Dan Du on Grant, The Chinese Cornerstone of Modern Banking

Following is the first entry in what the BHC web editorial team hopes will be a long-running series of essays by Emerging Scholars that explain how a recently published book in business history has influenced their own research. To submit an essay for consideration, please contact Books of Interest editor Professor Eric Godelier.

Frederic Delano Grant, Jr., The Chinese Cornerstone of Modern Banking: The Canton Guaranty System and the Origins of Bank Deposit Insurance, 1780-1933 (Leiden; Boston: Brill, 2014)


By Dan Du, University of Georgia


On June 26 1933, when the Great Depression had devastated the American economy and collapsed over one-third of U.S. banks, Franklin D. Roosevelt signed the Banking Act and implemented the national deposit insurance program, thus restoring trust in the American banking system. Since then, this program has spread to about one hundred nations. However, is this world-renowned program an American “innovation”? The answer is “no." Frederick Delano Grant, Jr. argues that this idea—the collective financial liability—originated in China, which, ironically, is one of the nations currently without explicit deposit insurance programs.

Grant, a Boston lawyer and a historian of Chinese maritime foreign trade, relies on law case records and mercantile papers to trace the history of this program in his 2014 book The Chinese Cornerstone of Modern Banking: The Canton Guaranty System and the Origins of Bank Deposit Insurance, 1780-1933. From Joshua Forman’s speech to the New York legislature on the Safety Fund Act of 1829, usually a footnote to U.S. banking history, Grant discovered this fascinating story: the transplanting of Chinese Hong Merchants’ Guaranty System to the New York banking industry, which inspired national bank deposit insurance in the U.S. and worldwide. Under the Chinese Guaranty System, Hong merchants were collectively liable for each other in case of failure. Employing the Consoon Fund, the major source of which was the hangyong tax levied on the China trade, they successfully liquidated some foreign debts and established their creditability. However, Qing officials’ exactions and the lack of independent management to maintain sufficient reserves exhausted the Fund. Unpaid debts snowballed and the system eventually failed. However, the U.S. socio-economic system invigorated this Chinese idea; bank deposit insurance—with independent administration and limited liability—came into being. “The reception by a society that was already recognized as strongly individualistic of a Chinese practice that imposed liability on a collective basis is itself notable,” as Grant remarked (Grant 220). This research, therefore, elaborates the tremendous influence of ideas—transmitted across time, space, and different economic-political structures—on American business and legal institutions.  

To portray the Chinese Guaranty System, Grant’s research focuses on Hong merchants’ debt problems with not only the British, but also American, merchants. The large size of Chinese loans to Americans—in the form of promissory notes, instead of silver—uncovered by Grant’s work reoriented my research. My dissertation, “This World in a Teacup: Chinese-American Tea Trade in the Nineteenth Century,” investigates the production, transaction, transportation, and consumption of tea in China and the United States. How American merchants purchased tea from China is an emphasis of my dissertation. Previous researchers’ preoccupation with the large volume of silver carried by American vessels to Canton has led them to portray a hard-money system. However, my research shows that silver remained the “real” money to liquidate account balance in the China trade, but not necessarily the means of payment for each transaction. Chinese commercial credit was equally, if not more, crucial in sustaining the Chinese-American tea trade.

Chinese extended credits to Americans to facilitate tea transactions in three ways. First, they sold tea to Americans on credit. In this costly tea trade, paying in cash for each transaction was too expensive and inconvenient, especially given the difficulty to collect specie in the United States. If lacking money on account or in hand, Americans wrote promissory notes—proofs of debts acknowledging the due date and rate of interest—to Chinese merchants. These notes were usually due in 12 months or even longer, thus giving them more time to buy specie and settle their debts. Second, Chinese consigned tea to Americans for sale in the United States. If American consignees remitted the net proceeds to their Chinese consignors immediately after the sale, this was not counted as a form of credit. However, American merchants usually invested the money in other business, wrote promissory notes to their consignors, and remitted the amount in the future, so consignment sale constituted another form of Chinese commercial credit. Third, Chinese notes had a derivative function. American merchants remitted Chinese promissory notes—this negotiable financial instruments—to their agents or creditors at Canton, sometimes in preference to Spanish silver.

In this way, Americans shipped a considerable amount of specie from the U.S. to China to pay off their notes, up until the late 1820s, when English bills of exchange—including bills on India (Bombay and Bengal) and England (drawn by American merchants on their London agents)—became a profitable investment. The thriving opium and cotton trade between Chinese and Anglo-Indian merchants produced a bill market in Canton, where Americans could sell English bills of exchange—generated by the Anglo-American cotton trade—to raise money for tea purchases. Thus, the volume of specie shipped by Americans to China sharply dropped after 1826, thus transforming the financial structure of the Chinese-American tea trade.