International Banking in Hong Kong in the 1860s
International Banking in Hong Kong in the 1860s
The rise of the large British and American tea and opium trading firms in the middle of the 19th century coincided with the growth of international banking. Trading companies such as Russell & Co., Smith, Archer, & Co., and Baring Bros., all of which are mentioned in the Gold journal, began as traders and then expanded their operations to include investment banking. Because the networks created by these companies were so large, it was possible to overlay a credit network on top of pre-existing trade relationships; ships carrying tea and opium could very easily carry letters of credit between different banks.
Following the Opium Wars (1839-1842 and 1856-1860), European and American merchants, enjoying their diplomatic protection, were able to exploit the Chinese market and make large profits off tea and opium. Russell & Co., for example, expanded its opium trade into the interior of China during the 1840s following the first Opium War. By 1860 the firm was operating in the Philippines, Hong Kong, and Shanghai at least, with connections to other large trading firms such as Baring Bros., a London-based trading company. These companies, having dominated the China trade for years, were able by the 1850s and 1860s to expand their operations. Baring Bros., an established bank, led the way by introducing credit banking to the region (Baring Archive). The British territory of Hong Kong became a financial center. The other firms followed by expanding into banking themselves.
In the ledger at the back of his journal, Cornelius Gold mentions receiving cash from Russell and Sturgis (a division of Russell & Co.) as well as receiving bills of exchange from Baring Bros. & Co., drawn by Russell and Sturgis (Gold 62-63). These large trading houses worked just as banks do today. Gold had a line of credit from Russell and Sturgis and used Baring Bros. to exchange his currency from dollars to pounds in Hong Kong. Gold also mentions receiving money from his mother, which he receives from Smith, Archer & Co. in Hong Kong. Smith, Archer & Co. was a tea trading company that had only opened its operations in Hong Kong in 1861 (May, “Expanding Horizons”). Cornelius Gold arrived in Hong Kong that same year. Using its trading network, Smith, Archer & Co. was able to give Gold cash from his mother with her having paid the company in the United States. This is an impressive feat in the age before telecommunications, as information about that credit would have to have arrived via ship, likely via a trading ship.
By the 1860s, merchants in Hong Kong used paper banknotes. Although the economy functioned on a silver standard, to facilitate trade merchants and bankers used paper money. It was then possible to issue credit and checks. With a currency exchange involving paper money, it became crucial to maintain exchange rates so that paper money would hold its value, especially among merchants who were frequently travelling. Because of its proximity to China and the prevalence of Chinese merchants and bankers in Hong Kong at the time, banking in Hong Kong was closely tied to the already established Chinese banking system. Upon verification of the account balance, funds could be transferred with only a signed letter between banks (Brown 66). This process was known as the “tael-transfer” system, so named for the unit of measurement of silver. Using credit exchanges, banks could simply pay each other instead of paying the client who would then pay the other bank (Brown 68). This system functioned well in China among its native banks and was in practice at least as early as 1850. Baring Bros. was involved in credit banking as early as the 1820s. As Baring Bros. was known to have been operating in Hong Kong in the 1860s, a system similar to the tael-transfer system would likely have been in place in Hong Kong in 1861.
By the 1800s banks were increasing in size and action. Starting with the “cheque” back in the 1600s, people would pay debts through a courier, which could only deal with a specific bank. By the 1800s, London had the bankers’ Clearing House, a designated area that allowed banks to pay each other directly. As global trade increased, England’s system of currency exchange grew more and more popular. With this, companies like Russell and Sturgis and Baring Bros. expanded to China , the hot-spot for trading at the time. Merchant banks were also a big component for bill exchange. It was a useful feature for people like Cornelius Gold because instead of the merchant banks issuing their own money like the other banks, they provided credit to people by endorsing the paper bills they had from other banks (Mokyr 257). Baring Bros., one of the largest English merchant banks, simplified the process of international credit exchange. At the same time, the Chinese government had their own paper currency known as “flying cash”, which was never considered as legal tender. “Flying cash” was solely utilized by the merchant bankers, as it was an easy way to quickly pay local merchants. The “flying cash” could then be converted into hard cash at the capital.
- Matheos Lopez and Dan Gossels
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