China's Complete Silver HistoryThe Chinese Silver Standard's Historical Journey
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IntroductionThis analysis while being about Silver as a monetary standard, is a lesson in history underscoring the interplay between global trade dynamics, monetary systems, and political events.
- History Repeating Itself: Exploring the Chinese Silver Standard
- Columbus Started It
- China Prefers Silver over Gold
- The Opium Wars and the Decline of China's Sovereignty
- Development of the Chinese Silver Standard
- Chinese Private Banks
- End of an Era
- What Made Western Fiat Work?
- Impact on China: Depression and the Rise of Mao
- History Rhyming Now?
- Appendix
1- History Repeating Itself: Exploring the Chinese Silver StandardMark Twain's famous words about history rhyming and not repeating itself echo the common sentiment that humans learn nothing from history. Nevertheless, it is always valuable to delve into the annals of the past.
China has some unfinished business with silver
This is particularly true in the case of the Chinese silver standard, which not only endured as one of the longest-existing coin standards but also successfully unfolded with minimal intervention from the Chinese government.
Its origins can be traced to a development on the opposite side of the world: Christopher Columbus' (re)discovery of America in 1492, paving the way for Spain to rise as the first truly global power.
2- Columbus Started ItBy the mid-16th century, the Spanish Empire had established the first global trade network. They brought silver from Mexico, Peru, and Chile across the Pacific to China, purchasing tea, porcelain, silk, and spices in return. The Manila Galleon served as the pivotal transshipment port, ferrying Chinese goods back to the east.
The treasures were then unloaded in Acapulco and transported overland to Vera Cruz on Mexico's east coast. From there, alongside other precious metals and New World commodities, the goods made their way to Spain through the Spanish treasure fleet.
The profitability of this trade system during the 17th and 18th centuries was astronomical, with returns on investment reaching 200-300% per trip. However, the emergence of new players like the United States and the British Empire, coupled with changing trade routes, led to a decline in Spain’s profits by the end of the 18th century.
Despite the Spanish trade system's demise in 1821 with Mexico's independence, its effects persisted through the establishment of the silver standard that endured well into the 20th century.
3- China Prefers Silver over GoldDuring the 17th, 18th, and 19th centuries, China showed little interest in foreign goods. European products and those from European colonies overseas failed to capture the attention of the Chinese populace.
The Chinese were primarily interested in acquiring silver, which held a significantly higher relative value in their domestic economy compared to gold. The gold/silver ratio in China stood at 1:3, while in Europe, it fluctuated between 1:15 and 1:20. These European figures better reflected the natural distribution of gold and silver in the Earth's crust.
Silver exists in nature at a ratio of between 15 to 1 and 20 to 1. China’s appetite then was 3 to 1. Why Silver is priced at 90 to 1 now given its industrial applications makes no sense
Europeans, however, were captivated by Chinese goods, particularly tea, silk, and porcelain. Spices, precious stones, and woods were also highly sought after. This created an imbalance in trade, with the Chinese amassing substantial surpluses while the Europeans, especially the Spanish and later the English, faced significant deficits vis-à-vis China.
The Spanish, buoyed by seemingly boundless silver mines in Mexico and Peru, supplied approximately half of the silver mined in the Americas from 1500 to 1821 to China. The British, however, found an unethical trade-balance solution in opium.
They heavily promoted its cultivation in Bengal and India through private merchants and smugglers. This trade strategy transformed the deficit into a massive surplus, resulting in the outflow of around 20 million silver dollars from the Chinese empire between 1820 and 1835.
The British Empire's pursuit of this economic advantage, along with the struggles of Central and South American countries for independence, significantly reduced silver mining and altered transpacific trade routes.
4- The Opium Wars and the Decline of China's SovereigntyChina responded to the rampant smuggling of foreign opium by aggressively cracking down on its illegal importation. While China did cultivate its own opium, mainly in the region of Guangzhou (Canton), the British Crown's monopoly in India enabled them to flood the market with vast quantities.
This created a social crisis in China, as addiction spread rapidly and its population faced an embarrassing and humiliating situation. China's attempts to curtail the opium trade ultimately led to the outbreak of the First Opium War (1839-1842), resulting in a British victory.
Under the Treaty of Nanjing, signed on August 29, 1842, China agreed to open the five ports requested (Canton, Amoy, Foochow, Ningpo, and Shanghai), pay an indemnity of 20 million silver dollars, abolish the Cohong monopoly that hitherto had controlled trade in and through Canton, and adhere to a fixed schedule of customs duties. Additionally, the British were granted the right to occupy Hong Kong in perpetuity; this was their sole outright territorial acquisition
The Treaty of Nanjing in 1842 forced China to cede Hong Kong to the British, open up several ports to foreign trade, and grant extraterritorial rights to foreign residents.
These events marked the beginning of a new era in China's economic and political landscape. The influx of foreign goods disrupted local industries, and the trade imbalance only widened. The Chinese government struggled to find a solution to this crisis, leading to the eventual adoption of the Chinese silver standard to curtail outflows to the UK.
5- Development of the Chinese Silver StandardThe Chinese silver standard evolved gradually, largely untouched by state intervention. As silver flowed into the country, it formed the basis of China's monetary system. The Great Tax Reform implemented by Zhang Juzheng in 1581 officially recognized silver as the standard medium of exchange.
Silver Ingots of The Qing Dynasty
While the Chinese silver standard existed for over three centuries, it lacked uniformity. The system relied on various coins and silver certificates, each with their own weights, shapes, and fineness.
Foreign silver dollars, particularly those minted in the United States, gained popularity due to their standardized specifications, making them widely accepted in Chinese trade.
6- Chinese Private BanksChina's banking system also differed significantly from its European counterparts. Private banks, rather than state-controlled institutions, played a crucial role in financing trade and facilitating economic activities.
Former Yikang Old-style Chinese Private Bank
This also undermined monetary unity then. Incidentally, these private banks held considerable influence in the financial landscape and continued to play a significant role even in the early days of Deng Xiaoping's economic reforms in the late 1970s.
7- End of an EraThe Chinese silver standard, a monetary system that had stood the test of time for nearly 350 years, faced an abrupt and dramatic end in the early 20th century. This demise was largely influenced by external factors that significantly impacted China's monetary landscape.
The return of the British Empire to the gold standard¹ ( yet another way to counter China’s continued hoarding of Silver to the UK’s detriment while the US also bought it) and the US Great Depression², among other factors, contributed to the decline of the silver standard in China. As global economic dynamics shifted, China was forced to adapt to new monetary systems.
The rise of fiat currencies backed by the governments' credit and economic policies gained prominence worldwide. Fiat currencies, such as the U.S. dollar, were not linked to any specific commodity like silver or gold but derived their value from the trust and confidence placed in the issuing government. This departure from commodity-based currencies posed a challenge to the traditional silver standard and prompted China to adapt to new monetary systems.
8- What Made The West’s Fiat Work?The above is extremely important when considering where we are now. How did the West pull this off, getting China’s silver standard to collapse by introducing trust/confidence-backed Fiat? Where did this “confidence” come from?
It came from innovation, industrialization, and increased efficiencies in using other commodities for creating value. This was not about “trust/confidence” at all.
As the Western economies eclipsed them, China had to join the crowd monetarily, and use the leverage that fiat enabled, or fall behind even more. That, incidentally resulted in hyperinflation in the end.
9- Impact on China: Depression and the Rise of MaoThe United States' commitment to purchasing silver³ at a high price created a situation of depression in China. The sudden withdrawal of this support further destabilized the Chinese economy. In 1935, China abandoned the silver standard, banned private silver ownership, and introduced a new fiat currency. However, this marked the beginning of a tumultuous period for China's monetary system.
Between 1947 and 1949, the country experienced hyperinflation, further exacerbated by the Chinese Civil War and the rise of Mao Zedong's Communist Party. The collapse of the silver standard became a pivotal moment in China's history, ultimately leading to the establishment of the People's Republic of China.
One can say, the end of the Chinese Silver standard helped pave the way for Communism’s growth. One can also say, more speculatively, the policies of the UK starting with Opium trade to balance their books and then abandoning the Silver standard also contributed to Communism’s rise.
10- History Rhyming Now?Think about this in the context of now. China’s economy has eclipsed most of the West’s. So where is this “confidence” in the West’s economic superiority? There is none currently except for militarily. But..using military on a large scale to “win” loses.
Skirmish (Opium, Ukraine etc) wars do not take down a giant economy such as China anymore. As to “trust”; that is now gone with the confiscation of Russian reserves.
Now China has a Fiat-based economy with which it can also back itself in Gold if it chooses to do so. Further, it has a renewed voracious appetite for silver, ostensibly for industrial use. But it would be naive to think of Silver only as industrial when studying China’s history.
How important was Silver? It forced the British to go off their own silver standard because they did not have enough, even after opiating the Chinese economy and taking much of their wealth as an ersatz drug dealer. Now, its importance rises again.
/end
Appendix: The Rise of the Chinese Silver StandardColumbus Started ItThe Chinese silver standard, one of the longest-existing coin standards, came into existence due to the (re)discovery of America by Christopher Columbus in 1492.Spain, emerging as the first global power, established a trade network where silver from Mexico, Peru, and Chile was transported westward to China. In exchange, China provided goods like tea, silk, porcelain, and spices. This trade route relied on the Manila Galleon, which carried Chinese trade goods back to the Americas. PIC HERE
The profitability of this trade system was immense, with a return on investment of 200-300% per trip. However, with the emergence of new players like the United States and the British Empire in the international trading arena, profits began to decline in the late 18th century.China’s Silver Appetite Causes Trade ImbalancesChina's preference for silver over gold, which differed from the European preference, played a significant role in the establishment of the silver standard. Europeans had a strong demand for Chinese goods, while China showed little interest in foreign products.This trade imbalance led to the flow of silver from the Americas to China, making silver the preferred currency. The gold/silver ratio in China was 1:3, while in Europe, it ranged from 1:15 to 1:20.The UK needed to get China to buy something to rebalance their Silver supply. Enter Opium.Opium Kills ChinaThe British Empire, facing a trade deficit with China, resorted to opium cultivation in Bengal and India to balance the deficit. This led to a massive surplus in trade and the outflow of silver from China. The British forced the Chinese emperor to legalize the import of opium through two Opium Wars, leading to a significant decline in silver mining and transpacific trade volume.Despite resistance and regional uprisings, silver eventually gained official recognition as currency in China during the Ming Dynasty. However, China’s silver standard was not uniform, as coins and silver certificates of varying weights, shapes, and fineness circulated.The Opium Wars between Britain and China resulted in the massive outflow of silver from China, leading to the eventual decline of their silver standard.This lead to decline of trust in the standard in China. Foreign silver dollars eventually became preferred due to their uniformity, and it took until 1898 for China to issue its own official coins.However, the end of the Qing dynasty and the establishment of the Republic of China in 1912 brought further changes to the monetary system.
The Chinese banking system differed from European systems, with a long history of private and regionally active banks. Incidentally, this free banking system, reminiscent of China's past, was later relied upon during Deng Xiaoping's economic reforms in the late 20th century.China Forced to Abandon Silver StandardThe Chinese silver standard came to an abrupt end in the early 20th century. Factors such as Britain's return to the gold standard and the US's policy of purchasing silver at an inflated price led to a significant outflow of Chinese silver. China abandoned the silver standard in 1935, transitioning to a fiat currency and ending the era of Chinese free banking. The subsequent economic challenges, including hyperinflation, played a role in the rise of the Communist Party.The hyperinflation and economic instability under the nationalist government fueled discontent among the population, providing fertile ground for the Communist Party's message of equality and social reform.With the establishment of the People's Republic of China in 1949, the Communist Party took control of the country's monetary system. They introduced a new currency called the Renminbi (RMB), which became the official legal tender. The Communist government tightly controlled the monetary policy and implemented various economic reforms to stabilize the economy and address the consequences of the previous hyperinflation.Mao Zedong's Leadership and the Transition to Fiat CurrencyUnder Mao Zedong's leadership, China pursued a planned economy and strict capital controls. The country focused on industrialization and agricultural collectivization, which led to significant economic and social changes. During this time, the silver standard became a thing of the past, and the Chinese government maintained a monopoly over the issuance and management of currency.Economic Transformations and Market-Oriented ReformsIn the following decades, China went through various economic transformations, including the implementation of market-oriented reforms under Deng Xiaoping's leadership in the late 1970s. These reforms opened up the Chinese economy to foreign investment and trade, leading to rapid economic growth and the emergence of China as a global economic power.China's Managed Floating Exchange Rate SystemToday, China operates under a managed floating exchange rate system, where the value of the Chinese yuan (CNY) is influenced by market forces but is also subject to intervention by the central bank. The country has accumulated significant foreign exchange reserves, becoming one of the largest holders of foreign currencies in the world.The Significance of the Transition from Silver to Fiat CurrencyWhile the Chinese silver standard had a long and significant impact on the country's history, it eventually gave way to a centralized monetary system under the Communist Party. The transition from silver to fiat currency marked a turning point in China's economic and political landscape, setting the stage for the subsequent economic reforms and the country's rise as a global economic powerhouse.
1
The British Empire's shift to the gold standard meant that their currency, the British pound sterling, was no longer freely convertible to silver. This change had a ripple effect on global trade, including China's silver-based economy, as it disrupted the established equilibrium of international exchange rates.
2
The collapse of the U.S. stock market in 1929 triggered a worldwide economic downturn, leading to reduced trade, mass unemployment, and financial instability. As one of China's key trading partners, the United States' economic struggles had a direct impact on China's export-oriented economy, including its reliance on silver as a medium of exchange… sound familiar?
3
FDR did this starting in 1933 as an amendment to the Farm Relief act which was in part to help alleviate deflationary pressures. Call it QE for Silver. One effect was the destabilization of the China Economy in combination with the UK going off the Silver standard. https://www.jstor.org/stable/2138806 |
