US Silver Purchase Act of 1934 Drove $256 Million in Silver Out of China, Triggering Economic Crisis

Byrne Hobart recently highlighted the significant, often overlooked, impact of United States monetary policy on China during the period leading up to and including the Sino-Japanese War. Hobart stated in a tweet, > "Hadn’t appreciated until now how much US monetary policy hurt China during the Sino-Japanese war. We bought silver, which backed their currency, and basically gave them a financial crisis during their war." This refers to the US Silver Purchase Act of 1934, which inadvertently plunged silver-standard China into a severe financial crisis.

While most major global economies adopted the gold standard, China uniquely maintained a silver-backed currency in the early 20th century. This made its monetary stability directly vulnerable to international silver price fluctuations. Initially, falling global silver prices during the early Great Depression (1929-1931) offered China a competitive advantage through currency depreciation.

The situation dramatically reversed with the passage of the US Silver Purchase Act on June 19, 1934. Enacted primarily to stimulate the American domestic silver industry, the Act mandated the US Treasury to aggressively purchase silver. This policy caused a rapid surge in global silver prices, with prices more than doubling between December 1933 and April 1935, peaking at 81 cents an ounce.

This artificial inflation of silver prices proved devastating for China. As international silver values rose, massive quantities of the metal, which underpinned China's currency, flowed out. In 1934 alone, net silver exports from China surged to approximately $256 million, a nearly 20-fold increase from the previous year, according to historical economic analyses. This outflow severely contracted China's money supply, triggering widespread deflation and a credit crunch.

The financial distress led to numerous bank failures, especially in Shanghai, and significant declines in real estate and stock markets. While some interpretations, like those by Brandt and Sargent, suggest economic resilience, other studies, including by Richard Burdekin and Jing Hu, emphasize severe contraction. Data indicates an 8.7% drop in China's GDP and a 7.4% drop in personal consumption between 1933 and 1934, alongside double-digit deflation in many Chinese cities.

To stem the silver outflow, the Chinese government implemented measures like export taxes, but these proved largely ineffective against market forces and speculative flows. Unable to sustain its silver standard amidst relentless outflow and economic turmoil, China was compelled to abandon it in November 1935, transitioning to a fiat currency. This necessary move followed years of economic destabilization, significantly weakening the nation as it faced escalating external threats, including the full-scale Sino-Japanese War that erupted in 1937.