The History of Shanghai is a Tale of Successful Capitalism

The History of Shanghai is a Tale of Successful Capitalism
January 8, 2014

Richard Ebeling

Richard Ebeling is a professor of economics at Northwood University in Midland, Michigan. (read full bio)

China’s impressive modernization since the death of Mao Zedong in 1976 and the end to the destructive madness of the Cultural Revolution has been epitomized by the dramatic growth of the industrial and port city of Shanghai, with its majestic skyline of impressive futuristic skyscrapers. It is forgotten that Shanghai already was a commercial and industrial center before the Second World War, built on the principles of laissez-faire capitalism.

Following the Chinese-British War of 1842, several ports along the China coast were opened to Western merchants. In these “treaty ports,” portions of the cities were recognized to be under European jurisdiction. Known as “concession” areas, the European powers administered these areas according to Western principles of the “rule of law,” with recognition and protection of property rights, personal freedom and civil liberties.

By the end of the 19th century, Shanghai had become the most important of the treaty ports. Indeed, it was the industrial, commercial and cultural center of modem China until the Japanese occupation of the city in December 1941, following the attack on Pearl Harbor.

Shanghai an Almost Free City-State

The Western-administered portions of Shanghai were divided into two districts: the French Concession and the International Settlement. A Consul-General appointed by Paris administered the French Concession.

But the much larger International Settlement was administered by a Municipal Council composed of fourteen members elected by the permanent foreign residents of the city, with the franchise based on being a “ratepayer,” i.e., a tax-paying property owner within the boundaries of the International Settlement. By the 1930s, around 90,000 Europeans and Americans lived in Shanghai.

Hence, Shanghai’s International Settlement was almost an independent “city-state” based on the nearly unhampered principles of free trade and free enterprise under the protection of the Western Powers (which ended up meaning mostly a British and American military presence).

In general, the economic policies of Shanghai’s International Settlement followed the ideas of Adam Smith’s system of natural liberty and laissez faire. The Municipal Council limited itself primarily to three functions: administration of justice; police protection of individual liberty and property; and the undertaking of a limited number of “public works,” such as construction of roads, traffic control (administered by Sikh policemen brought by the British from India), harbor patrol, and the dredging of the Whangpoo River that connects Shanghai with the mouth of the Yangtze.

Treaty agreements between China and the major Western nations established that legal disputes in which a Chinese citizen sued a Western resident were adjudicated before a court of the country of which the Westerner was a citizen. This system was known as “extra-territoriality.” While viewed as an insult to Chinese territorial integrity, and while not always free of abuse and bias, this meant that on the whole, an impartial and efficient system of Western-style justice was guaranteed for everyone in Shanghai’s International Settlement.

A Prosperous Metropolis of Asia

Under a regime of limited government, low taxes, and economic laissez faire, Shanghai became the most prosperous metropolis in all of Asia. The standard of living, including that of Chinese residents in the International Settlement and in surrounding Chinese-administered areas, was the highest in East Asia. It was this free market environment that created that Western-style skyline that in the 1930s was considered the Asian rival of New York.

The city also became the focal point for the Chinese intellectual community as well as a Chinese cultural center — and one in which freedom of speech and press were protected for all, Westerner and Chinese alike. While tempests of civil war engulfed China in the period between the two World Wars, Shanghai was a haven of economic and civil liberty.

Through a system of private colleges and universities that served both Westerner and Chinese, Shanghai developed into China’s center for higher learning. Indeed, through scholarships and philanthropic endowments — many being supported by Christian missionaries — many of those who later became China’s leaders in politics, literature and the arts acquired their advanced schooling in Shanghai.

A Refuge from Taxes and Tyranny

The city was a refuge for many searching for fortune or freedom, and often both. For Western businessmen Shanghai was a haven for those "escaping" from heavy taxation in other parts of the world. For example, along the Bund, the commercial waterfront, stands an impressive hotel with a pyramid roof. This was the Cathay Hotel, also known as Sassoon House, built by Sir Victor Sassoon, who left Britain with a good part of his fortune in 1927, to get away from the high business and income taxes in Great Britain.

The port bustled with the coming and going of merchant ships from all over the world. Shanghai’s manufacturing enterprises supplied inexpensive but quality goods to serve the consumers of China, and competitively exported many products on the global market.

Shanghai also was a haven for many people escaping real tyranny -- not just tax "oppression." Following the Bolshevik Revolution, thousands of (anti-communist) “White Russians” found refuge in Shanghai. They became famous in the city, not only among the city's "sing-song" girls, but as doormen at nightclubs and bodyguards for Chinese gangsters who usually preferred the nightlife in the French Concession; and, of course, for the city's many fine Russian cuisine restaurants. (Russian noblemen, or their sons, were seen playing the balalaika in those restaurants, or even in the streets pulling rickshaws, to earn enough to live, having lost their family wealth to communist confiscation in Russia.)

In the 1930s, thousands of German Jews who fled Nazi Germany found refuge in Shanghai, because the city had neither passport nor visa requirements. Many of them settled in the Hongkew district of Shanghai, which had been badly damaged during the fighting between Chinese Nationalist and Imperial Japanese army forces, first, in 1932, and then, again, in 1937.

But under the diligent work ethic and industry of these refugee German Jews, much of the Hongkew district was rebuilt and again became a thriving part of the city. And, then, in an irony of fate, when the Japanese occupied the International Settlement following the attack on Pearl Harbor they did not intern these Jews (unlike the systematic roundup and imprisonment and cruel treatment of all French, British and American citizens), because these Jews carried German exit passports. And though these passports were stamped with the infamous "J," the Japanese viewed them as citizens of their wartime ally.

A Safe Haven from Chinese Tyrants and Warlords

Shanghai was also the headquarters for numerous religious and secular charities and philanthropies that ministered to the needs and improvements of the Chinese population both in the city and throughout other parts of China. There were voluntarily funded orphanages, soup kitchens, shelters, schools, and vocational training colleges to give a "helping hand" to the Chinese.

Finally, throughout the second half of the 19th century and up until the 1941, Shanghai's International Settlement and French Concession were a refuge for many Chinese when revolutions, civil wars, or the general cruelty of Chinese government governors or warlords made life "nasty, brutish, and short."

There in Shanghai, financial savings were safe in Western banks, and property rights were respected and protected from both illegal plunder and the "legal" plunder of Chinese officials and warlords.

But, in addition, Shanghai's International Settlement was a cultural oasis for Chinese artists and intellectuals. Here was born the Chinese motion picture industry; non-traditional music and art; and a haven for freedom of speech and the press, which were not allowed in surrounding Chinese administered areas. Here civil liberties were respected and secure, under the rule of law.

It was also a property rights-safe place for the development of Chinese-owned manufacturing and industry -- not only Western businesses. In Shanghai, these Chinese entrepreneurs were free from the "squeeze," the Chinese term for bribes and corrupt protection rackets and government official shakedowns.

Imperfect People, But Still a Free and Prosperous City

It was also a city that operated on the basis of commercial trust and integrity. Many of the foreign residents, for instance, never paid for anything with cash or check. A person simply signed his name to a “chit” for any purchase, and just settled up at the end of the month, and rarely did these everyday debts go unpaid.

Shanghai was, of course, a many-sided city. In the French Concession were the homes of many of the most notorious Chinese gangsters. Opium dens abounded and houses of ill repute existed in the hundreds — and catered to every imaginable racial and socio-economic group. And the city attracted its fair share of adventurers, conmen and hucksters from all around the world.

Like everywhere, in an imperfect world with imperfect people, Shanghai was no "utopia." But its instituting and general protecting of Western civil and economic liberty made the International Settlement a place of practical, everyday personal and economic freedom.

Of course, most Chinese — from intellectuals down to the ordinary (and usually) illiterate Chinese "coolies" — resented the power and presence of the European and American "foreign devils." And this resentment and anger against the power and too-often arrogance of the Westerner, took many forms, including boycotts and strikes, and sometimes violent demonstrations, especially in the 1920s and 1930s.

But, de facto, Shanghai's International Settlement gave many Chinese the personal safety and economic and cultural opportunities they could never have under their corrupt and power-lusting Chinese rulers in the rest of the country.

The End to Shanghai’s Era of Laissez-Faire

This all came to an end in 1941, with the Japanese occupation of the city. Then, at the 1943 Cairo Conference between Franklin D. Roosevelt, Winston Churchill and Chiang Kai-Shek (the head of the Nationalist Chinese government), the Western powers relinquished their rights to "extra-territoriality," which was the basis for those foreign concessions in China, of which Shanghai's International Settlement was the most important and famous.

After the war, from 1945 to 1949, when Shanghai was under the control of Chiang's Nationalist government, the city suffered through political corruption and abuse, and as well as a hyperinflation caused by the Nationalist government's massive printing of paper money to finance its war against Mao's communists.

Then from 1949 until the 1980s, the communist regime left the city in a state of a "frozen moment in time," with its skyline virtually unchanged from what it was in the 1930s.

Yet, Shanghai’s “frozen” capitalist-built commercial skyline symbolized all that was possible when men and their creative, entrepreneurial minds are left free, and people are at liberty to peacefully and profitably produce, trade and prosper to the mutual benefit of all individuals concerned.

[First published at Epic Times.]

Richard Ebeling

Richard Ebeling is a professor of economics at Northwood University in Midland, Michigan. (read full bio)