ON NOVEMBER 4 the world was startled by the news that China had abandoned the silver standard. But this step merely rendered de jure a condition which had existed in fact since October 15, 1934. It was to the connected measures [i] that foreign attention was principally drawn. Chief among them is the nationalization of the demonetized metal. If there is considerable question whether this can be carried out completely, it must be remembered that in China reforms do not bear the literal signification that they do in the West. Consequently it would be an error to look for the full execution of this decision. What, then, caused it? It is admittedly true that the American silver purchase policy helped economically to create the conditions calling for remedial measures. Nevertheless the view that Nanking's seizure of silver is to be explained solely as an answer to that policy may be only half true. The Nanking Government, in addition to its economic harassment, had been under political pressure from Japan. So the assumption of control over the principal Chinese bank reserves could be viewed with equal justice as a desperate move to bolster up the power of the Nanking Government vis-à-vis Japan. Evidently this fact, more than any alleged connivance by the British, is what has chagrined, not to say angered, the Japanese.

In a previous article [ii] the writer showed that, in putting a ban on free silver exports on October 15, 1934, China had divorced the foreign value of its currency from silver. Henceforward Chinese currency fluctuated in foreign value independently of silver. Though China thus unlinked itself from the silver standard, nevertheless the metal was still allowed to circulate internally. That is to say, the country[iii] could have been non-technically described as remaining on the silver standard internally, in that notes and metal were freely interconvertible. In this respect the act was different from the measures which the United States took in 1933 to sever the dollar from gold. In the latter case gold payments internally as well as externally were banned. One reason for the difference in action as between China and the United States was that China is a country using hard money, whereas the United States, for the great bulk of its payments, uses banknotes and bank checks. On November 4, however, the Nanking Government completed its imitation of the American example as to gold. It called in, or nationalized, the silver in circulation, as the United States did its gold, for sequestration in government vaults. China is thus formally divorced from the silver standard internally as well as externally. The decree nisi has been made absolute, and to currency management there has been added more currency management.

Few more memorable steps have been taken in monetary history. Traditionally China and silver have been inseparable. In China the metal has hitherto occupied a three-tiered throne -- as a standard of value, as a medium of exchange, and as a store of value. These uses for silver go back to time immemorial -- back, indeed, to the dawn of China's contacts with ancient Europe. For very little silver is mined in China itself. Most of the silver in use before the advent of the modern trading era originated in the mines of ancient Greece and Spain. It entered China via the overland route in exchange for Chinese silks, teas, precious stones, ivory, and objets d'art. Alison, the historian of Rome, actually attributes Rome's fall to its loss of silver to the Orient. In the Middle Ages, too, as we read in Marco Polo, the trade was considerable. Columbus, who had read Marco Polo, discovered America accidentally in his quest for Cathay and its fabulous riches. He and his successors renewed Europe's store for China buying, the additional means being provided out of the mines of the New World. Silver formerly entered China in bullion form. When the sea route was opened up, and the modern trading era started, the metal began to reach China in coins. To this day one may find scattered throughout the country specimens of the old trade dollars in use by the early traders. Early America played a notable part in taking this contribution to China. The old clipper ships used to load up sometimes with nothing but "pieces of eight" for the run around the Cape of Good Hope.

All told, the "hoards" accumulated down the ages amount at present to about one and three-quarter billion ounces.[iv] In itself this store has been an important factor in the silver market. To the market, however, China's real importance has lain in its use of silver as its currency standard. Being the last country of any importance to keep its money on a silver basis, it was the marginal buyer and its requirements dominated the price of the white metal.

Nationalization has been justified by the failure of the controls set up in 1934. The effect of the severance of the tie between the foreign value of Chinese currency and soaring silver was that silver commanded a better price outside than inside China. Something had to be done to close the gap lest the silver still left circulating in China should flow out in search of profits. Consequently an export tax was united to a so-called equalization fee intended to rise or fall with this outside price so as to equalize the two prices. This was on October 15, 1934. Four days later an exchange stabilization committee was set up. Its establishment marked the decision of the Chinese Government to control the exchange market through intervention, i.e., through buying or selling exchange. To this end, the authorities secured directorial control over the three leading Chinese banks and obtained a "gentleman's agreement" from the important local foreign banks pledging coöperation. Thus China appeared to be equipped to "manage" or "regulate" the foreign value of its currency, which had hitherto been left to the vagaries of the silver market. Government-bank coöperation subsequently allowed for relaxation in the strict "equalization" of the imposts.

The smugglers, however, could not be controlled. Though a death penalty for smugglers was subsequently added to the armory of stabilization, nevertheless silver continued to leak out of China. Smuggling in China is an art superior even to the efficiency of the foreign-officered Chinese Maritime Customs Service. Officially, the country since October 1934 has parted with a minor quantity of metal. But the illicit traffic has been considerable. How much has escaped through the adjacent territories of Hongkong and Japan is not known. Imports into the United States, however, afford some clue. In the nine months ended with September 1935 the total receipts amounted to $197,965,000, as compared with a yearly world production, at current prices, of around $120,000,000. Most of it came from the great silver market, London. No data are available as to ultimate sources. But for just the month of September, Japan alone reported exports to London of 20,793,000 yen worth of silver. Now the total annual output in Japan is only about 8,000,000 yen and the country had no stocks on hand. Obviously most of the exports came from China.

This continued exodus of silver has intensified deflation in China. In the article already referred to, the writer gave the details of past losses and of the dimensions of the consequent deflation. Between January and September of 1935 the commodity price index in Shanghai fell further from 110.9 percent of the 1926 level to 105.4. It stood at 118.1 in October 1934. Money remained tight, business stagnant, bankruptcies frequent, and several banks closed their doors. Foreign trade continued to decline. In September 1935, as compared with September a year ago, American sales to Great Britain, Canada, Germany, Italy, Australia, the Argentine, Chile, Cuba, Egypt, Greece, Ireland, Mexico, Norway, Portugal, Switzerland, Turkey and Spain increased. To China, however, they fell from $3,971,000 to $2,462,000, the arguments and statements of the "silver Senators" to the contrary notwithstanding.[v] Rumors of inflation hung over the markets, causing a lively flight into foreign currencies and gold bars, and there was a recession in the outside price of silver.

All these circumstances militated against any kind of management of the external value of the yuan adumbrated by the decrees of October 15, 1934. Chinese exchange was then 34 cents. It rose to 41 cents in May, and on the day before the nationalization order was quoted at 30½ cents. The major part of the fall occurred in October in anticipation of the suspension of the silver standard, the drop in the last two weeks of the month being 20 percent. Such extreme fluctuations, so disruptive of any stability in the import-export business, encouraged the Nanking Government to take the bold course of nationalizing silver.

Is it possible for the state in China to seize the circulating silver? The writer has been dubious. Just before the decrees, Eduard Kann, financial adviser to the Chinese government, writing in Eastern Exchanges, a technical service published in Vienna, said: "The adoption of a so-called managed currency offers not only great difficulties in a country where the population has for centuries been accustomed to the handling of hard money, but is liable to bring about open rebellion." It is not in the nature of things that the Nanking Government can commandeer all China's one to two billion ounces. The fact that it could not prevent wholesale smuggling is itself proof of disability in this respect.

It is far easier to stop at the frontiers a relative handful of smugglers in actual possession of metal than to impound the metallic possessions of 400,000,-000 people. One reads without astonishment, then, of the refusal of North China bankers to part with the metal, of the Japanese promise to protect those who refuse, and the Nanking Government's bland reply that the metal would be considered seized in those northern vaults! Silver, moreover, is as esteemed by private persons as government is disesteemed. China's regard for silver is not so æsthetic as the Hindu's. It is more realistic. In the turmoil in which some portion or other of China has always been engulfed, silver is rated an incomparable store for savings. Consequently people in China are not likely to stand in queues with their silver, as so many people did with gold in the United States and England, when those countries took steps similar to those now taken by China. Even the private Chinese who sold willingly to smugglers in return for convertible currency will be very chary about selling for the new democratic inconvertible currency.

Nevertheless, the Government should be able to collect a sizable hoard. In Shanghai alone the bank stocks on November 1 amounted to 326,540,000 yuan, or about 250,000,000 ounces. These are mostly held by Chinese banks. They will be subject to seizure, and, as private Chinese are forced to draw upon their silver reserves for buying purposes, the flow to Nanking may be continuous. With this stock the Government will have some funds for "managing" the yuan on the foreign exchange market. In addition, it controls some balances abroad, and will gradually be able to count upon resumption of remittances from Chinese overseas, the flow of whose money back to China has been interrupted by the depression and by the uncertainties attaching to the exchange.

The "management" will be directed, it is reported, to the maintenance of the present exchange rate with the pound and the dollar. For many months past these units have been more or less on stable terms. If a break should occur, there appears no question in experts' minds that the Chinese yuan would follow the pound sterling, as the Japanese yen has done these three years past. Given the present promise of pound-dollar stability, given also a responsible fiscal policy in China, there are grounds for thinking that there is enough basic strength in China's international economic situation to prevent depreciation in coming months below the present rate of 30 cents to the yuan. Some measure of exchange stability after so much fluctuation should encourage a capital flow to China. And on the basis of the present depreciation it should also stimulate China's exports to a reviving world which is in need of them.

The new Chinese policy is thus a complete volte face. A year of trying to block exports of silver proved fruitless. So the Government has decided to take charge of the leak officially, and, instead of interposing obstacles in the fulfillment of the American Silver Purchase Act of June 1934, will henceforward turn itself into an official source of supply. Thus some of the profits on sales will go to the Government instead of smugglers. It is as if Nanking had said to Washington, "If you insist on paying a fancy price for silver, then, instead of resisting it, we might as well take advantage of it."

Dr. H. H. Kung, Chinese Minister of Finance, does not put the policy exactly in this way. In his zeal to copy the American example as to gold he has copied the curious explanations at one time current about the divorce of the dollar from metal. He says: "The new monetary policy means neither suspension of banknote convertibility nor abandonment of the silver standard for the currency. It is, rather, a suspension of the circulation of silver currency in the market." [vi] Silver, of course, will now be in the government vaults, but this is much different from making that silver a standard for currency. By standard is meant the free and unlimited convertibility of currency into metal and vice versa at a fixed price. This is not now the case in China either at home or across the foreign exchanges. Under the nationalization order, the silver clause in contracts has been abrogated and paper money made unlimited legal tender for those debts as well as for current payments. Thus the fact that the government has unobtainable silver in vaults is no more significant to an average Chinese than if it had feathers or any other useful commodity in them. As for "convertibility," this has a technical significance in relation to metal. All that the Chinese yuan can now be converted into is either goods and satisfactions at home, or foreign exchange. Dr. Kung's reference to "convertibility," therefore, is just like saying that Chinese money from now on will buy something!

This Chinese dethronement of silver has been in the making ever since the passing of the American Silver Purchase Act. That measure gave the American Executive such enormous buying powers that the United States has become the decisive influence in the silver market. It also gave the Executive control over the Chinese currency because that currency was linked to silver. At that time the Chinese were already chafing under Japan's assumption of political hegemony. The silver law gave China another master -- in the vital sphere of currency. Undoubtedly it has made China more compliant to Japan. No one can doubt that the silver policy has hurt China. At the same time, the Chinese would have been in trouble economically (as this writer in his previous article has already explained) even if there had been no American silver policy. To this extent the policy has been extremely useful politically to Nanking in that it has given the Government the excuse -- the foreign foe argument -- to extend its power over Chinese bank reserves and Chinese banks.

Many circumstances surrounding the decisions are lost in the Chinese confusion. Some of this confusion is due to the presence in China of Sir Frederick Leith-Ross, Chief Economic Adviser to the British Government. As announced, Sir Frederick's visit was merely exploratory. Apparently it was decided upon only after a British proposal for an international mission had failed to win the support of either Washington or Tokyo. Still, Secretary Hull, at his press conference on June 28, issued what was described at the time as "an open invitation" to Sir Frederick to stop off at Washington on his way to the Orient. Sir Frederick, however, chose to go through Canada. In an interview given in Montreal, he said: "There were newspaper stories to the effect that I would go to Washington, but I wasn't officially invited, and my government is not in the habit of sending representatives to places without a formal invitation."[vii] In Japan, where the British emissary stopped over, he apparently had a chilly reception. The Nichi Nichi said: "To do anything important in China without Japanese understanding will be hopeless to attempt for Great Britain, because this will be attended by great risk and uncertainty." To add to his troubles, Sir Frederick found himself the object of Japanese anger when China issued the November 4 decrees. Japanese commentators jumped to the conclusion that Japan had been outwitted and that the move was engineered by Sir Frederick on the promise of a British exchange loan.

Army officials in Japan saw in the decrees their worst suspicions confirmed. For some time they had been taking issue with the Japanese diplomats over the right way in which to win complete hegemony in China. The diplomats had been pleading for a "negative" policy of negotiating with General Chiang Kai-shek in Nanking. Army spokesmen questioned the General's "good faith." The unexpectedness of the monetary reforms, together with the suspicion that Britain had stolen a march on Japan in influencing the Nanking Government, came as powerful support of the army point of view. For the moment the diplomats in their chagrin seemed to be half ready to agree with the Army that the time had arrived to pursue their old plan of detaching North China from Nanking under cover of an autonomy movement.

In regard to the Chinese currency, the British have avowedly never discussed a British loan, which would violate the Consortium agreement of 1920. According to Sir Frederick Leith-Ross, they are however sympathetic with the proposal for an international loan. They contend that China's desertion of the silver standard is in conformity with so many foreign suggestions in the past that on more than one occasion the country has been promised a loan as the reward for such reform. The last recommendation was the Kemmerer report of 1929.

To the United States the Chinese reform would formerly have been as welcome as to other nations. The opinion today is all wrapped up in domestic silver politics. In this connection the main effect of the monetary measures in China is that the country which for so long has been silver's major prop, buying in the fourteen years before 1931 about 30 percent of the current world production, has resigned the worrying about silver to the United States Treasury. The aim of the American silver policy was a more extensive use of silver as a monetary metal. The result is progressive demonetization and debasement.

[i] Summarized in the London Times of November 4 as follows: (1) A new paper currency shall take the place of the ancient silver dollar. (2) The existing banknote issues shall be withdrawn and replaced by one single note issue. (3) This note issue will be the monopoly of a modern Central Bank. (4) The government-owned Central Bank will be reconstructed and converted into a modern Central Bank, which will be charged with maintaining the stability of the currency. (5) The new paper currency will be inconvertible. (6) The formal monopoly of the note issue will come into force in two years. (7) The Budget is to be balanced within 18 months. (8) All silver will be nationalized on much the same lines as gold has been nationalized in the United States.

[ii] "Silver, East and West," FOREIGN AFFAIRS, July 1935.

[iii] In certain parts of China, however, silver yuan (dollars) were already at a premium with convertible notes, so even this is not strictly correct.

[iv] Estimates of Chinese silver resources vary widely. The latest is by J. A. Yavensky, in Finance and Commerce (Shanghai), October 9, 1935. He puts the total at 1,275,000,000 ounces. Mr. Yavensky's estimate before American silver purchases started was 1,500,000,000 ounces.

[v] Compare Senator Key Pittman's speech in the Senate, April 11, 1935: "The myth [of the hurt to China and Chinese trade] is gone. It is dispelled. The predictions are untrue. The statistics with regard to the rise of silver throughout the world, the buying of silver by governments, the buying of silver everywhere, show that silver is a precious metal, that silver is scarce, and that silver must be had for monetary purposes throughout the world. The statement that we are ruining China is perfectly absurd." (Cong. Rec., p. 5608.) The Tobacco Association of the United States, noting the decline in the tobacco trade with China as contrary to the expectation of its exporter members, now brands the Act as not only "against our interests, but destructive of goodwill in China toward the United States."

[vi] New York Herald Tribune, Nov. 7, 1935.

[vii] Christian Science Monitor, August 28, 1935.

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  • H. B. ELLISTON, Financial Editor of the Christian Science Monitor; for some years Chief Editor of the Chinese Government's economic publications
  • More By Herbert B. Elliston