1935 the Parent Banks were obliged to give it a "gift" of ￡150,000.55 Despite this, the Bank was eventually forced to buy francs outright at rates from F75 upward. The situation was not saved until the new Blum government decided to devalue the Franc in September 1936. The "horrible nightmare", the General Manager wrote, was finally over.56 Other nightmares remained. The Bank had been hit, as were all British banks, by the "Standstill" agreements which had been negotiated in 1931 following the Austrian banking crisis in May of that year. The first Standstill agreement, signed on 19 August 1931, had aimed at precluding any attempt at the mass withdrawal of deposits and credit facilities from, in particular, Germany. It bound creditors in Britain, France, America and seven other countries to maintain their acceptance, time-deposits and cash advances for a period of six months. The agreement was subsequently renewed every year, becoming an exclusively Anglo-German arrangement. By September 1934 Britain was owed some ￡34 million.52 Under the "Standstill" agreement, Lloyds and National Provincial Foreign Bank were left with a 52Memorandum on French franc devaluation, 26 Oct 1936, NW File: 4244. 53Report of Investigation by Riches and Stanley, 10 Dec 1935, NW File: 4247. 54 55 56 57 Lloyds and National Provincial Foreign Bank Ltd, Report 20 Dec 1935, NW File: 4248. Memorandum of Special Payments made by (National Provincial Bank) to L and N P, 1943, NW File: 4252. Cecil Jones to Colin Campbell, 26 Sept 1936, NW File: 4244. Sayers, pp. 503-12. EASTERN BANKING liability of ￡602,000, Swiss Fl,112,800, and French F12,467,000. Although the interest was paid, the "disturbing query", as one bank memorandum put it in December 1935, was whether the "principal amount [was] to be regarded as a doubtful debt".^* * * 6 It was gradually realised that this was one more frozen asset. The Parent Banks once again had to come to the rescue. In 1936 the Parent Banks made a Special Payment of ￡200,000 to the Contingency Fund as a reserve against losses likely to accrue from the Standstill debt, and a further ￡250,000 was subscribed to cover losses on the Standstill ‧ ‧ 5Q position. 7 A further blow came in 1937, when "irregularities" were discovered at the City Office of the Bank. This was one of the few profit-making branches, but the problem was really that the profits had all stemmed from speculative exchange transactions.60 The affair at the City Office finally provoked major reforms. The extremely able manager of the Roubaix branch was transferred from Paris to London. The policy of reducing branches, especially in tourist centres, was extended. In 1934 and 1935 the Bank had attempted to persuade the Westminster and Barclays to agree to a rational reduction of the number of branches owned by the three banks in France.6^ After the two other banks had refused to co-operate, Lloyds and National Provincial took unilateral action. Cannes and Nice were closed in July 1938, Biarritz, St Jean and Pau in October 1938.6^ Moreover, in December 1938 it was finally agreed that the phrase "A British Bank conducted on British lines" should be omitted from the Bank's advertisements.*^ The Board and its Chairman, Colin Campbell, watched the events of the late 1930s with increasing pessimism. In October 1937, after the revela. tions of the City Office irregularities, Campbell spoke of his desire to secure "a gradual curtailment of the business in the hope that a way may be found in a few years time for getting out altogether". The Bank, he con. tinued, "gets no help from any quarter ... we only get the leavings of business from the commercial community; and we are told quite frankly by the Bank of England that there is no scope for us in France and that we are not wanted there. Under these circumstances it is indeed an uphill fight that we are engaged in."6^ By 1939 it was obvious that the Bank had got the worst of the "uphill fight". Disaster had followed disaster, and the Bank had only survived through the support of its two Parents. Between 1921 and 1939 Lloyds and National Provincial had received total dividends from their subsidiaries of ￡203,000. In return, they had paid out during the 1930s ￡900,000 to cover bad debts in France, ￡150,000 to cover the "swap" operations in 1935, and ￡450,000 to meet the German Standstill debts. For much of the decade, a 1937 report observed, it appeared that "the Bank was run mainly for the benefit of the staff". Between 1932 and 1936, while total net profit was a 66Final Report by Riches and Stanley, 10 Dec 1935, NW File: 4250. ■^Letter to Cutting, 11 Dec 1936, NW File: 4250. 60Full Inspection: City Office, 18 Nov 1937, NW File: 4246. 6^Board Minutes 1934 and 1935, LBI. ^Committee Meeting, 12 May 1938, NW File: 4253. ^Board Minute, 22 Dec 1938, LBI. 64-Colin Campbell to Alwyn Parker, 25 Oct 1937, NW File: 4244. LOMBARD STREET ON THE RIVIERA bare ￡13,000, the total paid out in salaries and allowances was ￡1,777,000.65 The Westminster Foreign and Barclays Bank found themselves equally engaged in an "uphill fight" during the inter-war years. They too were hit by irregularities, German Standstill and the crisis over the franc, al. though in comparison with the Lloyds and National Provincial Foreign Bank their performance seemed almost successful. The Westminster Foreign Bank came to grief early in its life in Spain. In the immediate post-war period various fiscal measures, such as a tax on the total amounts of foreign banks' nominal capital and reserves, greatly reduced the opportunities of the Bank conducting profitable opera. tions in Spain. Bad management, however, was the main weakness of the Bank. The Bank was soon hit by the same story of bad debts and declining business that had plagued the Lloyds and the National Provincial Foreign Bank. A report in March 1922 discovered that the Barcelona branch had a mere thirty-two depositors. In Bilbao, the staff costs exceeded the total gross income from all sources. Only the Madrid branch made reasonable profits, although again largely from exchange transactions. As a result of this report it was decided to close all the branches in Spain except Madrid.66 Madrid itself, however, was hit the following year by agitation by the bank clerks' syndicate. The Westminster Foreign Bank refused to negotiate with the union, and the Madrid branch was also closed. The liquidation of the Madrid branch was finally achieved in March 1924, and ft 7 the whole Spanish venture written off at a cost of ￡81,247. The Bank continued to operate in France and Belgium. The policy was tightly controlled from London; an attempt had been made to control all the French branches from Paris in 1919, but this had been reversed after the Lidbury inspection later that year. From 1920 all branches were individ. ually accountable to the London management of the Bank. Lidbury's policy was one of extreme "caution and providence". 68 The Bank had got off to a spectacularly unsuccessful start. By March 1921 it had accumulated a trading loss of ￡426,063 and total loss to the Parent had amounted to ￡965,810.^9 Lidbury was determined that such losses should never reoccur. Indeed, although he could see no immediate way of the Bank extracting itself from the Continent, for a time he hoped for a merger of all three of the British banks on the Continent. "Where there is no permanent liveli. hood for three," he wrote in 1922, "there may be quite a decent thing for one. The great difficulty for the Bank in the inter-war years was that Lidbury's tight conservative control left no room for any expansion of the business. From the middle of the 1920s the Bank began to experience falling deposits in France. During 1927 one member of the Board argued for a new strategy for the Bank, based on the "development of the commercial ^Edwards and Mayles. 66Rae, Report on Spanish Branches. ^Historical notes, n.d. NW File: 1494. 6°Hugo Baring to Rae, 4 Apr 1927, NW File: 1642. 69jbid, Report by Rae and Barthorpe, August and September 1921. 70lbid, Lidbury to Rae, 15 Aug 1922. EASTERN BANKING side of our business". This meant that Head Office should not control too closely the local managements and what control it did exercise should be "judiciously and sympathetically exercised, without carping criticism, and with the recognition of possible differences of method in the examination and appraisement of any proposal entailing risk".7-*- Lidbury's highly con. servative policy, however, was maintained, and with hindsight it is clear that this was the right policy. The Westminster Foreign Bank was affected both by Standstill and by the cost of the franc crisis in 1935 and 1936, which it was also forced to meet by "swapping". ^ The Bank was also not immune from "irregularities". In the early 1930s the Bank lost Fl million through defalcations at the Paris branch. The Bank, however, was spared the very serious bad debt position and trading losses of the Lloyds and National Provincial Foreign Bank. Barclays Bank (France) also fared badly, although not as badly as the Lloyds and National Provincial Foreign Bank. During 1921, the last year of Cox & Company's (France) existence, the business had made a trading loss of F20.5 million.Barclays subsequently experienced more problems than they had anticipated in making the business profitable. Ignorance of local conditions and ill-advised lending led to a growing bad debt problem. By 1925 the Bank was described as experiencing "hard times".^ During the early 1930s the Bank's fortunes in France fell to their lowest point. "Conditions in France are very bad and getting worse," a memorandum observed in November 1934. "In many of its Branches the Bank finds it impossible to make profits, and its reserves are practically exhausted.Apart from the external problems faced by the other two Banks, Barclays Bank (France) was additionally handicapped by two other problems. The first was that many of the Bank's branches were housed in very lavish premises, with "more than twice its capital locked up in this way". The second problem was that by 1934 Barclays Bank (France), for reasons of Group policy, had accumulated investments worth ￡315,345 in Barclays' loss-making Italian venture and the Banque de Commerce in Antwerp, and the tying up of the Bank's assets in these ventures had an additional depressing effect on its profitability.^ In 1935 the Board decided on a policy of strict economy measures in levels of staff and salaries. Barclays Bank (France), however, was a comparative success compared to Barclays' investments in Italy. This was the most bizarre of the Conti. nental schemes of the British banks. In October 1924 Barclays Bank was promised that if it opened in Rome, it would be guaranteed "within a very short space of time . . . the custom of most important Religious Societies ^Ibid, Hugo Baring to Rae, 4 Apr 1927. ^"Secret" Memorandum, 13 June 1936, NW File: 494. ^Cox & Co (France) Ltd, 25 Jan 1922, BBI File: Cox & Co (London) and Cox & Co (France) Ltd. ^H J Whitaker to F C Goodenough, 14 Apr 1925, BBI File: Chairman's Over. seas Filing-Papers Concerning setting up and ultimate closure of Barclays Italian Subsidiary. ^^Memorandum, 21 Nov 1934, BBI. 76jbid. LOMBARD STREET ON THE RIVIERA in Rome, including that of the Vatican".77 An International Estates Com. pany was planned, which it was hoped would eventually control the Church's finances and "lay the foundations of an organization which might ultimately develop into a commercial Vatican".* * * 7R Barclays were to become the bankers of the "commercial Vatican". The Chairman of Barclays, F C Goodenough, responded eagerly to this proposal, and plans for a Rome branch proceeded quickly, with the prospect of the rich business to be secured during the 1925 Holy Year acting as a major incentive. ￡100,000 was spent on buying a building in Rome, and in 1925 a branch of Barclays Bank SAI was opened strategically situated at the foot of the Spanish Steps in the Piazza di Spagna. Barclays' aim, Good- enough wrote to Duncan Balfour, the resident Director in Italy, in February 1925, was "to carry on a quiet private business, not launching out into commercial business in Italy".7R At first all went well. By March Balfour was able to report to Good- enough that on both "the religious side and the commercial the Bank is undoubtedly progressing". Balfour had seen the heads of the Augustinians and the Jesuits, and they had promised Barclays some business. He had also had great hopes of large deposits from one order of English nuns, who "when they go to St Peter's to Mass invariably proceed there in their own private cars, and they live in one of the most magnificent houses in Rome".RR At the beginning of 1926 the Vatican itself placed a small deposit at the Bank, and a new branch was soon opened at Genoa. Unfortunately, this proved to be the high point of Barclays' busi. ness. The scheme for a "commercial Vatican" collapsed. By the end of 1927 problems were arising from unsecured loans and bad debts.R^ During the following year the Bank made a trading loss of ￡18,000, apart from bad debts, and during 1929 and the 1930s losses began to mount. In July 1930 Goodenough complained that these had "been due chiefly to wrong information in regard to the standing of customers, their reliability and also perhaps, their integrity".R2 A new conservative lending policy was adopted, but this was too late to prevent further large losses. "The Bank," Goodenough wrote to Italy in 1934, "has passed through two phases—the first was one of disaster, and the second, one of liquidation."RR By 1934 all Barclays in London hoped was that the Italian bank would become self-supporting. Expenses were cut, loans reduced, and in 1937 the branch at Genoa was closed. The Rome branch lived on small earnings from exchange transactions until the outbreak of war. Throughout the inter-war period, the Midland Bank watched the sub. sidiaries of its four United Kingdom rivals floundering in their different ways on the Continent and adhered strictly to its faith in "correspondent" 7^Szarvasy to Stevenson, 30 Oct 1924, BBI File: Chairman's Overseas Filing- Papers Concerning Italian Subsidiary. 7RIbid. 7RIbid, Chairman to D Balfour, 6 Feb 1925. 80jbid, D Balfour to Chairman, 27 Mar 1925. R^Ibid, F C Goodenough to D Balfour, 9 Dec 1927. ^RIbid, F C Goodenough to D Balfour, 9 July 1930. 83ibid, F C Goodenough to D Balfour, 18 May 1934. EASTERN BANKING business. On the formation of the Irish Free State in 1924 the Midland Bank disinvested in that country because, in the words of the Chairman, "it is not the policy of the Midland Bank to own branches in territories out. side the United Kingdom."^ The correspondent business flourished in these years. Large credits were opened for Continental banks and for various foreign governments. During the 1920s the Midland Bank established close links with various Soviet banks. In October 1924 the Board agreed that the Russian State Bank could deposit ￡1 million with the Bank which was to be used to financed trade between Britain and Soviet Russia.3 In subsequent years other Soviet banks, such as the Banque Commerciale et Industrielle de l'URSS, placed deposits with the Midland Bank.^ As Table 3 indicates, the Overseas Branch of the Midland Bank saw a considerable expansion in profitability during the inter-war years. Table 3 Profitability of Midland Bank Overseas Branch 1918-1937^7 Years Cumulative Net Profits ￡'000s 1918-21 1,096 1922-25 1,960 1926-29 2,966 1930-33 4,726 1934-37 6,858 The business proved particularly lucrative during the 1930s, and between 1931 and 1937 the Overseas Branch's net profits represented 23.1 per cent of the published profits of the Bank. These profits came largely from correspondent banking. In 1939 the Chairman observed that the Bank trans. acted "probably the largest share of the overseas business passing through London". By 1940 the Midland Bank had even more reason to be grateful that it had avoided direct Continental commitments. As the German armies attacked and occupied France and Belgium, and Fascist Italy entered the war on the S^Green, p. 73. 85Midland Bank Board Minutes, 5 Oct 1924, MB. ^Buchanan Diaries, 8 June 1925, MB File: 30/338. ^Analysis by Manager of Overseas Branch, June 1938, MB: Overseas Branch Files. The notes attached to this analysis explained that these figures allowed for all bad debts incurred, "with one exception only: the Aus. trian Creditanstalt account, which involving a long term liquidation was taken over by Head Office: eventual loss will be under ￡50,000". ^Chairman's Report to Annual General Meeting of Midland Bank, 26 Jan 1939. LOMBARD STREET ON THE RIVIERA side of the Axis, the British staffs of the three banks fled to the nearest seaport and were evacuated back to Britain. It was a tragic, but rather appropriate, symbol of their banks' performances on the Continent over the previous two decades. IV During the years of the Occupation, the French and Belgian branches of the three banks were run by locals. Their experience was broadly similar. Until the summer of 1942 they were left with some freedom of manoeuvre. After then the German administration exercised a considerable amount of control over their policy. During this period all three banks earned profits, due, as the Board of the Lloyds and National Provincial Foreign Bank was informed after the Liberation of France, "to the rates charged to the unsound class of customers who were brought to the Bank at the time".R* * * 9 The local officials of Lloyds and National Provincial and Foreign Bank, in particular, emerged from the German occupation unscathed from accusations of collaboration. The Geneva branch of the Bank had remained under the control of London throughout the War and assisted the Allied war effort by the purchase of German, Italian and French notes for the British Legation, "to be used by British Secret Service".90 Table 1 shows the remarkable recovery in the Bank's profitability once it was stripped of its French and Belgian branches. The immediate post-war years were ones of great difficulty. The branches of all the banks had been separated from Head Office control for long periods, and this gave rise to serious problems of readjustment. The years after the War were ones of great financial stringency for the Conti. nental countries. Banks became subject to greater control from the State. Post-war legislation in Belgium compelled banks to create a statutory reserve inside the country. This meant that the Lloyds and National Provincial Bank, for example, which before 1939 had no reserves inside Belgium, was obliged to create a reserve equal to seven per cent of sight and short-term liabilities.9^ Despite these difficulties, the post-war decade saw an apparent improvement in the fortunes of Lloyds and National Provincial Foreign Bank. Between 1946 and 1951 the total profits of the Bank amounted to ￡397,364.9^ Yet the structure of the business remained very much as in the pre-war period. Some branches, such as Roubaix and Bordeaux, developed or retained profitable business connections. The business of several other branches, however, remained static. Geneva lived off United Nations accounts, as it had previously lived off League of Nations business. The Lille branch derived twenty per cent of its gross revenue in 1951 from the account of one firm. The tourist trade in the South of France partially recovered, although it was reported in 1951 that Monte Carlo had lost its position as a fashionable resort "and the summer visitors, although more R9Bezos to Scatcherd, 6 Nov 1944, NW File: 4252. 90Ibid, Report on position of the Bank in Switzerland, 29 Oct 1945. 9^Ibid, Memorandum on Capital in Belgium, March 1950. 9^Ibid, Memorandum, 15 July 1954. EASTERN BANKING numerous, are of the "paid holiday" class".^3 By the early 1950s one of the shareholders of the Bank, the National Provincial Bank, had had enough. The National Provincial Bank had paid out some ￡750,000 to the foreign bank, and received a mere ￡110,250 in divi. dends.*^ There was little doubt that if National Provincial's original capital and subsequent payments had been invested elsewhere higher returns might have been earned. National Provincial had never felt that it ob. tained its fair share of whatever benefits did stem from owning the foreign bank. The very name of the Bank led many people to assume that it was a Lloyds 'venture. A National Provincial manager in 1924 referred to the prevalent feeling that "apart from a shareholding interest, this Bank does not get a full share of reciprocal business.In an exchange of letters about the future of the Bank between Colin Campbell and Henry Bell of Lloyds Bank, Campbell observed that there was not much difference between their respective views "except you suggest that the business abroad attracts a great deal of business to our two home banks, and as far as the NP is concerned we get practically nothing of any consequence".^ In 1954 the National Provincial Bank sold its shareholding in the Foreign Bank to Lloyds, and in 1955 the Bank, under the new name of Lloyds Bank (Foreign) Limited, became a wholly-owned subsidiary of LLoyds Bank Limited. Ironically, the departure of National Provincial was followed by an upturn in the Bank's fortunes. This was due, in part, to improved man. agement and especially the work of M H Finlinson, who was General Manager between 1956 and 1964. By 1960/61, the gross profit had reached ￡314,991, which after tax and writing off of exceptional items made a working profit of ￡132,000. The amount of deposits increased from ￡23.6 million in 1956 to ￡47.7 million in 1961, and the amount of advances from ￡5 million in 1956 to ￡26.2 million in 1961. Finlinson worked hard to improve the quality of the Bank's management. "On the Continent," he wrote in 1961, "we now have a first class managerial team, average age 48, keen and ener. getic." Together with most of British business, the Bank eagerly awaited Britain's entry to the Common Market. "With Britain's application to join the Common Market," Finlinson observed, "I do not think it is too much to hope that we shall be able to extend still further our continental banking connec tions."9? In fact, events took a different course. In 1964 Finlinson was appointed Vice Chairman with special responsibility for the Bank's develop. ment. Under his supervision, the Bank was transformed, during the 1960s, from a small deposit bank operating in four countries to a major interna. tional bank. In 1971 Lloyds' European interests were merged with the Brit. ish Bank of London and South America, and the new company became known as QO Lloyds Bank International in 1974. 93ibid, Inspection Report on Monte Carlo, Jan-March 1951. 9^Ibid, Memorandum, 23 June 1952. 95J P Edwards to General Manager in Paris, letter does not appear to have been sent 96 97 6 Oct 1925, NW File: 4243. The Colin Campbell to Henry Bell, 27 Dec 1934, NW File: 4252. Report by General Manager, 8 Nov 1961, LBI. 98 d F Channon, British Banking Strategy and the International Challenge LOMBARD STREET ON THE RIVIERA The improved fortunes of Lloyds—and other banks—European operations during the 1960s were closely related to the opportunities provided by the emergence of the Euro-currency markets. These markets were developed by the American banks. As the postwar dollar shortage gave way to a great wash of U.S. dollars by the end of the 1950s, and as markets for such funds began to appear in America and Europe (such as British local authorities) various American banks began to open branches abroad, particularly in London, in order to escape the domestic restrictions which prevented them from directly dealing in such markets. In Britain, government and Bank of England restrictions, and the clearing banks' own cartel, made it difficult for the banks to participate directly in Euro-currency markets. They could, however, participate through their overseas banks or branches. They could offer market rates for deposits and demand market rates for loans in a manner not open to them in domestic banking. The European banks of Barclays and Westminster Banks followed a broad. ly similar pattern of development to Lloyds after 1945. Barclays recovered control of its Italian subsidiary in 1945. There was little enthusiasm for continuing the business. A report written in 1947, by the Deputy Chairman of the Bank, A W Tuke, held out little prospect of increasing the Bank's business in Italy, unless the Bank resorted to certain devices used by Italian banks to attract capital. "We must either do as the Romans do," Tuke observed, "or do without their business. Personally, I prefer the latter."99 Barclays, however, were reluctant to shut the whole affair down. There was a feeling that British business might soon expand into Italy, and that Barclay's presence in Rome was "appreciated by the British Community".^RR It was hoped that business might look up in 1950, which was a Holy Year. It was argued that Barclays' prestige would suffer if it withdrew from Rome. Above all, there was little point in selling the Bank's only asset, the magnificent building in the Piazza di Spagna, for inconvertible lire. The position of the Bank, however, got steadily worse. "From the point of view of Profit and Loss," Tuke reported in April 1948, "the Bank is again getting into deep water." The large Head Office staff and "the killing cost of maintaining Englishmen in this country at the present time" were major burdens. Tuke could think of no solution for the high costs except the "very drastic one" of not attempting "to maintain social contacts on a high level", which he dismissed as unpractical.^R^ During 1949 plans were being made for the Holy Year. A Barclays representative long resident in the United States was instructed to proceed to Rome, because the Bank was setting its "cap at the Americans in connection with the Holy Year".^R^ Holy Year, however, brought a miracle of another kind. Early in 1950 the Banca Commerciale Italiana offered Barclays ￡110,000 to be paid in sterling in London for its Rome bank. Barclays willingly (London 1977), p. 132. 99 a W Tuke's report on Profit and Loss Figures for 1947 and 1948, BGI File: Chairman's Overseas Filing-Papers Concerning Italian Subsidiary. 10RIbid. lRllbid, Memorandum, 13 Apr 1948. lR2ibid, Tuke to G E Meek, 29 June 1949. EASTERN BANKING accepted. Barclays Bank (France) continued to operate after 1945, although never earning high profits.103 During the 1960s, however, it was revitalized and the Barclays group expanded elsewhere in Europe. Barclays' European Repre. sentative opened an office in Zurich in 1961, and ten years later Barclays formed, with a 62.5 per cent holding, the Societe Bancaire Barclays (Suis. se) SA which opened a branch in Geneva. Meanwhile, in 1963 a holding was obtained in the Banque de Bruxelles. The Euro-currency markets again provided the main drive behind this expansion. In 1971 Barclays Bank SA became part of Barclays Bank International, which was formed from the old Barclays Bank (DC0).104 The Westminster Foreign Bank also remained fairly dormant until the 1960s, when it began to become involved in various consortium banks. Following the merger with the National Provincial Bank in 1968, the new National Westminster Bank used the Westminster Foreign Bank for a policy of aggressive expansion on the Continent and elsewhere. ^ It was, similarly, not until the 1960s that the Midland Bank's inter. national banking strategy began to change radically. The Midland Bank had experienced a very big expansion in correspondent banking after 1945. By 1949 the Midland Bank was reported to have 16,000 correspondents. 1*-*^ The value of foreign exchange transactions handled by the Bank rose from ￡27 million in 1949 to over ￡135 million in 1954. Payments made or received on the instruction of overseas banks each year more than doubled between 1952 and 1962 to reach 1.23 million transactions by that year. By the late 1950s, however, the Midland Bank, faced with the growth of the interna. tional money markets, was beginning to feel a need for diversification in its international operations. The first product of this new thought came in 1963, when the Bank joined three Continental banks, the Amsterdam- Rotterdam Bank, the Deutsche Bank and the Banque Societe Generale de Bel. gique in an informal agreement to co-ordinate their banking operations in Europe. This was the beginning of Midland's involvement in a growing number of international partnerships and agreements. V There were, and still are, a number of alternative forms of overseas repre. sentation for a bank. The principal alternatives are: the correspondent relationship; participation in consortiums or joint banks with local or international banks; the purchase of foreign subsidiaries and the retention of local autonomy; representative (that is non-banking) offices; and overseas branches, with a bank operating under its own name for private and corporate customers. Only the Midland Bank, of the "Big Five" British 103^ujce an(j Qillman, p. 106. lO^Channon, p. 129. 105Ibid, p. 132. 106r Thackstone, "Work of the Foreign Branch of a Commercial Bank", in Institute of Bankers, Current Financial Problems and the City of London (London 1949), p. 122. Green, passim. LOMBARD STREET ON THE RIVIERA clearing banks, opted for the first alternative in the period before 1960. There can be no doubt that the Midland's policy proved very lucrative. In contrast, the other clearing banks opted for the fifth alternative, at least so far as their Continental activities were concerned, and this strategem produced at best only mediocre returns. The experience of the three Continental subsidiaries of the clearing banks was remarkably simi. lar. In each case the banks expanded rapidly during the First World War. Their fortunes peaked in the early 1920s and there followed a period of stagnation or decline. The 1930s were extremely difficult for all the banks, and especially for the Lloyds and National Provincial Foreign Bank. The banks were allowed to stay in business during these years largely because of the prestige considerations on the part of the Parent Banks. All four Parent Banks paid heavily for any prestige gained. The fifteen years after 1943 were marginally profitable, but totally undramatic. Barclays was glad to sell off its Italian bank, and National Provincial was eager to pull out of its joint venture with Lloyds. It was not until the 1960s that these small Continental ventures emerged as useful bases for their Parent Banks' operations in the new Euro-currency markets. By the 1970s the transformation into international banks was complete, and together with the Midland Bank, these banks were heavily involved in inter. national consortiums and joint banking ventures. The poor performance of the British banks on the Continent before 1960 cannot be explained entirely by difficult economic and financial condi. tions. British banks were successful in other parts of the world, even in the inter-war years. Indeed, the achievements of British overseas banks in the Empire and the Americas made the clearing banks' disappointment in their European adventures all the greater. "I have had a good long experi. ence with commercial business overseas both in my own business in India and as Director of the Chartered Bank operating throughout the East," Colin Campbell wrote in October 1937, "but working in the British Empire is easy compared to trying to do so in a foreign country. The three banks faced certain specific problems in trying to do busi. ness on the Continent. The most obvious problem was the different legal and banking systems and traditions functioning on the Continent, which were made additionally difficult by foreign languages. This all too often led the banks to rely on managerial staff of a quality they would never have considered in Britain. Many of the British staff of Continental subsid. iaries do not seem to have been of the highest ability. It is sometimes suggested that the general quality of British bank staff in the inter-war years was not uniformly high. The sudden completion in 1917—18 of the amalgamation process, which reduced the number of leading banks to the Big Five, gave the banks a miscellaneous staff from the various merged banks who may not have been particularly appropriate for the bigger groups into which the smaller banks were absorbed. It is possible that a dispropor. tionate number of the weaker managers were despatched to the Continental branches. 1^9 lO^Colin Campbell to Alwyn Parker, 25 Oct 1937, NW File: 4244. i09I owe this point to Prof Pressnell. The taking back of men who had fought in the First World War, and who were not necessarily suited to EASTERN BANKING A further problem was managerial control. The three banks possessed different forms of organisation for controlling their Continental subsid. iaries, but not one of these proved satisfactory. If local managements were given too much freedom, it could, as the Lloyds and National Provin. cial Foreign Bank discovered, prove almost fatal. On the other hand, too much control from London meant that business could not develop at all. Business conditions were very different from the United Kingdom, and local managers needed sufficient autonomy to adapt their branches to these local conditions. Yet "local conditions" were sometimes very different from British ones, and this could give rise to unfortunate complications. All three banks experienced staff "irregularities" during the years in ques. tion. In particular, a number of staff were involved in exchange dealings on their own account. To the Parent Banks in London it was outrageous that staff should undertake large exchange speculations, but in countries such as Switzerland where the branches operated such behaviour was the norm, and free from any taint of "dishonesty". The three banks also suffered from a chronic failure to identify their market. They all began with the central idea of serving British people, and British business, on the Continent. By the later 1920s it was obvious that this market was not sufficient, but by then the banks were too well- established in their original moulds to develop an adequate substitute. There was much talk about developing local French and Belgian business, but only exceptional managers were able to secure large amounts of local com. mercial and industrial custom. Green field investment in competition with local banks is rarely easy, and in this case it was exceptionally difficult because of the bank's origins. Even after Lloyds and National Provincial Foreign Bank had decided to chase local business, the Bank retained a large proportion of high-cost Britishers on its staff—some forty-four per cent of the staff in France in 1937 were British—and this made it additionally hard to attract such custom. Significantly, the two more successful banks, Barclays and Westminster Foreign, operated with a far lower proportion of British staff. The upshot was that all three banks ended up with a hodge. podge of expatriate business and low-quality local business, and existed largely off exchange earnings. In addition to these identifiable problems, British bankers seemed prone to an unusual degree of bad judgement, even eccentricity, whenever they crossed the Channel. The inflated aims and expensive premises acquired during the First World War, which burdened the three banks throughout the inter-war period, is one instance of this, and Barclays' pursuit of Church money is another. Yet these highly optimistic activities were usually underpinned by a lack of faith that profits could really be earned on the Continent. Indeed, from the later 1920s there was a lack of faith in Europe itself. "I have a feeling firmly fixed in my mind," a writer told Colin Campbell in May 1936, "that some day we may be thankful if our commitments in [France] are on the light side."HO This attitude was partly the result of experience and partly the cause of that continue in their old ruts of jobs, may further have reduced staff com. petence . 110G F Abell to Colin Campbell, 1 May 1936, NW File: 4245. LOMBARD STREET ON THE RIVIERA experience. Perhaps, as the textbooks say, doing business in the Empire was just too easy compared "to trying to do so in a foreign country". An obvious question that arises from the story told on the previous pages: how far were the Continental activities of the banks typical of the clearing banks' performance in Britain itself during the inter-war years? Unfortunately, until more is known from internal sources about the history of British banking since 1914, this must remain an idle, but interesting, speculation. THE HONGKONG AND SHANGHAI BANKING CORPORATION GROUP ARCHIVES* by S W Muirhead Until 1969 there was no section or department of the Bank devoted to col. lecting, collating, and maintaining the Bank's Archives and no person in the Bank had been made responsible for them. However, after that date the Corporation Secretary's Department of the Bank began to look after archival records which came into their possession although it was not until 1977 that a separate department called "Hongkong Bank Group Archives" was created and the Bank's archives became the respon. sibility of a designated officer. The Hongkong Bank Group therefore now has a firm policy of preserving and developing its historical archives and these are all being centralised in Hong Kong. The Archives is situated on the 20th Floor of Warwick House (East) in the Taikoo Trading Estate at Tong Chong Street, Quarry Bay, Hong Kong. The total area of the Archives (including the staff offices) is 5,573 sq.ft. The premises are protected by a sophisticated burglar alarm system; storage areas have 24-hour air-conditioning and humidity control; and the sprinkler fire protection system was recently replaced with a fire preven. tion system which uses Halon gas. There is no doubt that a major impetus for establishing a separate department to look after the Bank's archives has been the Hongkong Bank History project which is directed by Professor Frank H H King and adminis. tered by the University of Hong Kong. The Nature of the Archives. Hongkong Bank Group Archives is a private archives and specific prior arrangements must be made by both outsiders and members of the Bank's staff before research can be allowed. Purpose of the Archives and Retention Policy. We recognise that we have a duty not only to the Bank but also to the public to preserve vital records relating to the Bank and, like most business archives, we follow a policy of preserving important records relating to not only the history of the Hongkong Bank Group but also to its legal establishment, functions, policies, organisation, procedures, decisions, and operations. The Hongkong Bank Group has a Standing Instruction requiring Branch Managers to consult the Controller of Group Archives before destroying any items detailed in a comprehensive list laid down in the manual which might be of archival value. In addition, Branch Managers are reminded to also *This paper was presented at a conference entitled "Research Materials for Hong Kong Studies", held in the Centre of Asian Studies, University of Hong Kong, October 1982. APPENDIX refer items which might not be listed which they may consider to be of historical or other interest such as photographs, private letters, old banknotes, old machines, old maps, uniforms, old books, manuscripts etc. Apart from the duty we feel we have to preserve a record of the Bank's business and history and the fact that our Archives is a service both to the Bank and the public, more specifically from the Bank's point of view there are positive advantages in maintaining the archives for public rela. tions, marketing, legal, training, strategy, policy and other aspects. Access to the Archives. Because the Archives contains a lot of information which is still of a private or sensitive nature (for example, recent records, records relating to the private affairs of customers of the Bank, and records concerning private matters relating to staff of the Bank) it is essential that anyone applying for access to the Bank's Archives for research purposes should be as specific as possible concerning the precise nature and purpose of their research and the period to which their research relates. Particular importance is attached to researchers being properly intro. duced, preferably and usually by an accredited institution of learning (such as a university or similar professional organisation) or by their company or professional body. Unlike, for example, public record offices in some other countries, we do not have a mass of material available which has been de-classified and is freely available for research. Instead, and mainly because of the nature of the records which we keep, it is generally necessary for the Controller of the Archives or his deputy to vet material requisitioned from the Archives before it is handed to a researcher so as to check whether there are any items of a sensitive or particularly confidential nature which should not be disclosed. Having said this, in the interests of research, we encourage inquiries and we do try to be as liberal as possible. And as a general rule we follow a number of guidelines such as:- a. No internal files or records of the Bank relating to matters during the last 30 years may be made available. b. Concerning files and other information which are more than 30 years old, matters relating to staff and the private affairs of customers are also regarded as confidential and special clearance has to be sought. c. Managerial letters (for example inter-branch and Head Office corre. spondence of a general nature) which are more than 30 years old may generally be made available for research but in some cases internal correspondence of a particularly sensitive or confidential nature might be restricted for much longer. d. Unrestricted access is allowed to general ledgers of the Bank (except to general ledgers relating to the last 30 years) as much of the information contained in these ledgers is incorporated in one way or another into the Bank's Balance Sheets which are available for public information. e. Access to customers' accounts, however old, is not allowed but APPENDIX information of a general nature, such as the number and growth of accounts may be made available at the discretion of the Controller of the Archives. Rules, Regulations and Internal Controls. Obviously there have to be rules restricting photocopying without permission and all research has to take place in our search room on our premises within normal office hours. There are other rules and regulations which have to be enforced of the usual practical nature and a list of the current rules and regulations for the use of the Archives can be obtained from the Controller of Group Archives. There is strict control on the release of files to researchers and the return of the files when research has been completed. In addition, researchers have to sign a standard form concerning access which also calls for no publication of material derived from the Archives without permission in writing being granted. As I have already stated, we always try to be as liberal as we can and obviously if a researcher finds information in our Archives which is avail. able and unclassified in some external source, then there is obviously no objection to publication. Accession Policy. Although all items accessioned into the Archives are ultimately indexed according to their subject matter, the provenance of the records is protected by our treating distinctive batches of records from individual offices as separate record groups. We therefore segregate in separate physical locations in our Archives batches of records from differ. ent sources even though these records will ultimately be indexed according to subject rather than according to their sources. It is therefore pos. sible in our Archives to search the records either from the aspect of the record group to which they belong (in our case their source) or from the point of view of a specific subject which might be covered by records from several different sources. The principal record groups which we maintain are: - Mercantile Bank general records from London Office - Mercantile Bank historical records from London Office - Hongkong Bank general records from London Office - Hongkong Bank historical records from London Office - Mercantile Bank records from Shanghai - Hongkong Bank records from Shanghai - Records from the Head Office in Hong Kong - Records from Hongkong Office There are also smaller record groups: - Records from HSBC Lyons - Records from Mercantile Bank Bombay Office - Records from Mercantile Bank Mauritius - Records from Hongkong Bank and Mercantile Bank branches in Malaysia etc APPENDIX Finding aids. This is a relatively new archives, therefore it will be appreciated that we are still accessioning a mass of accumulated material from various offices of the Bank throughout the world and particularly the Far East. Accordingly, detailed indexing of our archival records is still proceeding and will proceed for a number of years to come. Our main finding aid consists of card indexes under which every item in the Archives is indexed initially under a subject heading and also cross indexed under other appropriate references such as the branch and country of origin and alternative headings under which a researcher might be likely to pursue a line of inquiry. There are separate card indexes relating to the banknote collection, Board Minutes, the photograph collection, and the accumulated banking, commercial and other documentary records, historical records from London etc. The principal constituent parts of the Group (for example, The Hong. kong and Shanghai Banking Corporation itself, the Mercantile Bank Ltd, and The British Bank of the Middle East) are denoted separately in our indexes by different coloured cards (for example, all the cards relating to infor. mation on Mercantile Bank Ltd [and its predecessor in title, the Chartered Mercantile Bank of India, London & China] are blue in colour). As an additional finding aid, separate loose-leaf files are maintained with photocopies of all the index cards filed in numerical reference order in separate files corresponding to the principal record groups. For internal purposes, we have a separate written catalogue of items filed in subject and sub heading order (i.e. filed according to the alpha. betical classification prefix and the running numerical subject and file reference). An investigation is being carried out at the moment as to the best means of up-dating and reproducing this catalogue so that copies of the catalogue or, more particularly, copies of subject and sub heading listings can be made available to people wishing to undertake research. This we feel will ultimately prove an extremely useful finding aid particu. larly in those cases where the nature of a file or individual item is such that it might well be listed under more than one different classification or sub heading. It will therefore be seen that our finding aids enable us to search for items either according to record groups, or according to subject, or by reference to a comprehensive catalogue. The card indexes are not generally made available to individual researchers. Instead when a researcher has advised us of his specific line of study or inquiry, the staff of the Archives themselves study the card indexes and make photocopies of any cards which appear to be relevant to the line of research so that the researcher may have copies of these to study and so that any items which appear to be relevant can then be with. drawn from the archives. Nature of the Records. Many of the Bank's records have been lost or dis. posed of over the years as a result of routine destruction procedures, wars, damage due to climatic conditions, etc, therefore there are inevi. tably many gaps in the collection. Nevertheless, the volume and research value of the records which have survived is impressive and the existing APPENDIX collection of records can be divided into the following principal cate. gories : 1. The Photograph Collection - This is a collection of several hundred photographs which to a large extent covers Bank buildings, Bank staff, and some local views. The collection includes some albums of photo. graphs of general views of Hong Kong taken in the last century. Although in the main these photographs are relevant to the Hongkong Bank Group, nevertheless the collection includes many photographs which are of general interest to the public including quite a large number of photographs of Hong Kong. The collection has already been referred to and used on a number of occasions for television, research and other purposes. 2. The Banknote Collection - This is a collection of several thousand banknotes specifically of The Hongkong and Shanghai Banking Corpora. tion, Mercantile Bank Ltd and its predecessors, the Mercantile Bank of India Ltd and the Chartered Mercantile Bank of India, London & China), and the Imperial Bank of Persia. It is an extremely interest. ing and valuable collection and, although there is at the moment no generally available public display of a selection from this collec. tion, a display is planned for the future and we do make parts of the collection available for viewing by visitors and researchers. 3. Architectural drawings - There is a collection of architectural drawings relevant to buildings designed for the Bank in the past and in particular quite a large collection of architectural drawings relating to the Bank's former office in Shanghai. These drawings, in conjunction with the large collection of photograph which include many photographs of the Bank's buildings, are an invaluable source of research to students of architectural history. 4. Board Minute Books - There is an almost complete collection of the Board Minute Books of the Hongkong Bank going back to the establish. ment of the Bank in 1865 together with the Board Minutes of Mercantile Bank Ltd dating, back to the 1880s. These are still in the process of being indexed and, whilst the books themselves cannot be made avail. able freely to researchers, nevertheless we are prepared to release information which does not need to be restricted. Inevitably the Board Minutes of the Hongkong and Shanghai Banking Corporation tend to be very relevant to Hong Kong which is where the Head Office has always been established, apart from a short period during the Second World War. The Board Minute Books of Mercantile Bank Ltd are not so relevant to Hong Kong as their Head Office was always in London until quite recently and the major part of their business in the earlier days tended to be concentrated in the Indian Sub Continent and the Malay Straits. 5. Ledgers/Account Books/Registers/Record Books/instruction Books/Code Books etc - The Hongkong Bank Archives has a large collection of ledgers and other books of account from various offices although of necessity it is only possible to preserve a selection of these due to their weight and the space which they take up. Only a few of these record books are directly relevant to Hong Kong although the older APPENDIX code books do have bearing on the trade of Hong Kong in earlier years. 6. Publications - The publications section of our archives includes the Annual Reports of the Hongkong Bank and Mercantile Bank (a complete set in each case) going back to the establishment of both banks in 1865 and 1856 respectively. These are valuable documents from a research point of view. In addition this section includes a large number of internal publications produced by the Bank over the years, many of which are particularly relevant to Hong Kong. 7. Material collected by the late Dr J R Jones - One very important part of our records consists of material collected during the 1950s by the late Dr J R Jones who was Legal Adviser to the HSBC at that time. This material was mainly collected to form the basis for the Centenary history of the Bank (Wayfoong: The Hongkong and Shanghai Banking Corporation by Maurice Collis) which was published in 1965. Dr Jones arranged for newly typed copies of key letters and other material by subject (e.g. silver, business, loans) and he also collected biograph. ical material through correspondence with retired members of the staff and others. Although these files are not necessarily completely comprehensive and although we do not know to what extent they were proofread, nevertheless they do form a very valuable source of research and are of course in many cases very relevant to Hong Kong. 8. Banking documents - An important and valuable part of our archives is our large collection of banking and other commercial documents. This collection includes, for example the following types of documents as well as many others: - Old share certificates Bank draft forms - Many different types of cheque forms Other types of Bills of Exchange - Travellers circular letters of credits Powers of Attorney - Loan agreements - Examples of many different bond issues Letters of Credit Sundry items of stationery - Shipping documents Many of these documents are relevant to Hong Kong and include examples from the last century as well as modern examples. 9. Correspondence files - By far the largest collection of records in the Hongkong Bank Archives is correspondence and other files. This part of the archives includes correspondence in the widest sense both internal correspondence within the Bank in the form of managerial letters, instructions, circular letters, etc, and external correspond. ence with Government departments and clients. These files cover the Bank's operations worldwide but the largest part of the collection is derived from London, Shanghai and Hong Kong. These correspondence files form perhaps the largest area avail. able for research in the Archives covering as they do much of this century and reflecting the numerous economic, social and political changes that we have undergone. APPENDIX Because the Head Office of the Bank has always been in Hong Kong the internal correspondence and other internal files tend to reflect correspondence between the Head Office in Hong Kong and the various major branches throughout the world. This means that the files tend to give more of an insight into conditions in other countries rather than in Hong Kong itself. However, much information about Hong Kong also can be found in these files. 10. The Bank's Art Collection - The Hongkong and Shanghai Banking Corpora. tion's art collection is already well-known mainly because it includes one of the finest and most important collections in the world of paintings by George Chinnery. What is perhaps not so well-known is that the collection also includes a very large number of other impor. tant works of art, particularly ones with a theme relative to the Far East, (including marine paintings with a Far Eastern theme) by other famous artists such as William Alexander, Thomas and William Daniell, August Borget, William Prinsep and W J Huggins etc as well as a fine collection of maps by J Bleau. This art collection is also controlled by Hongkong Bank Group Archives and is in itself, apart from being a collection which rivals that of many art galleries, a very valuable source of research which must not be overlooked. 11. Oral History Tapes & Transcripts - As an important part of the Hong. kong Bank History Project directed by Professor Frank H H King, an extensive oral history program has been initiated covering both The Hongkong and Shanghai Banking Corporation and the Mercantile Bank Ltd. A similar oral history program has been organised by Geoffrey Jones in association with J L A Francis, formerly Secretary, BBME, in respect of The British Bank of the Middle East. The program consists of formal recorded interview sessions mainly with retired staff of these banks focussing primarily on banking [although including, as readers of these proceedings will know, some personal reminiscences] . These interview sessions are under the direction of Christopher Cook (of the BBC) and the tapes are edited and transcribed so that they can be used not only for the History Project but ultimately for other research purposes in the future. This is a particularly recent project and obviously some of the tapes include material which might be of a confidential and sensitive nature. The tapes and transcripts are therefore not freely available for research purposes at this stage unless complete clearance has been given by the interviewee and in the unlikely event that the tapes tapes also contain no confidential or sensitive material from the point of view of the Bank. Nevertheless, these tapes and transcripts will form a most valuable research medium for the future covering as they do not only matters directly relevant to the operations of the Hongkong Bank Group but also, as noted above, the reminiscences of retired staff and their wives covering a period of tremendous political, economic and social change. General. In addition to the above principal categories of records there APPENDIX are a number of other items and records which do not fall into these cate. gories and in particular the Archives includes a collection of artifacts relating to the Bank's operations and history in Hong Kong and other parts of the East. For example, the artifacts include such items as scales, old accounting machines, cash tokens, punches used on gold and silver bullion etc. The Archives also includes a useful library. In addition, the records in the Archives include many examples of Chinese bonds, particu. larly bond issues which were used to finance the building of railways in China. It will therefore be seen that the Hongkong Bank Group Archives is a useful and perhaps unique source of study not only relevant to economic, financial, political, social, and other conditions in the Far East gener. ally since the middle of the last century but also particularly relevant to Hong Kong. INDEX [This is an index of essays 1 through 29 only. [Conference collections are not usually indexed, since each paper is independent. However there are sufficient recurring themes and subjects in the essays dealing with the Hongkong Bank and the Mercantile Bank to justi. fy a modified index. Readers are warned that items appearing only in a single article are not necessarily indexed; the editor assumes that readers will examine the table of contents and note the sectional headings and sub. headings before consulting this index. On the other hand, the main index includes, under 'Banks and financial institutions', the names of all banking institutions, however casually mentioned, and, under 'Hongkong and Shanghai Banking Corporation' in the sequence, the names of all staff members (but not directors or compradores) of the Hongkong Bank, the Mer. cantile Bank, and the Imperial Bank of Aglen, Sir Francis, 27 Augustine Heard and Co., 39, 40, 46- 48, 60, 247. See also Heard, Albert F. Banks, chartered: problems of limited liability, incorporation and regulation, 32-48, 53-55, 67-69, 150-53, 156-62, 166, 168-69, 353 Banks, legislative and other restric. tions on, 374-77, 387-88, 391, 430-32, 457, 461-63, 511, 513 Banks and financial institutions: - Agra and Masterman's Bank, 43, 60 - Allahabad Bank, 706-7 - American Express Bank, 297-98 - Anglo South American -Bank, 531 - Antony Gibbs and Sons, Ltd., 612 - Asiatic Bank [Madras], 702, 704 - Asia Banking Corporation, 451 - Asiatic Banking Corporation, 46, 47, 67 - Aynard and Rliffer, 467 - Ban Han Lee Bank, 387 - Banco Espanol-Filipino [de Isabel II], then Bank of the Philippine Islands, 435, 437, 440, 449-50, 451, 454, 459, 461, 465 - Banco Peninsular Ultramarino, 435 - Bank Bumiputra, 380-81, 382 - Bank Negara Malaysia, 374-80, 383 - Bank of America, 464 - Bank of Bengal, 703 Persia referred to in the essays.] - Bank of China, 283, 285, 287, 288, 297, 299, 300, 303, 305, 317-20, 431 - Bank of China, Ltd. [Bombay], 34 - Bank of China, Japan and the Straits, Ltd., 62n87 - Bank of Chosen, 276n72, 322, 331, 340, 346 - Bank of Communications, 283, 288, 297-98, 304, 317-18 - Bank of England, 3, 16, 281, 287, 289, 293, 312, 427-28 - Bank of Hindustan, Delhi and Lon. don, 42n23 - Bank of Int. Settlements, 16 - Bank of Japan, 331, 346 - Bank of Madras, 409, 702 - Bank of Nova Scotia, 387 - Bank of Pangasinan, 451 - Bank of Taiwan, 322, 331, 464 - Bank of the Philippine Islands, 459, 465. See also Banco Espan- ol-Filipino - Bank of Zamboanga, 451 - Banque de France, 471, 480-1, 497, 503, 508-9 - Banque de l'Indochine, 421, 424, 425, 426-27, 431, 479, 480, 496, 508 - Banque Franco-Chinoise, 508 - Banque National de Paris, 475, 508 - Banque Nationale pour le Commerce INDEX Banks (cont.): et 1'Industrie, 508 - Baring Brothers, 47, 236, 258n41 - British Bank of the Middle East, 181, 593, 602-3, 610, 618, 702-3. See also Imperial Bank of Persia - British Bank of West Africa, 531 - Canadian Bank of Commerce, 448 - Central Bank of China, 286-87, 300, 301, 303, 320 - Central Reserve Bank [Nanking], 293 - Chartered Bank of India, Australia and China, then Standard and Chartered Bank, 6, 42n23, 128, 155, 156n2, 164-76, 275, 276n72, 287-89, 299, 305, 312, 317-20, 327-28, 331, 333, 355-56, 363-65, 366-69, 381, 388-89, 398, 399- 400, 409, 421, 423, 425, 428, 430, 435, 439-41, 444, 448-50, 454, 467, 479, 481 , 530, 531 , 534, 658, 698, 700, 706 - Chartered Mercantile Bank of India, London and China, then Mercantile Bank of India, Ltd., then Mercan. tile Bank, Ltd., 42n23, 48, 62n87, 104, 110, 155, 156n2, 165, 204-29, 228, 289-99, 301, 352, 354-55, 363-65, 367-69, 376, 388- 89, 400, 409, 419, 420, 423, 431, 467, 560, 565, 593-94, 602-3, 610, 611, 618-20, 655-99, 700, 704, 705-8, 713 - Chase Manhattan Bank, 298 - China Banking Corp, 452 - China-Siam Bank, 428 - Commercial Banking Corp, 47 - Comptoir d'Escompte de Paris, then Comptoir National d'Escompte, then Banque National de Paris [BNP], 42n23 , 47n39, 469, 475-77, 499, 508, 518 - Credit Lyonnais, 467, 472, 474, 499, 516 - Credit Mobilier, 545-46 - Dai-ichi Bank, 346 - Dal'bank, 275, 276n72 - Danske Landmannsbank, 426 - De Javasche Bank, 392, 393, 395-408 - Deutsch-Asiatische Bank, 239, 331, 517n, 519-21 , 426-27, 523, 530 - Deutsche Bank, 542 - Development Bank of Singapore, 586 591 - Disconto-gesellschaft, 428, 532, 535 - Dorrepaalsche Bank der Vorsten- landen, 399 - Eastern Bank, 6 - Federal Reserve Bank [Peking], 290 - Grindlay's Bank, 409 - Guarantee Trust Co, 440 - Hang Seng Bank, Ltd., 560, 611, 709-16 - Hongkong and Shanghai Banking Com. pany, Ltd., 35-37, 52, 140, 150 - Hongkong and Shanghai Banking Cor. poration, see main listing - Hongkong Bank Group, see under names of members - Hongkong Bank of California, Inc., 602, 619 - Hope and Co., Messrs, 401, 531 - Hua Hsing Commercial Bank, 290, 293, 294 - Imperial Bank of Persia, 1-13. See also British Bank of the Middle East - International Bank of London, Ltd, 522 - International Banking Corporation, see National City Bank - Internationale Crediet -en Handel- svereniging Rotterdam, 398, 403 - Koloniale Bank, 399, 403 - Kwong Yik Banking Corporation, 359n42 - Lai Hing Bank, 96 - London and County Bank, then Lon. don County and Westminster Bank, q.v., then ... National Westmin. ster Bank, Ltd., 38, 39, 50, 233, 242, 243, 257, 363 - London and Westminster Bank, then as above, 38, 49-50, 51 - London, County and Westminster Bank, then as above, 515n230 - Madras Bank, 702 - Malayan Banking Berhad, 375, 380, INDEX Banks (cont.): 381, 382 - Marine Midland Bank, N.A., 588, 590-1, 594, 717, 724 - Marine Midland Banks, Inc., 717-30 - Mercantile Bank [of India] Ltd., see Chartered Mercantile - Mercantile Credits, 565 - Mitsui Bank, 331, 337, 339, 431 - Molsens Bank, 527 - Monte de Piedad y Caja de Ahorros de Manila, 435 - Morgan Grenfell, 593 - National Bank of China, 61 - National Bank of India, 409 - National City Bank, and Interna. tional Banking Corporation, then First National City Bank, then Citibank, 273, 274, 276n72,280, 283, 289, 306, 331 , 430, 451, 458-59, 729 - National Provincial Bank, 428 - National Westminster Bank, see Lon. don and County Bank; London and Westminster Bank; London, County and Westminster Bank; Westminster Foreign Bank - Nederlandsche Handel-Maatschappij (NHM), 393, 398, 404 - Nederlandsch-Indische Escompto Maatschappij (NIEM), 398, 399, 400 - Nederlandsch-Indische Handelsbank, NV (NIHB), 393, 398, 464 - 'New Asiatic Bank', [pseud, for The Hongkong and Shanghai Bank], 193— 203 - New Oriental Bank, 409. See also Oriental Bank Corporation - Norddeutsche Bank, 536 - Oriental Bank Corporation, 42-43, 155, 156n2, 166, 232-33, 234n2, 238-41 , 253, 261-62, 324, 400, 409, 416, 419 - Overseas Chinese Banking Corpora. tion, 381 - Peninsular and Oriental Banking Corporation, 706-7 - Philippine Bank of Commerce, 464 - Philippine Bank of Communications, 464 - Philippine National Bank, 442, 451-53, 457-60, 465 - Reichsbank, 16, 526nl4, 530, 532, 535 - Rothchilds, 4 - Rotterdamsche Bank, 398 - Russo-Asiatic Bank, 275, 276 - Russo-Chinese Bank, 276 - Samuel and Co., 5 - Schroders, 261 - Seligman Bros., 5 - Shanghai Commercial and Savings Bank, 307 - Siam Commercial Bank, 426, 428, 430, 431 - Soci4t6 Gdndrale [Paris], 467nl - Soci6t6 Lyonnaise de Depots de Comptes Courant et de Credit Industriel, 474 - Southern Bank [Nampo Karhatsu Kinko], 371 - Speyer Brothers, 454 - Standard Bank of South Africa, then Standard and Chartered Bank, 531, 532, 536 - State Bank of India, 409 - State Bank of Morocco, 15 - State Mortgage Bank [Colombo], 411 - Thrift Corporation Bank, 275 - Union G4n￡rale, 474 - United Malayan Banking Corp, 375, 381 - Veuve Guerin, 467 - Wah Tat Bank, 387 - Wardley Limited, 566, 588, 589-90, 593, 603, 611, 620 - Wayfoong Finance Ltd., 560, 603 - Wells Fargo Bank, 735-52 - Westminster Foreign Bank, 501, 503 511 - Yokohama Specie Bank, 276, 276n72, 300, 309, 321 , 325, 331 , 333, 336, 340-42, 346, 371, 404, 431, 451, 481 Belilios, E.R. 60 Bland, J.O.P., 10, 339n32 Bowler, T.I., 232, 237-38 Boxer Indemnity payments, 480 British and Chinese Corporation, 2, INDEX 9-11, 62, 285, 339n32 Chen Kwang-pu [K P Chen], 307, 316 Chettiars, 353, 410-20 China: Currency Stabilization Board, 303-314; Currency Stabilization Fund, 281, 287-304, 308, 314, 317-20; Imperial Maritime Cus. toms, 7-8, 230, 232-37, 246, 255- 56, 339; Tsungli Yamen, 234, 251, 255 Chinese Central Railways, 9, 11, 15 Chinese Eastern Railway, 266, 267, 271 Chomley, F., 49n47, 52n59 Compradores, 32, 55-57, 93-111, 117, 126, 294, 358-62, 371, 409, 410- 20, 557, 610, 674, 677 Crisp, C.B. 5, 6 Currency and related problems, 153, 154, 173, 230-31, 250, 254, 272- 73, 276, 322-48, 357, 362-65, 424-26, 442-50 de Reuter, George, 5, 12 Delmege Reid and Co. Messrs, 409 Denis Fr&res, 505-6, 513 Dent and Co., 42, 49n47, 487 Dewey, Admiral George, 437-39 Evans-Thomas, E.H., 311, 314 Extraterritoriality, 32, 44, 66-76, 161-62, 166, 168-69, 353, 436-37 Forbes, W.H., 61, 242 Fox, A. Manuel, 281-82, 283, 299, 304, 307-9, 311 Gilman and Co., 49 Hall-Patch, E.L., 307, 311 Hart, Sir Robert, 19, 232-33, 238-41, 248, 251, 253 Harun Idris, 372-74 Heard, Albert F. , 34, 39nl6, 45-48, 232-33, 237, 241-47. See also Augustine Heard and Co Heard, George F., 43n25, 59-60 Holme, Ringer and Co [Chemulpo], 347 Hongkong and Shanghai Banking Corpor. ation: banknotes, 32, 35-37, 39, 55-56, 139-54, 155-179, 424; branches, 35n6, 42-45, 46-47. 68- 69, 139-43, 164, 352-55, 366-69, 375, 376, 430, 437, 553-54, 603, 609, 629-54; currency and advice on, 55-57, 93, 152, 356-57, 341- 43, 353, 362, 388-89; German directors of, 35, 62-63, 518-22, 525; loans, 3, 4, 8, 9-10, 12, 16, 19-20, 24, 57, 230-64, 282, 285, 338, 371-72, 426-28, 454, 479, 518-21, 524; London branch, special position of, 34, 48-53, 65, 193-203, 204-7, 239, 241; management and role of direc. tors, organization, 39-65, 233, 241-44, 261, 282, 313, 713; policy on industrialization and finance of, 58, 355, 371-72, 377-80, 545-57, 601-27; staff, life, recruitment, characteris. tics of, 14-15, 17, 43, 50, 117, 146-147, 193-203, 204-27, 371- 72,383-88, 612, 624-26, 678, 679. See also Table of Con. tents, essay sub-headings, other headings in index Hongkong and Shanghai Banking Corp. oration, the Imperial Bank of Persia and Mercantile Bank, staff referred to in essays (does not include directors and compradores): - Addis, Sir Charles S., 4, 6, 7, 8, 11-12” 14-31, 63n92, 65, 282, 427, 525-26, 527, 539-41 - Andree, H.D., 420 - Aspinall, H.C., 218 - Baker, T.S., 366 - Barlow, C.C. 479, 512n216, 515n230 - Barnes, Charles I., 436-37, 447 - Barnes, O.J., 280, 281 - Benson, D., 219 - Bevis, H.M., 118 - Bishop, F.C., 155, 159 - Black, F.C.B., 197-98, 228 - Browne, T. McG., 424-25 - BrUssel, Julius, 522-26 - Butt, G.W., 525, 527 - Cameron, Ewen, 2, 3, 4, 6, 7, 11, 29, 282, 352-53, 522, 525, 528 - Cameron, P.E., 527 - Carruthers, M.G., 199, 200, 228, 564 - Cassels, W.C., 307, 308, 311, 314 INDEX HSBC/MBLD Staff (cont.): - Cautherley, J., 146-47 - Cope, H., 353 - Davies, E.J. 285n8, nlO - Davis, D.C., 479, 513 - De Bovis, F., 26, 29, 29n71, 61-62, 478-500, 505, 511-12, 151n230, 516, 524 - Edmondston, D.C., 218, 221, 541-42 - Edwards, C.L., 407-8 - Edwards, O.P., 279n - Fenwick, T.J.J., 182, 228 - Ferguson, G., 412 - Gard'ner, Wade, 339n32, 354, 527 - Geddes, John I., 705 - Gordon, William, 705 - Gray, S.A., 513 - Grayburn, Sir Vandeleur, 127, 131, 132-33, 218, 223, 280, 286, 289, 293-311, 312-134 - Greig, James, 60, 233, 241-44, 245- 47, 249, 251-52 - Greig, W.G., 356 - Harrold, A.J., 524 - Hawkins, Caesar, 1 - Hawkins, V.A.C., 527 -Henchman, A.S., 280, 283-311, 312- 314 - Hewat, H., 26 - Hillier, E.G., 11, 19 - Hope, W.J., 508 - Hutton, J.H., 479 - Huxter, J.R., 289, 294-95, 299 - Hynd, R.R., 527 - Jackson, Sir Thomas, 1, 16-18, 29, 43, 58, 59, 60-62, 325, 333, 449-50, 477, 478, 522, 527 - Johnston, D.A., 479, 511 - Jones, H.D.C. . , 447 , 453, 489, 516, 543 - Jones, J.R. , 180, 315, 393, 473, 517 - Kirkpatrick, M.C. , 400-1 Knox, E.M . , 273-74 ‧ 5 277 Koelle, F .T., 524- 41 Kresser, Victor , 32 , 36, 42, 43 47, 60, 475-76 Leith, Alexander, 20 , 30, 242, 249 - Lendrum, M.B., 479, 503 - Lun, Denis, 180nl - Lynch, F.B., 287nl5 - Mabey, H.A., 513 - Mackay, W.R.T., 705 - McLean, David, 42, 474 - McLennan, J., 527 - McNab, J., 353 - Mason, V.A., 228, 300 - Moncrieff, R.L., 226 - Morel, E. 47n39, 63, 474-78, 497, 523 - Morse, Sir Arthur, 147, 227, 420, 510, 512, 513, 546-48 - Moutrie, G.C., 517 - Munden, R.V., 626-27 - Muriel, H.E., 50, 510 - Murray, G.S., 155, 177 - Murray, W.C., 312 - Nicholson, J.C., 401, 425 -Noble, G.E., 26, 29, 29n71 , 421, 478, 522 - Ogden, B.J.N., 181, 228 - Ostrenko, A.T., 274n61 , 277 - Padfield, R.E.N., 530, 538-42 - Palisson, J., 473, 513, 516 - Peter, Sir John, 224, 356-57, 489 - Phillips7~St G.H., 530, 534-35 - Price, Wykeham, 401n25 - Rabino, Joseph, 2, 9, 12 - Rogers, Sydney, 3 - Sandberg, M.G.R., 180, 564-65, 603 625 - Sanford, H.C., 267 - Saunders, Sir John A.H., 557-58, 560-61 , 602", 603, 609, 618, 625 - Sayer, Guy, 609, 611, 620, 625, 633 - Smart, J.D., 417, 483 - Smith, J.R.M., 421 - Stabb, Sir Newton, 59, 62-63, 515n2307~527, 540-41 - Stephen, A.G., 7, 456 - Stewart, G.O.W., 228, 564n35 - Thambiah, R., 419 - Townsend, A.M., 43, 50, 325, 438- 39, 442, 446 - Turner, Sir Michael, 228, 601-2, 609, 6f27618, 625 - Tytler, Bruce, 180nl - Vacher, W.H., 43, 48n45, 49, 50, 52 INDEX HSBC/MBLD Staff (cont.): - Vincent , L., 228, 510, - Walker, R.C., 705 - Watson, J.S., 479 , 511 - Wilson, C.H., 527 - Winter, F.B. 133, 221 - Wodehouse, P.G., 180nl, 193-203, 315, 467n - Wood, A.0., 2, 8 - Wood, M.W., 274 - See also staff lists, 228, 699, 708 Hsi Te-mou, 286, 307 Hu Kwang-yung, 234n2 International Oriental Syndicate, 5 Jardine, Matheson and Co., 2, 9, 11, 32, 38, 42, 52n59, 61-62, 63n92, 102, 109-10, 150, 232, 234n2, 236n6, 237-39, 258n41, 405, 517 Jordan, Sir John, 27 Jucker, Sigg and Co., 421, 424 Jurado and Co., 70-72, 73-75, 436 Keswick, William, 1, 9, 11, 61 Keynes, John Maynard, 15 Kipling, Rudyard, 218 Kung, Prince, I-hsin, 234, 235n3 Kung, H.H., 283-84, 287, 297, 304, 306, 311 Kunst and Albers, 343 Lee, Peter [Lee Shun Wah], 99, 111 Leith-Ross, Sir Frederick, 280, 282 Lockhart, James Stewart, 22 Malay States, 163-77 Manchuria, 335-45 Martin Dyce and Co., 400 Mercer, W.T., 36-37 Michie, Alexander, 22, 27 Morrison, G.E. 63, 520 Nissen, Woldemar, 35, 40, 45, 47-48, 59-60, 63n92 Norman, Sir Montagu, 281, 287, 298 Ostasiatishcher Verein [OAV], 524-25 P&O [Peninsular and Oriental Steam Navigation Company], 34, 209-29 Palmer and Turner, 113, 118, 119, 120, 126, 128, 129-35 Panmure Gordon and Co., 259 Pei Tsu-yee, 307, 309 Pekin Syndicate, 9-10 Persia and the Imperial Bank of Persia, 1-13 Pickenpack, Theis and Co, 421 Rice, 479, 508 Rubber, 480, 513 Rogers, Cyril, 280, 289, 297, 303, 307 Russell and Co., 40-41, 61, 62n87 Russell, Sturgis and Co., 47, 436 Russia, foreign policy of, 2-13 Samuel and Co (Taiwan), 346-47n44 Sassoon, Arthur, 41, 62 Shroff, see Compradore Shen Pao-chen, 231-32, 234, 237-38, 251 Siemssen and Co., 39, 62, 498. See also Nissen Silk, 467-73, 480-507, 514 Silver, see Currency Soya beans, 269-76 Sugar, 398, 400, 401-5, 407-8, 436- 37, 452-53, 456 Sutherland, Sir Thomas, 34-37, 42 Soong, T.V., 283-84, 298, 300, 306, 316 South Manchurian Railway, 266, 339, 340 Swire, John, 59-60, 60n83 Taikoo Sugar Refinery, 404-5 Telge and Co., 262 Tso Tsung-t'ang, 238, 239 United Kingdom: Foreign Office atti. tudes to overseas banks, loans, etc, 3-13, 239, 247, 287-90, 301, 302, 305, 307-8, 312, 341-43, 429, 519 Wade, Sir Thomas, 239, 247 Walker and Lumsden, Messrs, 259 Wallich, Hermann, 47, 47n39, 49-50, 476n51 Warner, Barnes and Co., 447, 454, 464 Wilson, James, 157-58 Young, Arthur N., 292, 294, 298, 307, 311, 315, 316 Yuan Shih-k'ai, 8 DATE DUE CARR McLEAN, TORONTO FORM 010105 000 f HG 3354 .H66 E27 1983 Eastern banking: essays in th 63 0 09432 TRENT UNIVERSITY f HG335^ .H66E27 1983 Eastern tanking. Q Q 0 0 Q ' --*3-^1 / / . 1 J O DATE ISSUED TO 382288 CD