Introduction

This chapter lays out the conceptual framework needed to grasp the challenges facing exchange bankers in late nineteenth-century Asia. It borrows from the transaction cost literature underlying the study of the structure of the international monetary system; and it subscribes to the notion that such structure is the product of international currency competition. In the historical literature, applications of these insights are surprisingly scarce. Yet it is demonstrated that, by (1) settling on the existence of a distinction between ‘center’ and ‘periphery’ and (2) the existence of ‘network effects’, the transaction cost approach may explain the persistence of monetary arrangements in the long run. Remarkably, seemingly ‘retreating’ currencies retain a degree of superiority that would not be warranted in case network effects were absent; vice versa, non-liquid currencies have only a very small chance at climbing the ladder of currency prestige—they are structurally disadvantaged. It is argued that the distinction between center and periphery is real, not just analytical, and has had tangible implications for monetary and financial policy makers in the fields of sovereign debt and trade finance.

Conclusion

Although a conclusion is mostly thought of as a recapitulation of findings in the preceding chapters and as an indication of the legitimation with regards to the way in which these findings build on one another, this is not my intention here. Instead, I am inclined to expatiate on what has been an encompassing interest that preoccupied many of the above findings, yet which I was not able to include because of the difficulty of proof. It concerns the question whether the ‘even keel’―a hedging strategy pertaining to the bank branch network level of analysis―can be believed to have been conducive to strengthening trade ties between the gold standard Western countries and the East, either through...

Yokohama Specie Bank Flow-of-Funds Analysis

The main aim of this chapter is to demonstrate how the implementation of an intra-branch exchange risk hedging strategy can be traced cross-sectionally, that is, by means of snapshots of banking practice at certain points in time. After documenting the Yokohama Specie Bank (YSB)’s early history, it is demonstrated how the bank went through different managerial phases. YSB development in China on a silver basis is explained as a natural consequence of hedging practice, in contrast to the tendency to treat the latter as an anomaly. At all times, the bank could not neglect the realities of the world’s monetary geography. Willingly or not, YSB’s cadre had to take into account the fact that the bank’s center of gravity would, almost inevitably, move towards Shanghai; YSB’s decentralized operating in the many industrial and commercial centers of Manchuria was the consequence of government policy, on the one hand, and the severely limited credit conditions within the regions, on the other.

‘On an Even Keel’

Drawing on descriptive evidence from journalistic outlets in nineteenth-century Shanghai, this chapter reconstructs the debate on how fluctuations in the silver price could be accommodated in bill finance. It is demonstrated that this was effectuated by means of the ‘even keel’, a management strategy arguably pioneered by the Hongkong and Shanghai Banking Corporation (HSBC). Concretely, amounts of bills bought were matched by amounts of bills sold; bankers used ‘swap’ operations (i.e., they simultaneously purchased and sold bills in one currency for bills in another currency for the same quantity, in order to offset them) in order to eliminate exchange rate risk. This is shown quantitatively by means of flow-of-funds data of the Yokohama Specie Bank. The chapter concludes with several admonitions for existing macro-historical research.

Silver Risk, Silver Exports, and Sovereign Debt in the Nineteenth Century

Whereas in the traditional view, bimetallism has been considered innately flawed, and the worldwide adoption of the gold standard, for that reason, inevitable, this chapter finds traces of evidence of the opposite course of events. Building on a revisionist strand in the literature, it describes that, for the period 1871‒90, contemporaries viewed silver as an essential ingredient of the international monetary order. They had, therefore, no immediate reason to question its credibility in the denomination of a country’s sovereign debt; instead, they considered the likeliness that a country would be able to continue to service its debts more or less independently of the denomination of these debts; and they were preoocupied by the question of whether currency risk should be taken by the issuing country or investors. Silver’s credibility eroded gradually, for instance through adding premia to bond issues; only in the 1890s was its credibility lost.

Trade Finance in the Late Nineteenth Century

Trade finance was revolutionized at several crucial junctures of the late nineteenth century. Before the 1870s, bill business was only loosely monitored, as fluctuations in the gold price of silver were minimal, being kept in check by France’s bimetallism. France’s decision to ration (1873) and later abolish silver monetization altogether (1876) made this practice untenable. This chapter explains that silver fluctuations were behind the contraction of bill business and the fall of several exchange banks. Only in the 1880s could the tide be reversed, mostly thanks to the introduction of the ‘interest bill’. In this chapter, it is furthermore demonstrated that the financialization of bill finance led to a remarkable development in international finance: the birth of so-called ‘carry trades’ between money markets in Europe and the less liquid world periphery.