The Chinese Silver Standard: Parity, Predictability, and (In)Stability, 1912–1934

This paper reassesses the debate on the demise of the Chinese silver standard (CSS) in the mid-1930s. One side contends the U.S. Silver Purchase Act of June 1934 drained China of silver, which caused deflation and economic crises. Others argue the CSS collapsed because the way it operated was inherently unstable. We evaluate these claims by estimating Bayesian structural VARs with drifting parameters on new China-U.K. and China-U.S. samples from April 1912 to September 1934. Our results show that uncovered interest rate parity is seldom rejected, instability in the CSS peaked during the U.K. and U.S. recessions of the early 1920s and the Great Depression, impulse response functions are unchanged from January 1934 to September 1934, and estimates of natural rates of the CSS indicate arbitrage was expected to maintain stability of this monetary system. We argue from this evidence that neither the U.S. Silver Purchase Act of June 1934 nor a design flaw were responsible for the end of the CSS.