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enabling China to dispose of its large stock of silver on highly favorable terms. But because silver was China's money, the rise in the price of silver had produced a major deflation, which in turn had led to severely troubled economic conditions. "Imports declined while exports became increasingly uncompetitive. Industrial production drew to a halt with the low level of activity in the economy, unemployment rose and prices slumped. The effect of the deflation on agriculture is clear from the fall of the price index of agricultural produce from 100 in 1926 to 57 in 1933. This represented an appalling decline in income, and hence purchasing power, for those living by cultivation of the land" (Greenwood and Wood 1977a, p. 32).* According to Arthur N. Young, who served as a financial adviser to China from 1929 to 1947, "China passed from moderate prosperity to deep depression" (1971, p. 209).

An adverse effect of the U.S. silver policy on China was neither unpredictable nor unpredicted. In a February 1934 report, Sir Arthur Salter, who had been "invited by the Chinese Government to become for a few months an official adviser to the National Economic Council," wrote: "There are great dangers and difficulties in any departure from the present silver basis of the Chinese dollar. Without that, however, China can only escape the injury of further deflation if silver ceases to rise substantially in relation to the foreign currencies and to the world prices of commodities. The principal factor is the U.S.'s silver policy. It seems important, therefore, that China (whose real interest in silver is overwhelmingly greater than that of any other country) should make her position clear to the Government of that country" (Salter 1934, unnumbered prefatory page, [>]). Note that this was after much of the damage had already been done. In a subsequent editorial of September 3, 1934, based largely on Salter's report, the New York Times wrote: "One of the odd aspects of our silver policy is that it was originally advocated precisely to help the 'silver-using' countries and to 'restore the buying power of the Far East.'...The only important country on the silver standard, however, is China, and those who are intimately acquainted with the Chinese situation are practically unanimous in holding that raising the price of silver can only be injurious to that country." The Times editorial concluded by noting that the American silver policy might "have the ironic result of driving the only important remaining silver country on to the gold standard."* In fact, the policy drove China onto a paper standard.

In March 1934, the U.S. Treasury sent Professor James Harvey Rogers of Yale University to China to report on the effect that higher silver prices would have there. Like Salter, Rogers reported that the effect would be highly adverse, going so far as to write to Secretary of the Treasury Henry Morgenthau in October, after most of the damage had been done, that "to proceed with this new policy [bidding up the silver price]—before giving the Chinese government an opportunity to adjust to the resulting monetary disturbances—seems to me to border very closely on international irresponsibility" (Young 1971, p. 205).

The effect on Chinese internal prices of the departure from the silver standard was prompt but, until 1937, moderate. According to annual averages for Shanghai, wholesale prices, which had fallen by 23 percent from 1931 to 1934, fell another 1 percent from 1934 to 1935 and then rose 24 percent in the next two years. The situation changed drastically, however, when Japan invaded China in the summer of 1937. "Government expenditure soared skyward to meet the cost of suppressing the Japanese invasion, and later to finance the civil war against the Communists" (Greenwood and Wood 1977a, p. 25). No doubt government expenditures would have soared even if the United States had not driven up the price of silver, and China would sooner or later have left the silver standard and gone on a paper standard. But the U.S. action assured that the paper standard