The Chinese silver standard: Parity, predictability, and (in)stability, 1912–1934

This paper reassesses the debate on the end of the Chinese silver standard (CSS) in the mid 1930s. One side claims the U.S. Silver Purchase Act of June 1934 drained China of silver, which produced deflation and economic crises that destabilized the CSS. Others argue the CSS collapsed because its operating mechanism was inherently unstable. We look for evidence of instability in the CSS 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 estimates show uncovered interest parity and long-run arbitrage often held under the CSS while its instability peaked during the U.K. and U.S. recessions of the early 1920s and in 1931 during the Great Depression. We argue these results show the demise of the CSS was for reasons other than the U.S. Silver Purchase Act of June 1934 or an own design flaw.