Abstract

"The Financial Revolution in Republican China: The Case of Indirect Issuance of Banknotes, 1905-1936"

Meng Wu, Manchester Metropolitan University (daisywu625@gmail.com)

This study examines the system of indirect banknote issuance in Republican China, known as lingquan (领券). Indirect issuance occurred between banks without note-issuing rights and those that were authorised issuance rights. Under a decentralised issuance system operating on a silver standard, non-issuing banks placed reserves—such as silver, bills of exchange, or government bonds—with note-issuing banks and collected equivalent amounts of banknotes for issuance. Each banknote issued indirectly bore a mark, such as numbers or letters, allowing the issuing bank to distinguish which non-issuing bank had collected it.

As a unique issuance system, the indirect issuance system was established when a mix of different currencies circulated concurrently. Over the course of its operation, the system enabled Chinese banks to accumulate reserves in large issuing banks while utilising the extensive networks of smaller, non-issuing financial institutions to circulate banknotes. With indirect issuance, Chinese banks broke the foreign banks’ monopoly on banknote issuance, fostered public confidence in domestic banknotes, expanded the money supply, and accelerated the development of China’s modern banking system.

To understand the indirect issuance system, this paper examines the following questions: First, how did indirect issuance function between issuing and non-issuing banks? Second, what motivated non-issuing banks to engage in indirect issuance? Third, given the remarkable increase in the money supply between the 1910s and 1930s, how much of it was issued indirectly? Our preliminary results indicate that, as a financial innovation, indirect issuance evolved through the design and modification of various indirect issuance contracts and reserve requirements. In addition, compared to banks that did not engage in indirect issuance, those that did had a larger income, more branches, and more staff on average. This suggests the underlying motivation for non-issuers to engage in the indirect issuance. Moreover, the system also fuelled the money supply during the Great Depression, which sustained monetary stability and mitigated economic contraction in China.