Conclusions

The sharp decline in HSBC stock during 1934, coupled with causal effects of silver prices on Chinese wholesale prices prior to the November 1935 currency reform, simply offers further confirmation of the picture arising from available descriptive data and anecdotal accounts.

China’s exit from the silver standard in November 1935, although offering relief from silver-induced deflationary pressures, also put an end to any limit on Chinese money issuance and arguably may have speeded China’s eventual descent into hyperinflation (Friedman, 1992).^[92] The initial application of a pegged exchange rate policy appears to have been relatively successful, however, and likely would have remained tenable for much longer had it not been for the Japanese invasion. Hong Kong certainly appeared to fare quite well after abandoning silver, and confidence in the Hong Kong dollar was established through maintaining a peg with the pound sterling, at sixteen Hong Kong dollars per pound, until the outbreak of World War II in 1939 (Schenk, 2000, p. 743). It is unclear whether the lesson to be drawn from this 1930s episode is the danger of unbacked paper currency or the danger of excessive currency appreciation. The additional currency appreciation that followed the implementation of the US Silver Purchase Act certainly did appear to be more than China’s own economy could bear at the time, producing a seemingly immediate, and severe, reversal of Shanghai’s prosperity and producing still more severe deflation in the neighboring economy of Hong Kong. The US silver purchases were not the sole source of the problem, but they may well have been responsible for causing the appreciation pressures to, if not spiral out of control, at least push the degree of economic strain beyond the breaking point.