By the early twentieth century China and Mexico were the only large countries remaining on a silver standard, and China was by far the largest. As the world’s major trading partners abandoned the gold standard in the early 1930s China found itself in the clutches of worldwide monetary turmoil and abandoned the silver standard.
After the discovery of vast silver deposits in the New World, silver flowed to the Far East, sometimes directly from Latin America and Mexico, and became the metallic currency of choice in that area. After the opening of China to European trade in the mid-nineteenth century, and the subsequent influx of foreign investment, China ran balance of trade surpluses. Excesses of exports over imports brought in a steady stream of silver, which became the basis of China’s currency.
Silver bullion circulated in different weights and shapes. Silver dollars, some minted in China and others in foreign countries, such as the United States, Mexico, or England, circulated along with subsidiary silver coins and copper coins. In 1895 England, itself on the gold standard, began issuing silver dollars, called trade dollars, specifically for trade with the Far East. English trade dollars bore inscriptions in English, Chinese, and Malay-Arabic. Briefly during the late nineteenth century the United States issued a special trade dollar designed specifically to compete with the Mexican dollar in Far Eastern trade. The Chinese called these various silver dollars yuan, meaning “round things,” and yuan became the standard monetary unit in China and modern Taiwan.
At the end of the nineteenth century Chinese banks reintroduced bank notes into China and banks held silver as reserves. The public demanded that banks maintain the convertibility of bank notes into silver, and banks that suspended convertibility saw their bank notes depreciate rapidly. In 1916 Yuan Shih-kai, president of the Republic of China, tried to enforce a regime of inconvertible paper money, instructing banks to cease redemption of bank notes and directing the public to accept notes at par relative to silver coinage. Yuan Shih-kai wanted to seize the silver reserves in government banks and divert those resources to help make himself emperor. The public put up a strong resistance and the effort failed. Provincial governments met with similar resistance to issues of inconvertible bank notes. When the Bank of Three Eastern Provinces could not redeem its notes in silver, the Manchurian government decreed the death penalty for anyone who circulated these notes at less than par. Nevertheless, irredeemable bank notes circulated at heavy discounts.
By 1922 the government banks had retrieved their irredeemable bank notes, and the public’s confidence in bank notes strengthened. Banks began publishing reports of their reserve positions and by the eve of the worldwide depression of the 1930s, sound bank notes had virtually displaced inconvertible bank notes issued by provincial banks.
At the beginning of the depression, prices—including the price of silver—fell precipitously in the gold standard countries, making China’s exports much more attractive in foreign trade, but making imported goods more expensive in China. China experienced a mild boom while most of the world slid into depression. As the world’s major trading partners abandoned the gold standard and began reinflating their economies, China began to feel some of the effects of the depression. The Japanese invasion of Manchuria in 1931 reinforced the depressionary forces making themselves felt in China. When the United State abandoned the gold standard in 1933 and began reinflating its economy, the price silver began to rise significantly, and China’s silver standard began to change from an advantage to a disadvantage. The rising price of silver meant that Chinese-produced goods were more expensive to the rest of the world, and foreign goods imported into China were cheaper.
The crowning blow to China’s silver standard came with the enactment by the United States Congress of the Silver Purchase Act of 1934. This law authorized the United State government to purchase large amounts of silver, sufficient to significantly raise the market value of silver. As the market value of silver rose, Chinese silver was melted down and exported, decreasing the Chinese money supply. Also, the high price of silver made Chinese goods expensive in foreign markets, sharply cutting into Chinese exports. To avoid the deeper ramifications of a deflationary spiral, China officially abandoned the silver standard in 1935. With the abandonment of the silver standard and the Japanese invasion in 1937, China began a descent into a hyperinflation debacle.
