THE SHANXI BANKS

The remote inland province of Shanxi was late Qing dynasty China’s paramount banking center. Itsremoteness and China’s almost complete isolation from foreign influence at the time lead historiansto posit a Chinese invention of modern banking. However, Shanxi merchants ran a tea trade northinto Siberia, travelled to Moscow and St. Petersburg, and may well have observed Western bankingthere. Nonetheless, the Shanxi banks were unique. Their dual class shares let owners vote only oninsiders’ retention and compensation every three or four years. Insiders shares had the same dividendplus votes in meetings advising the general manager on lending or other business decisions, and wereswapped upon death or retirement for a third inheritable non-voting equity class, dead shares, witha fixed expiry date. Augmented by contracts permitting the enslavement of insiders’ wives and children,and their relative’s services as hostages, these governance mechanisms prevented insider fraud andpropelled the banks to empire-wide dominance. Modern civil libertarians might question some of thesegovernance innovations, but others provide lessons to modern corporations, regulators, and lawmakers....