Beyond Market and Hierarchy

Patriotic Capitalism and the Jiuda Salt Refinery, 1914-1953

K. Man-Bun, Kenneth A. Loparo, Man Bun Kwan

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137335265
• eBook ISBN: 9781137331946
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Based on extensive archival research, Beyond Market and Hierarchy reconstructs how Fan waged modern China's war of salts. Led by his Jiuda Salt Industries, the nascent refined salt industry battled revenue farmers who, as a group, monopolized the production and distribution of evaporated salt.

1

The Institutions

As part of the state- and nation-building enterprise, the role of salt and its taxation generated considerable controversy in republican China. This chapter traces the evolving debate as Yuan Shikai (1859–1916, president 1912–1915) and his successors struggled to assert central control while the Reorganization Loan of 1913 secured on the gabelle created a seemingly “colonial and bizarre” Revenue Inspectorate charged with the mission of both collecting the tax to ensure repayment of the loans and modernizing the system on the principles of free marketing, equity, efficiency, and simplification. The Weberian ideotypical bureaucracy—professional, insulated, and departmentalized—seemingly delivered.¹ On the other hand, Esson Gale, among the inspectorate’s earliest foreign staff, remained equivocal in explaining the apparent success: Yuan Shikai’s military control of the provinces, inflation, or unknown revenue sources appearing “as if by magic.”² Unraveling the secrets behind the gabelle growth, the competing interests of the central government, the provinces, officials, and warlords, as well as the foreign staff at the inspectorate (and the masters that they must serve) and resourceful revenue farmers all contributed to the continued morass that was salt (yanhutu). A steady flow of revenue became the guiding principle shaping not merely the institutions but also the salt business.

The debate

The abdication of the Qing dynasty renewed the debate. Dividing the country into salt divisions, with supply and distribution handled by hereditary revenue farmers, no longer seemed to serve the public good. The search for a solution drew inspiration from China’s past and abroad. Yan Fu (1854–1921), echoing Adam Smith, argued that the regressive tax should be abolished altogether: already heaviest among nations, China’s gabelle revenue benefited not the government but the unscrupulous revenue farmers.³ To do away with all the corrupt merchants and bureaucrats, Tang Shouqian (1856–1917), echoing Feng Guifen (1809–1874), proposed that the gabelle should be folded into land tax, and salt allowed to be traded by everyone, as had been attempted in Gansu, Hedong, and parts of Changlu and Shandong divisions.⁴ Even though it meant that the landed would be subsidizing the landless, this school argued that the property holders would surely accept such a modest burden as loyal citizens of the republic.⁵

Others did not share this charitable view. With all the differing rates within and among divisions, the regressive gabelle already represented an unfair burden on many people. The landed would simply increase the rent on their tenants if the gabelle became a part of the land tax. If there must be a tax on salt, then only the state should benefit from it, not the revenue farmers. Drawing on the Meiji experience, they argued that the state must standardize the tax for an equitable burden and assume direct control of salt production, collection, transportation, and distribution as part of the modern nation-building enterprise.⁶ But where could the government find the capital, manpower, and expertise to implement such a system?

Before Beijing or Nanjing could decide, provincial authorities took the matter into their own hands. Hunan resolved to take over the salt trade, whereas Sichuan adopted free market.⁷ In Lianghuai and elsewhere, local military commanders began putting the squeeze on the merchants. Soldiers seized the salt and began trading. Song Jiaoren (1882–1913), a founder of the Nationalist Party and a staunch critic of the revenue farming system, might welcome this de facto abolition of divisional boundaries, but other advocates of gabelle reform found themselves divided on what to do.

While sharing the same disdain for revenue farming and divisional boundaries, Zhang Jian (1853–1926) and others invoked the idea of Li Wen (1608–1647). The state simply did not have the expertise and the capital to take over the entire salt operation. Instead, it should concentrate on taxation at source (jiuchang zhengshui), and once the uniform gabelle was paid, anyone should be free to transport and sell salt anywhere. Smuggling would no longer exist, as there would be no more divisional boundaries. For a transitional period toward this ideal, Jing Benbai (1876–1948), founder and editor of the Society for the Discussion of Salt Administration (Yanzheng taolunhui), persuaded Zhang to modify his position somewhat: the state would maintain a monopoly over supply while specific marketing areas could still be designated and assigned to merchants under an arrangement known as jiuchang zhuanmai; they would, however, no longer enjoy any hereditary privilege. Zhang presented the proposal to the provisional national assembly in 1912.⁸

However, Zhang Jian soon found himself torn between meeting revenue needs while promoting reforms as president of Jing’s society. Serving concurrently as the minister of industries and commissioner of the Lianghuai division, he had little choice but to implore revenue farmers to resume the trade and the flow of gabelle.⁹ Xiong Xiling (1870–1937), another advocate of gabelle reform and vice-president of Jing’s society, also found himself in a difficult situation. As the finance minister with a nearly empty national treasury, he needed, in addition to meeting the central government’s payroll, seven million taels for the military each month as soldiers under both Yuan Shikai and Huang Xing threatened (and did) mutiny. In addition, 26 million taels in indemnity payments, foreign loans, and interest were due at the end of the year. The ministry once projected over 71 million yuan in salt revenue available to the central government, but his plea for the provinces to remit a share of the gabelle and other revenues, including the transit tax (lijin) on salt (yanli), due to the central government, went largely unheeded.¹⁰ Of the total of 3.4 million taels pledged by ten provinces, only 400,000 taels found its way to the capital by May 1912, and 2.6 million taels by October 1913.¹¹ Strapped for cash, both Yuan Shikai and Sun Yat-sen agreed that revenue farming should continue, at least for the time being.¹² Worsening financial pressure on the young republic thus limited the options for any serious gabelle reform from the beginning.

Salt and the Loan Tangles, 1912

Both Yuan Shikai and Sun Yat-sen also agreed on another need: foreign loans. In late February 1912, the young republic began negotiations with the Four Power Groups Consortium of British, French, German, and American banks led by the Hongkong and Shanghai Bank Corporation. The result became known as the Reorganization Loan of 1913, a controversial episode condemned as another treasonous act by Yuan Shikai and as a violation of China’s sovereignty by foreign economic imperialism.¹³

Neither generalization is entirely accurate. Yuan Shikai did broach the idea of a major foreign loan soon after he returned to Beijing as premier on November 13, 1911, but Sun Yat-sen had already approached the Hongkong Bank for financial support. Charles Addis, the bank’s London manager, insisted over dinner that a proper government must be established first.¹⁴ While Yuan Shikai undoubtedly needed money to reorganize the country, including eventual suppression of Nationalists in the south who challenged his authority, Nationalist forces were also using the gabelle as collateral to raise money for a variety of purposes, including armaments purchase.¹⁵ Both sides wanted foreign support and financing.

As agents of economic imperialism, the foreign banks approached the negotiation table with mixed motivations. Profits and national prestige were at stake. Working through the bankers, foreign diplomats demanded that China must assume full responsibility for the obligations incurred by the ancien regime, damages during the fall of the dynasty, and make payments on indemnities and loans already in default. The diplomats also wanted a stable country for foreign commerce and investments and the opportunity to secure control of the salt gabelle.¹⁶

Yuan Shikai and his colleagues played the loan game reasonably well, given their weak hand. With the country increasingly divided, the central and local governments in disarray, and mounting financial problems, there was general agreement by everyone, including even Liang Qichao (1873–1929), about the need for foreign loans. But the issue was on what terms. Instead of caving in to foreign demands, Yuan and his colleagues pursued reforms initiated in late Qing period and, to the extent possible, exploited weaknesses of the groups consortium and Whitehall’s failure to control London’s impertinent bankers.

Following tortuous negotiations, the Finance Ministry proposed to create a salt administration. Under it would be a revenue inspectorate with a Chinese chief inspector and a foreign chief inspector selected from the staff of the Maritime Customs, supported by other foreign staff stationed at various salt production centers and “commercial ports” (tongshang kou’an) near them while leaving salt transportation, distribution, and anti-smuggling operations to the divisional commissioners.¹⁷ The Chinese choice of J. F. Oiesen, an experienced Danish member of the Maritime Customs as the foreign chief inspector, ignited a diplomatic row. Denmark’s neutrality was deemed inadequate for protecting the interests of the groups consortium.¹⁸ When the dust finally settled, Sir Richard Morris Dane (1854–1940), retired Inspector General of Excise and Salt for India, became the foreign chief inspector, with other positions awarded to nationals of the groups consortium.

Although it could have been worse, the terms of the loan were draconian. Repayable over forty-seven years, the £25 million loan, 84 firm, carried a nominal interest rate of 5 percent (after discount and a commission of ₤1.5 million for the banks, an effective interest rate of approximately 6.4 percent, doubling London’s interbank discount rate of 3 percent), and a handling charge calculated at ¼ percent of the annual loan service. Of the ₤21 million receivable, over half immediately went toward various overdue indemnities, repayment of advances, and provincial loans. Beijing received less than ₤10 million (or 90 million yuan), of which ₤8.5 million were earmarked for regular government expenditures and demobilization. There was no provision for direct foreign supervision of these disbursements except through the foreign staff employed by the Accounts and Audit Department, and the Bureau of National Loans, Ministry of Finance. Buried at the end of the agreement, Annex F set aside 20 million yuan (say £2 million), or 8 percent of the loan, for the reorganization of the salt industry: seven million as capital for state purchase and transportation of salt; three million for a salt factory; and five million each for reorganization of salt lands and advances to salt merchants.¹⁹

Politics and violation of parliamentary procedure aside, the offending provisions in the loan agreement that caused the most uproar read:²⁰

Article IV: The entire loan together with any advances . . . is secured in respect to both principal and interest by a charge upon the entire revenues of the Salt Administration of China . . .

Article V: The Chinese Government engages to take immediate steps for the reorganization with the assistance of foreigners of the system of collection of the salt revenues of China . . . The Chinese government will establish a Central Salt Administration (Yen wu shu) ...

Table of contents

• Cover
• Title
• Introduction
• 1   The Institutions
• 2   The Networks
• 3   Breaking into the Market
• 4   The Price of Success
• 5   Cartel as a Business Network
• 6   Relationship with the Nationalist State
• 7   At War
• Postscript
• Appendices
• Notes
• Glossary
• Selected Bibliography
• Index