Yuan Shikai government had faced financial straits since its formation. By the end of 1912, Yuan's government had owed more than 170 million yuan. As Yuan Shikai sought to restore the imperial system in 1914, it saw a sharp increase in military expenses, with the treasury running out of money. Therefore, Yuan' s government misappropriated the reserve against notes of Bank of China and Bank of Communications and forced the two banks to issue a large volume of bank notes for military expenditure, resulting in severe inflation.
For "distrust of the bank note", the government troops asked for silver dollars. Yuan's government had no choice but to withdraw silver stock from the exchequer and distribute it to the army, while Bank of China and the Bank of Communications witnessed their silver dollars stock declining dramatically. Moreover, due to the rapid growth of advances to the government, the bank note issuance amount of Bank of China and the Bank of Communications rocketed up to 38.44 million yuan and 37.29 million yuan respectively by the end of 1915, followed by a wavering of social confidence in exchange certificates issued by the two banks.
To preserve the limited silver dollars, on May 12, 1916, the Yuan Shikai Government issued a nationwide astonishing decree to cease honoring the exchange certificate of Bank of China and Bank of Communications as well as to stop paying deposits in cash, which triggered an enormous commotion. However, Bank of China Shanghai branch decided to resist against the decree and reduced its impact to the minimum.
Bank of China Shanghai branch made it known on newspapers that it would continue redeeming bank notes to resist the government's decree.
Thanks to the precaution by the shareholders of Bank of China, Bank of China Shareholders' Association was established as early as April 1, 1916 as the backbone to cope with incidents. After the publicity of the above suspension decree, the Association promptly released a public notice to stress, "Among all branches of Bank of China, no one is more important than Shanghai Branch given Shanghai's position as the country's financial hub as well as the attention focus of both China and foreign countries. To protect Bank of China, we must start with its Shanghai branch. As witnessed in the past, despite the overall collapse of the former Bank of Great Qing, the shareholder association used to fully support the Shanghai branch to remain safe."
Before the Decree was delivered, Bank of China Shanghai Branch had made sufficient preparations. After receiving the Decree from the State Council, Bank of China Shanghai Branch took the lead to resist it, and the Shareholders' Association immediately held a meeting, agreeing on five responsive measures: to select two supervisors by the Association for assistance of Bank of China in overall management of banking affairs; to engage two lawyers to take over the properties of Bank of China on behalf of shareholders; all reserves against notes to be transferred to the lawyers for management; to issue newspaper notice announcing that Bank of China and its branches would keep abiding by the normal rules to honor banknotes; and matured deposits to be paid in cash as usual.
Song Hanzhang and Zhang Jia'ao, leaders of Bank of China Shanghai Branch, placed the bank creditability before everything else. In a telegraph reply to the government, they said, "We will make all efforts (to maintain normal operation) and won't stop redemption until we have no cash left." However, such resistance by Bank of China Shanghai Branch led to many difficulties. The biggest problem was that Yuan's government in Beijing might dismiss the responsible persons in excuse of their disobedience of governmental decrees, so it would be hard for the bank to implement the resistance plan. Therefore, Song Hanzhang, head of Bank of China Shanghai Branch, went to visit the judge of the Shanghai Mixed Court to inquire how to sustain the service of managers and assistant managers of the Branch for a few days to resist the decree. The judge held that an interested person of Bank of China could pretend suing these managers of Shanghai Branch, so during the proceedings the Beijing police authority would not be allowed to arrest any of them. Bank of China Shanghai Branch did it and avoided the trouble.
On May 12, Yuan Shikai Government officially announced the decree to cease redemption of bank notes, which brought forth the most serious panic in the history of Shanghai's financial industry. It was also the first day of the severest test faced by Bank of China Shanghai Branch. In the early morning, customers flocked at the gate of the bank. In his self-narration, Zhang Jia'ao recalled, "At 8:00 I left my house to work. Standing across three roads away from my bank office, I could catch the sight of crowds around the building. I barely pushed myself near the door of the bank, finding that the customers were far more than 2,000. People were in a mad rush to be the first by punching the door and climbing through the windows, regardless of their own safety. Yet, all that were held in their hands were just pieces of bank notes of one yuan or five yuan, or a deposit receipt of two or three hundreds yuan."
On May 13, Saturday, Bank of China Shanghai Branch made an newspaper announcement to extend the business hours to afternoon, making the number of customers running on the bank that day decrease to around 400.
On May 14, Sunday, Bank of China Shanghai Branch opened for half a day to accept the withdrawers, and the number of those people already declined to less than a hundred.
Bank of China Shanghai Branch announced on newspaper to extend business hours for banknote redemption
On May 19, the bank run turmoil completely subsided.
The Decree brought far-reaching and serious impact to the national financial industry. Market panic occurred in Beijing with the commodity price rocketing; pawn shops stopped impawning and only serving redemption; firms ceased trading; and the whole market was bleak. Moreover, the Shanghai financial market was under extreme chaos with private banks across the city all suspending redemption of bank notes due to the soaring price of silver coins, and some banks were haunted by cash shortage till shutdown.
During the redemption turmoil, Bank of China employees adhered to a resolution of "would rather face execution than obey in humble silence", decisively resisting the Decree. With the influence of Bank of China Shanghai Branch, branches in Taiyuan, Hankou, Jiujiang and other places all refused to implement the so-called "Suspension Order". Finally, the victory against the Decree of Yuan's government lifted the creditability of notes issued by Bank of China and won wide acclaim for the bank.
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