Spring 2008, Volume 18, No. 1
China During the Great Depression: Market, State, and the World Economy, 1929-1937 by Tomoko Shiroyama (Cambridge, MA: Harvard University Asia Center, 2008. xvii, 325 pages)
This excellent book does more than simply provide the first in-depth investigation of China’s experience during the Great Depression of the 1930s. Shiroyama’s research also provides brilliant insights into China’s links with the global economy, the workings of Chinese business enterprise, urban-rural integration, and state-market relations in the early twentieth century. Rather than discussing China as a whole, Shiroyama sensibly focuses on the silk-reeling and cotton-spinning industries of the Lower Yangzi, two major contributors to China’s Republican-period economic growth. Her thesis is that changes in international silver prices during the Depression destabilized China’s silver-standard currency, bringing about economic dislocation and unprecedented state intervention in China’s monetary system.
With the establishment of the gold standard as the world monetary system in the late nineteenth century, global silver prices underwent a steady decline. As practically the only country with silver as the basis of its currency, China’s exchange rate fell along with silver prices. Silver flowed into China, where it fetched a higher price than in other parts of the world. With China’s money supply increasing, price levels underwent a steady increase from the mid-nineteenth century to 1931. It was no accident, as Shiroyama points out, that the global silver depreciation, declining exchange rate, and mild inflation coincided with China’s first wave of industrial development. This global perspective makes an important contribution to modern Chinese economic history.
Drawing upon business contracts and company records uncovered in multiple Chinese archives, she shows how Chinese entrepreneurs took advantage of credit expansion during the period of mild inflation prior to 1931. Without institutions to attract large investments, textile entrepreneurs in the Lower Yangzi used debt to cope with the persistent problem of accumulating capital. Chinese banks extended credit to businesses on the assumption that the collateral that backed these loans was secure. When prices tended to increase, creditors and debtors trusted that assets and commodities used as collateral would hold their value. Yet potential instability always existed in these financial arrangements. Without government regulation, the silver that circulated as China’s currency could leave the country whenever international silver prices fluctuated. If silver flowed out of China and deflation set in, collateral would lose its value and this set of economic institutions would fall apart.
Shiroyama demonstrates that this was precisely what occurred during the Great Depression. Between 1929 and 1931, agricultural prices had already started to fall in the Lower Yangzi’s rural areas. With prices decreasing, the usual influx of funds to rural areas during harvest season came to a halt. As urban-rural terms of trade worsened, silver drained out of the countryside and into cities, producing a money shortage that undermined rural financial institutions. Without access to credit, rural households that needed loans to cope with seasonal shortages of funds found it difficult to sustain production and make ends meet.
The global devaluation of silver from 1929 to 1931 gave textile enterprises a buffer against the economic slump, but it did not last long. After September 1931, countries all over the world followed Great Britain by abandoning the gold standard and devaluing their currencies, putting China in a precarious position. International silver prices rose along with China’s exchange rate, which intensified competition from foreign goods. Export-oriented industries like silk reeling lost their comparative advantage vis-à-vis gold-standard countries; domestic-oriented sectors like cotton spinning suffered from sluggish demand as rural purchasing power decreased. Falling prices reduced the value of collateral that textile businesses counted on to secure loans, making banks unwilling to extend credit. With prices dropping and markets stagnant, many businesses had to default on their debt obligations and suspend operations.
Even as industrial enterprises fell on hard times, inflows of silver from rural areas and abroad made money abundant on Shanghai’s financial market between 1929 and 1933, where interest rates fell and banks expanded credit. Shiroyama’s analysis of this trend differs fundamentally from that of Thomas Rawski and Loren Brandt, who see increases in China’s money supply in the early 1930s as a sign of strong industrial and commercial activity. In her view, expanding financial activities did not generate more investment in industry and commerce. On the contrary, investors used their money to make speculative investments in government bonds and Shanghai real estate. After the 1934 American Silver Purchase Act pushed silver prices even higher, large amounts of silver left China and Shanghai’s financial markets crashed. The real estate market collapsed as well, further disrupting loan-debt relationships.
Shiroyama sees the currency reform of November 1935 as a major success for the Nationalist government. With the exchange rate no longer pegged to silver, China’s currency was devalued, and the deflationary trend came to a halt. Trade soon revived, paving the way for recovery. However, increased state intervention in the economy was balanced by the need to maintain public confidence in the new monetary system. The Chinese public gave up silver for the new currency, but they had doubts about the government’s monetary management. To ensure public trust in its currency, the Nanjing regime had to carefully maintain convertibility and try to keep the exchange rate stable. Monetary policy objectives gave the government little room to expand the budget by issuing notes and bonds. Shiroyama concludes that the commitment to exchange-rate stability put severe limitations on Nationalist efforts to give financial assistance to industrial enterprises and reconstruct the rural economy.
Given the strength of Shiroyama’s research and the sophistication of her analysis, this investigation of the Great Depression’s impact on China deserves to be read by all students of Chinese economic history. Like all good books, Shiroyama’s monograph raises a number of issues that need further investigation. Did the Depression lead to any economic restructuring in the Lower Yangzi, with other industries growing as silk reeling and cotton spinning declined? How did the impact of the Depression compare to that of other external shocks, such as the massive Yangzi River floods of the 1930s? Most importantly, how did the effects of the Great Depression on the Lower Yangzi differ from other regions of China that were not as closely tied to the international economy? Answering these challenging questions will fill important gaps in our understanding of the economic history of twentieth-century China.
Micah S. Muscolino
Saint Mary’s College of California
