“Empire of Silver: A New Monetary History of China”, by Jin Xu (2017) ISBN 978-0-300-25004-6. 374 pages.
Joseph Needham, a 20th Century British scientist, struggled for decades with what has come to be called Needham’s Puzzle: Up until around the 1500s, China’s science & technology put it far ahead of other civilizations. As late as 1820 AD, China was the world’s largest economy generating nearly one third of world GDP. So why didn’t the Industrial Revolution occur in China?
Equally, we could ask why the Industrial Revolution actually did occur in the remote British Isles around the 1800s? It seems as if everyone wants to claim part of the credit. Agriculturalists have pointed to prior advances in farming, which had the side effect of driving many poor Brits off the land and providing the labor force for those dark Satanic mills. Geologists have pointed to Britain’s rich endowment of coal and other minerals. Technologists have pointed to the brilliant advances of a small number of British inventors. Lawyers have talked about the centrality of English patent law.
Now comes economist Jin Xu to claim that the development of the British financial system was a key factor. Currency systems are subtle and complicated. The author quotes John Kenneth Galbraith that answers to the question of what is money are “invariably incoherent”. Ms. Xu argues that China could not have an Industrial Revolution because it failed to develop an appropriate financial system. As a measure of the challenge of currency – while most of us think of Isaac Newton as a giant figure in physics, he spent more of his life (and arguably made more impact) as the long-time head of the Royal Mint.
However, the discussion of Needham’s Puzzle is only a minor part of this fascinating story of dynasties, wars, international affairs, finance, and currencies. While reading about the monetary history of any country might seem like a form of cruel & unusual punishment, Ms. Xu manages to make her book interesting and engaging on a number of different levels.
First, this is an English translation of a Chinese book by a Chinese author for a Chinese audience. It is interesting to see the world from China looking out, rather than the usual outsider looking in. Naturally, the author assumes that the dates of, say, the Duanping period are as well-known to her intended audience as those of the Napoleonic era would be to a Western audience. Fortunately, this translation usually includes AD dates.
Second, China’s long tortured experience with using a precious metal (silver) as a currency should give today’s proponents of a return to the Gold Standard pause for thought. Contrary to expectations, a precious metal currency demonstrably did not solve China’s economic problems nor ensure stability of prices.
Third, there is an awful warning for us today in China’s history of repeated attempts to use a paper currency, always ending in excessive money-printing, inflation, and collapse.
Finally, Ms. Xu is clearly a talented writer, and her translator, Stacy Mosher, has done a fine job of the notoriously difficult task of translating Chinese into readable English.
The book starts back in the Shang Dynasty around 1600 BC and ends with the Republican government which lost the civil war in 1949. To oversimplify a complex story, China’s rulers were far ahead of Europeans in adopting paper currencies instead of metals. From about 1023 AD onwards, they repeatedly tried to use paper currency. And repeatedly, those attempts ended in inflation and collapse of the currency. As the author notes (p. 108):
“Crossing centuries of history, the dimwittedness and stubbornness of rulers were replicated to such an extent that there seems to have been no progress whatsoever. The paper-currency experiments of the Song, Jin, and Yuan all ended in inflation …”
(Those were the dynasties from 960 – 1368 AD).
Much of the book focuses on the Ming and Qing Dynasties (1368 – 1912 AD), whose rulers again tried to introduce paper currencies, and again could not resist the temptation to devalue that currency by uncontrolled printing. The people learned to trust silver rather than paper.
China has little gold and only limited silver deposits. Thus the early use of silver as a currency relied on bullion from trade with Japan. Following the European colonization of the Americas and the discovery of silver in the Andes in 1545, China gained a new source. As much as half of the bonanza of New World silver found its way to China as Europeans exchanged it for products such as tea & silks, providing the expanding supply of metal which came to circulate as a bewildering array of official & unofficial currencies. Reluctantly, China’s Ming and Qing rulers came to accept that the people preferred silver to paper. But the prices of commodities in silver were hardly stable.
When the English launched their shameful Opium Wars in the 1840s, the flow of silver into China reversed. In addition to selling their opium for silver, the victorious English imposed heavy reparations on China which had to be paid in silver. Silver currency began to drain from China. This was exacerbated in the 1890s when Japan attacked & defeated China, and also demanded reparations in silver. A further blow came in 1934 when the US passed the Silver Purchase Act for its own domestic reasons. Unintentionally, this severely impacted China by changing the terms of international trade to China’s disadvantage, resulting in the impoverishment of many of the Chinese people.
To Ms. Xu’s credit, she writes about these events in an even-handed, matter-of-fact kind of way. There is no hint of the resentment of the “Century of Humiliation” which drives much of China’s international behavior today. Indeed, Ms. Xu asserts: “… China’s backwardness did not begin with the Opium War; it was a habitual condition that can be traced back to even before the Ming.” (p. 208). She ascribes China’s belated development to systemic failure, part of which was the failure to develop an efficient currency and financial infrastructure.
When the Qing Dynasty collapsed in 1912, in part because of currency problems, the following Republican government again tried to introduce paper currency. Once more, money printing ballooned as the government struggled with warlords and later with Japanese invaders. Inflation and the eventual civil war defeat of the Republican government were inevitable consequences.
In this long, complicated tale, it is hard for the reader to avoid comparisons with the West today. As one example, in the later Qing Dynasty (late 1800s), the parasitic overhead class grew unsupportably as government administration expanded to provide make-work employment for the growing numbers of educated people.
There are also warnings from China’s history to those who hold precious metals in an effort to avoid a government’s debasement of its own paper currency. When the late Qing Dynasty found itself in deep financial trouble around 1900 AD: “It compelled the people, under threat of arrest and forcible house search, to surrender their gold, silver, Mexican dollars and all foreign currency to the central bank”. (p. 214)
Buried in with all of this serious material are many fascinating snippets of information. Who knew that the name of Tokyo’s Ginza commercial district means “Silver Seat”? Who knew that the US did not adopt the Gold Standard until 1900?
There is much that is relevant to today’s world in this thought-provoking volume. But we should remember the author’s caution: “History is a piece of wind-battered paper, with misreadings and obstructions everywhere”. (p. 225).
Is it worth taking the time to read and absorb the lessons from this grand sweep through the history of money in China? Ms. Xu notes in her Afterword: “Economists pay attention to opportunity costs, and the greatest cost in human life is time; life is short, so we should spend our time on only the best things.” (p. 299). I think the time spent reading this book qualifies.