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Ten Years' Endeavor to Solve the Beijing Banknote Issue (1916 -1923)


 

The so-called "Beijing Banknote Issue" was actually the direct product of the Redemption Suspension Decree promulgated by the Yuan Shikai Government. Although its enactment lasted only a week, the resulting problems posed very extensive and far-reaching impacts on the whole country. The Beijing banknote issue was a very typical example.

"Beijing Banknote" refers to those banknotes circulated in Beijing issued in succession which yet could not be honored after the order of redemption suspension released by Yuan's government. Beijing implemented the decree earlier and deeper than other places and also was under the greatest pressure after the resumption of honoring banknotes. Causes of that situation were as follows:

Ⅰ. Beijing was the location of the central government, with no room of flexibility for execution of the suspension decree.

Ⅱ. The head offices of Bank of China and Bank of Communications were both in Beijing, which made the two banks directly exposed to the pressure of advance and excessive issuance of banknotes from the Ministry of Finance.

Ⅲ. All advances or borrowings to local governments by Bank of China were eventually converged in Beijing, hence huge payment pressure.

Ⅲ. All advances or borrowings to local governments by Bank of China were eventually converged in Beijing, hence huge payment pressure. In summary, the Beijing Banknote Issue was a difficult problem unresolved for years, disrupting the market, harming people's livelihood, and resulting in market panic and rising prices. In his Essay under the Lamp (Deng Xia Man Bi), Mr. Lu Xun (one of the greatest writer and literary theorists in the 20th century) once had such a description: "I still remember that at that time I had about thirty or forty yuan of banknotes issued by Bank of China and Bank of Communications, but all of a sudden, I almost became a pauper unable to afford a single meal...". It was a true portrait of the Beijing Banknote turmoil.

The handling the Beijing Banknote Issue was divided into five phases.

First phase: From May 28, 1916 to June 30, 1917, preparations for resumption of redemption till the failure of first redemption.

In view of the recovery of banknote redemption business by Bank of China branches in most areas, Bank of China Beijing Branch planned to resume redeeming notes on October 26, 1916. But such a plan was not approved by the authorities. After a congress debate with an inclusion of a compromising proposal that reflected views of all parties, the congress approved that "Bank of China may firstly resume the banknote redemption business while Bank of Communications shall gradually come to deal with such issues". But before the re-opening of cash business, the emperor political camp (the Communications Clique led by Liang Shiyi) and speculators had bought in, at low price, a large number of banknotes issued by the above two banks and held to be honored. So after resuming banknote redemption, almost everyday the bank counters were taken up by those speculators and officials while common people were deprived of the opportunity and the banknote deviated from the cash par value. Finally such redemption already turned into an important tool for financial speculations and cheatings in both public and private sectors, thus consequently ended in failure.

Second phase: From July 1917 to December 1917, accomplishment of controlled redemption.

According to the order by the Ministry of Finance, Bank of China handed over all banknote redemption issues to the police for temporary processing. Bank of China made redemption of 40,000 yuan each day and transferred them to the police for collection and supervision; then from July 25, 1917, the Beijing police authority started operating the cash redemption business simultaneously in twenty subareas in Beijing and regulated that the limit for each person was one dollar per day till the daily quota was entirely cashed out. So each day there were about 50,000 to 60,000 people queuing up for cashing, but before long this operation had to stop because such method was no good for the price stability of banknotes.

Third phase: From January 1918 to September 1918, the issuance of both long and short term government bonds in the seventh year of the Republic (1918) to handle the Beijing Banknote Issue.

After two failures to re-open banknote redemption business, the government, Bank of China and Bank of Communications all realized that for resumption of cash transaction, the fund resource was the first problem to resolve. So after borrowing a government loan of 145 million yen from the Japanese government, the Chinese Government eased some financial difficulties. And at the request of Bank of China and Bank of Communications, respectively on January 25 and April 27, 1918, the Chinese Government issued the Republic Seventh Year Short-term Government Bonds of 48 million yuan and the Republic Seventh Year Long-term Government Bonds of 45 million yuan both at interest rate of 6%. Bank of China was assigned to sell total bonds of 49 million yuan, including short-term bonds of 24 million yuan and long-term bonds of 25 million yuan. By the end of June 1918, Bank of China had sold the two types of bonds of 24.81 million yuan. But due to the new advance of 17 million yuan to the government, the circulation amount of Beijing Banknote actually reduced by 7 million yuan only. Meanwhile, because of its narrow usage of the Beijing Banknote, the public lost their confidence in such banknotes, resulting in constant falling of the banknote price. Bank of China earnestly suggested to the Ministry of Finance that no more order be made to force banks to advance banknotes from now on." And the Ministry of Finance stated in the reply to the two banks: "The Government decides that from the date of October 12, 1918, Bank of China and Bank of Communications will not be required to make advance with the Beijing Banknote, and that the two banks, except for payment of deposits by the Beijing Banknote, shall not use such banknote as business fund." The biggest gain in handling the Beijing Banknote Issue was that the Ministry of Finance promised not to compel the two banks to give advances to the government, and such a promise became the key solution to the Beijing Banknote Issue.

Fourth phase: From September 1918 to September 1920, handling of the renewal issuance of the Republic Seventh Year Short and Long-term Government Bonds.

Despite the decrease of the Beijing Banknote volume, the banknote price kept going down. The Ministry of Finance filed a letter to the President, applying for the renewal issuance of the above government bonds deposited in the two banks to collect the Beijing Banknote. However, due to public doubt of the redemption capacity of such bonds, the renewal issuance sales encountered difficulties. In addition, the banknote price was fluctuant with warfare impact; it once again became a speculative tool.

Fifth phrase: From September 1920 to December 1923, through issuance of the Republic Ninth Year Short-term Government Bonds for Finance Treatment by the Chinese Government and the issuance of term deposit receipt by Bank of China, the clearing of the Beijing Banknote Issue achieved its final completion.


Ten-yuan Government Bond issued by the Ministry of Finance in 1920 with Bank of China and Bank of Communications as the issuing agents

The Ministry of Finance kept its promise of not requiring the two banks to make advances for the government. But due to fiscal hardship, it determined to issue the Republic Ninth Year Short-term Government Bonds of 60 million yuan, of which an amount of 36 million yuan of such bonds was allocated to the Bureau of Government Bond for sale, and accordingly the Beijing Banknote recalled as per par value of the bond was entirely destroyed, while the residual 24 million yuan of such bond was maintained by the Ministry of Finance and the Ministry of Communications to clear the guarantee loans for the Beijing Banknote. The Bureau assigned the above bond with value of 24 million yuan to Bank of China, yet due to debts of more than 34 million yuan owed by the Ministry of Finance, Bank of China still had to raise over 10 million yuan on its own to fully recall the Beijing Banknote. Therefore, Bank of China proposed to recall the Beijing Banknote with corresponding term deposit receipt, with the respective principal and interest being born by Bank of China for the Government. Since Bank of China announced the decision on term deposit receipt, the Beijing Banknote amount for replacement of the term deposit receipt had exceeded 22 million yuan, much more than the initial cash demand of about 10 million yuan.

Finally, the Beijing Banknote issue lasting nearly one decade was solved.

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