Earnest Money Agreement Sample: Fill & Download for Free

If a home buyer submits an offer with an inspection contingency, and later gets “cold feet” or finds another property they like better, can they just declare the home does not pass inspection and reclaim their earnest money no questions asked?Disclaimer: I’m not a lawyer, so this isn’t legal advice.No.“No” for several reasons. First, the question asks about reclaiming the earnest money “no questions asked.” If the issues are trivial (a light switch that needs to be replaced, a GFI outlet that needs to be installed in a bathroom, a window screen that’s missing), there will be plenty of questions asked. Further, the money is being held in escrow and both buyer and seller must agree to the release of the money. If the seller gets pi$$ed off, he may not be willing to sign off on the release of the earnest money deposit.As a practical matter—as the other answers correctly note—you really can’t force someone to buy a property they’ve decided they don’t want. (The seller can demand “specific performance,” but actually getting that would be extremely difficult.) So if the buyers don’t want the property, it’s still effectively tied up—preventing its sale to another buyer—to the detriment of the seller.Nevertheless, if the seller decides to be difficult, he/she can make it difficult for the ex-buyer to move on.And here’s some additional anecdotal evidence. I’m an investor and have attended a number of training sessions (“boot camps”) at which sample contracts have been distributed. There’s one particularly good instructor who has modified his Purchase and Sale Agreement based on his personal experience as well as that of his students.Most investors buy properties in “as is” condition. But they still retain the right to have the property inspected, and any smart investor will have an inspection done. The contract gives them the right to walk away after an unsatisfactory inspection.Sort of.That’s how this one investor’s contract used to read. Then he ran into a problem. He had an inspection done and uncovered some real (not trivial) problems. He tried to use the inspection contingency to cancel the deal. He finally got out of the deal, but not before paying thousands of dollars. So now that portion of his contract (with the additional language highlighted) reads:Seller will allow Buyer and/or his inspectors complete access to the property for a whole-house inspection, a wood-destroying pest inspection, and any other inspections Buyer deems necessary, all at Buyer’s expense. Buyer’s obligation to close is contingent upon the results of these inspections being satisfactory to Buyer. In the event Buyer determines to terminate contract as a result of any of these inspections, Seller shall promptly refund Buyer’s deposit and neither party shall have any further obligations to each other.It may seem obvious to a layperson that the inspections would have to be satisfactory to the buyer. But that’s not what the contract originally said.Inspection contingencies can be tricky.For more information, talk with a lawyer.

Short version: We turn over every stone, and keep turning before, during, and after an investment is made.Long version: I perform hedge fund due-diligence (DD) for family office and institutional investors so this topic is quite near and dear to me. I’m proud to have steered our clients away from several funds that turned out to either be fraudulent or blew up for operational reasons. We’re dealing with allocation sizes in the tens of millions so the stakes are obviously very high. I’ll try to be as detailed as possible but this will really only scratch the surface at best.There are several objectives to hedge fund DD (and it’s not all about making sure the manager isn't a Madoff.) It helps to recognize from the outset that each hedge fund is first and foremost a business, and for businesses to be successful they need to have a differentiated product, a repeatable process for creating that product, and as a potential client you need to evaluate your own need for the product. In other words, what is the manager's differentiating 'edge' (see Nate Anderson's answer to As a fund manager, what’s the best response to, "What is your edge?" when asked by a potential investor? I talk about the differentiated strategy approach and team experience. I’m not sure there’s a genuine structural edge in the investment business.), what is the process for exploiting that edge, and how does it fit into your portfolio?To answer these questions investors must gain a deeper understanding of all of the following: (a) the strategy, (b) the investment process, (c) the people involved in the fund, (d) the ‘business’ operations of the fund, and (e) the performance track-record.Initial ReviewTypically, the DD process starts with an initial document review to glean the basics and see if its worth taking the meeting. I generally start with the tearsheet, presentation, and recent investor letters. Every investor has their own limiting criteria, but depending on the investor some will pass right away due to factors such as:Size of the fund. Some investors want the sense of ‘safety’ from a large fund, while others prefer smaller funds due to their higher return potential. (My diligence is generally focused on smaller funds, which may have higher operational risk, so the research burden tends to be higher.)Undifferentiated strategy or an unfavorable strategy for the market environment.Lack of a track record. Many institutions and investors require 3 years of track-record or a ‘portable’ track record from a manager's previous firm in order to get comfortable with their historical ability to perform. Again, I have some investors who are comfortable being 'day-1' money which raises the due-diligence threshold.Poor relative or absolute historical performance.High volatility or large drawdowns.Poor quality of investor communication. The only thing that differentiates a 'black-box' from a transparent fund is communication. If the communication from managers is sparse or uninformative it is tough to get comfortable with a strategy. We generally like to see monthly performance updates with quarterly commentary. Anything more frequent may mean the manager is spending too much time writing, and anything less means we are in the dark for too long.Lack of credible third-party service providers (auditor, independent fund administrator, prime broker, legal counsel.) Third-party service providers are the checks and balances on a manager's operations. Investors do not get compensated for taking on unnecessary operational risks, so if we don't see auditors, administrators, and prime brokers in place we will pass immediately.MeetingIf the manager passes our initial document review we'll take a meeting. The first meeting(s) are usually the standard pitch, a walk-through of the presentation, and a high-level Q&A. Though we'll have an idea going in on what we want answered and what we'd like to discuss, we let the manager start with their pitch and always end up free-forming after a while. The idea is to get a sense of the manager, personality, and to probe on different areas of interest or concern and get a sense of whether it holds up.If the strategy, performance, fund structure, and people all pass the initial smell test and merit further interest, due-diligence begins in earnest. An initial document list is requested which generally includes:Marketing materials:Investor letters since inception. These give us a sense of the quality of communication, investment ideas, research, and insight into the manager’s personality and approach.Relevant PR such as interviews, press releases, and published articles.Due-diligence questionnaire aka the ‘DDQ’. This is a key document that asks 100+ detailed questions about the fund. The AIMA (Alternative Investment Management Association) version is the most common DDQ. We review the DDQ provided by the manager and compare it with the AIMA DDQ to see if the manager deleted any questions from the list. Usually, when a question is missing from a DDQ it's because it was irrelevant to the strategy, but sometimes a deleted question can be HIGHLY relevant and show what questions the manager doesn’t want to answer. (Here's a random completed DDQ off Google in case you’d like to get a sense of what that document looks like: Page on opcvm360.com)Research samples. Again these give us a sense of the depth and focus of the investment process.Legal:Private Placement Memorandum. This is the legal doc outlining key terms of the fund. This is generally where all the nuances on fees and fund structure are found. See How do you describe, calculate, and interpret management and incentive fees and net-of-fees returns to hedge funds? for more detail on nonsense to be aware of surrounding hedge fund fees.Subscription documents. We review to make sure everything is consistent with the PPM.Partnership agreements. These detail terms of the business structure and can also detail nuances of the fund structure.State certificate of organization/LP certificate/state registration doc, IRS W-9 tax ID form. These are mostly just confirmatory documents.Other:Audits since inception. The independent auditor’s report is of critical importance, as it will reconcile assets, portfolio balances, performance, and often provide insights on portfolio construction, liquidity of underlying assets, and back-office protocols.Independent prime brokerage report as of last completed audit. This allows us to see even more detail on the portfolio from the time of last audit and allows us to reconcile the audit with the actual portfolio. If anything doesn’t line up with the audit it means either we or the auditor are missing something.Reference list. They will all obviously be glowing references, but the choice of references can be very important. Who they leave out of the reference list is often more instructive than who is included. That being said, sometimes good information can be found through the references.Service provider contact information. We verify the relationship with each service provider, and perform due-diligence on the service providers to get an understanding of the terms and length of the relationship with the fund.Any external or internal risk reports. These give us a sense of how they measure risk, what risks they control for, and how they fall within those parameters.Regulatory registration documents such as form ADV for advisers. This is more confirmatory information but can also show critical pieces of information such as assets under management as of a particular date, key principals, number and type of clients, and compliance with the law.Once the document review is completed, you’ll likely have a better understanding (and many new questions) about key issues surrounding the 3 P’s: people, process & performance. The next step is to dig on areas of interest or concern to learn more on each of these three areas.PeopleOne of my favorite stories on manager due-diligence came from a well-known investor who passed on a hedge fund because of a raincoat:The investor wanted to get to know the manager better, so they agreed to go on a hike. Halfway up the mountain it began to downpour. Unfortunately, the manager hadn’t checked the forecast and spent the latter part of the hike completely drenched. The (dry) investor realized at that point that the manager was a little too focused on the adventure ahead of him and not at all focused on managing the predictable risks along the way. The investor passed due to concerns over risk management.We haven’t passed on any managers over rain gear, but I think the point is relevant. In poker, you must observe everything about a player; betting patterns, style of play, tolerance for risk, and personality. You piece together an understanding of the person from the data in order to get a sense of their tendencies. The same applies to due-diligence on people. Fortunately we have a lot more data to work with than at a poker table:Background checks. We use a service that looks for criminal, regulatory, and civil infractions, including Anti-Money-Laundering checks on all principals and key employees of a prospective firm.Regulatory checks. The Financial Industry Regulatory Authority (FINRA) has a very comprehensive database of brokers and investment adviser firms that shows whether individuals or firms have had any regulatory infractions, their registration status, whether they’ve had any arbitration awards issued against them, and the full employment record of registered individuals (among other things). It also ties into the SEC database which is often relevant for larger firms. All of this is obviously extremely valuable background information. One little trick we use is to match up the employment record of the principal with the bio in their marketing materials. Often they will leave firms out of their bio if they had a bad experience there, though they'll include it on their regulatory filings. It may bring up points that require further digging: BrokerCheck: Research Brokers & Investment AdvisersBack-channel reference checks. This is probably one of the hardest things to do effectively, particularly for industry outsiders, but this can be a source of absolutely critical information. This is the scuttlebutt; the “I’ll talk to my guy who worked in this manager’s Deutsche Bank division when he was a portfolio manager...” This approach is often how you get the ‘real’ story behind a manager.Regular ol’ reference checks. You have to cut through the glowing praise and ask the right questions to really get a sense of the truth, but these can be helpful.Direct interviews with the manager. This doesn’t have to be a cross examination but during the meetings there should be a component of confirmatory questions along with getting a sense of the manager’s personality, background, and approach.Google. (Never underestimate!) I was asked by a family office to diligence a manager and I googled the manager before anything. Past investors had posted on a forum that the manager lost 90%+ of their money by making risky bets then doubling down when the original bets didn’t work out.Skin in the GameAlso worth noting is that it's incredibly important to know that the manager has invested in their own fund, and that they are risking their assets alongside yours. Most investors want to know what percentage of the manager's liquid net worth is in the fund, and will often request documents to prove it.Operational and Investment ProcessNow that you understand more about the people you’re working with, you want to understand the structure and processes that constrain them.A hedge fund, like any other business, creates a product (a portfolio). In order to generate consistent portfolio performance you need to understand the sausage factory, including both the investment process AND the operational processes in place.I know what you’re thinking—operations are boring. The sexy stuff is how people come up with their brilliant investment ideas. Unfortunately, the operations and business side of the fund are not trivial matters; research has shown that over half of all hedge fund blow-ups occur due to operational issues that have nothing to do with the investment process. As unappealing as it is to try to figure out the nuances of how Net Asset Value is calculated and reconciled with the fund administrator, it’s even less appealing to lose a billion dollars because you didn’t take the time. (Yes, turning over every stone means turning over the ugly ones too.)I’ve seen institutional investors pass on funds for reasons which may not be immediately obvious problems to a new hedge fund investor. Below are some examples. If you can think through the issues or potential issues with each real-life scenario below then you are off to a good start:A small fund required a single signatory on cash transfers.A fund had legal entities for their marketing, deal sourcing, and investment divisions of the firm.A large, well-known fund has used a big-4 firm as their auditor since inception, and worked with several offices of the firm over the course of their relationship.The same fund in #3 managed their fund administration internally.A fund was down 3% one month.A fund had rehypothecation agreements in place with their Prime Broker, a major, well-respected Wall St. bank.I imagine some of the above might not even sound like English. So what does it mean and why were these all problems for the prospective investors?Single signatory. Like any other business, embezzlement can be a problem for hedge funds. Requiring a single signatory to move cash, particularly for a small fund, means that a founder/key employee can potentially loot the place without limits. It’s not unheard of for a business owner to get served divorce papers then decide it's time for an early retirement in a tropical, non-extradition friendly country. On a less major scale, an employee may embezzle smaller amounts systematically over time. Hedge funds generally have much higher asset liquidity than traditional businesses, and therefore cash stewardship is of utmost importance. For these reasons, institutions usually require double signatories on cash transfers, often with one signatory being a credible, independent fund administrator.Multiple legal entities. Separate legal entities are put in place to limit liability (and potentially transparency) between entities. Whenever a manager puts legal shields in place between different operational aspects of a fund the investor should have a very clear understanding of why that is the case. In this case the reasons didn’t pass the smell test, and were likely in place to obscure important information for investors.Using several offices of the same accountant. Accountants understand the concept of multiple legal entities all too well. For example, each office of PWC may have its own separate legal entity which protects the greater organization and other offices from shared liability. In other words, working with 3 different offices of the same firm can be like working with 3 completely different firms. Another fact about accountants: If they find a problem with a fund (or a company) they will often resign rather than report their suspicions. In this particular example, 3 offices of the same accounting firm resigned over the course of the life of the fund. Unfortunately, most investors just thought: "Well, the manager has used a credible firm since inception, therefore it’s all kosher." Wrong.In-sourced administration. Approximately 90% of all hedge fund frauds would be eliminated through use of a credible outside fund administrator to manage valuation, NAV reporting, subscriptions/redemptions, and the back-office functions of a hedge fund. Madoff (again) in-sourced his administration. He couldn’t have reasonably pulled off his fraud had he used a credible outside administrator.Fund down 3% in a month. This by itself isn’t a problem. Some funds have high volatility and +/- 5% or more in a month isn’t unusual. The problem was that this particular fund’s investment strategy was expected to generate a slow, consistent half percent a month. A drawdown in one month of 3% in the context of that strategy was a red flag. The next month the fund was down 9% and subsequently lost another 20% before shutting down.Rehypothe-what?? Rehypothecation is when the fund lends their securities to their prime broker. The broker can then use the securities as collateral to lend against, and will generally pay the fund a small fee in return, which helps lower the fund’s brokerage expenses. Here’s bottom line: When Lehman Brothers went bankrupt, this small distinction determined who 'owned' the assets. It was the difference between blow-up or solvency for many funds. (Literally billions were lost or saved over this nuanced operational detail.)In addition to operational processes, the investor must understand the investment processes in order to get a sense of how the fund’s portfolio is constructed. How does the manager source ideas, and what does their own research consist of? What kind of risks does the fund take? Risks such as currency, security, sector, market, interest rate, volatility, and countless other risks can be a part of the portfolio construction process. How does the manager make sure they are adequately compensated for those risks? How do these risks fit into the investor’s broader portfolio? Professional portfolio managers must account for all of these factors with the funds they invest.Performance.On every disclaimer on every document you will read from a hedge fund it will say: "Past performance is not indicative of future results." I'm generally not a fan of legalese but this bit should be taken as gospel. Historical returns are in the past, and without understanding them in the context of the strategy, the risks taken, and the changing nature of the strategy in the market then those returns are meaningless. Statistics lie. At the very least they can mislead: Did you know that the Vatican City has 5.9 Popes per square mile? True fact.Lets go through another quick example. If a manager tells you “we returned 100% last year.” Are you:(a) Excited(b) Interested(c) Skeptical/unsure(d) Overwhelmed by feelings of inferiority over your own lousy returnsIf the answer is anything other than lots of ‘c’ with a little bit of ‘b’ then you need to learn more about what performance means. (If your answer is ‘d’ I suggest yoga.)Performance needs to be understood in context. What risks did you take to make 100%? What is the volatility an investor can expect on those kinds of returns? (No matter how great your returns are, you only need to lose 100% once to wipe it all out.) Statistics like Sharpe ratios, maximum drawdown, correlation, and volatility can only really be helpful in the context of the market and the strategy that contributed to that performance.I once met with a manager who returned 142% in 2009 and 55% in 2010. Those were eye-popping returns, and they had all the right service providers and statistical ratios to ‘prove’ how credible and great they were.The manager told me that their whole strategy was to analyze momentum price signals, because “when you focus on one thing all day you get pretty good at it.” They were a complete black box as far as their model and their investment process, but the manager shared one aspect of the model: “When the market goes up we are able to capture those returns, but as soon as the market starts to drop, the model shuts down in order to mitigate any losses.” Classic baloney. (Explanation: Unless you know whether the market will continue to go down or up you can't determine when to turn the model on or off. He was basically implying that they could perfectly predict the direction of future price action in the market.)I passed on the fund, and it literally blew up the next month. (To be fair, I didn’t realize it would blow up so soon, though I did know that it would inevitably blow up with those returns coupled with no credible explanation of how they produced them or why they would persist.) The moral is that it's hard to find an edge and generate consistent returns, and historical performance (whether good or bad) has to be understood in full context.OverallThis overview really just scratches the surface but hopefully the framework and actionable tips are helpful. Many institutions view their due-diligence process as proprietary, but personally I’d rather see all investors have a deeper understanding of the process. It’s bad for the industry when charlatans run around with impunity, and quality diligence helps lift the entire profession. Most hedge fund managers are good people (honestly), but even among good people there can be a lot of average performers and undifferentiated strategies. A good due-diligence process can be both informative and collaborative-- in addition to learning about the managers our DD process often leads to operational improvements among funds we work with.Take your time, and don’t be afraid to ask even seemingly stupid or awkward questions. The best questions are often a little bit awkward. Always keep in mind that the next stone you turn over could be the difference between gaining or losing everything. If a manager seems reticent to provide information or answer your questions its generally a sign of what the relationship will look like going forward. Investments in hedge funds are ultimately partnerships and the good managers will understand and appreciate your need to learn before investing. Good luck!

In its simplest sense because parliament voted for it.But there is a background to it. A background of monetary policy, central banking and commodity money.The global silver flowIn the mid 16th century the Ming dynasty switched to the silver standard for accounting and fiscal purposes. China which lacks rich silver mines and hadn’t used it extensively for centuries did not have a large supply of silver stored somewhere. Since China had around a quarter of the world population this caused such a demand its effects were felt throughout the globe.Europe on the other hand was relatively rich in silver especially following the 16th century South German mining boom and the discovery of silver in the Americas.Huge pile of silver in one place of the globe and a small pile and huge demand on the other side; you can guess what happened with regards to the global flow of silver. Between 1500 and 1800 China imported around 30% of new world silver which it financed with silk, porcelain and gold.The fact that silver was a medium exchange in both places also had another very important ramification. The European economy ‘backed’ by a large amount of silver had very high silver wages while China had low silver wages. In modern parlance one could say that the ‘euro’ was a very strong currency while the ‘yuan’ was a very weak one. A factor further compounded by differences in real wages. As any modern economist can tell you this affects trade, a weak currency makes it easier to export goods while limiting import while a strong currency is detrimental to export but allows for cheap import.Being on opposite sides of the Eurasian landmass the lands in between represented a gradient with regards to silver price. A kilogram of silver in England might have a 115% purchasing power in the Ottoman Empire, 140% in India and 200% in China. Merchants were keenly aware of this fact and its effects on their bottom line [i.e. profit and return on investment]. The 17th century trade of the English East India Company and the Levant company, which traded with the Ottomans, shows this dramatically.English agents in India noted that it was hard to sell things like English woollen because the people could not afford it. The end result was that English export to India consisted for 70% of specie and bullion while 30% consisted of other goods.In the Ottoman empire during that same time the difference in silver price was smaller which meant that European produce could compete with silver. The Levant company exported 70% English woollen and 30% specie and bullion, in fact Ottoman demand sustained the entire wool industry of several English counties.The high silver value in China also made Chinese gold very cheap. The Portuguese arrived in Macau right around the time of a Japanese silver boom which gave it an exchange rate close to that of Europe. In a time when trade between the two countries was limited the Portuguese were able to export Chinese gold to Japan with a 60% profit margin. For the record; the 15th century Venetians who had a monopoly on European pepper import pocketed a relatively modest 40% profit. While it is not often mentioned along silk and tea the Chinese gold export was also a considerable source of revenue.Another quirk of silver was that, because it was currency across much of the world, it was extremely liquid. The Dutch who managed to corner a very large segment of the spice trade and exported spices to China found that the English were still getting the better of them because their specie was more liquid. Selling all the spices in China took time, sometimes months, whereas the extremely liquid silver could be traded as soon as a stock of tea was available. In a time when getting the first fresh tea to Europe resulted in higher profits this was important. Furthermore interest rates were commonly above 10% annually which meant that having goods for sale for any period of time (having ‘dead stock’) was tantamount to burning money.Already in the 17th century one Dutch employee mentioning trade with India recommended selling goods at a loss if it did not sell quick enough simply because keeping ‘dead’ or slow selling stock was even worse.A final note would be that especially Spanish coins were valuable. The face of a Spanish king and some latin inscription on itself were not particularly interesting in Asia (though they did lead to them getting funny local names such as ‘fat Buddha’). Because these Spanish coins were well known for being of reputable quality with regards to weight and silver content they became the de facto currency of global trade. In the 17th century an English employee in India already noted that they were more liquid than other European silver coins and it traded several percent above remelt value.In short, it was incredibly profitable to export silver to Asia and this fact was not lost on European merchants. While there were some reservations early on the East India trading companies of Europe were granted exemptions on general bans on bullion export in the 17th century. Not doing so would have hurt their bottom line or profit which was not acceptable. The fact that the owners of these companies were often the same people running the government probably helped this.A note on government salariesWe briefly have to look at the Ming Dynasty.The founding Hongwu Emperor was a fan of tax cuts.He reduced government tax to roughly a fourth of what it had been during the Song dynasty. This despite the fact that Ming China would grow to have a larger population and larger government apparatus. To cut cost some checks and balances on government employees were removed which lead to officials having combined functions such as administrator, tax collector and judge. Government wages were also massively reduced below previous levels and became fixed. In some cases wages simply weren’t paid at all.By the 15th century, about half of salaries were paid in grain, and half in commodities such as silk fabrics, cotton cloth, pepper and sapanwood. By 1434, however, it was estimated that the value of the commodity payments was only 4% of the scheduled amount. In 1432, some officials were paid with confiscated garments and salvaged materials, and in 1472, peas were used as payment. In the following year in Nanking, it was found that the peas were suitable only for feeding horses (Huang, 1974, p. 48). From this account, it is apparent that salaries steadily fell over the course of the Ming and by the mid-1400s, half of the salaries was effectively unpaid!…In 1012, nominal annual salaries for Sung civil servants ranged from 96 kuan for low-level to 4800 kuan for top-level officials (Wong, 1975). This is considerably higher than Ming salaries in 1392 of 60 piculs of grain for low-rank to 1044 piculs for the top-rank officials (Huang, 1974). Comparing the Sung to the Qing, Deng (1999, pp. 302–3) reported that the First Rank Sung official was paid about 10 times his Qing counterpart. Although this latter number may be too high to be taken literally, it is clear that Sung officials were paid much higher than Ming and Qing officials.Now you might imagine that making government officials much more powerful while simultaneously reducing their official pay would lead to massive corruption but for this the first few Ming Emperors had a solution. Corruption was sought out and punished, officials were flayed alive, had their skins stuffed with straw and displayed as a warning. Other favourites were Lingchi (death by a thousand cuts) which saw a thirty fold increase in its application and Nine familial exterminations which, while not always applied entirely, did entail executing much of the immediate family of the corrupt official.However subsequent emperors were a little more relaxed in their application of such measures which caused corruption to grow. The Qing Dynasty who displaced the Ming in the 17th century largely kept the Ming tax and salary institutions. Though an attempt was made to limit corruption by increasing salaries threefold this did not reverse the course;Official salaries were raised significantly during the Qing in the hope of curbing corruption. In the early Yung-cheng period (1727), allowances called yang-lien (honesty nourishment) were instituted to supplement regular salaries. Key provincial and local officials, as well as military officers, also received an additional allowance known as kung-fei (administrative expenses). Chang (1962, p. 38) reported from Qing records that the total legal annual income to all officials amounted to about 6.3 million taels of silver including 1.4 million in salaries, 4.3 million yang-lien, and 0.6 million kung-fei. On average, the extra allowance intended to curb corruption was over three times regular salary. It is not surprising that the salary reform had little impact on curbing corruption because even though the salary increases were generous, compensation was still negligible compared to incomes from corruption. The Ming and Qing economies were much larger than the Sung economy. Increases in population (fivefold) and expansion of cultivated land (threefold) during the Ming and Qing increased the potential gain from corruption, especially among the top rank of the government. Chang (1962) estimated that around 1880, aggregate extra-legal income was about 115 million taels of silver, shared among 23,000 Chinese officials, with more than half of the income shared among 1700 top officials. In other words, corrupt income was 18.3 times legal income! This extraordinary amount came from office-holding alone and did not include the officials’ income through land-holding and other activities in commerce, where they also enjoyed advantages over common citizens.This widespread supplementation of official salaries is rather important with regards to the Canton trade. Prohibitions issued in Beijing often turned into regular items of trade thanks to the payment of ‘extra legal taxes’. Both Chinese and European merchants knew full well that sometimes a ‘gift’ was needed to make trade happen.The Canton tradeDuring the Qing dynasty trade was concentrated in the city of Canton where a number of Chinese (Hong) merchants gained a government licensed monopoly on trade with European merchants. Their number varied from 5 to 26 but was often around the 10–12 mark. While many items were traded between these groups of merchants the most important one was the tea trade which saw Spanish coins being traded for tea.The Thirteen Factories in CantonNow as mentioned earlier this silver import was rather important as it was the bulk of the Chinese silver supply. Furthermore the case of coins is worth mentioning. The Ming Dynasty, while on the silver standard so to speak, didn’t actually mint silver coins and the later Qing dynasty did make some attempt but those coins never really found much popularity in the coastal provinces, de facto the coastal provinces of China were ‘on the dollar’.This effectively meant that a handful of European companies were the money supplier of southern China, or in other words; the central banking function of the Qing had been outsourced to European merchants supplying Spanish dollars.This was not without problemsIn 1783 the British went to war in Europe and this caused the their silver export to China to be reduced to exactly zero kilograms for four years and then the next year it was only around 4000 kilograms. This sudden contraction in trade seems to have caused deflationary forces in southern China and caused the British East India Company a loss of revenueFurthermore war between Europeans could not only cause trade to halt but also resulted in more silver being used to pay for wars. Both the European merchantsWhen ships did not show up, Chinese were left with bulging inventories and no funds to meet obligations. And because war consumed silver reserves, ships that arrived in China during war years were often lacking sufficient capital to purchase return cargos. Some of these private commission merchants such as the Armenians, Muslims, Parsees and Americans operated outside the nationalistic companies and colonies so they were not usually embroiled in these conflicts. Because of their 'neutrality', they were often sought by everyone in China who needed a loan.The Seven Years' War (1756-63) provides a good example of how war affected the China trade. In these years, Suiqua's (Cai Ruiguan) house [Hong merchant] accumulated large debts when the French ships did not arrive. Poankeequa's (Pan Qiguan) Manila trade was interrupted when the English attacked the Spanish there and occupied the place from 1762 to 1764. Hunqua, Monqua and Chetqua were forced to pay higher interest on their loans because of a lack of silver coin arriving in China. The war drained the EIC of silver making it difficult for supercargoes in the early 1760s to get enough money for the advances needed for tea orders. The depleted silver supplies from English and French ships in China gave the Dutch, Swedish and Danish companies a strategic advantage in negotiating loans and trade with their merchants. By January 1764, the EIC had become so drained of funds from financing the war that supercargoes had to run to private financiers in Macao for an emergency loan of 72,000 Spanish dollars. As we saw in the last chapter, this was the same time that the opium trade became more competitive and widespread. Other war years were no different. In the early 1780s, Tsjonqua's (Cai Xiangguan) house, which was already in a poor state, was forced into bankruptcy when the VOC ships were lost to enemy attack and did not arrive in China. As Plates 3 and 6 reveal, private commission merchants were often the only source of funding for Hong merchants and foreign companies during years when capital was short. An emergency loan could help them through difficult times, but resulted in some Chinese becoming deeply indebted to these financiers.The fickle nature of the flow of silver and thus a highly liquid currency hurt the bottom line of European and Chinese merchants on multiple occasions.This is where Opium comes in.You see the Emperor had banned it already in 1729 when it was barely used but since his court was roughly 2000 kilometers from the port of Canton and since most officials supplemented their salary with gifts such a ban amounted to nothing. Prohibitions on the trade of some European luxury goods and export of gold and certain silk had been widely skirted since the beginning of the Canton trade.However initially the large chartered European companies avoided Opium like the plague because they feared it might hurt their trade;The Swedes, English, French, Dutch and Danes clearly acknowledge in their records that opium was a forbidden article in China. The companies' ban on the drug seems somewhat contradictory, given the fact that many of them traded regularly in other forms of contraband such as gold and illegal silk. Opium was a regular and legitimate item of trade for the English, Dutch and Danish companies in other Asian ports, but not China. For large companies, the tea trade was far too important to risk for the sake of a few chests of opium. In 1750 security merchants for the EIC were perturbed to learn that a private English trader had tried to market the drug in Canton. Chinese merchants were also worried that they would incur the Hoppo's wrath if the attempted trade was reported. The supercargoes immediately inquired into the matter and issued instructions to all EIC officers to 'use the most effectual means to prevent its [opium] being landed hereThe Hoppo is perhaps also worth mentioning as he was effectively the person in charge of handling customs duties. Unlike many other officials he was somewhat less corrupt in that he actually send the revenues directly to Beijing rather than having it go through channels where some of it was skimmed off.His job, in short, was to get as much revenue directly to the Qing court as possible. This meant that promoting trade was in his interest and it put him in something of an awkward position when the silver supplies were interrupted and when opium started to become an increasingly more useful item.Essentially a perfect storm occurred.As the downsides of the limited silver supply became more obvious while the ability of opium to replace it more acknowledged there wasn’t much to stop it. The Hoppo keen on seeing an expansion of trade, the mandarins who lined their pockets, the Europeans who saw their profit margins rise and the Chinese merchants who saw its advantages.Dealing opium was a way for Chinese merchants to produce quick capital and much needed silver. They needed silver to purchase opium, but they sold it for silver as well so like tea, it could increase their capital reserves. With tea, they had to give silver payments in advance so it might be six months or more before they saw returns on their investments. But opium, in good years, could be sold within days of its purchase [i.e. it was very liquid] so silver supplies could be replenished very quickly. A few quick sales of opium at the beginning of a season gave Chinese merchants more silver to buy tea and less need to take out high-interest loans from foreigners. Except for a few bribes to the Mandarins, no duties had to be paid to the government. Thus, opium had the unique characteristics of producing profits in its own sale, expanding tea sales and reducing usury costs both of which increased tea profits, and it did all of this without creating new debts (duties owed). The minimal risks involved in trading opium in China in the 1760s meant that there was much more to be gained in selling it than lost in avoiding it so the trade continued to expandIt was also around this time that the British realised they possessed the land in India which produced the highest grade opium;The EIC continued to ban opium on company ships going to China, but encouraged private traders to purchase the drug from the company in India and then smuggle it to the delta. The EIC benefited from this commerce in two ways: from the profits on the sales in Bengal and from the silver that it received for the opium that was sold in China. Large quantities of silver were needed to purchase tea, and opium was about the only commodity that could be readily exchanged for that specie. The EIC sold its opium and such articles as Indian textiles to the country traders in exchange for silver, which it then used to buy tea.Rather than having to bring their own silver or taking out loans the company could now rely on silver provided by private traders who could sell their opium within days rather than having to wait months for other goods to sell. In fact once the opium trade really got going the flow of silver started to reverse.…bribes were fixed amounts that did not change from one year to the next, which reduced risks and made it easier to project profits and attract investors. Connivance procedures for products such as gold and illegal silks were already well established by the early decades of the eighteenth century. The normalisation of smuggling enabled contraband traders to anticipate their expenses and calculate their profits with as much clarity and reliability as legitimate tradersIn fact, in some aspects, the contraband trade was less risky than the legitimate trade in tea. Unlike tea, which could lose 50 percent of its value if held over for a season, opium was less prone to deterioration if properly stored. Moreover, the sales of Chinese exports were often tied to the purchase of foreign imports, such as cotton and textiles (a practice known as 'truck'). Plate 19, for example, shows the SOIC supercargo Charles Irvine exchanging cochineal and cloth in 1744 with the Hong merchant Tan Suqua (Chen Shouguan) for chinaware. After the Chinese merchants made the agreements, they took the import goods into their factories in September or October and sold the items before mid November or December when the new tea arrived.Revenues from the sale of imports were used to purchase tea and porcelain, which meant that goods had to be sold at a time when the market was saturated and prices were at their lowest level. Merchants could not always afford to warehouse their import goods until prices had recovered, so this was a precarious situation for them.Chinese merchants could not contract tea unless they agreed to buy a certain amount of textiles and other imports, and they could not pay for the tea until those products were sold. By the early nineteenth century import duties also had to be paid by late October or early November, so imports had to be sold immediately. There was no way of knowing how many ships would arrive each year or how much of one commodity would be dumped onto the market. Larger merchant houses in Canton tried to bring a little more security into these arrangements by buying up all the supply of a certain product to control its price. But this also required an enormous outlay of capital, which most merchants could not produce. Thus, for many of the Chinese merchants in Canton, the tea trade was risky business.If prices plummeted, all that merchants could do was to sell their import goods at a loss and hope to recoup their outlay with tea sales. The tea market, however, was also highly competitive, which meant that profit margins were extremely slim even in good years. Moreover, tea sales required huge advances, often with high interest rates. Thus, it was not likely that profits from tea would make up for losses from imports. Opium, on the other hand, was a cash-and-carry commodity. If the markets were saturated, opium could be stored until prices recovered because it was not tied to the sale of exports.…By the 1810s and 1820s the smuggling procedures were so established, indeed, commonplace, it was no longer necessary to sell the goods aboard the ships at Whampoa. Foreigners could arrange for all contraband to be shipped direct to Canton, where they began warehousing such contraband items as opium and selling them directly out of their factories. Chinese buyers could go there and sample the goods instead of having to travel to Whampoa, as in the example of the Disco [a ship]. The contraband trade was, by degrees, becoming almost as secure and stable as the legal trade. The legal trade was protected by Chinese imperial decrees and policies, and the contraband trade was protected by long-established local practice and procedures.Brokering houses were set up in Macao and Canton to arrange the sales and pay all the connivance fees. These commission merchants dealt in legitimate items as well which is why they were allowed to stay in China. It is probably safe to assume that without the funds generated from the contraband trade, the legitimate trade would not have grown as fast, as extensively or as consistently as it did for 140 years. Thus, it was in the interests of the Hoppos to tolerate these illegal activities so that the tea trade would not be affected. Toleration was perhaps the easiest and most effective way to ensure that the flow of revenues sent to Beijing was uninterrupted. If no unnecessary ripples were made in the system, such as launching a campaign to wipe out corruption and opium, then the revenues from the legitimate trade might even increase during each of the three years that a Hoppo was in office. This was the optimum outcome.Something even more profitable, more elastic in supply and locally available supplanted silver. It caused a massive increase in the tea trade which the Hoppo and Chinese merchants were all to happy with. The British for their part could use a little additional revenue too, wars had left them deeply indebted. The surge in the tea trade was exactly what was needed.In the minds of company officials, the tea and porcelain trades were too important to be allowed to diminish or go to ruin for the sake of a lack of silver. There was not enough of a deterrent in Canton or the delta to discourage private traders or government officials from benefiting from the trafficking, so pressures of supply and demand for silver encouraged the continual expansion of the opium trade. In this way, the growth of opium trade went hand-in-hand with the growth of legitimate trade in tea.…This blending of legal and illegal trade, the willingness of Chinese on all levels to accommodate smugglers, the uniformity in connivance fees and practices, and the need for large quantities of silver to exchange for tea, all contributed to a flourishing opium trade. Because the illicit trade supported the legitimate trade, it was easy to justify or, at least, to tolerate. As a result, the efforts that the government made to stamp out smuggling before 1835 were always too little and too late, and often ill-matched to the situation.However the fact that silver started being used increasingly less and the fact that opium was increasingly bought and consumed resulted in silver actually moving out of China.By the early 1830s, the outflow of silver was putting severe strain on administrative budgets to the point that Chinese officials in both Canton and Beijing began considering legalizing the opium trade as a means of curbing it, on the one hand, and taxing it on the other. The government could generate new revenues from its sale, and it was suggested that the trade could be controlled if the distribution and use of opium were tightly regulated. At the heart of these discussions, of course, was the silver problem. Many suggestions were put forth to limit the amount of opium purchases to one-third silver, or to only allow bartering where opium was exchange for other goods.In this new environment where officials in both Beijing and Canton were now more open in considering alternative measures of controlling the contraband, a very accurate and comprehensive report was handed to the emperor of the extent of smuggling and effects it was having on the empire. After better understanding the situation, and after realizing the large number of officials who were involved in the smuggling, it was decided that controlling it was impossible. Legalization would only lead to more problems and would not solve the silver crisis. The emperor then began sending a series of edicts to Canton to put an end to the opium trade.Some today mention an abstraction like a ‘trade deficit’ but I hope the above shows such a thing is rather complicated when talking about commodity money. The import of tea was covered by the export of silver, both of which are obviously commodities rather than money in abstraction. Ready cash, rather than money, formed an obstacle which opium was to overcome.An unholy trinity of tea, silver and opium blew up too such proportions that when the crackdown came the British backed most of their tea with the opium trade. A trade that was now almost four times the size it had been when silver was predominantly used.Thus the destruction of (what amounts to several billion in today’s money) worth of opium combined with the prospect of not being able to use opium to buy tea but having to revert back to silver made those involved in the Tea trade rather afraid. The private fortunes of individuals came to depend on the newly expanded trade and a contraction could entail reduced income or even bankruptcy.To get back to the vote in Parliament.A lot had become pinned to the opium trade, not just profits on its sale in India but the fact that it allowed the tea trade to grow exponentially. This must have weighed heavily on those who had little qualms about opium in the first place.Yet for all of this the vote was only carried with 50.84% in favour and 49.15% against, a narrow margin.Thomas Macauley, the Secretary of State for War, argued in parliament, “I beg to declare my earnest desire that this most rightful quarrel may be prosecuted to a rightful close. . . . that the name not only of English valour but of English mercy may be established”. William Gladstone, a member of Parliament who had tried and failed to cure his sister of opium addiction, responded to Macauley’s flag waving speech by focusing on the high moral ground:“Does [Macauley] know that the opium smuggled in to China comes exclusively from British ports, that is, from Bengal and through Bombay? . . . That we require no preventive service to put down this illegal traffic? We have only to stop the sailing of the smuggling vessels . . . it is a matter of certainty that if we stopped the exportation of opium from Bengal and broke up the depot at Lintin and checked the cultivation of it in Malwa and put a moral stigma on it we should greatly cripple if not extinguish the trade in it. They [the Chinese] gave you notice to abandon your contraband trade. When they found you would not do so they had the right to drive you from their coasts on account of your obstinacy in persisting with this infamous and atrocious traffic . . . justice, in my opinion, is with them; and whilst they, the Pagans, the semicivilized barbarians, have it on their side, we, the enlightened and civilized Christians, are pursuing objects at variance both with justice and with religion . . . a war more unjust in its origin, a war calculated in its progress to cover this country with a permanent disgrace, I do not know and I have not read of. Now, under the auspices of the noble Lord, that [British] flag is become a pirate flag, to protect an infamous traffic”The Canton Trade, 1700–1842 - Paul A. Van DykeHigh corruption income in Ming and Qing China - Shawn Ni, Pham Hoang VanThe East India Company and the Export of Treasure in the Early Seventeenth: K. N. Chaudhuri