The Chinese Cornerstone of Modern Banking

The Canton Guaranty System and the Origins of Bank Deposit Insurance 1780-1933


Modern bank insurance is traced to its roots in The Chinese Cornerstone of Modern Banking: The Canton Guaranty System and the Origins of Bank Deposit Insurance 1780-1933. Frederic Delano Grant, Jr. provides new understandings of the Canton System, collective responsibility for debt at Canton, and the history of deposit insurance.

The Canton Guaranty System inspired radical reform in New York in 1829 – the ancestor of all modern deposit insurance. Yet it was never the success imagined, and soon failed. In the Opium War, the Chinese government as implicit guarantor was forced to pay its debts in full on 23 July 1843. The afflictions of the Chinese system, including moral hazard, too big to fail, and unenforced laws, remain familiar today.

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Frederic Delano Grant, Jr., J.D. (1983), Boston College Law School, and Ph.D. (2012), Leiden University, is a Boston, Massachusetts lawyer who has written extensively about the business and legal history of China’s maritime foreign trade.
“As the United States and China are today inextricably interlocked in trade and investment, so too are their legal systems. This makes knowledge of the origins of this world-shaping economic cooperation, and the roles of law in its development, more important than ever. Frederic Grant’s well-researched and interesting book sheds new light on all of this and China’s previously-unknown influence on American business law in the nineteenth century.”
Jerome Alan Cohen, Professor of Law, New York University School of Law

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."
Andrew Sheng, Distinguished Fellow of the Fung Global Institute, Chief Advisor to the China Banking Regulatory Commission, former Deputy Chief Executive of the Hong Kong Monetary Authority

“This is both a pioneering and a path-breaking study. Crossing national as well as disciplinary borders, it traces bank deposit insurance, the cornerstone of efforts to secure the stability of modern banking systems worldwide, to its origins in a government mandated private guarantee fund set up by the Cantonese hong merchants before 1800. Although that fund eventually failed due to moral hazard and other all too familiar problems, it had already become famous for its effectiveness, and was taken as the inspiration for banking reform in the United States. Using evidence from records of Western traders and North American law case records, and drawing on the author's rich experience as a lawyer and legal historian, this book shows the self-confidently global activity of these Chinese merchants and trade financiers. This is a substantial and innovative contribution to the global history of economic and legal institutions.”
Rudolf Wagner, Senior Professor, Institute of Chinese Studies, Heidelberg University.

“Frederic Grant's legal history sleuthing enriches in stunning ways our understanding of old Canton as a nexus of globalization.”
John E. Wills, Jr., Emeritus Professor of History, the University of Southern California
Acknowledgements ... ix
List of Illustrations ... xii
List of Tables and Charts ... xiv
Note on Spelling ... xv
Glossary ... xvi

1. Introduction ... 1
1.1 Subject and Framework .... 3
1.2 Previous Research ... 8
1.3 The 1829 Crisis in the State of New York ... 13
1.4 The Crisis in the Chinese Port of Canton: 1829 ... 15
1.5 The 1829 Crises as Prologue ... 16

2. Sources of the Canton Guaranty System ... 18
2.1 Conquest and Pacification ... 18
2.2 The Organization of Merchants Engaged in Maritime Trade ... 31
2.3 Official Roots of Collective Responsibility ... 39
2.4 Collective Responsibility in Chinese Tradition ... 47

3. Evolution of the Canton Guaranty System ... 54
3.1 Official Management of Maritime Foreign Trade ... 54
3.2 The Security Merchant System and Origins of Collective Responsibility ... 60
3.3 The Formal Regulation of Maritime Foreign Trade ... 71
3.4 Debt Collection Under the Canton System ... 93
3.5 The 1780 Crisis and Imposition of the Collective Guaranty ... 111

4. The Fund is Drained, 1780-1799 ... 126
4.1 The Hong Merchants, 1780-1799 ... 127
4.2 The Demands of Government, 1780-1799 ... 129
4.3 Trading Conditions, 1780-1799 ... 132
4.4 The Collective Guaranty of Debt, 1780-1799 ... 138

5. Three Plagues: War, Piracy and Litigation, 1800-1814 ... 146
5.1 The Hong Merchants, 1800-1814 ... 148
5.2 The Demands of Government, 1800-1814 ... 151
5.3 Trading Conditions, 1800-1814 ... 154
5.4 The Collective Guaranty of Debt, 1800-1814 ... 157
5.5 The Abortive 1810 Receivership of Gnewqua II and Ponqua ... 159
5.6 The 1813 Receivership of the Junior Hong Merchants ... 163

6. Years of Rebound and Opium, 1815-1828 ... 166
6.1 The Hong Merchants, 1815-1828 ... 166
6.2 The Demands of Government, 1815-1828 ... 170
6.3 Trading Conditions, 1815-1828 ... 171
6.4 The Experience of Conseequa, 1796-1823 ... 173
6.5 The Collective Guaranty of Debt, 1815-1828 ... 184

7. The Last Years of the Canton System, 1829-1842 ... 192
7.1 The Hong Merchants, 1829-1842 ... 194
7.2 Trading Conditions, 1829-1842 ... 202
7.3 The Collective Guaranty of Debt, 1829-1842 ... 207

8. From Safety Fund to Bank Deposit Insurance ... 218
8.1 Joshua Forman ... 221
8.2 The Power of Suggestion ... 224
8.3 The Banking Crisis in the State of New York ... 226
8.4 The 1829 New York Safety Fund Statute ... 230
8.5 Early State Bank Guaranty Programs ... 237
8.6 Implementation of National Deposit Insurance in the United States ... 240

9. Eighty Years of Bank Deposit Insurance ... 252
9.1 Federal Deposit Insurance in the United States ... 253
9.2 The International Progress of Bank Deposit Insurance ... 257

10. Epilogue ... 263

Appendix 1. The Original Five Regulations (1760), Modern Translation ... 283
Appendix 2. The Original Five Regulations (1760), Contemporary Translation ... 286
Appendix 3. The Eight Regulations (1831) ... 291
Appendix 4. The Eight Regulations (1835) ... 301
Appendix 5. The Eight Regulations (Per W.C. Hunter) ... 312

Bibliography ... 315
Index ... 333
Those interested in legal history (American and Chinese), Chinese history (Qing period), business history (American and Chinese), banking history (American) and the history of bank deposit insurance (American and Worldwide).
• Traces modern bank deposit insurance to its historical inspiration -- a private guaranty fund, operated under the supervision of the Chinese government, whose insolvency was one of the causes of the Opium War.
• First study of the guaranty program enforced by the Qing government among the hong merchants of Canton (Guangzhou), China, and of the Canton System itself as a distinctly Chinese regulatory system.
• Draws parallels between the Canton Guaranty System of 1780-1842 and modern financial guaranty schemes, including failures to properly assess and reserve for risk contingencies, failures to enforce laws designed to avoid risk -- and too big to fail, "with Chinese characteristics."