Introduction

Although the post-2001 dollar depreciation discussed in Chapters 1 and 2 was not part of any officially declared government policy, the 40% deval­uation of the dollar against gold in 1933-1934 reflected US policymakers’ determination to free the economy from persistent deflationary pressures and was accompanied by a rapid acceleration of domestic money supply growth (cf.

¹ As quoted in T’ang (1936, pp. 76-77). ^[71] purchase program, these silver-based currencies appreciated in value. This, in turn, made China and Hong Kong’s exports more expensive abroad and less competitive in world markets.

China experienced a large outflow of silver in 1934 that led to a liquidity shortage in Shanghai late in the year and exacerbated the pressures associated with the appreciating value of the national currency. The Chinese authorities came under increasing pressure to offset deflationary pressures and imposed administrative measures in October 1934 to try and limit the outflow of silver. Following these measures, price deflation was slowed relative to that endured by Hong Kong but smuggling activities still produced sizeable silver outflows. In November 1935, China broke entirely from the silver standard and Hong Kong immediately followed suit, in each case adopting a new exchange rate peg with the pound sterling. Whereas Hong Kong’s exchange rate peg was sustained until the outbreak of World War II, the new Chinese currency, the fapi, did not fare so well. The fapi, in fact, underwent a seventeen-hundredfold depreciation over the eight years of the 1937— 1945 Sino-Japanese War before (literally) disappearing during the ensuing Chinese Civil War. Although China’s suffering in the early 1930s was not entirely caused by US policy actions, the short-term and long-term damage arising from sudden upward pressure on the external value of its currency is likely a lesson that is hard to forget.