A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898–1933

by Debin Ma (London School of Economics and Hitotsubashi University)  and Liuyan Zhao (Peking University)

The full paper is due to be published in The Economic History Review.

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Despite the political turmoil, the early 20th century witnessed  fundamental economic and industrial transformations in China.  Our research documents the most important but neglected aspect of this development:  China remained on the silver standard until 1936 while many countries remained on gold.  Nonetheless, the Chinese silver regime defies easy classification because  its silver basis was traditionally not in coinage, but in the form of privately minted ingots called sycee, denoted by a unit of account called tael.  During our study period, sycee circulated alongside standardized silver coins such as Mexican and later Chinese silver dollars. We know relatively little about the operation of the silver exchange and monetary regime within China, in contrast to the large literature on the gold standard during the same era.

We present an in-depth analysis of China’s unique silver regime by offering a systematic econometric assessment of Chinese silver market integration between 1898 and 1933.  As a result of this integration, the dollar-tael exchange rate, the  yangli, became the most important indicator of the Chinese currency market. We compile a large data set culled from contemporary publications on the yangli across nineteen cities in Northern and Central China, and offer a threshold time series methodology for measuring silver integration comparable to that of gold points.

We find that the silver points between Shanghai and Tianjin, the two most important financial centers in Central and Northern China, declined  steadily from the 1910s for the rest of the period (Figure 1).  Our estimates of silver points from the daily rates of nineteen cities during the 1920s and 1930s also reveal that there was no substantial difference in the level of monetary integration between the Warlord Era of the 1920s and the Nanjing decade of the 1930s. Figure 2 provides a simple linear plot of  the distance between Shanghai and the estimated silver points of those cities paired with Shanghai during the 1920s and 1930s. This Figure shows a positive relationship between silver points and the distance from Shanghai, indicating the rise of a monetary system centered on Shanghai.

Our silver point estimates are closely aligned with the actual costs of the silver trade derived from contemporary accounts. Moreover, the silver points help predict corresponding transaction volumes: the majority of large silver exports from Shanghai occurred when the  yangli spread was above the silver export points;  only limited flows occurred when it fell within the bounds of the silver points. The econometric results reveal that monetary integration between Shanghai and Tianjin improved in the 1910s—precisely during the Warlord Era of national disintegration and civil strife—and these improvements spread to other cities in Central and Northern China in the 1920s and 1930s.

Our research provides a historical analysis of the causes of monetary integration, attributing a central role to China’s infrastructure and financial improvements during this period. One plausible driving force was the rise of new transport and information infrastructure, for example, the completion of the Tianjin-Nanjing Railway, and the Shanghai-Nanjing and Shanghai-Hangzhou Railways constructed between 1908 and 1916, which linked the Northern and Southern China. Compared with road or water transport, railroads offered much faster, cheaper and safer delivery, an advantage far more significant for high-value silver shipments than low-value high-bulk commodities.

Another, more important factor was monetary and financial transformation indicated by the rise of a modern banking system from the end of the 19th century. Although it was the government that issued national dollars, banking communities played a key role in defending its reputation and purity. Overtime, the ‘countable’ dollar outperformed the ‘weighable’ sycee as a medium of exchange, gaining an increasing share in China’s monetary system. This eventually paved the way for the currency reform of 1933, which abolished the sycee and the tael, establishing the dollar as the sole standard. A notable monetary transformation was the increasing popularity of banknotes. The system of Chinese bank note issuance was largely run on a model of free banking with multiple public and private banks, Chinese or foreign, issuing silver-convertible banknotes based on reputation mechanism. Thus, the increasing note issue from the 1910s provided a much more elastic currency to smooth seasonality in the money markets and enhance financial integration.

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To contact the authors:

Debin Ma (D.Ma1@lse.ac.uk)

Liuyan Zhao (zhly@pku.edu.cn)