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vis-a-vis the U.S. dollar, which meant that the Chinese dollar appreciated in terms of the pound sterling, the rupee, and the yen, while continuing to depreciate vis-a-vis the U.S. dollar—to 19 cents at the end of 1932. For the first time China began to feel the effects of the world depression, though sheltered somewhat by the continued decline in the price of silver in terms of the U.S. dollar, the limited monetization of its economy, and the large-scale use of copper coins by the general populace. The Chinese balance of payments deteriorated sharply, and in 1932 China had to export gold and silver to pay for the excess of imports over exports. Internally, wholesale prices peaked in 1931 and then fell sharply, and economic conditions deteriorated, in the judgment of most contemporary observers (Salter 1934, p. 6; Wignall 1978b, [>], [>]).

The adverse effect on China of the departure of Britain and other countries from the gold standard in 1931 was reinforced by the Japanese occupation of Manchuria in September 1931. At the time, China was governed by the Kuomingtang, under Chiang Kai-shek, although regional warlords ruled some areas and the communists were leading a rebellion. "Chiang Kai-shek's response to the Manchurian occupation was indicative of China's weakness. The reality was accepted and no resistance offered. The Kuomintang leader concentrated instead on building up his army to meet the inevitable Japanese aggression. A strong army was also required to suppress the Communists and the regional power bases of the remaining warlords. These military demands were a crucial reason for the growing budgetary deficits of the Kuomintang. The debilitating effect of a long background of deficit financing was a prime factor in China's subsequent hyperinflation" (Greenwood and Wood 1977a, p. 27.)* Nonetheless, Chiang had considerable success in unifying the country. "The regional powerbases of the warlords were undermined, while by 1934 the Communists were driven back to the northwestern mountain retreat of Yenan" (Greenwood and Wood 1977a, p. 27).

The temporary advantage in foreign trade that China had gained by its silver standard was not just eroded, but was eliminated and converted into a major disadvantage when the United States, too, went off gold in 1933. The Chinese dollar appreciated further with respect to the pound, the yen, and the rupee and, for the first time, with respect to the U.S. dollar, from 19 cents at the end of 1932 to 33 cents at the end of 1933—almost all the way back to the 1929 level. True, prices in terms of the dollar and other currencies were rising, offsetting some of the effects of the appreciation of the Chinese dollar. But the U.S. price of silver rose much more sharply than prices in general, so that only a small part of the appreciation was offset. As a result, Chinese exports fell sharply, by 58 percent compared to 1930, and exports of precious metals continued. While most of the rest of the world was beginning to recover from the Great Depression, China was, according to contemporary observers, entering into the severest phase of its internal depression.*

The adverse effect on China of the U.S. departure from gold was strongly reinforced by the U.S. action to "do something" for silver, which was a major factor in the near doubling of the price of silver during 1933 and its more than tripling at its peak in April 1935. At that point the Chinese dollar was valued on the market at 41 cents. The price of silver subsequently declined, as noted earlier, but by then the harm to China had been done. China went off the silver standard on October 14, 1934, by raising the export duty on silver and imposing an adjustable "equalization charge." It went onto "what was essentially a paper standard" (Wignall 1978b, p. 38), though an official statement that China was leaving the silver standard was postponed until November 3, 1935, when the government announced a sweeping currency reform.

Had silver been simply a commodity in China, the rise in the price of silver would have been a welcome windfall,