China during the Great Depression: Market, State and World Economy, 1929-1937

The Great Depression in China: Market, State, and World Economy (1929-1937)

This book summarizes the impact of the global economic crisis of the 1930s on China, focusing on the role of silver prices, the relationship between the state and the market, and China's place in the international monetary system.

Readers can expect to understand:

• How the global depression affected China's economy and society.
• The factors that led to the Chinese government's decision to abandon the silver standard.
• How this crisis shaped the modern Chinese economy.

Core Content:

1. China's Silver Standard System and its Vulnerabilities:

• China uniquely adhered to the silver standard when most nations adopted the gold standard, linking China to global silver markets but also making it vulnerable to price fluctuations.
• Since silver was a commodity to other countries but currency to China, international price changes directly impacted China's economy.
• The lack of barriers between the domestic monetary system and global silver trade amplified vulnerabilities.

2. Impact of International Silver Prices:

• 1929-1931: Silver's relative drop against gold standard currencies protected China from early depression impacts.
• 1931 onwards: Countries abandoning the gold standard devalued their currencies, driving up silver prices and the value of Chinese currency, damaging Chinese industry and trade.
• The US Silver Purchase Act of 1934 accelerated silver outflows, plunging China into deflation.

3. Mass Expectations and Debt Structure:

• A long period of silver devaluation led to public expectations of continuing inflation, which impacted debt and investment decisions.
• The debt structure was such that the Chinese economy faced significant difficulties when it came to the economic downturn; businesses found it impossible to secure further credit from banks.

4. Government Intervention and Currency Reform:

• The economic crisis led to a historic shift, with the government abandoning "laissez-faire" in favor of interventionist policies.
• On November 4, 1935, China adopted a managed currency system abandoning the silver standard and introducing the "fabi" (legal tender).
• The move increased government control over currency supply, but also tied its hands.

5. Economic Policies and the Limitations:

• The government's primary goal was a successful currency reform even at the expense of domestic governance.
• While currency reform brought stability, it limited the government's flexibility in implementing other economic policies, especially for industrial and agricultural revitalization.

6. China and the Global Economy

• China’s close ties to the world economy shaped its policy choices.
• Maintaining stable exchange rates was prioritized to facilitate trade and investment, reflecting an understanding of China’s interconnectedness.

Q&A:

Q: What was the main cause of China's economic problems during the Great Depression?

A: The main cause was the vulnerability of China's silver standard monetary system to fluctuations in international silver prices, which directly impacted China’s industry and trade.

Q: Why did China abandon the silver standard?

A: China abandoned the silver standard due to the devastating effects of the Great Depression, which left Chinese economic authorities with no choice. The move was an effort to protect itself from global deflation and to regain control over its own monetary policy.

Q: What were the limitations of the Chinese government's response to the crisis?

A: The government was so concerned about successful economic reform that they sacrificed governance. In order to succeed in currency reform, it needed to cut back the expenditure and thus sacrificed industrial and agricultural revitalization to some extent.