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Effort Against Silver Outflow During the World Silver Market Fluctuation (1933 - 1935)


 

From 1928 to 1932, the international silver price dropped by 50%, leading increasing amount of silver to China. After the World War I, an economic crisis broke out in most capitalist countries and many countries changed to adopt the gold standard, which caused surplus of silver supply and sharp drop of silver price in the world market. The mean price of silver on New York Commodity Exchange in 1928 was USD 0.585 per ounce, and dropped to USD 0.283 in 1932, down by 51.62% within four years. Falling silver price in the world, increase of silver inflow, deterioration of international balance of payment and inflation of imported commodities put a heavy burden on the Chinese government to repay foreign debts.

From 1933 to 1935, silver price was raised by the U.S., more than doubling within the three years, forcing silver to flow out of China. At that time, the U.S. was a silver producer significantly impacted by the falling silver price. In order to manipulate the world silver market, pass on the economic crisis and address the pressure from domestic silver mine owners, U.S. began to implement a new silver policy. It abandoned the gold standard in March 1933, making the purchasing price of silver rise by 50% on December 21. On June 19, 1934, the U.S. Government published the Silver Purchase Act, specifying that silver should account for a quarter of American gold and silver reserve. At the end of March 1934, with the gold reserve worth USD 8.599 billion, the U.S. needed a silver reserve worth USD 2.855 billion to keep the gold to silver ratio of 3:1. Besides the silver and silver coins it already held, the U.S. still needed to purchase 1.1 billion ounce of silver, equivalent to the world output of silver in 6 years. U.S. purchased silver on the markets of London and caused soaring silver price. The market price of silver in the world reached up to USD 0.81 per ounce, which was three times that the record low on New York Commodity Exchange in 1932. That shocked the world.

Huge fluctuation in the silver market brought a deadly strike to China where a silver standard was implemented. Outflow of large amounts of silver reserve caused tight money supply and declined price at home, and it became difficult for those in the industrial and commercial communities to turn over funds, resulting in bankruptcy of many banks, factories and stores in succession. The economy was on the edge of collapse.

With domestic economic depression and financial turmoil, Bank of China tried to find solutions for remedy.

I. Appealing to the U.S. government. Bank of China was a major member of the Shanghai Inter-bank Association, which telegraphed to the U.S. president on February 2, 1934 to present that increase of silver price was unfavorable for both China and U.S..

II. Suggesting imposing tax on silver export to the government. In March 1934, the Inter-bank Association suggested that the Ministry of Finance impose export duty on silver. On April 5, 1934, the Ministry of Finance ordered the Customs Service to impose a 2.25% export duty on silver export, and announced the Ordinance on Imposing Tax on Silver Export on October 14, 1934, specifying a 10% duty on export of silver-standard currencies.


Sample of a 100-yuan customs duty treasury bill in 1934

III. Participating in the Foreign Exchange Market Stabilization Committee. In order to stabilize the foreign exchange market, the Ministry of Finance established the Foreign Exchange Market Stabilization Committee on October 17, 1934, including 3 committee members delegated respectively by the Central Bank, Bank of China and Bank of Communications, and Bei Zuyi, the manager of Bank of China Shanghai Branch and manager of the Foreign Affairs Department of the head office, was elected as the president of the Committee. Meanwhile, it collected working capital of 100 million yuan which was borne by the Central Bank, Bank of China and Bank of Communications according to a ratio of 40%, 40% and 20%.

IV. Fully supplying silver needed by the market. Facing the market with insufficient silver and tight money, the restive public rushed to collect silver dollars. In order to prevent potential trend of cash withdrawal, Bank of China fully supplied silver dollars needed by the domestic branches. Within the two months from November 12, 1934, silver dollars transported from Shanghai to the inland amounted to over 57 million yuan, among which Bank of China contributed the most. Meanwhile, Bank of China Shanghai Branch issued more one-yuan banknote to ease the demand for silver dollars. Because of insufficient stock of one-yuan banknote in the treasury, the note already printed with Beijing as the issuing place was changed into Shanghai to supply to the market.

V. Importing silver dollars for the Ministry of Finance. In March, 1935, the Ministry of Finance entrusted Bank of China and Bank of Communications to purchase silver dollars worth 20 million yuan from Hong Kong in Hong Kong Dollar and foreign currency securities.

VI. Suggesting incentives for import of silver. On December 24, 1934, Zhang Jia'ao, the general manager of Bank of China, and Chen Guangfu, the managing director of Bank of China, suggested Kong Xiangxi formulating the policy of rewarding for silver import. The president of the Foreign Exchange Market Stabilization Committee, Bei Zuyi (the manager of Bank of China Shanghai Branch), also proposed to the Ministry of Finance on January 12, 1935, to formulate a method for rewarding foreign banks to input silver.

VII. Concluding a "Gentlemen's Agreement" with foreign banks. As foreign banks enjoying exterritoriality manipulated Shanghai's financial market to some extent, the Nationalist Government hoped them to assist China in preventing silver outflow, and dispatched T.V. Soong in the name of the newly appointed Chairman of Bank of China to hold meetings with representatives of the Shanghai Foreign Bank Association and to conclude a "Gentlemen's Agreement" without compelling force. The Foreign Bank Association convened an extraordinary meeting on April 16 according to the Agreement, and announced to sponsor the sound inflation policy of the Nationalist Government by pausing silver export; and that all banks should prevent from any correspondent banks from exporting silver.

In 1935, the U.S. government stopped purchasing large amounts of silver from London commodity market and the world silver price began to decline. Combined with measures taken by different communities at home, the domestic silver market was stabilized and the unrest of silver came to an end.

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