How Chinese banking can profit from a borrowed idea of old Canton
Andrew Sheng discerns lessons about the importance of strong supervision of risk-taking
The best Christmas present I got last year was a preview of a forthcoming book by a banker-historian in Boston. He sent me his doctoral thesis, a piece of masterly detective work on how ideas travel over time and space, become adopted successfully in a different place, and then come back to where they started.
Dr Frederic Grant Jnr's forthcoming book uncovered how the US bank deposit insurance system has its root in ideas borrowed from 19th-century Canton. The origins of the US deposit insurance scheme arose from the 1829 Safety Fund Act of the state of New York, first drafted by an entrepreneur named Joshua Forman.
In those days, if the state-authorised banks failed, the state would have to pay for their failure. Forman borrowed the idea from Canton that those authorised for privileged trade (in banks, the privilege of private currency issue) should be responsible for their own debts.
The success of the New York safety fund inspired the adoption of similar schemes by other US states. The Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC) following the failure of many banks across the US. This idea of a national deposit insurance scheme has been widely adopted around the world, and is currently being considered in China.
How did Forman get the idea about the Canton system? Apparently, New York was already a major port for US-China trade and the scheme was familiar to New York businessmen.
How did the Canton system evolve? It all came about because the Qing dynasty official merchants, namely merchant houses (or hongs) authorised by Beijing to conduct foreign trade, often required trade credit to do so. If these traders defaulted on their loans, the foreigners threatened to take action on the weak government. Hence, in order to prevent individual merchant failure, the Qing government used a collective responsibility method evolved by the Manchu court that ensured those authorised to benefit from foreign trade also guaranteed each other's trade debt, and a premium was paid yearly into a fund to pay off any individual failure.