fyxmll Mnivmii^ Jitotg THE GIFT OF K.\'^.':\Xo..h 9L5/y/o..5. 1287 Qommlsstoh on Internatioiiar Exchange of - the United States of America. , CONSIDERATIONS on A New Monetary System fpr CHINA, by JEREMIAH W. JENKS, Commissioner in Cliina. — „_.- — _-.^ Cornell University Library HG 1228.JS3 Considerations on a new monetary system ■'.4 ""3 1 924 023 465 "382' HUGH H. HANNA, \ CHARI/ES A. CONANT, > Commissioners-. JEftEMIAH W. JENKS, j ' Albert C. Duranij, j ITHACA, N. Y. ANDRTO & CHUACH, 1904. The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924023465382 Commission on International Exchange of the United States of America. CONSIDERATIONS on A New Monetary System for CHINA, by JEREMIAH W, JENKS, Commissioner in China. HUGH H. HANNA, | CHARLES A. CONANT, >■ Commissioners. JEREMIAH W. JENKS, J Sao-ke Alfred Sze, | Secretaries in China. Albert C. Durand, j ITHACA, N. Y. ANDRUS & CHURCH, 1904. TABI.E OF CONTENTS. Page. I . — Introduction. 1. Purpose of the pamphlet i 2. Two plans suggested 8 3. The process of establishing a monetary system 9 4. Outline of the American plan 11 II. — Uniformity of Coinage. Necessary governmental action 12 III. — Methods op Fixing Values of Subsidary and Minor Coins. 1. Business fixes value 13 2. Government determines business acts by (a) Making subsidiary and minor coins less valuable as bullion 14 (b) Limiting quantity 14 (c) Always receiving coins at face value 14 (d) Interchanging small coins for large, and vice versa 14 (e) Making coins legal tender 14 3. If above plan followed, especially (d), value will be maintained 14 IV. — Advantages op a Fixed Gold Value for the Chinese Currency. 1. a fixed rate of exchange 15 (a) Effect on prices in foreign trade 15 (b) Effect on internal trade 15 (c) Effect on quantity of exports and imports 16 2. Coinage profit 17 3. Increase of investments 17 4. Strengthened credit 18 5. Certainty regarding taxes 19 V. — Reasons for Adopting a Gold Value for the Silver Coins at the Beginning of the System. 1. Government profit 19 2. No disturbance of business 20 3. If introduced at silver value disturbance will follow. 20 (a) Result of fall in price of silver. Case of India. 20 (b) Result of rise in price of silver 21 (c) Result of raising value of coins after circu- lation established 21 VI. — Methods of Maintaining the Silver and Copper Coins at a Fixed Value with Gold. 1. Governmental control of coinage 22 (a) Value depends upon quantity 23 (b) Value depends upon confidence 24 2. Universal acceptance of coins by Government 25 3. Make coins legal tender 25 4. Governmental sale of gold exchange 26 (a) Gold needed for payment of foreign debts only 26 (b) Bankers will use coins if they can buy ex- change 27 (c) Government rates for exchange 27 (d) Profits from ejfchange 28 5. Coins furnished in exchange for gold at home or abroad 28 VI. A. — How Can a Forty-eight Cent Dollar be Made by the Government to Pass for Fifty-five Cents Gold. Specific illustration of VI 28 VII. — The Gold Reserve. J. A Gold reserve necessary 31 2."Atnount of reserve 31 3. The uses of the re.serve 35 4. The means of obtaining a reserve 35 (a) Profit on coinage 35 (b) Contributions 36 (c) Loan 36 ( 1 ) Basis of increased returns from customs 37 (2) Opium, spirits, etc 38 (3) Land tax. 38 (4) Mines 38 (5) Railroads 40 (6) Other sources 40 5. The means of maintaining the reserve 40 (a) Gold paid in 40 (b) Sale of silver bills on China 40 (c) Buy gold exchange 41 (d) Profits on exchange 41 (e) Sale of silver on hand 41 Note. An opium farm for some of the cities of China, 42 VIII. — Cost of Establishing the New Monetary System. Estimates four dollars per capita 44 Estimates two dollars per capita 46 5 IX. — Administrative Organization. 1. Conditions of success 50 2. How to secure these conditions 50 3. Officials needed 51 (a) Monetary Commission or Board of Revenue.. 51 (b) Expert adviser (Controller) 52 (c) Deputy Controller 52 (d) General Accountant 52 (e) General Superintendent of Mints 53 4. National bank 53 (a) Powers 53 (b) Organization 55 (c) Officers 55 (d) Branches and agencies 55 (e) Management 56 (f) Profits 56 X. — Revision of Treaties. 1. Regarding the importation of foreign coins and of bullion 56 (a) Reasons for checking importation 56 (i) To secure and keep one uniform system 57 (2) To keep up value of silver coins 57 (b) When regulate importation 58 (i) When fixed number coined 1 58 (2) When special board agrees 58 2. Methods of negotiation 59 (a) In China 59 (b) In foreign countries 59 XI. — Comparison of the Two Plans op Starting THE Monetary System 59 XII. — To Begin the Monetary System on a Gold Basis Without a I,oan. 1. At same rate of coinage as with loan 62 2. At slower rate than with loan 64 XIII. — Coinage Specifications 66 XIV. — Foreign Experts for the Chinese Mone- tary System. 1. Difficulties of the Task. Reasons for Foreigners 68 (a) Few Chinese experts 68 (b) Need of confidence 68 2. Relative need for experts under the two systems 69 (a) Under silver system 69 (b) Under gold system 69 3. Experts needed especially at beginning of system 70 (a) Making plans difficult 70 (b) Making plans most important part of work— 70 (c) Mistakes at beginning often irreparable 71 4. Selection of experts 71 (a) For ability and fitness only 71 (b) Contracts definite 7' (i) Regarding time 71 (2) Regarding work 71 (c) Associate Chinese with experts 71 (d) Establish training school under experts 72 XV. — Summary of Points in Connection with the Chinese Monetary System. 1. Comparison of two systems 72 2. Expenses compared 74 3. Method of starting system 75 4. Loan and security 76 5. Engagement of experts 76 6. Contracts with experts 78 7. Relation of foreign Governments 78 XVI. — Government Procedure. 1. The Appointment of experts l 79 (a) Controller of the Currency 79 (b) General Superintendent of Mints 80 (c) Geneial Accountant 80 2. Controller to prepare and submit drafts of edicts 81 (a) General currency law 81 (b) Minting law 81 (c) Gold reserve law 81 (d) Banking laws 81 3. Regulations regarding loan 81 4. Regulations regarding reserve 82 5. Modification of treaties 82 6. Organization of national bank 82 XVII. — Second Summary : Answers to Objections ; AND Final Suggestions. 1. Summary of work of expert organizer 83 2. Delay inadvisable 84 3. Objections to system answered 84 (a) People too ignorant 85 (b) China has no gold 85 (c) Foreigners will not receive new coins at gold value 85 (d) System will benefit foreign nations 85 (e) China cannot maintain value of coins 86 (f) Will drive cash shops out of business 86 (g) Exporters will not gain from rise of gold 86 (h) Foreign expert help needed 86 4. An expert can modify his plans to suit special needs.. 87 5. Success sure if plans well managed and supported 87 I. INTRODUCTION. r. Purpose of the pamphlet.— Several months ago the Com- mission on International Exchange published at Shanghai a pam- phlet, "Memoranda on a New Monetary System for China," pre- pared by Mr. Jenks. In that pamphlet were given the reasons why the United States Government had appointed the Commission on International Exchange, a very brief outline of the plan which was suggested for the consideration of the Chinese government together with some arguments regarding the plan, and a brief statement of the work which the Commission had done in Europe and elsewhere. It has been found that, owing to the brevity of the pamphlet, several parts of it were misunderstood, especially by Chinese officials and business men, and very many inquiries have been made for a more detailed discussion of many of the points therein raised. As a representative of the American Commission on Inter- national Exchange, the writer of that pamphlet has spent several months in investigating the currency question in China with the aid of very many officials and business men in the different parts of the Empire and in discussing the outlines of some practicable plan for a new monetary system especially with the members of the Monetary Commission appointed by the Imperial government. It is the purpose of this pamphlet to elucidate many of the points touched upon in the first pamphlet by printing, with here and there slight corrections and elaborations, a series of papers handed to the Chinese Monetary Commission to form the basis of discus- sions with them. It is thought that by so doing a much more definite view than was presented in the earlier pamphlet may be obtained of the plan which it had seemed to the Commission on International Exchange wise to submit to the Chinese govern- ment for its consideration.^ This method will of course, involve ' A translation into Chinese of the first pamphlet, made by Mr. Sao-Ke Alfred Sze, one of the secretaries of the Commission on International Ex- change, was published at the same time. This pamphlet will also be pub- lished in Chinese through the courtesy of their Excellencies Lii Hai-Hwan and Sheng Hsiian-Huai, Treaty Commissioners of China. The translations into Chinese have been made for the most part by Mr. Sze. Chapters X., XII ', XIII., XVI. were translated by Mr. E. T. Williams, Chinese Secretary of the American Legation at Peking. 8 considerable repetition and will destroy the unity of the discus- sion. On the other hand it will emphasize the points whiclj have been made most prominent in the discussions. 2. Two plans suggested. — It will be noticed in the follow- ing memoranda that a rather sharp contrast is drawn between two possible plans of procedure on the part of the Chinese govern- ment — (a) the establishment of a new, uniform monetary system, consisting of silver and copper and possibly nickel coins, on the silver basis, the question of the establishment of these coins at a fixed value with gold being a matter left for future consideration, with the definite idea, nevertheless, that the iiltimate aim of the government is the establishment of the system on a gold basis : (b) the establishment of a monetary system consisting of silver, nickel and copper coins which would be issued by the Chinese Government at a fixed value in terms of gold and maintained at that value thereafter. Very many of the persons who had earlier been giving advice to the Chinese Government and who had been writing on the subject of monetary reform in China had recommended the first system, believing that the establishment of a uniform silver cur- rency was a useful, if not even a necessary, preliminary first step toward the establishment of a monetary system on the gold basis ; and the example of India was cited as a case in point. It was the belief of the American Commission, after making a detailed study of the question, even before its representative went to China, that it would be much easier for China to follow the second plan and to establish its coins at a fixed value with gold from the be- ginning, as the United States has done so successfully within the last year in the Philippine Islands. The American representative found, on taking the matter up for discussion with the Chinese Government, that this Government, very naturally, not having had, as yet, opportunity of studying the subject thoroughly, and very properly desiring to proceed gradually on so important a mat- ter, had practically adopted the views of those who thought it was best first to establish a uniform silver currency without reference to its gold value. In consequence, a considerable part of the energies of the commissioner were devoted to the discussion of this question. It is a pleasure to record that the views of the American Commission seem finally to have met the approval of a goodly number of the Chinese officials, as well as of several of the English writers and business men who, naturally looking first at the example of India, had advocated, some of them in print, begin- 9 ning on the silver basis. Several of these men have now said that a further study of the question has convinced them that the plan suggested by the American Commission will be the easier for China and the wiser plan for her to follow. There is good reason to believe that further consideration of the subject in de- tail in the light of the experience of the Philippines and of the changed conditions of the silver market during the last few years would lead substantially all to this conclusion. It is difficult to follow the course of reasoning of some who say that it is impossible to put a monetary system on a gold basis until you have a system complete. The gold value attaches to each of the coins. It is immaterial logically whether that value is given to them when they are issued or later. Practically, as will appear in the following pages, it is much simpler and more profitable to give them the gold value one at a time as they are issued, than to give it to them all at once when millions are al- ready in circulation with a well known silver value. 3. The process of establishing a monetary system. — So much has been said regarding the ' ' gradual ' ' establishment of a monetary system in China and of taking one step at a time, that it seems worth while in this introduction to consider briefly the nature of the process of the establishment of a monetary system, in order to show how misleading the figure of speech of ' ' going forward step by step' ' has been. The subject will be made clearer, of course, in the detailed discussions which follow. A monetary system, made up of copper, subsidiary silver, stand- ard silver and gold coins — to omit representative money like bank notes — is a single, complete, organized whole which must be built up gradually. The building of this structure is not like going on a journey, in which one can take one step forward, then another step forward, and another until the journey's end is reached. If it were so, one should begin first by taking the step which will lead to the copper coinage, and one should completely establish the new copper coinage throughout the country until the people became used to that. The next step should then be taken lead- ing to the subsidiary silver coinage, which is of less pure silver than the standard coins. One should then pause until the copper coins have been given a fixed value in terms of the subsidiary sil- ver. One should then take the next step forward to the intro- duction of the standard silver coins, and should then wait until the subsidiary silver and copper coins have been given a fixed value in terms of the standard silver coins. Finally, one should lO proceed to the fourth step of introducing gold either in the form of coins or in the form of a gold reserve which can be used as a standard. The country must then wait until the standard silver, the subsidiary silver and the copper coins are given a fixed value in terms of gold. The journey would then be complete. When one analyzes this process, including the silver and copper, it is seen that the idea is absurd. Nevertheless it is equally absurd to begin with silver and afterwards to go to gold, as it would be to begin with copper alone, proceed to subsidiary silver, and then to standard silver. The process in both cases is identical. The establishment of a complete monetary system is rather like building a house with four sides, one wall of which is repre- sented by the copper coinage, a second wall by the subsidiary sil- ver coins, a third wall by the standard silver coins, and the fourth by the gold. The structure must be built up gradually, but it is wise to build the four sides up together, so that the relations be- tween them will be the same from the beginning, and that, as the building rises, there will be no disturbance in their relations one to the other. In the plan which has been proposed, twenty years is allowed for this period of building the' structure. The cost has been estimated in detail for the first five years. The cost in suc- ceeding years would be relatively less and would need no special provision. The system would pay for itself after the first five years. But the completion of the monetary system is planned to take twenty years, surely a long enough time, and the process is a gradual one. The plan of beginning on a silver basis to change to a gold basis later is like building up three walls of the house together, omitting the fourth wall. It will take practically as many years to build the three walls as it would to build the four. After the twenty years are completed, unless some specific provision has been made for the accumulation of a gold reserve, it may take many years longer before that is accumulated. When the gov- ernment begins to establish the gold standard, that is to build the fourth wall of the building which has been left out, all of the ar- rangements of the house, which have been made heretofore with reference to having one side open to the air, must be altered to suit the new conditions, with the result that — to drop the figure — there will be a complete upsetting and disarrangement of the busi- ness relations of the country. In other words, the whole system of prices, which has been adjusted to the silver standard, must be upset and readjusted to the gold standard. That process of readjustment will continue several years at best. In consequence, if the government adopts the silver plan, it is simply postponing indefinitely giving . to China a good monetary system, and it is increasing vastly the diificulties, as is explained in detail later. In the plan which the American Commission has proposed, in five or six years there will be enough of the new money in circu- lation so that prices in all the treaty ports and in all internation- al traffic will be adjusted to the new gold standard, so far as the people have any desire so to adjust them. The gradual exten- sion of the system into the interior as the new coins increase in number will involve no new disturbances. The change from a standard of prices fixed on bullion silver to those fixed on a standard dollar with a gold value is not appreciably more difiicult than the change from prices on the bullion standard to those on a dollar standard on the silver basis. There must be at least one disturbance of prices ; it will be much less on the whole if it is taken directly from the beginning, and it will save completely the trouble and expense of a second readjustment, from the standard silver dollars to gold after the one from bullion to standard silver dollars has been made. To begin with the silver plan with a gold standard only for the indefinite future is like setting up an engine to run imperfectly for years without the governor with the idea that this can be attached later. The engine should have all its essential parts when it begins to run. 4. Outline of the American plan. — It is perhaps wise to in- dicate in outline at the beginning the main points of the plan which has been advocated by the American Commission in order that the papers that follow may take their places as a more de- tailed explanation of a system already outlined. The following is therefore submitted : (a) The Chinese government to assume supervision or con- trol of the various provincial mints so that the entire coinage system of the Empire will be managed in harmony. (b) The establishment of one uniform system of imperial coins, consisting of silver coins, nickel coins and copper coins, which shall be uniform throughout the Empire, and in due time a legal tender for all obligations, public and private. The mint- ing of all other coins to be stopped. (c) These silver, nickel, and copper coins to be established on a decimal system and to be maintained at proportionate values one to the other. (d) A gold unit consisting of a fixed number of grams or 12 decigrams of gold to be established as the basis of the currency. The silver and copper coins to be issued at fixed values pro- portional to this unit, and to be maintained thereafter at this fixed gold value. It is understood that gold will not be used in general circulation within the country itself, although a small amount may be coined, but that the currency shall be the silver and copper coins above mentioned, and bank notes based upon them. (e) The establishment of a gold reserve sufficient to maintain these coins at the fixed gold value, but not necessarily to furnish a gold circulation for the country itself. (f ) The Chinese government to manage this system in accord- ance with the principles established elsewhere by successful ex- perience ; and, therefore, in order to secure the necessary confi- dence of Chinese and foreign business men, to employ to assist in the establishment of the system foreign expert advisers of the highest standing whose reputation and work will secure confi- dence. (g) The establishment of a national bank, of subordinate treasury agencies, and of other means that may be recommended by the experts and that may prove essential for the successful carrying out of the system. II. UNIFORMITY OF COINAGE. Action will need to be taken by the government covering the following points : 1 . Declaring that there is to be established a uniform system of coinage, arranged on the decimal plan, and that the coins will in due time be made legal tender throughout the Empire for the payment of public and private debts. 2. The central Government assumes charge of all mints ; this action to take effect as soon as compensation is determined. 3. The provinces, on agreement with the Viceroys and Gov- ernors concerned, are to receive due compensation for all the mints surrendered to the central Government ; this compensation presumably to be in the form of a certain amount paid each year for a fixed number of years, or a remission of taxes of a fixed amount for the same period. 13 4- All coinage of present coins by the different mints to be stopped immediately, unless it should be decided to adopt into the system the ten cash pieces and to continue their coinage tempo- rarily. That would probably not be wise. 5. Expert appraisers, presumably three, two from the mints now in existence in China, and the third to be hired presumably from abroad, to be appointed to appraise the value of the mints on the basis ©f their normal output as a basis for agreement with the viceroys. This output to be gauged in part by what they have been doing in the past, but especially by the fair normal capacity of the mints themselves. 6. These same appraisers to make detailed recommendations as to the mints that can be used most profitably in the future, as to those which should be closed absolutely, and as to the transfers of mint machinery or the purchases of new machinery that should be made. 7. Detailed reports of all coins of all denominations heretofore issued by each one of the mints to be secured from the various Viceroys and Governors concerned. 8. The best estimate possible to be secured of the money now in use, — (a) coins of silver, (b) silver bullion, sycee, (c) gold of whatever form, (d) cash of whatever form, cents, etc. 9. Regulations to be made regarding the denominations of the various new coins, with their exact weights in silver, nickel and copper, the amount and quality of the alloy, etc. III. METHODS OF FIXING VAIvUES OF SUBSIDIARY AND MINOR COINS. 1. Business fixes value.— The business men will ultimately fix the values at which the people will take the coins, since the people use the coins in buying and selling with the merchants, bankers, etc. , who in such matters are more influential and pow- erful than the common people ; but 2. Government may determine business acts. — The Government can make such arrangements regarding coinage and the receipt and issue of coins that the business men and people will find it to their advantage to accept and use the government ■ valuations : 14 a. Make subsidiary and minor coins less valuable as bullion. — Let subsidiary and minor coins, both silver and copper, never be proportionately more valuable as bullion than are the large coins ; usually they may be much less valuable. b. Limit quantity. — So far as is practicable suit the quan- tity of coins issued to business needs. At first this cannot be measured accurately, later, experience will show the right amounts. c. Always receive coins at face value. — Let the Government always receive the coins at their face value in the payment of taxes. For this purpose the quantities of subsidiary silver to be received at any one payment might be limited to sums of not over, say $20 for 50 cent pieces, and to, say, $10 for 20 cent and ID cent pieces. Quantities of copper to be received at one pay- ment may be limited to, say, $5 for 20 and 10 cash pieces ; to $1 for smaller pieces. d. Interchange small coins for large and vice versa. — Let the Government at its established agencies keep a good supply of all kinds of coins, and exchange them free of charge one for the other for all applicants in reasonable amounts, (say as above in receiving taxes), dollars for subsidiary silver, nickel or copper coins, and vice versa. e. Make coins legal tender. — Ultimately when the value is firmly established at the government rate, let decrees be issued making it legal for every debtor to pay his debts in whichever coins he chooses within the limits set in (c). 3. If above plan followed, especially (d), value will be maintained. — If there are plenty of places where these exchanges can be made, no one will give eleven 10 cent pieces for a dollar when at the government office he can always get a dollar for ten of them. IV. ADVANTAGES OF A FI5^ED GOLD VALUE FOR THE CHINESE CURRENCY. In the Imperial Edicts of April 22, September 7, September 26, and September 29, 1903, the encouragement of commerce and industry was emphatically announced as the present policy of the Government, and the Board of Commerce was established 15 in order to carry out that policy. Perhaps in no other single way can this purpose be accomplished so promptly and surely as by the establishment of a monetary system which has a fixed value with gold. It is worth while to note the following benefits which would come therefrom. I. A fixed rate of exchange. — It removes the fluctations in exchange. This makes business much more, secure and takes away from it the gambling element. During the year 1903 the Shanghai tael varied in average monthly value from 2 shillings i^ pence in March to 2 shillings and 7 pence in October, a variation of 5^ pence. Often there are strong fluctuations in one day with no cause that can be foreseen. In Japan there used to be similar fluctuations, but they have practically entirely ceased. For example, some two years and a half after the fixing of the rate of exchange the fluctuations of the yen were only between 2 shillings 0.1250 pence and 2 shillings 0.8125 pence ; that is to say, less than seven-tenths of a penny in two and a half years. This practically eliminates all business risk from this source. (a) Effect on prices in foreign trade. — It should be noted also that this removal of risk from business will have a tendency, on the one hand, toward increasing the prices paid by foreigners for Chinese goods for export, and, on the other hand, toward lessening the prices for goods imported into China from foreign countries for the use of the Chinese people. With the risk eliminated, the competition of merchants, both importers and exporters, will lead them to take less average profits than now. (b) Effect on internal trade. — These advantages of stability in foreign trade will be reflected also to a greater or less ex- tent in domestic trade, while the favorable effects upon prices will be felt in all parts of the country to a noteworthy ex- tent in the internal trade. The chief curse to internal trade now is the variety of taels and fluctuations in internal exchange. While a uniform silver currency would to a great extent cure this evil, it can never be permanently cured until the silver currency is given a gold basis. A change from a uniform silver to a gold basis after a few years would produce a business upheaval worse than a present change from a variety of taels to a uniform silver currency which has a fixed gold value. No especial difficulty will be felt now in introducing a new cur- rency on either a gold or a silver basis. It will seem but one i6 more added to many existing standards. When there is once uniformity, a change of basis with a complete upsetting of es- tablished prices means a crisis. (c) Effect on quantity of exports and imports. — This removal of risk from business will tend also to increase decidedly both the import and export trade of China. After Russia had established her system on a gold basis her foreign trade increased very decidedly, and a similar result was shown in Japan. Count Matsukata, the Japanese Finance Minister under whom the change was made, says that on account of the freedom from fluctuations in the value of coinage and also in prices, commercial and industrial enterprises came to make a healthy and orderly development, while trade with the gold standard countries, which comprises the larger part of Japan's foreign trade, for the same reason was also making a very healthy growth. Even as regards the trade with the silver countries, where people had feared that, on account of the change, the country might be at a disadvantage, there was a considerable increase in the foreign trade. It was his opinion that trade would, on the whole, be benefited. The statistics of Japan seem to show that the change to the gold standard does not itself increase imports, on the whole, more than it increases exports, as some people argue. On ac- count of the large speculative business in Japan at the time of the payment of the Chinese indemnity, during the year preceding the establishment of the gold system and for two years thereafter there was a very decided increase in the imports as compared with the exports, but since that time there has been a decided decrease, so that in 1899 and 1901, for example, the imports ex- ceeded exports by only a very slight amount, in 1900 there being again an increase. The figures seem to show that the relative quantity of the imports as compared with the exports are due mainly to other factors and practically not at all to the quality of the currency. The figures regarding the excess of imports and exports relatively from 1894 to iQOi inclusive are as follows : TABLE I * Excess of Imports 1894 Yen 4,235,869 " " Exports 1895 " 6,851,600 ' " Imporls 1895 " 53.83',714 1897 " 56,165,694 " " " 1898 " 111,748,404 1899 " 5,472,032 1900 " 82,831,852 ' 1901 " 3,467,102 * The Fourth Financial and Economical Annual of Japan, 1904, p. 67. 17 The law establishing the new gold system was passed in March, 1897. It went into operation September 30, 1897, but it was not fully in effect until July, 1898. The great excess of imports, therefore, is as much during the period of silver coinage as of gold, and there was a great fall the year after the estab- lishment of the new system, the excess of imports almost disappearing. 2. Coinage profit. — Giving to the Chinese coins a fixed value in gold would give to China a very large profit from the coinage. At the present prices of silver and copper, the profit on each dollar coined, on the average, may be conservatively estimated at 20 per cent. During the last year the profits in the Philippines have been over 19 percent., and the touch of the subsidiary silver coins there has been higher than would be necessary for China. Probably, also, the amount of copper coins, on which the profit is much greater than on the silver, would be larger in China than in the PhiUppines. The Vice- Minister of Finance in Japan, Mr. Sakatani, has estimated that China might count on an average profit of 30 per cent. Estimating the profit at only 20 per cent, on a probable output of 250,000,- 000 dollars of her new coins within the first four or five years, China's gain would be 50,000,000 dollars. This should be made to form a' very large proportion of a gold reserve. Moreover, if every effort were made to keep all of the coins at a fixed value one with the other, it would be possible to issue the subsidiary coins at a lower touch than if they were to have their value fixed by ordinary custom among the merchants. Whether the coins are given a fixed gold value or not, effort should be made (and the methods are not at all difficult) to keep up the value of the subsidiary coins to their face value, but if the coins were given a fixed gold value this would be absolutely essential and would certainly be done. 3. Increase of investments. — Fixing the value of the coins in terms of gold would, beyond question, increase such in- vestments of a conservative nature both foreign and native, as the Chinese government would wish. Count Matsukata, in re- ferring to the result of the reform of the currency in Japan, said that the tendency had already promptly set in to invest in that country at low rates of interest capital from gold standard foreign countries, thus supplying the lack of capital in the country and giving a powerful stimulus to the development of industry. This was seen within two years after the establish- ment of the system. Statements were hkewise made to the representatives of the Mexican Government by leading financiers in New York that they had money ready to the amount of at least $50,000,000 gold in specific cases which they mentioned, to invest immedi- ately in Mexico as soon as the fixed value for the Mexican coins should have been established. Doubtless this sum would have been very largely increased. China might well expect much greater results owing to the much greater opportunities for investment here and to the larger extent of her undeveloped resources. Unless there are political considerations which lead to invest- ments, money will be offered much more freely for building rail- roads, opening mines and making public improvements of all kinds if China has a sound monetary system on a gold basis. The conservative business men of the industrial nations will gladly invest when they can make certain calculations. Before then we may expect investments rather from speculators or from those who have some political schemes to further. After rail- roads are built and trade on a large scale in the interior is estab- lished, a sound coined money on a stable basis will be a necessity. Trade cannot grow satisfactorily under present currency condi- tions. 4. Strengthened credit. — Probably no other action on the part of the Chinese Government would strengthen its credit among foreign nations so much as the establishment of a sound mone- tary system which would fix the value of its money iji terms of gold. This would enable her to borrow money much more cheaply than at present, and quite possibly to refund some of her foreign debts at lower rates of interest. The experience of Japan, as stated by Count Matsukata, was this : Within three years after the system was established, he says, "It may be regarded as a happy omen that the Govern- ment was able to raise recently a foreign loan of ;^io,ooo,ooo in Ivondon at 4 per cent, interest." He ascribed this result to the improved credit of the country, due to the establishment of the new system. If China could refund her debts which now bear interest above four per cent., at that rate, it would effect a saving, if we assume the tael to be worth only two shillings and six pence, of 3,136,400 taels a year. That alone would more than pay the interest on all the loan she would probably need to 19 make to establish the new system with an ample gold reserve, if she desired to adopt a system with a loan. 5. Certainty regarding taxes.— Beside the possibility of re- funding her debts, if the price of silver should continue to de- cline, China could pay off her present debts much more easily with her currency given a fixed gold value. During the past 15 years the decline in the value of silver has lessened the income of China, as compared with what it would have been on a gold basis, by nearly one-half, the average value of the tael in 1890 being. 5 shillings 2^ pence, and during the year 1903, 2 shillings 7^ pence, while it has been at times even considerably lower. As soon as the new monetary system is established, there will be no further decline in the value of the taxes collected ; and even if silver should not decline further, there would be a decided ad- vantage to the Government in being able to reckon accurately on the value of the taxes collected for the purpose of paying for- eign obligations. The chief danger to China in her relations with foreign coun- tries comes from considerations of a financial nature. If she at any time fails to pay her obligations, the danger of aggression will be very great indeed. On the other hand, in no other way can she so strengthen her military force or her resources in other directions which would be available for defense against aggression as by improving her financial situation. In no other way can her financial situation be improved so rapidly as by establishing a monetary system which will have the full confidence of Chinese business men as well as of foreigners, and such a system can never be satisfactory to either Chinese or foreigners until the coins have a fixed value in terms of gold. It is clearly within the power of China to establish such a system in the immediate future by taking energetic measures. V. REASONS FOR ADOPTING A GOLD VALUE FOR THE SILVER COINS AT THE BEGINNING OF THE SYSTEM. I. Government profit. — The Government will gain a profit from coinage of some fifteen per cent, more than would be possi- ble if the system were introduced on the silver basis. On the 20 gold basis the average profit should be at least 20 per cent. ; on the silver basis, possibly five per cent. Unless this profit is made when the coins are first introduced, it can never be made after- wards. This additional gain should amount to a yearly profit of $6,000,000 or thereabouts throughout the introduction of the system, say ten to twenty years. It would be increased or less- ened in proportion to the rapidity of coinage and in part to the price of silver. It would last as long as the new coinage contin- ued to be introduced. Can the Chinese Government in its present financial situation afford to neglect this source of profit ? 2. No disturbance of business. — If the coins are intro- duced at their gold value while business is being done with so many other kinds of coins and with bullion, there will be no appreciable disturbance of business. Prices are now fixed in so many different kinds of moneys, that an addition of one kind more would not be noticeably detrimental. It would be only like introducing a new kind of tael. 3. If introduced at silver value disturbance will fol- low. — If the coins are first introduced at their silver value and an attempt is later made to give them a gold value, the result is almost sure to be a great disturbance of business over a period of several years. . (a) . Result of fall hi price of silver. Case of India. — If it were certain that the value of silver bullion would continue to fall, so that the government could simply fix the gold value of the new coins at the silver value of the day when the Government starts on the gold value and that the silver bullion value of the coins would then continue to decline, there would be no serious dis- turbance of business. Both Japan and India were extremely for- tunate in fixing their gold values under such circumstances. At that time, however, not only was silver bullion steadily falling in the world market, but it was known that the stoppage of the free coinage of silver in India would certainly cause a fall in silver bullion, so that India might safely count on that result, inasmuch as its action would lessen for the time being the demand for silver by some ten or twelve million ounces yearly. At present, however, in China the situation is entirely differ- ent. No act of China's is likely to have any effect toward lower- ing the price of silver, and even if its action were to have that effect, this would take place immediately upon the introduction of the new system, so that the gold value should be fixed then rather than later. In the second place the condition of the silver market 21 for the last two or three years has been such that one may- anticipate a rise in silver as fully as probable as a fall. There is practically no increase of output ; there is a large increase in demand ; there is a large increase in the output of gold. There are certain to be fluctations. (b). Result of rise in price of silver. — If the price of silver does not fall, the Government must ultimately fix the gold value of its silver coins at considerably above their bullion value, say fifteen per cent, at least. If it should fix the rate at say only five per cent, above, any slight rise in the market value of silver would be sufficient to lead to the melting or exportation of the silver coins. A slight fall would again lead to their coinage, and so on, making the system very unstable. We must not forget that in 1903, which was by no means a bad year, the average monthly rate of exchange in Shanghai varied as much as 20 per cent. China might and should make arrangements so that a per- manent rise of any extent in the value of silver bullion, which should lead to the melting of the silver coins, would bring about the introduction of gold coins ; but, on the other hand, it is doubtless better, considering business conditions in China, that silver coins be the chief medium of exchange rather than gold, although the value should be fixed in gold. A large bulk of the business of China is on so small a scale that gold coins, which would not be convenient in sizes worth less than five dollars, — are not adapted to the needs of the people. On this account, Mexico for its own use, the United States for the PhiUppines, England for India and the Straits Settlements, and France for French Indo-China, are providing systems with silver coins to which they have given or expect to give a gold value, rather than real gold systems with gold in circulation. The country needs small change, at any rate, even though it should have gold coins. The Government, therefore, if it takes any risk of having its silver dollars melted down, should keep the half dollars, twenty cent pieces and ten cent pieces more nearly free from that danger by making them eight-tenths fine while the dollar pieces are nine- tenths fine. (c. ) Result of raising value of coins after circulation established. — If the Government fixes the gold value at say fifteen per cent, above the bullion value after the silver coins are once in general circulation, there must be a great disturbance of business. The only way (short of an artificial scarcity which will seriously injure 22 business and which it would be extremely difficult to enforce in China) to give the coins that higher gold value is for the Govern- ment, after they are in circulation and after it has been receiving them at a certain fixed rate, to say that it will receive them at a higher rate, and for it to be prepared to sell gold exchange at this higher rate. For example, if to-day a silver dollar is worth 48 cents gold (American), the Government must say that it will receive it for, say, the next two months at 50 cents gold ; for the two months thereafter at 52 cents, and so on, until it has reached the required value. If, now, it should increase the rate at all rapidly, the result would be that the banks and wealthy people would hoard great sums of money in order to secure these higher rates. There would be a great scarcity of coins and busi- ness would be seriously hampered. Wealthy people who could thus hoard would make large profits at the expense of prosperity in trade. If the Government, to prevent this speculation, should raise the rate gradually, at say not over five per cent, a year, bringing it up slowly month by month, it would extend the period of unsettled business, of changing and gradually lowering prices, etc., over several years, which might well produce a serious commercial crisis. A failure on the part of the Chinese Government to begin on the gold system now means, therefore, that it is taking, first, an' absolutely certain loss of many millions of dollars to begin with, and second, a very serious danger of a future hampering of business for several years, and at any rate it must take a much more complicated process, in the future, in reaching a gold sys- tem than it need take if it starts now on a fixed gold basis. VI. METHODS OF MAINTAINING THE SIIvVER AND COP- PER COINS AT A FIXED VAI^UE WITH GOLD. I. Governmental control of coinage. — The Government must absolutely control the coinage and must limit the quantity of coins to the actual needs of business. It is impossible to keep the value of silver coins above their bullion, value unless the Government itself keeps rigid control of 23 the mints. Private individuals must neither be allowed to coin by themselves, nor must they be allowed to determine in any way the quantity which the Government shall coin, or to determine individually the amount of money in use. In consequence, be- sides the Government control of the mints, it is desirable, and will ultimately be necessary, that the Government be able to stop the importation of foreign coins and bullion, except on Govern- ment account ; or that, by other measures such as taxation, it make it more disadvantageous to use them than to use the new Government coins. This limitation and control is absolutely necessary for the fol- lowing reasons : (a) Value depends upon quantity. — The value of coins, as well as of goods of all kinds, depends,' to a considerable extent, upon the quantity of them which are available for use in proportion to the demand for them, just as flour or cloth becomes more expensive when the quantity is scarce and decreases in value when there is a surplus on hand. So the coins, by being fewer in number than the merchants might readily make use of, will acquire an added value, while, if the merchants were allowed to coin them freely, there might easily come to be an over-supply so that their value would fall to the value of the silver bullion which they contained. In establishing a fixed gold value for the silver coins in India, the government depended for some years upon scarcity alone. Before 1893 the mints had been open to the free coinage of silver. On the 26th of June of that year the mints were closed, and for some years no more were coined. At first the value of the coins declined there being a large supply in circulation ; but after a time, inasmuch as the quantity was limited and no further coins were supplied, there came a strong demand for more to supply the growing needs of business. Then the value of those in circulation began gradually to increase until it reached the price which had been fixed by the Government — one shilling and four pence to the rupee. When this point was reached and there came a fur- ther demand from the merchants, they were ready to pay gold to the Government in order to have the Government, for their con- venience, coin more rupees at that price, one shilling and four pence. It must not be forgotten, however, that the scarcity hampered business for a time by raising the rate of interest. In a similar way it would be wise for China to declare that she would furnish her new silver coins to any amount on the demand of merchants, provided they would pay a correspond- 24 ing amount of gold into the treasury at the fixed value deter- mined. On no other condition, however, should the merchants be permitted to demand of the Government an increase in the number of silver and copper coins. The merchants should be permitted to have gold coins furnished them at any time either with or without payment of a reasonable mintage charge, as seems best when the system is established, in exchange for gold bullion which they themselves pay in. (b) Value depends upon confidence. — In order . to main- tain the value of the new coins, it is also necessary that the Government secure and keep the confidence of the public in connection with its management of the new system. This can be done best by maintaining absolute faith as regards the quality of the coins, by the employment of the ablest experts of the highest reputation, and by publicity in connection with the management. Heretofore the mints have, at times, used a larger amount of alloy than was provided in the law and there has been'no proper check over the assays. In consequence the public has lost con- fidence in the coins of some of the mints. This must never be permitted to happen in connection with the new coins. Each melting for coinage must be carefully assayed, and under no circumstances should any coins be minted that are not of the right quality. In order to secure the confidence of the public, coins taken at random from the different mints from time to time should be tested by assayers not connected with the mints and their reports published. It would be well also, for a time, to have coins selected at random by persons not connected with the Government or with the mint management and sent to foreign mints to be assayed and reported on. The confidence of the public, both Chinese and foreign, must be secured and kept. Publicity regarding the quantities coined and put into circula- tion will likewise tend to give confidence in the wisdom of the Government management, and such publicity should be encour- aged. The confidence of the public, in the first place, is necessary in order to maintain the value of the silver coins ; and, in the second place, this confidence would be profitable to the Govern- ment inasmuch as, when the people trust the Government, the gold reserve, which it will need to carry, may be much smaller than will be the case if they distrust the Government. 25 2. Universal acceptance of coins by Government. — The Government must receive its new coins at all times without hesi- tation anjrwhere in the empire in the payment of any obligations due it. (a) The acceptance of the coins without question by all Gov- ernment officials will give the public confidence in the good faith of the Government. (b) This acceptance by the Government makes also a demand for'the new coins which will tend to keep up their value. While the supply of coins is still limited to an amount less than the ordinary demands of business require, this Government demand, of itself, might possibly be sufficient to maintain the value at the gold rate. In some countries the annual revenue receipts of the govern- ment amount probably to 25 per cent, or more of all the money in circulation. Even though the annual revenue of China should be considerably less than that, the government demand would still be very great. (,c) It would be well, in the first place, probably, not to com- pel the officials, even in the provinces where the coins are in- troduced, to pay to the Board of Revenue more than, say, one- quarter and afterwards one-half of their revenue in the new coins, the amounts in every case being adapted to local conditions and to the local supply of the new coins ; but finally, of course, they and all tax payers should be compelled to pay all of their money taxes in the new coins. There should be, of course no interference in this connection with the payment of certain taxes in kind. From the beginning, however, all of the of- ficials should be compelled to receive from the people at their full gold value all of the new coins offered to pay obligations due to the Government. Otherwise confidence in the Government would be lost and its credit would be seriously injured. If the introduction of the new coins is made locally, province by province, it might very likely be possible almost from the beginning to compel the people in the localities where they are introduced to pay all of their money taxes in the new coins. Of course if a tax payer does not have enough of the new coins in hand to pay his taxes, the Government will provide means through exchange shops with fixed rates to supply his needs, as will be explained in connection with administrative organization. 3. Make coins legal tender. — In due time the coins must by law be made legal tender (the legal money in which private 26 debtors may pay their debts). A law of this kind is usual in all countries where a developed monetary system exists. It tends, of course, to add to the demand for the new coins and thus to keep up their value. Such a law should not apply to debts made before the new coins are put into circulation. The people should also be per- mitted to make specific contracts payable in anything they like, but all contracts made payable simply in the money of the country such as dollars or taels, the debtor should be permitted to pay in these new coins. If the creditor objects, the debtor should still have the privilege of paying the new coins into the court for the creditor and of having the debt discharged. This law should not be passed at first, but after the people have become accus- tomed to the new coins and know their real value. 4. Governmental sale of gold exchange. — The Govern- ment should be ready at all times after the coins are put into circulation to sell in exchange for these coins at their gold value, on demand, in amounts of not less than $5,000, orders (bills of ex- change) payable in gold in London, New York, or Yokohama, at rates slightly more advantageous than the usual banking rates. If, for example, the usual average charge of the banks through- out the year is, exclusive of fluctuations in the value of silver bullion, say, three-quarters or seven-eighths of one per cent, the Government might offer to sell at, say, one per cent, or one and one-eighth per cent. (a) Gold needed for payment of foreigji debts only. — Inasmuch as business conditions in China (the low rates of wages, the low scale of prices, the great number of very small transactions, etc. ) do not require the use of gold in ordinary trade, there is no reason why the Government should offer to redeem the new coins in China itself in gold. .For the payment of obligations to creditors in foreign countries, however, gold is needed ; and in no other way can the Government so easily secure the confidence of the great mer- chants and the foreign bankers as by supplying gold at a reason- able charge for the settlement of these foreign debts. For the last thirty years Holland has found it possible to maintain for her silver coins a fixed value in gold without redeeming those coins in gold for use within the country. She has stood ready, however, to furnish gold at any time for the payment of debts abroad. India, for a considerable time, maintained the value of her 27 silver coins by scarcity alone. This, however, was always at a considerable risk that the coins might temporarily at any time, owing to a slackening demand, fall somewhat below their face value, and of late, since she has a large gold reserve, India has also been ready to furnish gold for the payment of foreign obligations. In the Philippines the Government relies chiefly upon this furnishing of gold by means of bills of exchange for the pay- ment of foreign obligations to maintain the value of its silver coins, although, inasmuch as it had a considerable quantity of gold and United States currency, which is at a par with gold, on hand in Manila, it offered temporarily to exchange this United States money free of charge for the new currency, and to exchange gold for the new currency at a charge equivalent to the cost of importation. Instead of furnishing gold itself for the payment of foreign obligations, it will be equally useful to the people and much cheaper for the Chinese Government to sell bills of exchange, as indicated. (b) Bankers will use coins if they can buy exchange. — In order to secure public confidence in the new monetary system, the bankers, especially the foreign bankers, and the great merchants must be willing to receive the new coins at their gold value. If the bankers and the merchants can always be sure of buying bills of exchange at a fair charge in exchange for the new coins, they will always be ready to receive and make use of them in their general business. There would never be any possibility of their falling in value more than enough to cover the difference between the charge for a bill of exchange which the bank would make and the charge which the Government would make, say one-half of one per cent. This amount is so slight that it would never be felt at all in local transactions, and, as a matter of fact, when the confidence of the public was secured, the difference would never be made by any of the banks. Other uses of the coins would be more than sufficient to cover any slight difference. (c) Government rates for exchange. — The Government should probably charge rates somewhat above those charged by the banks. In the first place the Government will probably not wish to compete with the banks in their ordinary business. In consequence, it places, its rates somewhat higher than the banks, in order that the banks may . ordinarily sell the usual bills of exchange. The Government will sell them only for the purpose of maintaining the value of the silver coins when there comes 28 an unusually strong demand for gold, so that without action on the part of the Government the value of its silver coins might fall. Should the Government establish a national bank, it would be possible to arrange, of course, for it to sell bills of exchange against the Government's gold reserve at the usual banking rates, thus competing with the other banks. It would probably, however, be better for the Government to have its rate fixed in the law, and for the national bank to use only its own funds and not the Government funds in competition with other banks. (d) Profits from Exchange. — This business of selling bills of exchange, under the circumstances indicated, will also yield to the Government a small profit, which should be placed in the gold reserve. 5. Coins furnished in exchange for gold at home or abroad. — The measure recommended in section 4 will prevent the depreciation of the silver coins. In order to prevent an in- crease of the value of the silver coins above their gold value fixed in the law, the Government should agree always to furnish these silver and copper coins to any amount at their face value in ex- change for gold paid in to the Government. This gold might be paid in either to the treasury in China or to its agencies or to the branches or agents of its national bank abroad. In the latter case the gold paid in abroad would be used to purchase orders (bills of exchange) payable in China in the new coins at the treasury or at the national bank. When these drafts on the home Government are purchased abroad, there should also be a charge made, as in the case of gold bills of exchange sold in China for payment abroad, although the rate of exchange may not be the same. This would likewise bring a small profit to the Government, and, what is of greater importance, as will appear later, will serve to prevent the exhaustion of the gold reserve. VI. A. HOW CAN A FORTY-EIGHT CENT DOI.LAR BE MADE BY THE GOVERNMENT TO PASS FOR FIFTY-FIVE CENTS GOI.D. [The following sums up in concrete form several of the points just made in VI.] A silver dollar which weighs seventy-two hundredths of a tael is worth in China at this date in American gold about forty-eight 29 cents. If that same dollar or an equal weight of silver could be given by action of. the Government a value of fifty-five cents American gold, it would be worth about eighty- two hundredths of a tael. The Government cannot, by mere decree, make seventy-two hundredths of a tael worth eighty-two hundredths of a tael, but it can take other measures so that all merchants will readily accept it at that value. Exactly that kind of result is secured by all the civilized countries except China. The following shows the way : If the Chinese Government takes seventy-two hundredths of a tael of silver bullion, coins it, and calls the coin the ' ' Imperial Coinage Dollar," it will be different in looks from any dollar now in circulation. I,et it pay this new coin to an of&cial for ■eighty- two tael cents ; that is, if it owes him 8.20 taels, let the Government pay him ten of the new dollars instead of $11.38 of the present dollars as the equivalent of 8.20 taels. The official will readily take the new dollars at the rate of eighty-two tael cents under the following conditions : I. — The Government agrees always to take the new dollar anywhere in the Empire, — Peking, Shanghai, in Szechuan, Honan, or elsewhere, instead of eighty-two tael cents due in taxes or contributions or in any other debt due the Government. If the official can pay it to the Government for eighty-two tael cents and the Government will surely receive it at that rate, he will not object to taking it. 2. The Government should pass a decree in due time, after the people understand the plans of the Government, saying that any one who has a debt to pay to any other person may pay it in the new dollars at the rate of one dollar for eighty-two tael cents. If the people know that the Government will always back them in paying their debts with the dollar at eighty- two tael cents, they will not object to taking it at that rate. 3. If the Government says, further, that it will take these new dollars and give in exchange for them an order to pay in lyondon or New York or Yokohama eighty-two tael cents worth of gold for each new dollar paid in to its bank, all the foreign banks will receive them at that value, for they are buying orders on tho^e places every day. If the foreign banks take them at that rate, all native banks and merchants will take them at the same rate, for they can be sure of paying them out at that. If the merchants take them at eighty-two tael cents, all the people will do so, for they will know that they maj^ pay them out at the same rate. 3° 4- The Government, too, having full control of the mints will not coin more of these coins than the needs of business demand, so that the people will always be using all that are in circulation, and this also will keep up the value. By following these methods the Government could without cost to itself gain a profit of ten tael cents on each new dollar coined. It would be practically as easy by the same methods to make a profit of twelve or fifteen cents, and it would probably be best to make the gain about twenty per cent. It should be noted that this profit can be made on each piece only once, and that is when it is first coined and put into circulation. After that the dollar must be taken in by the Government at the same value at which it is paid out, so that there is no profit. As forty-eight cents gold equals about seventy-two tael cents and fifty-five cents gold equals about eighty-two tael cents, it is shown above how a forty-eight cent dollar can be made to pass for fifty-five cents. It is important to note that, if the new dollars are introduced into circulation in the way indicated above, very little gold will be required at first and the gold reserve can be built up very gradually as the new coins go into circulation. If at first there should be distrust on the part of the people, so that they would wish to bring the coins paid out to them back to the Government in large quantities to buy gold with, it would be well to have on hand for the first few months a very large proportion of the coins issued. For example, for the first million dollars issued it might be well to let the people know that the Government had $750,000 gold in reserve ; for the second million issued, say, $500,000, that is $1,250,000 for the two millions issued. This large reserve at first is to guard against any possibility of panic. The actual demands probably would be trifling from the first, and after two or three years the reserve could probably safely be cut to twenty-five per cent, or even considerably less, provided the Government had made arrangements to borrow promptly on short notice. If the Government pays out the new coins for salaries and supplies, deposits them in the banks, gives fair rates in the new coins for silver sycee and cash purchased, receives them every- where for their full gold value in taxes, the people will very soon gain confidence and all persons having money to receive either for goods or for services will soon prefer to take the new dollai- 31 as the better dollar and the one steadier in value rather than the fluctuating Peiyang dollar or the inconvenient tael which has to be weighed. VII. THE GOI.D RESERVE. 1. A gold reserve necessary. — As has been stated before, in order to secure public confidence and to insure from the be- ginning the maintenance of the value of the silver coins in gold, by methods which we have already discussed, especially by selling bills of exchange on a gold fund held mostly abroad, it is necessary to have a sufficient gold reserve. It should be kept in mind, however, that the quantity of the gold reserve required on the system proposed would be very much less than if the redemption of the coins in gold on demand were made in the country itself. While, beyond question, when the system is being introduced there would be a certain specula- tive demand for bills of exchange from the interior on the part of bankers who could forward their new silver coins to Shanghai, Tientsin, and other places where the banks could use them in the purchase of gold exchange, this speculative demand would probably not last very long. It would depend upon the fact that at first a good many of the more ignorant people might be willing to sell the new coins, which would seem to them of light weight, at rates something below their face value. This danger could be largely obviated by having the Government give full information as to its means of conducting the business, and by the Government itself always receiving them promptly at their full gold value for money taxes of all kinds. This purely spec- ulative demand on the gold reserve would of course stop as soon as the common people knew experimentally that the Govern- ment was maintaining the value of the silver coins. 2. Amount of reserve. — The amount of the total reserve re- quired is extremely difficult to determine on account of the de- ficiency of statistics in China. In actual practice it must be deter- mined more or less experimentally, depending upon the demand for coins. It will be necessary, on account of the lack of accu- rate information, to make ample provision so as to coverall risks, and to see to it that there is enough at each stage of progress. 32 According to estimates made by the best experts in America and Europe, this reserve should be, for a considerable time at least, from twenty-five to thirty per cent, of the value of the new silver coins in circulation. At the beginning while the change from the old system to the new is going on, it will be necessary to have this gold reserve considerably larger than twenty-five or thirty per cent, of the coins at that time in circulation, inasmuch as there is likely to be a lack of confidence at first which may create a run on the reserve. Besides this fact, there will also be other coins and bullion in circulation for a considerable time. If there should be a slack- ening of business or a very strong demand for gold bills of ex- change, the withdrawal of, say, even fifty per cent, of the new coins in circulation might not contract the entire currency so much as would later, when the system is completely established, the withdrawal of, say, ten per cent. After the system is thoroughly established, it is probable that a reserve equal to ten or fifteen per cent, of the circulation will be suflScient for actual use, although twenty-five or thirty per cent, should always be available on short notice. In consequence of the fact that the reserve fund may be put to only special uses, i.e., to the redemption of the new silver in bills of exchange, etc., it will doubtless be possi- ble to keep part of it in good foreign bonds on which cash could be promptly realized. Again, so far as a part is con- cerned, it may be sufiicient possibly, instead of keeping cash or bonds on hand, for arrangements to be made by the Chinese Government for a mere right to draw bills of exchange up to a certain amount on say two days' notice, the regular rates of interest to be paid only on the amounts drawn. This privilege could doubtless be obtained at a very small charge if the manage- ment had the confidence of the great banking houses. According to the estimates of the Director of the Mint of the United States, the stock of silver in China at the present time is probably in value $750,000,000 Mexican, in round numbers, say 482,000,000 taels, or say $337,400,000 American gold. If we assume a population for China of 400,000,000 (An outside figure. The Director estimates 330,100,000.), this would give a per capita circulation of 1.205 taels, or substantially 84.35 cents gold. If the new dollar were issued at, in round numbers, two shiUings, one yen, or fifty cents gold, or a little more, it would doubtless be sufficient for the time being to allow two 33 of the new coins /^r capita, or 800,000,000 for the entire country when the system is completed. In order, however, to be sure to cover all possible expense in our first estimate, we take a figure more nearly like that of India and assume a profitable cir- culation of some eight shillings, or two dollars American gold, or say four of the new silver coins /(?r capita, making 1,600,000,- 000. At the present time, according to the same authority, the per capita circulation of China and of several countries which may be compared with it is, in gold, as follows : TABLE n. China |i.o2* Turkey 3.75 Japan 3.24 Cuba 2.19 Bulgaria 1.32 India 2.07 Egypt 371 Of course countries with more highly developed business have a higher ratio. For example : The Straits Settlements $ 8.03 Great Britain 18 31 Germany 20 48 United States 29.79 France 39 22 It is evident that four new dollars per capita would be a suffi- cient outside amount to take into consideration at the beginning of the new system. It would take several years at any rate to have the system established throughout the country, and experience would eventually show the amount required. While the condi- tons in China resemble those in India more than in any other prominent country mentioned, the probability is that conditions are even less developed, so far as the use of money is concerned, *The figures are $2.27 Mexican, which would amount to about Jr. 02 American, according to the price of silver when this is written. No other country in the list has so low an estimate. One of the best informed Chinese bankers estimates the present silver circulation at 100,000,000 taels, of which ten per cent, is paper and the rest bullion or dollar coins. He estimates the copper circulation at 50,000,000 taels, of which fifty per cent, is paper. He thinks the country needs more money, but gives that as the present amount. That estimate allows only 37.5 tael cents per capita, or 5c cents at a population of 300,000,000, the least assumed. Unless this estimate is ridiculously wrong, an allowance of two new dollars per capita is ample for the present. 3 34 in many parts of the interior of China than in India where a sys- tem of coins has been in use many years. It should be noted also that the per capita circulation in India, as given in the table, includes eleven cents per capita for paper money uncovered. It would be advisable, of course, for China to introduce the system first in the treaty ports or in some of the most populous provinces, and then gradually to extend the system throughout the country. The population in the treaty ports probably does not exceed 8,000,000, while the population of the four provinces which contain 'Shanghai, Canton, Tientsin, and Hankow is about 100,000,000. If we assume that China, within the first five years after she began the coinage, could supply 400,000,000 of the new coins, that would cover practically all parts of the country which have any direct dealings with foreign countries or which can be considered commercial to any noteworthy extent. A system that is made thoroughly successful in these sections of the country and with this class of the population for a series of years will, without especial difficulty, make its way through the rest of the country. An actual reserve, therefore, of say thirty- three and a third per cent, of this sum of 400,000,000 of the new coins, with the privilege of increasing it to 50 per cent, of or even to double the original amount in case of need, would certainly be ample provision to make for the introduction of the system. It would not be necessary, of course, for the entire final reserve to be raised within the first four or five years after the system is started. If the amount mentioned above were sufiicient to carry it through the first five or six years with safety, experi- ence would show how to take care of the system from that time on : but according to all reasonable calculations, if the price of silver were to remain where it is now or not to increase con- siderably, the profits from the coinage alone would probably prove ample thereafter to continue the reserve at a sufiBcient figure until the completion of the system. The figures given above are the highest that the writer has ever heard estimated, and are given as outside figures which would be safe under the most adverse circumstances. On the basis of most estimates, and those largely of Europeans long resident in China as bankers and merchants, one half of the sums mentioned would probably suflBce, and those are the figures recommended as best to assume. It would doubtless do to begin the system on one-half the estimates given all round, pro- vided arrangements were made to increase in case of necessity to 35 the higher figures, and provided also that the management were watchful and skillful and had the confidence of the public, native and foreign. The figures are tabulated by years of work in the next chapter VIII. 3. The uses of the reserve. — This has been explained sufficiently for present purposes in earlier discussions. 4. The means of obtaining a reserve. — (a) Profits on coinage. — The profits of the coinage of the silver, nickel and copper coins, if the prices of silver and copper do not increase materially, ought to amount to as much as 20 per cent. The ex- periences of the Philippines and of Japan seem to justify this esti- mate as reasonably conservative. Of course all would depend upon the value which the government determines to give to the coins, and it can, within reasonable limits, fix its profits. Ac- cording to the best experts, it is desirable that the face value of the silver coins be at least fifteen per cent, above the usual bullion value, in order to prevent the danger of the melting down of the coins if there should be an increase in the price of silver bullion, which would make the coins more valuable as bullion than as coins. On the other hand, it is not desirable that the profits be too high on account of the danger of counterfeiting. It is probable that so far as the unit coin (the dollar) is concerned, a reasonably safe profit of about fifteen per cent, is about right. From the present outlook regarding the future price of silver, the margin had better be somewhat above fifteen per cent, rather than below it. On the subsidiary silver coins, on account of the less danger of counterfeiting and also because the principle of scarcity can be applied somewhat more rigidly to maintain their value, a some- what higher profit may be made. If the dollar coins are nine- tenths fine, it is entirely possible that the subsidiary silver coins might be made eight-tenths fine. The disadvantage of the larger amount of alloy in the subsidiary coins is that people might at first hesitate somewhat about receiving them ; but that danger would soon be overcome if the government adopted the right measures of interchanging them for dollar coins on demand. The second danger of greater importance is that of counter- feiting. On the nickel and copper coins, of course, a much greater profit can readily be realized. On such coins a profit from fifty to one hundred per cent, is not unusual. As in China the quan- tity of copper and subsidiary silver coins would be unusually large, a profit of twenty per cent, on the entire coinage for five 36 years is probably safe to assume. Mr. Sakatani, Vice- Minister of Finance of Japan, assumes a profit of thirty per cent. It should be kept in mind also that if an increase in the value of silver bullion lessened materially the profit of the Government, it would also lessen the Government's risk at the same time. A decided rise in silver in the lyondon market would rather have a tendency, other things equal, to lessen the demand on the gold reserve, both by encouraging the payment of foreign obligations through the export of silver and by giving confidence in the Government as the risk from depreciation of its coins lessened. Moreover, if, owing to a threiatened exhaustion of its gold reserve, it were eventually forced to sell some of its silver coins to meet a temporary emergency, it would realize a higher price for them. In no event would it lose more than the cost of coinage and freight, unless the bullion value of silver fell between the time o'f its purchase of bullion and sale of coin. The profit on coinage should all be devoted, for a considerable time at least, to the purchase of gold for the gold reserve. If it should be necessary to get any considerable extra sum in hand at any one time, it would be possible to use this reserve and the silver on hand as a basis for a temporary loan of a few months, provided the government authorities had the full confidence of business men. It probably would not be wise, however, to count on this as a basis for any but a temporary loan. (b) Contribiitions. — The government has already made pro- vision for the accumulation of a gold reserve by permitting con- tributions from certain classes of officials to be paid part in gold or in silver at the ratio of 32 to i. It might be well to encour- age as far as possible the income from this source. Possibly other similar sources can be discovered which will add consider- able sums to the gold reserve. (c) Loan. — The Chinese Government might very profitably, considering the importance of the change of the monetary system and the profits of coinage, make a loan, of which a large part of the proceeds should be placed in the gold reserve. The direct gain from profits of coinage alone ought to make this loan very profitable, even if the extra capital needed had to be borrowed. In private Ufe to borrow at six or seven per cent, and to make twenty per cent, is considered very good business. China ought to be able to make better rates than those. If the foregoing estimates regarding the profits from coinage are not excessive, it will be noticed that these profits will 37 amount regularly, at the rate of coinage suggested as sufficient for beginning, to 8,000,000 dollars a year for a period of 20 years if the smaller estimates are taken ; to double that if the* larger are assumed. If the rate of coinage were increased, the income would be proportionately increased, although the time of its duration might be correspondingly lessened. However, even if this profit of $8,000,000 or $16,000,000 a year is made for the government so that it becomes government property, it could probably not be used for anything else than a gold reserve ; that is to say it could not become one of the regular revenues of the government to be applied to other purposes, at any rate for a considerable time. I,ater part of it might possibly be used in such a way. On the other hand, unless the statements made heretofore regarding the benefits to China of a monetary system established on this basis are grossly mistaken, the indirect benefits to China from the system would amount to much more than the cash profits from the coinage thus placed in the gold reserve. Before the system were en- tirely completed it is probable that as a result of its establish- ment the added revenue to the country from other sources would be enough to much more than pay the expenses of any loan required. Every increase in imports or exports increases both customs and likin receipts, while investments and confidence lead to increased revenue from other sources. In estimating the expenses of a loan, also, it should be kept in mind that, so far as the loan is required for the gold reserve, a considerable part of it could be kept as a current balance in the banks either at home or abroad, and thus be made to realize a considerable return in interest, doubtless two per cent, and in some cases more. The Government of the Philippine Islands has realized three and a half per cent. If experience showed that the demand on the gold reserve were comparatively small, a considerable portion might also be kept invested in securities, Chinese or foreign, which would pay part of the expenses of the loan, probably three to four per cent. At least half of the re- serve, on the average, might thus draw interest ; probably a much larger proportion than one-half might secure some income. As a basis for a loan, if any is needed, the following sources are suggested : (i) Increased returns from customs. — The annual increase of the returns from the imperial customs. The annual income at the time of the establishment of the indemnity, it is under- 38 stood, was practically all required for the payment of that in- demnity. The trade of China, however, is rapidly increas- ing, and there is, in consequence, a large annual increase in the returns from the customs. If the Government can secure its support on the basis of the income of three years ago and assign this increase in the customs to the establishment of a monetary system, this might be used as the basis of a con- siderable loan. (2) Opium, spirits, etc. — From investigations made through- out the provinces, it is evident that the Chinese Government is not receiving, either through the central government or through the provincial governments, nearly so large an income from opium, spirits, tobacco, and other similar products as is usual in other civilized countries. In the United States, for example, the central government alone derives from the manufacture and first sale of such products, mostly spirits and tobacco, ordinarily nearly half of the entire national revenue. Besides this, the municipalities derive a large additional income from licenses issued to shops where these products are sold. In India in 1902 the government derived from opium alone a revenue of 72,781,000 rupees, or in round numbers about 36,400,000 taels. From salt it received only about 89,000,000 rupees, say 44,500,000 taels. It would seem probable that by a proper organization of the service and an increase in the tax, the Chinese Government might realize from opium a much larger revenue in the near future without any tendency toward increasing the quantity of opium used. The Government would also derive a very great advant- age in securing a much greater control over its production and use which would enable it more easily later to adopt whatever measures might seem advisable. Probably similar provisions might be made, although they would be of less importance, with regard to spirits, wines, tobacco, and similar luxuries. The succeeding note offers some suggestions regarding an opium farm for certain cities. (3) Land Tax. — Sir Robert Hart has suggested an increased revenue from the land tax, the provisions of which are familiar. (4) Mines. — It seems to be the general opinion throughout the provinces, particularly among business men and those who have looked somewhat carefully into the subject, that a consid- erable increase in income might be derived from the development of those mines of China, the revenues from which have not already been assigned, and that, if it were desired, a loan might be made on this security. 39 In order to secure such an increase in revenue and to manage it to the best advantage, it is necessary that the government have a somewhat accurate and detailed knowledge regarding the mineral resources of China. This could probably be most readily secured if the Government, through the Board of Commerce, were to organize a central mining bureau. This bureau should undertake at once a careful survey or prospecting of the chief mining resources of the Empire under the direction of experts who would have the full confidence not merely of the Govern- ment itself but also of investors everywhere. In the case of all mines which seem important, very careful estimates should be made by these experts of the probable income which might be received from each mine under proper royalties. When this estimate was in hand the Government could judge reasonably well regarding the amount of money which could probably be borrowed on this basis. Of course no investors, either Chinese or foreign, would be willing to make a loan so large that its interest and amortization fund would exhaust the estimated royalty. Capitalists might readily be found, however, who would be willing to make a loan the average support of which might amount to say a half of the royalty. This would, on the average, give an ample security. The other half then, in case it were actually realized, would go into the general treasury of the Empire. When the mining bureau once had full knowledge of the mines at its disposal, it would be in a position to grant privileges on these mines on reasonable terms on the basis of the experts' reports. Investors would, of course, send their own experts, at first at any rate, to investigate the mines which they were pro- posing to develop or on which it was their intention to make a loan ; but if the Chinese had employed experts of equal skill, every such investigation would serve not only to confirm the judgment of the Government experts but likewise to add to the . credit of the Government itself. When the permit for the work, ing of the mines was given, until a sufficient sum had been secured for the monetary system, it might well be made on the basis of a loan of reasonable size. It is the opinion of a good many experts who have thought out the matter somewhat fully that from the mineral resources of the country there might be realized in this way a considerable sum within a comparatively short period, — enough probably to supply the needs of the mone- tary system. 4° (5) Railroads. — It is probable that there are also some rail- road concessions which might be used in the same way under the direction of the Board of Commerce. (6) Oi'^^r^oMrf^j.— Probably the Board of Revenue can sug- gest other sources of revenue ; for example, a. house tax such as has been employed in Canton ; a business tax such as is com- mon throughout Europe and in the Philippines ; or others. Of course any such taxes should be levied with discretion and with care not to interfere with business. There can be little doubt, • however, not merely that it would be extremely profitable to the Chinese Government but also very beneficial to the Chinese people, to make the sacrifice of shghtly additional taxes or of the use of some of the new sources of revenue suggested, amounting, say, to from two to five million taels a year, in order to establish a new monetary system, which would probably bring an annual profit for a good many years of from six million taels a year upward, besides the still greater indirect benefits already mentioned. 6. The means of maintaining the reserve. — Most of the means of maintaining the reserve at a sufficient amount after it has once been established have already been indicated in connec- tion with the maintenance of the gold value of the silver and copper coins, so that this subject may be treated quite summarily. The following methods may be noted : (a) Gold paid in. — In case individuals wished to have silver and copper coins issued to them individually in addition to those which the Government has put into circulation by the ordinary channels, the Government should coin and issue such silver and copper coins on demand in reasonable quantities for gold deposited. Such gold should be placed in the reserve fund. This has been the chief source, practically the only source, of raising the gold reserve in India. It could doubtless be made eventually to become a considerable source of gold revenue for China. It is not well to depend upon it too much, as, in order to have it work most efiiciently, it would be necessary so to limit the quantity of coins that business might be considerably hampered. Moreover, it should be kept in mind that full con- fidence in the administration and high credit is needed to make this source effective. (b) Sale of silver bills on China. — In connection with the above is the sale of bills of exchange for gold by the Chinese agencies abroad, these bills of exchange to be drawn on the 41 treasury in China or on the national bank acting as the agent of the treasury, and to be payable in China in the new silver coins. It is not necessary that the rates charged by the agents of China abroad for bills of exchange payable in the new coins in China be the same as those charged by the Chinese Government for bills of exchange payable abroad in gold from the gold reserve. In fact, if it seemed that there were danger of the exhaustion of the gold reserve, the Government might make the rates favor- able enough so that it would become an active competitor of the foreign banks in selling these bills of exchange. Of course the persons in charge of the system would need to exercise very careful discretion in determining what those rates may be in order, on the one hand, to maintain the system in its integrity, and, on the other, not to interfere unduly with private business. (c) Buy gold exchange. — In case of very heavy drafts on the gold fund, so that there seemed danger of its exhaustion, the Chinese Government, either through the national bank or through other special agencies, following the example which Japan set in more than one instance, might enter the market and buy in competition with others in Shanghai, Tientsin, and else- where, for silver, foreign bills of exchange payable in gold in London, New York, Yokohama, or elsewhere ; the products of these bills of exchange when collected in gold to be placed in the gold reserve. (d) Profits on exchange. — From the sale of bills of exchange on the gold reserve held abroad, as well as from the sale of bills of exchange on the Chinese treasury payable in the new silver coins of the country, small profits would, of course, be realized. These would naturally be placed in the gold reserve. While they would, in all probability, amount to a considerable sum each year, they would naturally form but a small part of the gold re- serve as a whole. They are therefore to be looked upon as a subordinate means of maintaining the gold reserve. (e) Sale of silver on hand. — Another resource is also left in case of an emergency, a means which was advocated by Mr. I,indsay, of the Bank of Bengal, when it was proposed to estab- lish earlier a gold reserve for India. In case very large quantities of the new silver coins are paid into the Government treasury in exchange for bills of exchange on the gold reserve, these coins are to be held in the treasury until there comes a strong demand on the part of business men for them to be paid out, a demand which would be manifested 42 ordinarily by the deposit of gold either at home or abroad for this purpose. It is evident that such deposits of gold would not be made as long as gold exchange is demanded. The govern- ment would therefore have in its vaults large quantities of silver coins. If the gold were not forthcoming elsewhere, it could either borrow temporarily on the security of these coins or could finally sell them on the market as bullion either for local use or for ship- ment abroad. Such a sale would involve a loss to the govern- ment of the cost of coinage and possibly also some shipment charges. Beyond that, however, there would be no loss suffered, provided the price of bullion remained the same, inasmuch as the government would itself have bought the bullion originally for coining these pieces at market bullion rates. There would be a loss of coinage and recoinage, but this, would be a very small per cent., possibly two or even four per cent, with freight charges, and might well be suffered rather than to take any serious risk of the exhaustion of the gold reserve and the depreciation of the coins already in circulation. NOTE. — AN OPIUM FARM FOR SOME OF THE CITIES OF CHINA. In the article on a Gold Reserve, under c (2), it is suggested that the Chinese Government does not receive so large an income from opium, spirits, etc., as is usual in other countries or as is desirable. In order to secure a sufficient basis for a loan for the new monetary system and in order to get this return within a year, which would be soon enough for the inauguration of that system, it has been suggested that the selling of opium in the larger cities like Canton, Shanghai, Hankow, Foochow, etc., might be made into an opium farm ; that is, that the monopoly of this sale, including the selling through the opium shops where opium is consumed, be made a monopoly and be sold to an indi- vidual or syndicate who would pay the largest amount for it and would conduct it in accordance with the law. The Government would then lay down whatever regulations it saw fit for its introduction into the city, and its sale, fixing, if it thought best, the quality, prices, restrictions regarding per- sons to whom it should be sold, the number of shops where it should be sold, with their location, and any other regulations that seemed desirable. The money for the farm should be paid quarterly in advance, so that the Government could count abso- lutely upon the amount of revenue and upon the date when it 43 would be received. This system should be applied to enough cities to furnish the revenue required for the loan. This law would form a good basis for the proper taxing of opium, and might later be extended to include a general opium monopoly by the state, or it might take whatever other form seemed ad- visable. It was suggested that a commission of three men, to consist of two Chinese and one foreigner, the foreigner presum- ably a man from the imperial customs who knew something re- garding the conditions of opium importation, etc. , and who could speak Chinese, should be sent at once to Singapore, the Feder- ated Malay States, possibly to Java, Sumatra, Manila, and For- mosa, to see how the farms are run in those different places, where they have them. They should then go to Canton and these other Chinese cities, and after informing themselves about conditions there, have charge of the selling of the opium farm. The farm should presumably be sold for a year at a time, with the expectation that if the farmer did his work well he should have a certain priority in the succeeding year. An opium farm of this type would presumably bring in a cer-, tain revenue more promptly than almost any other tax that could be devised. As soon as the farm was sold it would make an absolute basis for a loan, so good that a loan could doubtless be floated at a low rate. The chief advantages of the system are (i)the prompt and certain income ; {2) the ease of enforcing the law, inasmuch as the opium farmer, in order to keep his monopoly, would himself see to the enforcement of the law against all other persons be- sides himself. He himself has so much money invested that it would not pay him to take the risks of violating the law under penalty of forfeiture of his farm. (3) The ease of changing the system for another at almost any time whenever the change might seem desirable. Of course the dangers of a farming system like this are not overlooked. There is danger of evasion of the law, of a poor quality of opium, etc. In many respects a government monopoly is preferable. On the other hand, considering present conditions in China — the difficulty of handling honestly government mo- nopoly, the need of immediate and certain returns, etc., — it is probable that the opium farm would secure the needed revenue more certainly and promptly than the other forms of tax suggested. 44 VIII COST OF ESTABI^ISHING THE NEW MONETARY SYSTEM.— ESTIMATES. It is assumed in suggesting these figures, in order to make the estimates at the highest possible cost, that the population of China is, in round numbers, 400,000,000 ; that the new monetary standard coin shall be a dollar about equal to the present Peiyang or Canton dollar in size and weight, and that it is given a gold value slightly above that of the Japanese yen, enough to insure ^he requisite profit. It is within the power of the Government to fix the rate of profit at the beginning. There are two bases of estimates, the first assuming that China will need eventually, when the system is completed, four of these new dollars per capita. This is an outside estimate, larger than is usually given, and larger probably than is needed. The second assumes a circulation of two of the new dollars per capita, is the one more generally given and is the one recommended. It is ample for starting the system, though the rate of coinage might be increased, if the coins went into circulation readily. FIRST ESTIMATE— $4 PER CAPITA. The circulation for the entire Empire when the system is com- pleted will be $1,600,000,000. In the four chief provinces of China which are especially con- nected with foreign trade — Chili, Kiang-sii, Hupeh, and Kwang- tung — and which contain all of the leading commercial cities — Tientsin, Shanghai, Nanking, Hankow, and Canton — there is a population, in round numbers, of presumably some 100,000,000. If the new monetary system is once well established in these provinces and the fixed value of the coins maintained in terms of gold, there will be no difiiculty whatever in extending it on that basis through the rest of China. In consequence the estimates here given are on the basis of supphdng these four provinces completely with the new coins. In actual practice it is probable that a good many of the more remote districts of these provinces might not be well supplied at that time, while some of the cities of the other provinces such as Shantung and Fukien would be supplied ; but the quantity mentioned would be ample work for the first five years. The figures given are high enough in every case so that they are believed to be entirely safe. The following 45 table in millions of dollars gives, for each of the first five years the amount to be coined, the profit on the coinage at twenty per cent. , the amount in circulation, the per centage of the circula- tion to be held as a gold reserve, the amount of that reserve, and the amount to be supphed to the gold reserve fund by loan or otherwise outside of the coinage profit. TABLE III. Percentage of Amount to be year. Amount Coinage Amount circulation Reserve. supplied coined. profit. in circulation . in reserve from loan fund. or tax. 1st |8o $16 $ 80 75 % 60 f44 21ld 80 16 160 50 80 4 3rd 80 16 240 42|i 103 7 4lh 80 16 320 37A 119 __ .5ih 80 16 400 33J ■35 -- Total, . JS400 jS8o I400 J'35 $55 It will be noted that the larger part of the loan or special tax is called for during the first year. There are two reasons for this. In the first place, the special runs on the new system are likely to occur during the first year rather than later. On that account it might be thought advisable, for a time at least, to be ready to supply gold if necessary to a certain extent in ex- change for the new silver coins within the country itself at a charge equivalent to the cost of shipment of gold from Europe. This should not be adopted as a general policy, and it is ques- tionable whether it should be done at all ; but provision for a very large reserve to guard against possible runs should be made. In the second place, while the bulk of the circulation is still in other coins or in bullion, especially before their importation is stopped, it is possible that, in order to test the system, a very large percentage of the new coins would be presented to buy gold exchange with, even at the rather high rates charged for bills of exchange. After the system is finally established, the withdrawal of the coins from circulation on their presentation to buy bills would so contract the currency that the rates charged for bills of exchange would certainly fall, i. e. , a fixed amount in sterling, say ^1000, would cost less in the new dollars ; or a fixed amount of the new dollars would buy a larger sterling draft, as the dollars became scarcer. But while there remained a large circulation of other coins and particularly while importation of other coins might continue, it is possible that this might not be 46 the case ; hence the necessity during the first year or two of a very large reserve which could be used if necessary. It is ab- solutely essential to the success of the system that sufficient pro- vision be made so that the absolute confidence of the business world, both Chinese and foreign, be assured beyond question. SECOND ESTIMATE — $2 PER CAPITA. This estimate is much more reasonable on the whole and is ample for a safe starting of the system, though, if experience shows that the coins are readily used and the system rapidly wins success, provision should be made to increase the rate of coinage and the amount coined. The following table in millions of dol- lars shows the figures for each of the first five years and the totals. TABLE IV ^ear. Amount coined. Coinage profit. Percentage oj A mount circulation in circulation, in reserve fund Reserve. Amount to be supplied /rom loan. 1st % 40 $s % 40 75 $3,0 $22 2I1<1 40 8 80 50 40 2 3rd 40 8 120 42>^ 5' 3 4th 40 8 160 36} 59 -_ 5th 40 8 200 33^ 67 - Total , ,f200 I40 |200 I67 $27 In either case it would be desirable to make contracts in the cities where the gold reserve is kept for making further tempora- ry drafts in case of an emergency ; that is, an option to draw to an amount named would be bought. As long as it is likely that this privilege would not be needed, it is probable that the charge for the mere privilege would be slight In case use should be made of it, the Government would, of course, pay the usual rate of interest for the length of time it kept the money, say from one to four months. It would be easily possible, doubtless, to give to an institution from which this option of drawing was ob- tained, a warning of a day or two at least. Probably a warning of even a month could be given. In addition to the monetary circulation itself, it is necessary that there be some working capital. It is probable that from the present sources of income of the Chinese Government something could be furnished ; but in order that the entire expenses may be estimated, it is thought best to add a sum for working capital. Under the first estimate, in order that the principle of giving 47 the highest charges to everything be maintained, this sum may be placed at, say, $25,000,000. This would be suificient to pro- vide a liberal amount of bullion for the mints, to incur some expense in organizing the mints anew if necessary, and to make some provision for the initial establishment of exchanges and agencies for the introduction of the new system. It is possi- ble that this sum would also pay the provinces, in part at least for the mints taken over. This would make, then, to be raised from outside sources, i. e., from a loan or special tax $80,000,000. "Under the second estimate we may place the figure for ex- penses at, say $13,000,000. Doubtless a smaller sum would serve to run the mints, but not to the best advantage, provided many other expenses arise, inasmuch as it is desirable always to be sure of keeping an ample supply of material on hand. The payment for present mints is not included. This would make a total from outside sources, a loan or tax, under this estimate, of $40,000,000. Inasmuch as the present accounts of the Chinese Government are kept in Kuping taels, it might be convenient for purposes of computation if these sums were put into taels. It is assumed that the new dollar will be slightly more valuable than the Jap- anese yen. The Kuping tael is somewhat heavier than the Shanghai tael. According to late quotations, exchange on Yokohama was 80 Shanghai tael cents per yen. We may per- haps safely assume for the present purpose that the added value of the Kuping tael as compared with the Shanghai tael corres- ponds to the added value of the new dollar as compared with the yen, and reckon the new dollar as worth .80 of a Kuping tael. In that case the amounts to be raised would be, on the different estimates, respectively 64,000,000 taels and 32,000,000 taels. If an estimate of seven per cent, interest is assumed in order to get the annual charge, we shall . surely be taking an outside limit. It is probable that the loan could be made at considerably less than that. At the rate of seven per cent., under the first estimate, the annual charge would be 4,480,000 taels ; under the second estimate, 2,240,000 taels. If we may judge from the practically universal experience with such funds, however, a considerable portion of the gold reserve could be kept on deposit at call in the great business centers whether in Europe, America, or China, so that it would bear interest. It is clearly a con- servative estimate to assume that a half of the reserve is draw- ing two per cent, interest. It is probable that it would be con- siderably more than that. 48 The first year we should have a reserve of $60,000,000 ; the fifth year $135,000,000. It will perhaps be fair to take an average of these sums for the average reserve during the first five years, $97,500,000, the interest at two per cent, on half of which amounts to $975,000. Reducing this to taels at the same rate we get 780,000 taels, to be deducted from 4,480,000 taels, leaving 3,700,000 taels as the net expenditure. In the second table, reckoning in the same way, the annual net revenue at two per cent, for the first five years would be 388,000 taels, to be deducted from 2,240,000 taels, leaving an average annual ex- penditure of 1,852,000 taels. If to these sums respectively be added, say, one per cent, of the average reserve for the privilege of drawing an added amount equal to the reserve for any few days at a time when that might be needed, although in all probability it never would be needed, this will restore the annual charge to the figures given originally ; that is, 4,480,000 taels and 2,240,000 taels. When one considers the enormous benefits to China, as they have been stated before, which would accrue from these expendi- tures, the latter seem very slight indeed. These estimated charges themselves per annum would probably, in actual practice, suffice to pay off the debt incurred by the time the monetary system was made complete, provided the rate of coinage, the profits of coinage, and the amount to be coined remained as in- dicated in ' the estimates, and estimating that it will require twenty years for the complete establishment of the system. The following considerations indicate that result : The gold reserve could be made proportionally less before that time ; the interest on current balances would increase decidedly ; the reserve has been reckoned against the entire circulation, whereas it would not need to be kept for redemption of copper coins, etc. It is best, however, to make provisions against all possible risks, so that the above outside figures are given. It would be desirable to in- troduce the .system more rapidly than indicated here. In that event the cost to the country would be less, since the benefits to the country would be correspondingly greater, inasmuch as the benefits would take eiTect sooner. If for an expenditure of 4,480,000 taels a year, a cash income of 12,800,000 taels can be secured, and for an expenditure of 2,240,000 taels one of 6,400,000 can be secured, aside from all the other vastly greater benefits of established credit, of increased trade, of increased revenues, etc., it would seem that the most 49 strenuous efEorts ought to be made to secure the sum needed from year to year in order to keep up these benefits. It must not be forgotten that if the system, instead of being estabUshed with the coins on a fixed parity with gold, is placed on the silver parity, the profits of coinage will be reduced by three-fourths, at any rate, whereas the cost of minting and other incidental expenses of introducing the system would not be reduced at all. Moreover, there would be lost a very large pro- portion of the advantages that would come from an established credit, an increased investment of capital, etc. Beginning on a silver basis and afterwards transferring to gold would lose abso- lutely at least three-fourths of the profits on all the coinage issued before the system was established and would, beyond much of any question, postpone the completion of the system to a period at least double that which will be required if the system is started on the gold basis. It becomes a matter of the gravest import- ance, therefore, that the whole plan be thoroughly thought out before any positive action is taken. If it is rightly managed, the system not merely costs nothing in the long run ; it is a source of large actual cash profits from the first year. It is a very profitable financial investment. If the sovereign power of the state which enables it to make these profits could be loaned to a private company, such a company would willingly pay the Chinese Government several millions of taels a year for the privilege of starting and running the system, without any expense to the Chinese Government. It would, of course, be inadvisable to give such power to a private company ; but the fact shows the opportunity which is presented to the Chinese Government by the present conditions. All other civilized countries on the gold basis are using this source of profit to advantage ; but as the chief profits come from the new coinage they make much less than China can make which has to coin anew its entire circulation. If the Chinese government finds it difiicult for two or three years to secure additional revenue to pay the interest on the loan, it will probably be practicable to pay the interest for three years at least out of the seigniorage, so that the Chinese Government would thus establish its monetary system on a gold basis without any expense to its revenues for the first three years, provided the price of silver remained substantially the same. It is probable of course that this period might be extended a year or two ; it is possible that it might be shortened a little. From careful discus- 4 50 sion of the subject, however, with business men accustomed to floating foreign loans and dealing with financial matters of that tjrpe, it is practically certain that a loan could be made on the security of the gold reserve, with the interest to be paid for three years at least out of the profits of the coinage. This would be suflScient time for the government to start almost any new system of revenue which was necessary in order to meet expenses there- after. IX. ADMINISTRATIVE ORGANIZATION. 1. Conditions of success. a. The confidence of the people. Chinese and foreign. ( 1 ) That they may readily take the new coins at their face value. (2) That they may subscribe money for a loan or the establishment of a national bank. (3) That the banks, especially the native banks, may accept the coins in connection with foreign ex- change and the gold reserve. b. Sufficient capital. c. Skill in management of the system.. These three are all needed for the success of the sy.stem- whether the coins be given a fixed value in gold or not, though especially needed in the latter case. 2. How to secure these conditions. a. Means of securing confidence. ( 1 ) Publicity. If everybody knows well what is being done and how the system is managed and if the work is well done, confidence is assured. This will require a careful system of accounting and the regular publication of accounts, as is the case in most of the advanced countries. (2) Absolute good faith and uprightness in the manage- ment, and public belief in this good faith. At present the public has not always sufficient trust in the good faith of the government to give it its full confidence. The management must be such as to secure that confidence. 51 (3) Management in the public interest and public be- lief in that. At present there is sometimes, un- fortunately, a belief that some of the business of the government is managed in the interest of the officials. The new system must be managed by business methods, and it will be easier to secure public confidence if it is managed, as far as is practicable, through .the banks and other business men. (4) Skill and knowledge in management, and manage- ment through such agents that the people will trust their skill. It is not sufficient that the men have sufficient knowledge unless they are those whom the public, on account of their general reputation and of their connections, will trust. b. Capital. In order to secure capital the public confidence must first be secured and the plans adopted must meet the approval of the leading capitalists. After that the methods of raising capital by loans or subscriptions have already been sufficiently discussed under the question of a gold reserve. c. Skill in management of the system. Men for the different positions of responsibility.must be chosen, who from their training and experience will be known to have the requisite skill. It will not be sufficient to select merely men of promise. The men in the most important positions must have been already tested. 3. The officials needed. a. The Monetary Commission or Board of Revenue. Either the Monetary Commission or the Board of Revenue will presumably have the general supervision of the system as a whole, and the officials appointed will be subordinate to them. Presumably it would be well for some one person in this Commission to be designated as an active official to give his full time to the work and to represent the Commission as a whole. 52 b. An Expert (^Controller') in general charge of the system. He should be held responsible for the general man- agement of the system as a whole under the Commis- sion, and, generally speaking, of course, his recommen- dations should be followed. He should take no impor- tant step without the full knowledge of the fecial manager of the Monetary Commission, already men- tioned, and matters of chief importance should receive the sanction of the full board. He should be ex officio a director of the national bank, and should have immediate direction of the gold reserve, acting through the bank, where practicable, and also under the oversight of the Commission. He ought not to have any control over the revenues ex- cept in the monetary system. Presumably he should live at Peking. He should nominate to the Board for appointment the other chief monetary officials. c. Deputy Controller. Inasmuch as Shanghai is the most important business place in China and inasmuch as questions of exchange, as well as other important matters in connection with the system might presumably come up there first, it would be advisable that, when the system is started at Shanghai, there be a Deputy Controller resident there who would have the confidence of the Commission, and who, agreeing in general policy with the Con- troller and the Board, would represent the Controller in Shanghai. d. General Accountant. The necessity of accurate accounting and publicity has already been mentioned. This cannot be secured to advantage unless the accounts of the different mints and of the different branches of the work be kept in accordance with an harmonious system. The General Accountant should, therefore, determine the methods of accounting throughout the system ; should receive in detail from the mints and other branches of the work, including the national bank so far as its work is connected with the monetary system, uniform reports ; and should be held responsible for the regular 53 publication of accounts so far as matters are to be made public. He should collect statistics for the Commission, be the agent to send out notices of rates of exchange, etc. e. General Superintendent of Mints. Besides the sub-superintendents in charge of each one of the mints that is running, there should be a General Superintendent in charge of them all. It should be his duty to see to the buying of bullion, to the general principles on which the mints should be managed so as to secure absolute accuracy in the minting of the coins, as regards the touch of the coins, excellence of workmanship, care of the materials, etc. He should also deliver the coins to the national bank, the treasury or other agencies of the Monetary Com- mission, in accordance with the directions received ■ from the Monetary Commission through the Controller. He should nominate the sub-superintendents of the mints to the Controller for appointment by the Mone- tary Commission. Presumably the present local man- agers and working force would be retained as far as practicable. The National Bank. The National Bank, while doing presumably a large pri- vate banking business which would come to the profit of the stockholders, would also be an agent of the Government in connection with the monetary system and with other gov- ernmental work. As its profits would be in part dependent upon the Government and as it would do much Government work, it should divide profits with the Government and the Government should have a voice in the management, (a) Powers. (i) Discount or purchase of commercial bills of exchange. (2) Purchase and sale of gold and silver bullion and bonds. Private. { (3) lyoaning money on the security of gold and silver coins, bonds, government bills, or other collateral. (4) Opening and conducting deposit accounts, in- cluding safety deposits. 54 Partly Private. Public. Public. Public. (5) Issuing of bank notes convertible on demand into the new coins under government law de- termining the new coinage. A special law should be passed determining the amount and character of the coin reserve for the bank notes, the regulations regarding their re- demption and other ordinary provisions of a law regulating bank-note issue ; the right of issuing bank notes to be made a monopoly of the bank as soon as practicable. (6) Act as the chief agent of the Government in ex- changing the new coins and notes for the old coins and moneys now in circulation under regulations made by the Commission. For this work, of course, it would establish branches and numerous agencies. It would advise regarding the quantity and denomina- tions of coins to be minted, (7) Act as agent for the Government in the adminis- tration of the gold reserve fund in connection with the Controller under regulations made by the Monetary Commission. The gold reserve to be held as government property on deposit with the Bank and to be administered by the Bank, not as its own funds, but under general regulations, as indicated. Exchange to be sold against this gold reserve only under the general regulations and with the cooperation of the Controller, the Bank selling its own ex- change, of course, freely, without reference to the Monetary Commission. (8) Act as agent of the treasury in receiving and disbursing government moneys under regula- tion of the treasury, presumably receiving in its different branches government moneys for deposit ; acting as agent for the Government in paying government salaries, etc. This work to include the administration of the debt obligations so far as it may be made practicable. This work done under the Board of Revenue, not the Monetary Commission, except regarding its own funds. 55 b. Organization. The bank should be organized as a stock company for 25 or 30 years, with the Uability of stockholders limited to the amount of their capital stock. The stock-holders presumably private individuals. The capital presumably some forty or fifty million dollars of the new coins, one quarter to be paid in before the bank begins business. c. Officers. ( 1 ) Five to seven directors, elected by the shareholders. The President and the Vice-president to be chosen from among them. (2) One Manager, Chinese, and one Manager, foreign, to be elected by the directors with the approval of the Government, and to be given full power under the law laid down by the Government. (3) One auditor, to be appointed by the Government ; one or two auditors to be elected by the share- holders. (4) Compradores, managers of branch banks, minor officers and assistants to be appointed by the board of directors. (5) The Controller of the Currency, who is a govern- ment official, to be a director of the bank ex officio. The directors to be chosen for a period of five years, and to be so classified that one at least will retire each year. The private business of the bank to be managed solely by the board of directors at their discretion. The public business to be managed by them under regulations laid down by the Government and under its careful inspection through the Controller and audi- tor, and, if the Government wishes, also through an inspector to be appointed by the Government. d. Branches and agencies. The bank to establish branches in the leading com- mercial cities and to establish agencies throughout the country as rapidly as it is possible to extend the new monetary system, or wherever the bank finds it profit- able for its own business. The bank also in due time to estabhsh its branches and agencies abroad. It may possibly be advisable at 56 least for a time to make leading foreign banks its agents in connection with the reserve funds. e. The management. The management to be, in the main, in accordance with the customs of the leading foreign national banks. Reports of the exact condition of the bank to be pub- lished quarterly ; reports to be made on demand at any time to the Monetary Commission. So far as the government business in connection with the monetary system is concerned the books to be kept in accordance with the rules laid down by the Monetary Commission on advice of the General Accountant, and reports to be furnished him when asked for. Every effort to be made to secure public confidence by engaging well- known competent managers and by as great a degree of publicity of management as is practicable. f. Profits. From the profits dividends to the amount of six per cent, to be divided among the stockholders. If there is a surplus beyond, ten per cent, of this surplus to be placed in a reserve fund until that fund amounts to ten million dollars. Surplus beyond this to be divided into two parts between the stockholders and the state until the share of the stockholders amounts to eight per cent, of the capital. The remainder beyond that to be divided into three parts, one to the stockholders and two to the state. X. REVISION OF TREATIES. I. Regarding the importation of foreign coins and of bullion. — In order to carry out successfully its monetary reform, it seems probable that China will need to arrange with the vari- ous treaty powers a revision of the conditions regarding the im- portation of foreign coins and of bullion, so that she may either levy a duty upon their importation or forbid their importation altogether excepting under Government instruction. a. Reasons for checking importation. — The reasons for the checking of importation are as follows : 57 (i) To secure and keep one uniform system of coinage. — So long as foreign coins are admitted free of duty, it is likely that the Mexican dollars and especially the British dollars will circu- late freely in many parts of China, particularly in the coast cities. If the new coins remain on the silver basis and are substantially of the same weight as these other coins, there is no reason why the people should make any special discrimination between them, and it is not likely that they will take the trouble to do so. In- deed the reputation of the Mexican dollar and especially that of the British dollar are so well established that for a long time to come many would take them in preference to the new dollar. If the new coins should be placed on the gold basis, very many of the Chinese would gradually come to prefer the new coins as more satisfactory for use, especially in the import trade and in all other cases where a fluctuation in exchange with foreign countries is detrimental. On the other hand, for the use of exporters who wish to buy material in the interior of the country, for those who have wages to pay to the more ignorant classes among the people, and for many others, the cheaper coin would be consid- ered more advantageous, and on that account the foreign coins would hold their own against these new coins for a long time unless special discrimination were made against them. Of course the Government might discriminate against them by refusing to receive them for obligations due the Government and might deprive them of their legal tender qualities, but even this discrimination would not prove sufficient to expel them from the country, and resort would probably be had ultimately, if that were possible, to discriminating taxation on contracts, as ex- plained below. Without stopping importation therefore it would seem practi- cally impossible to carry out the provisions of the treaties which require the establishment of a uniform coinage. (2) To keep up the value of the silver coins by making them, relatively speaking, scarce as compared with the demand for them. One important influence toward maintaining the value of the silver coins, particularly if they are placed on the gold basis, is to see that the quantity of money in circulation is limited to the needs of business. If the Government is able to exclude foreign coins and bullion, it will be able, in case of a threatened depreciation of its new coins, to withdraw some of them from circulation by receiving them in exchange for drafts on its gold reserve, and then by retaining them in the treasury to create a 58 relative scarcity of the money in circulation. If there is no checking of importation, any such withdrawal of coins from cir- culation would have little or no effect, since their place would be filled by coins from Hongkong, by bullion, etc. To insure the maintenance of the gold parity without too great a strain on the gold reserve, a checking of importation is necessary. b. When regulate importation. — The regulation of importation of these coins and of bullion should be placed in the hands of the Chinese Government. It is possible, however, that foreign nations now having the right to demand the free importation of these articles, would not be willing to leave the regulation of their importation entirely in the hands of the Chinese Govern- ment. They would fear that such use might be made of the power that it would hamper business. In order to prevent such a result they will possibly insist that no restrictions be placed upon importation until a sufficient number of new coins are in circulation to prevent any undue scarcity of money. The deter- mination of this point is somewhat difficult. Two methods have been suggested. (i) When fixed number coined. — That treaties be negotiated declaring that as soon as China has a certain fixed number of the new coins in circulation, the Chinese Government shall thereafter impose such restrictions as seem to it wise. So little is known, however, regarding the money actually in circulation in China and the amount actually needed for doing business that it is probable that great difficulty would arise in securing agreement upon the quantity needed. Many business men would think it preferable to leave the matter to be settled by some joint com- mission made up of representatives of the Chinese Government, Chinese business men, and of foreign governments and business men. (2) When special board agrees. — It has been suggested, for example, that the power of restricting importation shall be exer- cised by the Chinese Government whenever the President of the Board of Revenue, the Controller, and the Managers of the National Bank representing the Chinese Government, and author- ized representatives of the Shanghai and Tientsin English, American, and Chinese Chambers of Commerce shall agree by a majority vote that the proper time has come. It is possible that it would be wise to add to this committee the ministers of the foreign powers resident in Peking or a certain number of consuls, but it is probable that this would simply increase the 59 difficulties and be of no advantage whatever. A committee representing the business men would probably be more satis- factory to other nations as well as to China. 2. Methods of negotiation. — In the case of the revision of the treaties one should consider where and how such treaties should be negotiated. (a) In China. — If they were negotiated at Peking with the ministers of the foreign powers, owing to the desire of each minister to make as strong a record as possible for accomplishing much for his government and to his natural desire to gratify his nationals and to secure more than do other members of the diplomatic corps, jealousies are likely to arise which make it difficult to secure satisfactory results. Moreover, the authorities in the home governments, owing to their lack of knowledge of actual conditions in China, are likely to hamper very seriously the actions of their ministers resident in Peking and thus lead again to delaj' and difficulty. (b) In foreign countries. — For the reasons given above it is usually better for the Chinese government to negotiate general treaties, requiring the agreement of several nations, in foreign countries, provided she can have the services there of men who are thoroughly well acquainted with the subject in hand. It is asked, therefore, whether it would not be better for China to send to the foreign countries to assist the Chinese ministers in making these treaties and in keeping them uniform, some rep- resentative Chinese who is fully in the confidence of the govern- ment, together with some expert who knows fully the monetary situation in China and can explain with the greatest clearness to the foreign offices the exact needs of China and the benefit to those countries from acceding to her request. By such a method probably the best results would be reached most quickly. XI. COMPARISON OF THE TWO PI.ANS OF STARTING THE NEW MONETARY SYSTEM. Before undertaking any matter of so great importance as the reform of a country's monetary system, it is advisable to make very careful estimates of the cost and of the results. Unless this 6o is done, mistakes are likely to be made which will prove very- expensive financially and which may easily cause failure. In the following comparison of the costs and results of the two plans, ( I ) that which starts with the silver coins given a fixed value in gold and (2) that which starts with the silver coins at their bullion value and later, after the accumulation of a gold reserve, raises them to a fixed value in terms of gold, it is assumed, for convenience of comparison and because the calculating tables make it more convenient, that the interest both paid and received is at five per cent, and that one pound sterling equals ten of the new dollars. (At present one pound sterling equals about f lo. ii Mexican.) ' In actual practice the government might probably have to pay from five and a half to six per cent, on a loan, but if so it might possibly be able to invest also at somewhat above five per cent. Whether the figures in themselves are exactly accurate or not, the comparison of the two plans will be fair. TABLE v.* I. Beginning" With a Oold Reserve. Borrow at f ve per cent, interest $ 40.000,000 Annual interest charge $ 2,000,000 /. Result at the end of five years. Amount of coins in circulation $200,000,000 Gold reserve on hand suflScient for the needs 67,000,000 To pay debt in five years requires in sinking fund annually | 7,240,000 Annual interest charge | 2,000,000 Total annyial payment I 9 240,000 2. Result at the end of ten years. Amount of coin in circulation $400,000,000 Gold reserve 107,000,000 To pay debt in ten years requires in sinking fund annually $3,180,000 Annual interest charge 2,000000 Total annual payment | 5,180,000 * In these tables there have been used as the basis for the calculation's the interest and bond tables of the Mutual Life Insurance Co., of New York If other tables were used with more or fewer decimals, the results would be slightly different. 6i 3. Result at the end of twenty years. (Loan for thirty years ; payment to begin after ten years. ) Amount of coins in circulation j!8oo,ooo,ooo Gold reserve 187,000,000 Annual expenses, first ten years % 2,000,000 Annual expenses, second ten years 3,208,000 Annual expenses, third ten years 3,208,000 Total expense for thirty years 584,160,000 Total expense for first twenty years 52,080,000 II. Beginning: With Silver to Accumulate Gold. /. Result at the end of five years. Amount of coins in circulation $200,000,000 Gold reserve, as before 67,000,000 To raise jf67,ooo,ooo in five years, with money in vested at 5 per cent, and used for no other pur- pose, the annual payment is % 12,127,000 2. Result at the end of ten years. Amount of coins in circulation $400,000,000 Gold reserve, as before 107,000,000 To raise $107,000,000 in ten years requires an an- nual payment of | 8,506,500 To raise even $67,000,000 in ten years requires an annual payment of 5,326,500 3. Result at the end of twenty years. Amount of coins in circulation $800,000,000 Gold reserve, as before 187,000,000 Annual expense % 5,647,400 Total expense for twenty years 112,948,000 To close the whole transaction in five years on the first plan there would be a yearly saving of $ 2,727,000 To close the whole transaction in ten years on the first plan there would be a yearly savingof 3,326,500 To close the whole transaction in tliirty years as recommended, making payments on the principal of the debt the last twenty years, there would be a total saving, over merely raising a gold reserve, in twenty years of 28,788,000 Advantages of the first plan. — (i) The gold parity from the beginning, preventing the fluctuations from exchange and all losses to the Chinese Government in taxes, etc., from any fall in the price of silver. (2) The cost, on a ten year basis including the payment of the debt, less each year by $3,326,500. 62 It would probably be more convenient for China to borrow the money, to pay in thirty years, with the privilege of pajdng at any time after ten years, then for the first ten years to pay only the interest, that is, $2,000,000 annually. Afterwards the ac- cumulations will probably enable the debt to be paid very promptly or at any rate to be refunded at a lower rate of interest. If, however, it should be decided to carry the debt for the full thirty years, at the end of ten years the Government could begin accumulating money in a sinking fund. This would re- quire an additional payment for twenty years of $1,208,000 each year. The result would, therefore, be that for ten years the Government would pay each year $2,000,000 ; for the succeeding twenty years it would pay each year $3,208,000. There can be little doubt, however, that as a result of the great benefits to the country of the new system the burden of these last figures could be very much lightened. It should be borne in mind, too, that under the second system there would be all the fluctuations in exchange for at least ten years ; that these fluctuations would probably continue for five years more while the gold value of the coins is being established, and that during that five years there would need to be a complete readjustment of prices throughout the country which would dis- turb business very decidedly. Under the first plan the only dis- turbance to business would be at the beginning for four or five years, and this would not be more appreciable than it must be any way during these same five years in starting on the silver basis. XII. TO BEGIN THE MONETARY SYSTEM ON A GOLD BASIS WITHOUT A LOAN. I. At same rate as with loan. — It has been suggested that if the new system were to begin on the silver basis, it might. not be necessary to wait ten years before putting the silver coins on a gold basis. It might perhaps be done, it is thought, in three years or five years. It is not worth while to estimate carefully the relative costs of this procedure. ' If the system begins by issu- ing the coins at a fixed gold value, the gold reserve may begin very small and increase gradually in proportion to the number of 63 new coins in circulation. If gold enough can be raised by the Government to change from the silver basis to the gold basis in five years, the system can be started on a gold basis without mak- ing any loan by raising the same amount of money in the same way ; and at the end of five years, on account of the greater, profits of the gold system, there will be on hand $33,000,000 more in a gold reserve than if the start is made on the silver basis. The figures to show this follow : There must be raised each year $12,127,000 to accumulate in five years by a sinking fund $67,000,000, the smallest amount planned to change the new system to a gold basis at that time with 200,000,000 new silver coins in circulation. If there can be raised only $12,000,000 each year, it would be easy to start on the gold basis at once without making any loan. TABLE VI. First Year. Coin $ 40,000,000 Of this in small silver and copper coins 10,000,000 Silver which can be used to draw on gold reserve $ 30,000,000 Raise by taxation and place in gold reserve 12,000,000 Profits of coinage at 20 per cent 8,000,000 Total reserve at end of first year $ 20.000,000 (This is 66% per cent of the amount available to draw on and will proba- bly be ample. ) Second Year. Coin . $ 40000,000 Total in circulation 80,000,000 Available for draft on gold fund not over 70,000,000 Reserve already on hand 20,000,000 Raised by taxation during second year 12,000,000 Profits from coinage at 20 per cent 8,000000 Total reserve end of second year jS 40,000,000 (This is 57^ per cent, and ample for the second year. ) Third Year. Total circulation would be 8120,000,000 Reserve 60,000,000 Fourth Year. Total circulati n fi6o,ooo,ooo Reserve . 80,000,000 Fifth Year. Total circulation $200,000,000 Reserve 100,000,000 64 The reserve is, then, at the end of the fifth year $33,000,000 more than under the other plan at the end of an equal period, and is large enough so that by adding merely the annual profits of the coinage to the reserve, stopping after five years all further tax- ation for this purpose, it will be suflScient to protect the coinage for twenty years from the beginning, if the mints work at the same rate. Besides this benefit, there has been no disturbance of business as under the other system, which involves a change from silver prices to gold prices, and the same rate of taxation need be maintained a much shorter time. It is probable that during the later years a less reserve might be needed than is indicated ; but that fact would be still more to the advantage of the system which starts on the gold basis. Confidence is gained some years sooner and more gold is readily available to be put to other uses. The advantage in this case, as in all the others, comes, of course, from the added coinage profit when silver coins are issued at a gold value. 2. At slower rate than with loan. — It being considered by some inadvisable for China to make any loan in connection with the new monetary system, the following new estimates are given to show the probable cost of establishing the monetary system without a loan, in a cheaper, though not quite so rapid a way as with a loan. It has been suggested by the Monetary Commission that China could probably raise 7,000,000 taels to start the new monetary system. In the following estimates it is suggested that 7,000,000 taels each year be raised for the first two years ; thereafter 3,500,- 000 taels annually. It is probable that after the sixth year the percentage of re- serve could be reduced somewhat, so that quite possibly no further sums would need to be contributed by the Government for the further development of the system. It is assumed for the purpose of maintaining whole numbers in the computations and for the purpose of keeping the estimates in dollars, so as to admit of more ready comparison with previous papers, that one dollar equals seventy tael cents. Seven million taels, then, would equal $10,000,000. For the first year it is assumed that half of this sum is set aside as a reserve and that half is used as working capital. For the second year and thereafter f 10,000,000 is kept as working 65 capital. By ' ' working capital ' ' is meant particularly the money used for the purchase of bullion and mint supplies. No account is taken of the interest on the reserve. This could be used either to reduce the annual contribution from taxation or to increase the rate of coinage, thus insuring the more rapid success of the system. The main difficulty, of course, will be during the first two years ; but it is not thought that these diffi- culties are by any means insuperable. This plan would secure for China the fixed value in gold of the the new coins from the beginning ; it would save the high profit from seigniorage, and it would avoid any loan. The upright- ness and skill required for the management would be substan- tially the same as in previous plans. TABLE VII. First Year. Working capital $ 5,000,000 Reserve 5,000,000 Coin 20,000,000 Profit to add to reserve 4,000,000 Total circulation 20,000,000 Total reserve 9 000,000 Second Year. Working capital $ 10,000,000 Coin 40,000,000 Profit to add to reserve 8,000,000 In circulation 60,000,000 Former reserve 9,000,000 Add reserve from taxation 5,ooo,ocxd Total reserve 22,000,000 Third Year. Working capital $ 10,000,000 Coin 40,000,000 Profit to add to reserve 8,000,000 In circulation 103,000,000 Former reserve : 22,000,000 Add reserve from taxation 5,000,000 Total reserve 35,000,000 Fourth Year. Working capital I 10,000,000 Coin 40,000,000 Profit to add to reserve 8,000,000 In circulation 140,000,000 Add reserve from taxation 5,000,000 Former reserve 35,000,000 Total reserve 48,000,000 5 66 Fifth Year. Working capital % io,ooo,C30o Coin 40,000,000 Profit to add to reserve 8,000,000 In circulation 180,000,000 Former reserve 48,000,000 Add reserve from taxation 5,000,000 Total reserve 61,000,000 Sixth Year. Working capital | 10,000,000 Coin 40,000,000 Profit to add to reserve 8,000,000 In circulation 220,000,000 Former reserve 61,000,000 Add reserve from taxation 5,000,000 Total reserve 74,000,000 While the reserve seems small for the first two years, it should be kept in mind that the new copper and nickel coins, which might make a considerable part of the coins in circulation, would make little, if any, demand upon the reserve. Furthermore, the rate of coinage might be checked somewhat, if more time seemed advisable to secure confidence and thus lessen the demand on the reserve. XIII. COINAGE SPECIFICATIONS. The following specifications regarding coinage are suggested as perhaps reasonable if it is decided to establish the new mone- tary system on the silver basis and to make the new dollar sev- enty-two hundredths of a Kuping tael, as the committee has proposed. It is quite possible that the specifications would be equally satisfactory if it were decided to give the coins a fixed value in terms of gold, but in that case the matter should be dis- cussed again fully before coinage is begun. These weights are in decigrams so as to make, generally speaking, whole numbers. Inasmuch as the coins are ultimately to be given a value inde- pendent of their weight, it is inadvisable to refer to their tael weight either on the coin or in the law. Moreover the tael weight is not exactly known and uniform, so that it will be neces- sary for the government to fix weights in grains or decigrams 67 before the confidence of business men, native or foreign, can be secured and held. The metric system is followed here as the system most generally approved. According to the treaty with Japan regarding the settlement of the war indemnity in gold, it was decided for that special purpose that the Kuping tael was 575.82 grains. This gives the weight of seventy- two hundredths of a Kuping tael as 268.65 decigrams. The silver standard, therefore, in the nearest divisible round numbers would be 268 decigrams. We had therefore suggested the following table : TABLE VIII. Cross weight in Kind oj Amount of decigrams alloy alloy. One dollar 268 Copper .1 Fifty cents 134 ._ " 2 Twenty cenis 53.6 " .2 Ten cents 268 " _. .2 If it were thought not unwise to make the new dollar a trifle heavier than the present one (and there would be no objection to this if it were given a gold value), there would be an easier division if the dollar were to weigh 270 decigrams. In that case the dollar should be given a gold value presumably of some fifty- five cents American or two shillings three pence English. Should silver rise much, it might be well to make the coin 60 or 62.5 cents American ; or it might be thought best to give the new dollar a value of exactly fifty cents American (gold) or two shill- ings English and make the coin slightly lighter than the Mexican dollar so that there would remain a coinage profit of 15 per cent, or 20 per cent., a sufficient margin perhaps for any probable rise in the. price of silver bullion ; but the question of exact gold value is not under consideration here. TABLE IX. Gross Percentage Composition. weight in , ■ _ > decigrams Copper Nickel Tin Zinc Five cents 5° 75 25 One cent 7° 95 ' 4 Half cent 35 95 i 4 Two mills (cash) ... 25 50 50 One mill 12.5 5° 5° The legal limit of variation from these weights and degrees of fineness should be made to conform substantially to those of the leading countries. 68 XIV. FOREIGN EXPERTS FOR THE CHINESE MONETARY SYSTEM. I. Difficulties of task. Reasons for foreigners. — The successful organization and direction of a monetary system is one of the most complicated and difi&cult problems which any state has to undertake. The experience of nearly every state of Europe and of America shows that mistakes in such systems bring enormous losses in commerce and industry to the countries con- cerned, and that frequently such mistakes lead to commercial crises from the efEects of which a country does not recover for several years. Moreover, they often leave a system permanently faulty. The starting of a new monetary system in a country like China, with its enormous population, its great extent of territory, its incomplete methods of communication, and its mingling of foreign and Chinese business methods, is a task of especial dif- ficulty and this makes it of particular importance that no mis- takes be made at the beginning. China should have the advice of some of the best experts in the world. A few of these experts must at first probably be foreigners for the following reasons : a. Few Chinese experts. — It seems to be the general opinion, Chinese and foreign, that owing to her previous methods of doing business without a well organized monetary system there are at present no Chinese who have the requisite training and experience to undertake the task without foreign assistance. b. Need of confidence. — Even if there were such Chinese at present, it is generally said that neither Chinese business men nor foreigners have the confidence in Chinese experts that is absolutely essential to the success of the new system, while they do have confidence in trained foreigners of reputation. As the system cannot succeed unless the people give it their confi- dence, it is apparent that some foreigners of special abihty and reputation should be engaged at first. The refusal on the part of the Chinese Government to engage such experts would cer- tainly be interpreted to its discredit by some of the leading Chinese business men themselves, as well as by foreign business men and by foreign Governments. From what is often said by Chinese business men they might Readily interpret such^action as 69 evidence of a lack of sincerity, and of good faith on the part of the Chinese Government. They might even interpret it to mean that the Chinese officials undertaking the work had their own special profit in view rather than the benefit of the Chinese people. 2. Relative need for experts under the two systems. — Under which method of beginning the new monetary system are experts most needed ? a. Under silver system. — The system which starts with the introduction of the silver coins issued at their bullion value, with the intention of raising those coins within a few years to a fixed value in terms of gold, is, in the long run, the more difficult, and certainly requires as able experts as the other. Moreover, these experts are as much needed at the beginning of the system. (i) Care must be taken that nothing is done, either in de- termining the form of the coins, their relative weights and rela- tions to one another and to the coins already in existence or in their methods of introduction which will hamper the change to a gold system when the proper time shall have arrived. (2 ) The problem arising from melting and exportation of many of the new coins, together with the old, will make it far more difficult to secure and keep accurate information regarding the conditions of the currency, so as to know when and how. to un- dertake the change. There will be no melting of the coins under the gold system. (3) A gold reserve must be gradually accumulated. The providing and managing of sources of revenue for this gold re- serve and the due investment of it until a sufficient amount of it has been accumulated, requires much skill and discretion, else there will be a great waste. (4) When business has once become adjusted to the new sys- tem of coins and the present coins and sycee are largely out of the way, business men will shrink from the disturbance of business which another change is sure to create, and it will re- quire great confidence in the Controller of the Currency on the part of the people and great skill on his part to select the right time to begin the change and to find the right methods to carry it through without arousing severe criticism and causing the great- est confusion in business. b. Under gold system. — Under the system of starting with gold the main tasks at first will be the following : (i) There will be the same care to be taken regarding the forms of the coins, the purity of the minting, etc. 70 (2) The problems of introducing the coins among the people, inasmuch as their value will not depend upon their weight, seems somewhat different from that in the other case and somewhat more difficult. In reality it is about the same. In both cases the Government must fix and must regulate from time to time for tax purposes and for all government business the varying rates of exchange of the new coins for bullion silver, copper cash, the present dollars, etc. This must be done for all government busi- ness. Private banks and merchants will make their own rates, but in practice they will accept mostly the government rates. This difficult task must be met in either case whether the coins be given a gold value or not. It makes little difference to the people whether the rate for one tael is $1.31, say, under the silver plan or, say, $1.10 under the gold parity. (3; Unless the Government can raise considerable revenue for the first four or five years, it will be necessary to raise a small loan ; in fact it will probably be much easier to raise the loan than to secure under the first plan the requisite revenue for the accumulation of a gold reserve by a sinking fund. (4) Treaties with foreign powers regarding prohibition of importation of foreign coins, bullion, etc., must be negotiated in either case, but they would probably take effect first under the plan of starting on the gold basis. It is probable that they would be more readily secured from foreign governments under that plan. 3. Experts needed especially at beginning of system. The experts are needed especially at the beginning of the system. (a) Making plans is difficult. — The making out of the detailed plans regarding coinage, the introduction of the system, organi- zation of the bank, rules for minting, etc., and the organization of the whole of the working force is by far the most difficult part of the problem. After the system has been thoroughly or- ganized and has been running well for a few years much less expert knowledge will be required. (b) Making plans most important part of work. — The first work, as may be judged, is not only the most difficult part, but it is by far the most important part of the work, inasmuch as it involves the making of far reaching plans which are to affect the welfare of every person in the Empire for many decades to come. When a battleship is to be built or a great manufacturing es- tablishment to be organized the experts are called in at the very beginning to make the detailed plans. 71 (c) Mistakes at beginning often irreparable. — Mistakes in making the plans at the beginning are usually irreparable and even if not absolutely irreparable it will prove exceedingly expensive to change to a better plan. Few countries in the world to-day have monetary systems that they consider perfect on account of mistakes that have been made in the beginning which it has been impossible thereafter to rectify. Consider again the difficulty of remodelling a battleship half built on wrong plans made by a poorly trained naval architect, or of a great factory building poorly planned for the machinery which is to be used and for the work to be accomplished. 4. Selection of experts. — The Chinese Government will do well to be cautious in emplojdng foreigners, but it should be remembered that the Chinese Government selects the foreign ex- perts not as its masters but as its trained workmen. (a) For ability and fitness only. — Experts should be selected only for their ability and for their fitness for their positions. The Chinese Government should not give any person a position to please a foreign Government or because he has paid for that position, or merely because he is a friend of China's. While he must be friendly to China and devoted to her interests in his busi- ness, he must first of all be an expert who knows his business thoroughly. He should also, of course, understand as fully as possible Chinese conditions, but it is far easier in China for a thorough expert to become posted regarding Chinese conditions than for a person knowing Chinese well, but not an expert, to become an expert. (b) Contracts definite.— Contrsicts should be made with the experts which are perfectly definite. (i) As regards time. — It is probable that it would be well to engage these experts for a fixed period of not over five years, with chance of renewal of contract, with the right to discharge them at any time in case they prove ineflBicient or in case they exceed their powers. (2) As regards powers— The contract should be perfectly explicit regarding the field of work which the expert occupies. While he should be given much discretion in his special field, an attempt to control matters outside of his field without a new contract in which the Chinese Government joins should be sufficient cause for his prompt discharge. (c) Associate Chinese with experts.— KsaociaX& with the three or four leading experts Chinese of ability appointed to promi- 72 nent positions, who may know all of the details of the work of the expert and themselves become expert. They should not be given power to hamper the work of the expert, as he must take the responsibility under the Monetary Commission ; but they should have the right to know everything that he does in his work, to make suggestions, to give him information regard- ing Chinese conditions, and to aid in directing the Chinese employees. (d) Establish training school under experts. — There should be established under these experts schools in which should be trained in this special field of work Chinese to take positions in the department as the work develops. The way to get rid finally of the foreign experts is by training men who, from their training, experience, high character, and the confidence of the business community, are fitted to take their places. A failure or serious mistake in the establishment of the system in the first place, through neglect to secure in time com- petent expert assistants, would seriously discredit the Chinese Government, and would have the normal result later on of forcing into the Chinese service more experts, and that, too, for a longer time than would come from a selection of a few of the very highest grade at the beginning. XV. SUMMARY OF POINTS IN CONNECTION WITH THE CHINESE MONETARY SYSTEM. I. Comparison of two systems. — It has been proposed by the Government to start the monetary system on the silver and afterwards to change to the gold basis. It has been proposed by the American commissioner to start the system with silver coins which have been given a fixed value in gold from the beginning. The difiiculties of the introduction of the system are substan- tially the same in degree in either casie, although the difficulties are in some respects slightly different in kind. In either case the same amount and character of foreign expert help would be needed. a. The same care must be taken regarding minting of the coins. 73 b. The same skill is required in the establishment and man- agement of the national bank, although its work would be slightly different in kind in the two cases. c. The same skill and care is requisite in keeping the accounts and collecting statistics, which are absolutely essential for intel- ligent management, under the two systems. Inasmuch, how- ever, as under the silver system coins are much more likely to be melted down than under the system of gold parity, it would be absolutely impossible to have the same accuracy and knowledge under the silver system that could be secured under the gold. d. The difficulties of introducing the coins among the people are practically the same in the two cases, although it is usually thought that the difficulties are much less under the silver system. That would be the case if China had a fully devel- oped coinage system now, so that the only problem was that of exchanging one new coin for another old coin as in the Straits Settlements. If those two coins could be exchanged at par, it would be easier than to exchange the old silver coins for one given a gold value fifteen or twenty per cent, higher, so that say only eighty cents of the new coin would exchange for a dollar of the old. The present problem in China, however, is not at all of that nature. This is a point which has been often overlooked, and this mistake has led to mistaken advice which, if followed, will cost the Chinese government and the Chinese people many millions of dollars and serious disturbances in bus- iness. The great bulk of the business in China is done with silver bull- ion and copper cash. In consequence the Government is com- pelled, even if it introduces the new silver coins on the silver basis, to give to them an official rate of exchange in terms of the various taels in circulation. For instance, if the new coin is made to weigh seventy-two hundredths of a Kuping tael, when the coin is introduced into Peking the government would fix the rate of exchange with the Kungfa tael. The Government in posting the official rate would probably say, therefore, that it would re- ceive in payment of taxes instead of a tael $1.30 or $1.31 of the new coin. In case the dollar had been given a gold value, the notice would be that for each tael it would receive $1. 10 or $1. 12 of the new coins, depending upon the rate established. In the interior where the people are entirely unfamiliar with coins of any kind, they would take the new coins on the gold basis at say 74 $1. 1 o or $1.12 for the tael about as readily as they would if the coins were on the silver basis at say $1.30 or $1.32. In the treaty ports, where the people are accustomed to the Peiyang or Hupeh dollars, it may be that a new dollar which should pass exactly at par with them would have temporarily a slight ad- vantage. Taking China as a whole, however, the difficulties of introduction are substantially the same on the gold as on the silver basis, provided it is clearly explained that the Government always receives the new coins at their published gold value and that the people have the chance to see that this is done when they pay their taxes. e. The difficulties after the first introduction, at any rate, are much greater, immeasurably greater, if the start is made on the silver system. With the start made on the gold system, when the coins are once introduced the difficulties are over. "With the start on the silver system, when the coins are introduced they are given a silver value. When, some years later, it is proposed to change to the gold basis, the people are told that the dollar, which they had supposed was the standard, is no longer the standard ; that it is not as good as it ought to be, and that the Government, therefore, proposes to give it a higher value. Whereas before it was received at seventy-two tael cents, the Government now will receive it at seventy-four cents, then at seventy-six cents, then at seventy-eight cents, and so" on, until it has reached the value de- cided upon, say ninety-two tael cents. This process of gradually raising the value, by the Government changing its rates for re- ceiving it and selling gold in exchange for it at these rates, must cover a period of several years, otherwise it will lead to the greatest speculation and to the hoarding of the coins to make the profit when the sudden change is made of adding fifteen to twenty pet cent, to the value of the coins ; and this would probably cause a commercial crisis. On the whole, then, the difficulties of establishing a gold ex- change system from the beginning are very much less than if the system, established on the silver basis, is afterwards to be changed to gold. 2. Expenses compared. — The expenses of establishing and carrying out the system are very much less if one starts with gold than if one starts with silver and afterwards changes to gold. Other papers of these memoranda, giving the compara- tive cost of the two methods, makes this clear beyond all pos- sibility of dispute. 75 3. Method of starting system.— Either system should begin in a small way, especially perhaps the system with a gold parity. One province, preferably Chili, should be selected first. As soon as there is a suitable amount of coins on hand, the Government should decide that it would start the system in Peking, say, and a suflBcient quantity of the new coins of the various denomina- tions for use in that city should be provided. The people would be notified that the Government would exchange these coins free of charge at certain published rates for their provincial coins, sycee and copper coins, and a suitable number of agencies where these exchanges could be made would be provided. It would then be declared further that at a certain date in the future, which would be named, all local obligations due the government in cash must be paid in the new coins. This would include the octroi and small fees of all kinds, and the Government would establish exchange shops near the stations where ^the chief pay- ments are made, so that the people could, without trouble, ex- change their sycee and copper cash for the new coins at fixed legal rates. Of course for a time taxes payable in kind would remain as before. As soon as the number of coins minted had increased, the same plan would be followed in Tientsin, then, say, in Pao Ting Pu, etc., as rapidly as the new coins could be supplied and organiza- tion could be made throughout the province of Chili. The Government would of course agree from the beginning to receive these coins at their fixed gold value anywhere in the Empire for obligations due to it, provided the people wanted to present them. It would compel payment of obligations in these new coins only gradually as it had a sufficient supply for the local market on hand and had provided exchange shops in reasonable numbers for the people. Of course when these arrangements were made in the larger places, the merchants would soon take the coins at the regular value in the villages and elsewhere, so that in a com- paratively short time the change would be made from one money to the other without any special intervention on the part of the Government. As soon as the Government began insisting upon the receipt of these coins in obligations due itself, it would also begin pay- ing out these new coins in the payment of salaries, for supplies, etc., paying them out at the same rate at which it received them. Following the Province of Chili, would come, of course, the Province of Kiangsii, for the sake of Shanghai, Kwang-tung, 76 Hupeh, etc. No pressure, anywhere, would be brought upon the people to take these coins excepting to pay their obligations due the Government, and that would be done simply to accustom the people to their use, and such complete exchange arrange- ments would be made that there would be no hardship. 4. Loan and security. — A small loan, say of about 40,000,000 of the new dollars, or a little more than ^4,000,000, would doubtless be the most convenient way of securing money for the new system, though a loan is not necessary if the annual revenue can be increased somewhat for a few years. From careful discus- sion of this matter with people who are accustomed to making loans, there seems little doubt that China could make a loan at a reasonable rate of interest, possibly on the security merely of the gold reserve and the stock of coins on hand in the management of the department, with the added guarantee of the loan by the Chinese Government. It would doubtless be better, however, in many ways for the Government to supply another basis for the loan, such as, say, the receipts of an opium farm in Shanghai, Canton, and one or two other cities, and to keep the gold reserve to be used as a special security in case an emergency should arise. However, the ability of China to make the loan on reasonable terms is clear. The advisability of making a loan is a suitable subject for discussion ; and, as has appeared, China is probably able to start the system without a loan if it is thought best to do so. 5. Engagement of experts.— It will be necessary, in order to secure the proper skill in management and especially to secure confidence on the part of business men, both Chinese and foreign, that a few of the very best foreign experts be secured, especially for a few years at the beginning of the system. These experts would, of course, be under the Chinese Government. Their fields of labor would be rigidly defined in their appointments, so that the Chinese Government would take no risk of their usurp- ing power unduly ; but within the field of work assigned them they would need to have much discretion left them, inasmuch as the work is very difficult and almost from day to day must be adapted to the changing needs. Foreign Governments consider the establishment of their monetary system one of their most diificult problems. The experts chiefly needed at first would be a Controller in general charge of the whole system, whose business it should be to plan out the details of the work and the new laws needed, 77 the putting of those laws into force, the direction of the general organization of the system and its gradual introduction through- out the country, and the direction of its management. He should nominate to the Government for its appointment (a) a General Superintendent of all of the mints. This man should be thoroughly acquainted with all foreign methods of mint management and be well known, so that his name would be a guarantee to everyone of the absolute honesty of both weight and touch of the new coins and should also be a guarantee to the Government that the work was being done at the lowest possible cost. (b) An Accountant or Statistician. It is necessary that all the mints and different agencies for the introduction of the system should keep their books in harmony, so that from month to month, almost from day to day, the Controller can learn the exact con- dition of the mints as regards supply, the rate of exchange, the amount of money, silver, etc., on hand, in each of the agencies for the introduction of the money throughout the country, the condition of the national bank and its reserve, etc. The Ac- countant, therefore, must have authority to collect this informa- tion from the various sources, and to compel them to keep their books in the ways which he prescribes. He should be the me- dium through whom the information needed by the Controller should be gathered, and he should publish reports regularly. (c) The National Bank should be organized under a special law prescribing strictly its powers and duties so that the Government would be protected absolutely as long as the law was observed. Still further, the Controller, a government official, would be ex officio a director of the bank so that he should know the condi- tions and details of the management of the bank. The Govern- ment should also appoint auditors and inspectors to see that the bank kept within the law. The chief foreign Manager of the bank should probably be selected by the board of directors elected by the stockholders, but his election should be approved by the Government on the recommendation of the Controller. Inasmuch as the bank has so much government work to do and inasmuch as it must be run in harmony with the new monetary system, it is necessary that its Manager and the Controller work in the closest harmony. Possibly it would be best to have the Manager of the bank appointed by the Government on the nomination of the Controller ; but probably the way first suggested would be best. 78 6. Contracts with experts. — With these foreign experts the Government should make rigid contracts so that there could be no dispute as to their field of work, and the Government should in those fields give them practically full power. They should not be allowed to exercise authority outside th^ir special fields of work. It would be well for the Government to place with these foreign experts, who, it should be kept in mind, are skilled workmen and advisers employed by the Chinese Government and not in any sense its dictators, Chinese who are willing to make this kind of work their business, and who, as understudies, will know all the work of the foreign experts and will assist them in every way possible. To a considerable extent, in connection with the foreign experts, they will take charge of the Chinese subordi- nates who are employed ; but care must be taken, especially during the first years, that they do not hamper the work of the experts. The Controller should also start a training school to run for some years until he gets a good many well- trained young Chinese to take positions in the monetary system in the provinces. 7. Relation of foreign Governments. In securing these experts the Government should not in any way accept the dicta- tion of any foreign Government. Men should be selected for their knowledge and ability to do their work, and for this only. The banker should doubtless be one of the most experienced and ablest foreign bankers who have done business in the East for the last few years and one who has the confidence of everyone. The Controller should be a man who knows monetary science and monetary systems thoroughly, who has had experience in estab- lishing and administering foreign systems, and whose reputation will give confidence to business men, Chinese and foreign. The same thing should be said in their respective fields with reference to the Superintendent of the Mints and of the Accountant. The Accountant should be, if possible, one who knows the Chinese language thoroughly and Chinese ways of doing business. Pre- sumably the Chambers of Commerce might be consulted to advantage by the Controller in securing the names of two or three of the leading men from whom the Accountant should be selected by the Monetary Commission. Presumably some one of experience in the Imperial customs service would be the right man, although possibly some one of experience in private busi- ness might be better equipped. 79 After the first few nien are selected there will be little diffi- culty in getting their subordinates. For branch banks, etc., the board of directors with their Manager would, of course, con- trol ; for the more directly subordinate government positions the Controller would, of course, name (nominate, not appoint) the men ; in the mints practically in accordance with the wishes of the Superintendent of the Mints ; in the accounting department, at the suggestion of the chief Accountant, and so on. In the estab- lishment of the new monetary system in various places the in- spectors necessary would, of course, be more directly the personal subordinates of the Controller. The main difficulty is in getting the right start with the right men ; thereafter the system will develop easily. XVI. GOVERNMENT PROCEDURE. In the establishment of the new monetary system it is import- ant that the Chinese Government arrange soon a plan for its gen- eral lines of work, so that the whole system may be devoloped in an orderly manner without mistakes. So long as the new coins are not put into actual circulation there will be relatively little harm done by a delay of a few weeks, or even of a few months, after the first steps are taken, so as to permit the defi- nite formulation of plans. If the new coins are put into circula- tion before the plans are practically all worked out, it may do great harm since there will be great difficulty in making any changes thereafter. The following indicates the chief lines of activity which the Government must follow in the comparatively near future. So far as possible the order in which action should be taken is indi- cated. I. The Appointment of experts. — a. The Controller of the Currency. — Inasmuch as the Controller of the Currency will be held responsible by the Chinese government for the success of the system and inasmuch as it will expect to rely, to a consider- able extent, upon his judgment in making plans for the organ- ization of the system, his appointment should be made as soon as the Government can find a satisfactory man. This is equally necessary whether the system starts on a gold or on a silver 8o basis. It is merely good business policy to put the responsibility upon some one individual to whom the Government can apply at any time for suggestions, from whom it can demand reports, and with whom it will expect to counsel regularly regarding the de- velopment of thfe system. No other plan would be in accord- ance with good practical business methods. Inasmuch as he is to be held responsible for the successful and harmonious working of the system, the other chief officials to be appointed by the Government should have their names suggested to the Government by the Controller. In that way only can it be certain that friction, which might be dangerous to the success of the system, will be avoided. The Government should, of course, indicate to the Controller certain general matters in connection with these appointments if it wishes to do so, such as the nation- ality of the appointee which would be preferable, if it has any preference, the general type of man desired, etc. The two ap- pointments (aside from a secretary, or an assistant), that should probably be made first are : b. General Superintendent of Mints . — This appointment should be made comparatively soon, inasmuch as under the general management of the Superintendent, in accordance with direc- tions issued to him by the Government through the Controller, should be made the inspection of all the existing provincial mints, the inventory of their machinery, so as to bring out their capacity, the profits which they can make, etc. There should be ascertained also, either by the General Superin- tendent or by officials acting for the Controller, the profits which have been made by the mints of late years. The Superintendent should inquire likewise carefully into the skill and trustworthi- ness of the present managers and also regarding the most responsible workmen. The information indicated above is neces- sary in order that just and satisfactory arrangements can be made with the Viceroys for the transference of their mints in due time, and for the satisfactory working under the new system of the mints when they are once taken over. As the General Superin- tendent of Mints will be held responsible for every ounce of sil- ver or gold placed in his hands, he must have a voice in selecting his subordinates,' — so far as is possible from those now working. He should be consulted also regarding the edicts that will rieed to be passed in connection with the work of the mints. c. General Accountant. — It is not necessary that this appoint- ment should be made immediately, and still there should not be 8l too long a delay, inasmucli as the Accountant should prepare be- forehand, on consultation with the Controller, so as to be sure that the whole system is understood alike by them both, his plans for uniform accounting in all of the mints, his forms for the re- ports on public business of the national bank, as well as for the various offices for the distribution of the coins, etc. , throughout the Empire. He will need also to have furnished him, as the basis of the accounts of the entire system, the inventory of the material in the existing mints, the values of the machinery, mint buildings, etc. Such preparation before the actual work of the system begins will require considerable time. 2. Controller to prepare and submit drafts of edicts. — The Government should instruct the Controller to study care- fully with the Superintendent of Mints, the General Accountant, and others, then to prepare and submit for its consideration and action, as soon as it can be satisfactorily done, drafts of edicts on the following subjects : a. General currency law. — A general currency law which shall prescribe in outline the organization of the system. b. Minting law. — A minting law giving (i) a description of the coins to be issued ; (2) the limit of variation in weight and fineness of the coins to be issued ; (3) regulations regarding inspection of coins, purchase of bullion, the issue of coins, etc. c. Gold reserve law. — An edict creating a gold reserve fund and establishing general regulations for its management. d. Banking laws.—{\) A law for the establishment of a national bank. (2) A law regulating the issue of bank notes. These edicts should be drawn with the greatest care. A vari- ation of one decigram in the weight assigned to the gold stand- ard coin would make a difference of more than $20,000,000 prob- ably in five or six years. It is not necessary that all of these edicts be passed immedi- ately, but they should be prepared by the Controller as rapidly as they are needed, for submission to the Monetary Commission in ample time for full discussion of them by the Commission with the Controller before they need to be issued. 3. Regulations regarding loans. — If it is decided to make a loan in order that the new coins may be issued with a fixed value ill terms of gold, it is desirable that steps be taken soon in connection with that matter. (a) The question of proper security for the loan and provision for the payment of the inter- est and in due time of the principal should be considered, (b) 6 82 Negotiations should be entered into to secure the loan on the best terms by securing offers from various parties to see who will offer the best terms. 4. Regulations regarding revenue. — If it should be found that a loan is not necessary, provisions will still need to be made very soon to secure the revenue requisite from the begin- ning eitljer for the proper development of the system with the coins on a gold value or for the rapid accumulation of a gold reserve. 5. Modification of treaties. — Steps should be taken in the near future for negotiating amendments to the treaties with for- eign powers so far as they are necessary for limiting the importa- tion of foreign silver coins and bullion. These measures will perhaps not be needed for a considerable time, but there is likely to be much delay in securing the con- sent of all of the treaty powers, and when it does become neces- sary to limit the importation of silver coins and bullion, it would be a great misfortune if that step could not be taken promptly. With certain powers it might also be desirable to discuss informally the question of their attitude in the future toward taxation on business conducted in any currency excepting the new currency. For these measures a monetary expert will be needed with the Chinese Treaty Commissioners. 6. Organization of National Bank. — The Government should also instruct the Controller to suggest steps in due time for the organization of a National Bank and for beginning busi- ness with it. It is not absolutely necessary that the bank be started at any fixed time, but it would probably save some money to the Government, and it would certainly be desirable, if it is practicable, for the bank to be organized so as to begin busi- ness by the time that the new coins are issued. It would, of course, be an advantage if the bank could be started almost im- mediately, so as to have its buildings ready, its corps of assist- ants engaged and somewhat accustomed to their work, and some patronage already secured for the private business before it became necessary for it to take up its public business. In suggesting to the Monetary Commission the draft of the law for the establishment of a National Bank, the Controller would, of course, suggest methods of securing capital, organizing the bank, etc. , and he should be ex officio a director of the bank. The Manager, elected presumably by the directors, should be subject to approval by the Government on his name being referred to it by the Controller. 83 It will be noted in the outline above that the entire power and control rests with the Government, but that an organization is indicated so that it can receive continually from the Controller, and through him from each one of the subordinate oiEcials, sug- gestions regarding the details of organization, of management, of appointment of suitable men, etc. The Government will, of course, view these suggestions carefully ; ^nd finally, after full and careful discussion with the experts appointed, so that there will be no misunderstanding, the Government will take action. So far as possible its control will be largely in the form of these general edicts and a careful inspection to see that these laws are rigidly observed. The contracts made with the experts would, of course, prescribe strictly .their powers and duties, and they must confine their activities to those fields. Within those fields they should be allowed much discretion. It is only through this method of centralizing responsibility in the Controller and of dealing with the details of the system through the heads of the different dep^tments and eventually through the subordinates, each of whom is to be held strictly responsible by his immediate superior, that the Government can secure absolute certainty of results and absolute confidence on the part of thfe public, both Chinese and foreign. It would be understood, of course, from the beginning, that the whole system is to be managed on the strictest business principles and solely in the interests of China. XVII. SECOND SUMMARY : ANSWERS TO OBJECTIONS ; AND EINAI. SUGGESTIONS. I. Summary of -work of expert organizer. — The Chinese Government needs foreign expert help of the nature sug- gested in our previous discussions, substantially as much if it should decide to issue merely a silver coinage without giving that coinage a gold value as if it attempted to establish a gold system. The difiiculty connected with foreign experts, therefore, cannot be avoided by rejection of the American plan, and in addition to this consideration its rejection means also, of course, the loss of the twenty per cent, profit, the disadvantage 84 of not securing a stable rate of exchange with gold, and the many other disadvantages of the silver system mentioned. The expert will be needed on the silver basis for the following rea- sons : (a) To fix the ratio to the tael at which the Government will accept the new coins in various parts of China when it is intro- duced. (b) To see that the mints turn out coins of standard weight and quality, and to give the people confidence in them. At pre- sent this is not universally the case with any mint in China. Objections from business men have been heard against them all. (c) To organize and manage the distribution of the new coins and the purchase of the old coins and of bullion. Unless this is skillfully done the old coins will remain in circulation indefinitely and the new coins will have great difficulty in making their way. (d) He should advise regarding laws to be passed discouraging the circulation of old coins and of bullion. (e) He will be neededi in the arrangement of treaties permit- ting the prohibition of importation of the old coins and of bull- ion. (f ) His care will be needed in the detailed arrangements to keep up the value of the smaller silver and copper coins. (g) The coinage of the present copper ten cash pieces should be stopped very soon. He should be consulted regarding that. (h) He should make estimates regarding the taking over by the Board of Revenue of the provincial mints. There are other points which might be mentioned, but this is enough to show that an expert of the first rank is needed even if the gold system is not attempted. 2. Delay inadvisable. — With the new mint approaching completion, part of the machinery already being on hand, there cannot be any long delay in reaching a decision without consid- erable loss to the government. Nevertheless it would be far bet- ter to delay the issue of the new coins for a year or more, losing the interest on the capital in the mint, than to make a wrong start from the ill effect of which it might be almost impossible ever to recover. 3. Objections to system answered. — No objections have been raised to the gold exchange system which have not been satisfactorily answered, to some people at least who have taken the time for full consideration. In a few words are summed up below some of the most important objections and the line of 85 answer. There is no doubt that all objections can be satisfactor- ily answered. (a) People too ignorant. — It is said that the Chinese people are too ignorant ; not ready ; cannot understand the new system. No people in any civilized country understand the details of the monetary system ; it is not necessary that they should. Most people send telegrams without understanding the process ; they ride on the railroads without knowing how to run an engine ; they take bank notes knowing nothing of the reserve. In one week they can be taught that the Government will take the new coins at a fixed valuation ; that they can always get a thousand of the new cash for the new dollar or a new dollar for a thousand of the new cash, and that they need no longer be dependent upon the cash shops to learn the value of their money. This alone will secure the hearty support of the common people, and it is not really necessary that they understand more. The merchants and business men with whom I have had an opportunity of discussing the matter thoroughly have practically all supported it heartily. The one or two exceptions were simply in doubt as to whether it were not better to keep a silver system with its fluctuations. I am convinced that those who favor the gambling risks in business coming from the fluctuating rate of exchange of a silver system are relatively few. To urge that China must wait until her people are educated would seem to argue simply a wish to avoid responsibility. It might be well for the new Controller to visit some of the leading cities before the system is introduced and explain it in some detail to leading business men. (b) China has no gold. — It is said that China has no gold. China can buy gold as easily as she can buy machinery. More- over it is as cheap for her to buy gold with her present products as it is to get it by mining or in any other way. (c) Foreigners will not receive new coins at gold value. — It is said that foreigners will not take the new coins in the settlement of debt obligations. The new coins cannot be sent abroad at their gold value it is true ; but the new coins can buy at their gold value bills of exchange with which to settle the foreign debts and that is far better than to send the coins themselves abroad. In fact coins are not sent abroad now. (d) System will benefit foreign nations. — It is said that it will benefit the foreign nations at the expense of China. Foreign nations are benefited only in their foreign trade with 86 China. China will herself benefit from the new system as much as all the foreign nations put together, for her trade with all of them is equal to their trade with her and she benefits from the foreign trade as well as do they. The Chinese are too shrewd to do business in which they do not make a profit. Besides China's enormous added gain from a good system in her foreign trade, her domestic trade would also be very greatly improved if there were one system of uniform coins of fixed value throughout the Empire. Moreover a stimulus to foreign trade in itself gives a great stimulus to the internal trade. Most export goods change hands more than once in the interior. Rail- roads are building in many parts of China. These can work to advantage only with a fixed money. It would be practically impossible to use taels with a large traffic ; and there will be grave disadvantages to the Chinese people until there are fixed gold values. Railroads will always take advantage of the fluctu- ations in exchange at the expense of their patrons. (e) Chma cannot maintain value of coins. — It is said that China cannot maintain the gold value of her coins. It has been made clear repeatedly that this can be done without difficulty. (f) Will drive cash shops out of business. — It is urged that it will drive the cash shops and others out of business. It is doubt- less true that some few people, especially keepers of cash shops, will be injured in their business by the new system. That will be equally true with a good uniform silver system as with gold. It is inevitable that a few suffer from any industrial change. Where one suffers a hundred will benefit. (g) Exporters will not gain from rise in gold. — It is said that the exporters will not gain if there comes a rise in gold. True. Neither will they lose if gold falls. It takes away the gambling element from business — a most desirable thing. (h) Foreign expert help needed. — It would require foreign expert help, and some object to that. So will the new silver system, and in any case it has been made clear that the foreigners would be here as skilled workmen of the government and its advisers, but not in any sense as its masters. Most of these and of other objections are due either to a mis- understanding of the system or to the fact that the Chinese edi- tion of the earlier pamphlet did not make clear the plans. The more detailed explanations here will doubtless clear up many difficulties, and further details can easily be supplied. 87 4- An expert can modify his plans to suit special needs. — It should be kept in mind, also, that an expert who knows his business fully can probably modify more or less some features of a plan to meet special objections while retaining the chief points. It will be recalled, for example, that several modifications of the original plan were suggested so that China could start a system without a loan by raising considerable more money for the first few years. Other modifications could be made with reference to certain details regarding foreign experts, or with reference to the rapidity of introduction, etc., if it should be necessary, although the substantial features of the plan suggested would remain. 5. Success sure if plans well managed and supported. — On the Chinese Government, of course, rests the responsibility of the rejection of plans which, if they were successful, would mean a saving of very many millions of dollars to the people, besides an added prosperity which would count for far more than the millions of dollars saved. To that Government, on the other hand, would come also chiefly the satisfaction of a great service rendered and the grati- tude of the people for many generations to come if there is intro- duced and made successful a system which would be of so great benefit. From long study of this subject, from helping establish other systems, and from its experience in seeing similar systems at work in other places, the American Commission counts upon the full success of the system recommended, if it is well managed and if it is properly supported by the Chinese Government.