Money Mischief_ Episodes in Monetary History - Milton Friedman [59]
CHAPTER 7
FDR, Silver, and China
The U.S. silver purchase program that was initiated in 1933 by President Franklin Delano Roosevelt, under the authority of the Thomas amendment to the 1933 Farm Relief Bill, was the end product of a decade or more of political pressure by the silver lobby to "do something" for silver. The farm lobby supported silver purchases partly because it favored any measure that would produce inflation and thereby raise the prices of farm products—prices that had plummeted during the Great Depression. In addition, the farm lobby wanted to get the support of the silver lobby for other price inflation devices contained in the Farm Relief Bill. President Roosevelt supported silver purchases primarily to assure that congressmen from the silver and farm states would support other New Deal legislation.
The other inflation measures in the Farm Relief Bill had already demonstrated their capacity to produce inflation before any silver was purchased. However, the silver purchases did contribute to the growth in high-powered money that, from 1932 to 1937, supported an increase in the general price level of 14 percent, in wholesale prices of 32 percent, and in farm products of 79 percent.
The silver purchase program "did something" for silver by raising the price of the metal promptly and sharply, providing a large subsidy to producers of silver. However, the program also drove China—the only major country still on a silver standard in 1934—off silver, and it led other major users of silver for monetary purposes—notably Mexico and many Latin American countries—to reduce or eliminate the silver content of their minor coins. The program thereby assured the final and all but complete demonetization of silver.
The proponents of the silver purchase program had claimed benefits to China as one of its advantages. In fact, the program was a disaster for the Chinese republic, then ruled by Chiang Kai-shek. By virtue of being on a silver standard, China had been largely insulated against the worst effects of the early years of the Great Depression. But the U.S. silver policy imposed a major deflation on China in 1934—36, accompanied by troubled economic conditions, thereby undermining popular support for Chiang Kai-shek. More important, the policy denuded China of its monetary reserves and drove it off silver and onto a fiat paper standard. The war with Japan and the internal civil war between Chiang's Nationalist government and Mao Zedong's communists would undoubtedly have led to inflation in China in any event. However, the U.S. silver policy accelerated the onset of inflation and increased its magnitude, contributing to the hyperinflation of 1948–49. And, as Chang Kia-ngau wrote, while "many historical forces contributed to the collapse of the Nationalist government after World War II,...the direct and immediate cause which overshadowed all other factors was undoubtedly the inflation" (1958, p. 363). This sentiment is echoed by an American historian, C. Martin Wilbur, in his foreword to a slightly later book by a Chinese scholar on the Chinese inflation: "There seemed little doubt that China's wartime and postwar inflation was one of the prime factors which caused the downfall of the Nationalist government and the conquest of the mainland by the Chinese Communist Party" (Chou 1963, p. ix; see also Young 1965, p. 328). As a result, the U.S. silver purchase program must be regarded as having contributed, if perhaps only modestly, to the success of the communist revolution in China.
The Pressure for Silver
Like old soldiers, old causes never die; they only fade away. Supposedly interred by the defeat of Bryan in 1896, the silver issue repeatedly resurfaced.
Toward the end of World War I, "the government of India was having great difficulty in securing enough silver to provide for