Bloomberg View’s Stephen Mihm gives his readers a useful history lesson, looking at how US silver policy in the 1930s may have plunged China into Communism.
The Great Depression was a global crisis — almost. Every significant economy was devastated, with one notable exception: China. The reason was simple. In 1929, the U.S. and every other major nation pegged their currencies to gold. As the economic historian Barry Eichengreen has described, adherence to this standard punished countries by imposing “golden fetters” that led to crippling deflation. The fixed exchange rates of the gold standard helped transmit the monetary shocks around the world.
China, alone among the world’s major economies, operated under a silver standard in which the currency was pegged to a specific weight of that metal. This had the effect of allowing its currency to depreciate, and largely shielded it from the worst effects of the Great Depression. The economic historian Ramon Myers concluded that “China simply did not experience any national economic depression as the world depression deepened.”
As the Depression worsened in the early 1930s, the world’s biggest economies came off the gold standard, allowing them to expand their money supplies and stimulate demand. As plenty of scholars have observed, countries that did so recovered more quickly. The U.S. took the plunge in 1933, during the first year of Franklin Roosevelt’s presidency.
That was the first blow to the Chinese economy, ruining the competitive advantage it possessed when all other countries remained on the gold standard. As its currency began to appreciate, making its goods more expensive in world markets, its balance of payments turned negative, and imports exceeded exports. The worst was yet to come.
In the U.S., Senator Key Pittman of Nevada was hatching a plan that would prove the undoing of China. Pittman, the chairman of the Foreign Relations Committee, professed to be concerned that China was stuck with a silver currency that had limited purchasing power in global markets. If Pittman could drive up the price of silver, he proclaimed, China would see its purchasing power increase, enabling it to purchase more goods from the U.S.. Both countries would benefit.
China did not.