I have given an account of the system of banking as it prevails in China to-day, with brief references to its development since the earliest times. One who has the slightest experience of the progress of recent events in China, not to speak of the several muddles in the past, would have no hesitation in coming to the conclusion that there is a great deal in the methods of Chinese banking which needs improvement and alteration. Here, again, we nave an argument in the vicious circle; banking is unsatisfactory because currency is in a state of chaos, and currency is what it is to-day because banking is far from what it ought to be. The question is: how to improve the position of Chinese banking and make it really useful to the welfare and commerce of the country. One noteworthy feature of the position of banking in this country, as I have already stated, is that there has been no control at any time in its history by the government. This worked both ways, as for centuries past the Government has been ever inefficient so far as financial control is concerned. On many occasions, the Government has interfered with banking only when it wanted to get money cheaply, by issuing inconvertible notes without the backing of reserves. Until very recently, banks in China were absolutely innocent of taking advantage of the privilege of issuing paper money; even recently, that is, before the revolution of 1911, only quasi-Government institutions and the very worst of Chinese banks ever resorted to issuing paper money. Every time the Government resorted to paper, the public showed its lack of confidence by almost immediately depreciating the paper, in spite of threats and admonitions. Oftentimes, the principle that the state could make money in unlimited quantities by the proclamation of a law, which laid the obligation on its citizens to accept the state paper money at its full nominal value, has been proved to be fundamentally wrong. If the paper was accepted for the sake of appearances and in order to escape the punishment threatened by the Government, prices were increased to such an extent as to cover the anticipated depreciation in value. Therefore, the best of native banks in China have always fought shy of either issuing paper money themselves or of taking the paper money of the Government. As there was no proper currency, they always preferred to deal in silver and commodities and in the process of exchange between them.
From ancient times banks in China have, in a way, performed the original purpose of the guarantor as also the saving of time, trouble and money. The Shansi banks which had been in existence since the tenth century until they disappeared in 1911 facilitated the exchange of commodities between distant provinces, long before such a process was possible in Europe. They saved the trouble, risks and expenses incident on unnecessary despatch and redespatch of silver. The local native banks have not had the same scope, but they also did a great deal towards saving money." But there is an essential difference between the way in which banks in Europe have done it and the practice followed in China. In Europe the saving of money was facilitated by the growth of a system of credit; in China, as I have pointed out often, there has never been credit in the modern sense of the word; but there has always been noticeably an extraordinary amount of personal trust. Banking in China has, even to-day, not understood the meaning of mortgage, although, however, the pawnshops which seem to be one of the oldest of institutions in this country have known and appreciated the value of pledges. In business in this country there has never been anything but clean credit, while with foreign banks there is never any clean credit, except in the rarest of cases. Another point worthy of note is that, even to-day, banking in China is not a public institution in the real sense of the word. Native banking has been, and is to-day, entirely a mechanism for the furtherance of trade. Unlike the case with foreign banking, the public have very little to do with the native banks; they do not deposit their funds in, nor do they draw upon the banks; there is no system of cheques, as is known in foreign banking; and the general body of the people is entirely unconcerned as to what becomes of native banks. These institutions obtain their deposits, only from the Government and from the merchants; and lend out money only to dealers. They are, as is well known, proprietary institutions, not understanding properly the meaning of public credit. Naturally unlike well regulated European banks, they are dependent on a few traders and thus get themselves drawn into the vortex of questionable transactions. As a consequence, it is rather difficult to conduct average native banks on sound banking lines, not because the Chinese are inept or dishonest, but because no institution can do the ordinary business transactions and be a bank at one and the same time. The native banks grant loans and advances on clean credit; but they do not always understand properly the necessity of meeting immediately any demand made upon them by their depositors. The genesis of the trouble is that clean credit is not compatible with perfect security; and the native banks at present have practically no means of doing business except by means of clean credit, which system has been prevalent in this country for centuries.
So far as acting as the medium of the circulation of money between the Government and the public is concerned, banks in China have done practically nothing, simply because they were not called upon to do so. The Government had no money to put into circulation, except paper, which depreciated as quickly as possible. The banks were, for some reason or other, never approached seriously to put paper money into circulation; possibly the Government was aware of the fact that they could do very little in that direction. Whenever they had occasion to put out paper during recent years the Government created institutions like the Provincial banks; but the advantage these banks have had in the handling of Government money, however depreciated it might have been, was nullified by the fact of the trade keeping away from them. The regular native banks and the well established merchants never recognized even the coins of the Government. They only received bar silver, or silver in the shape of sycee, freely; as a matter of fact, they preferred the sycee. Whatever silver was imported into China was always melted and made into sycee, and even the sycee of one place was melted and converted into the sycee of another as soon as it had to become the reserve of the banks in the latter place.