The Silver Standard in Prewar China, A Blessing or A Curse?

Abstract: When the rest of the world sank deeper into the mire of gold shortage and the Great Depression, China, a country still adhered to the silver standard, maintained a relative independent connection to the global economy. In the initial stage of the Great Depression, Chinese economy under relative inflation benefited from the blessing of the silver standard. However, with international silver prices artificially being pushed up especially after the U.S. silver purchase act in 1934, the price of silver surged twice merely in two years. Millions of silver currency was exported from China to invest in financial speculation. Acute silver reserves shortage put a curse on Chinese economy and forced the Nanking government to abandon the silver standard in 1935. Contemporary observers recorded prewar Chinese economy dropping to serious downward spirals while macroeconomic indicators did not show obvious decreases. To figure out whether prewar China suffered from exorbitant silver price, quantitative analysis was carried out based on trusty adjusted trade indexes, separating the cause of aggregate trade fluctuations into price and quantity factors. The general conclusion is that the Chinese economy developed from 1929 to 1931 and then experienced sharp contraction from 1932 to 1935. OLS regression results further verified that widespread speculation had motivated silver flight in prewar China.