Money Mischief_ Episodes in Monetary History - Milton Friedman [68]
The hyperinflation not only helped sweep the communists into power. Once the warfare was over, the communists were able to eliminate the hyperinflation, and that unquestionably helped to cement them in power (Greenwood and Wood 1978).
Conclusion
It is impossible to assess with any precision the role that the U.S. silver purchase program played in bringing the communists to power in China. There is little doubt that the wartime inflation and, even more, the postwar hyperinflation undermined confidence in the Nationalist government so severely that "the accession of the communists to power in October 1949 did not provoke mass hysteria amongst China's business and financial community." But that can hardly be attributed solely or even largely to the aftereffects of the silver purchase program. "The prevailing attitude [when the communists came to power] was that nothing could be worse than the previous regime's incompetence and corruption" (Greenwood and Wood 1978).
With or without the silver purchase program, the war with Japan and the internal civil war would have led to inflation, and incompetence and corruption would still have existed. However, in the absence of the silver purchase program, the Nationalists would probably have had an extra year or two during which inflation would have been low. The existence of a silver standard would have been one check on inflation, the availability of silver would have been another, and the absence of an earlier major deflation still another. No doubt the same ultimate scenario would have unrolled, but it would not have done so in the same time span; it would have taken longer. The odds for avoiding catastrophe would have been a little better—better for China, and better for the United States.
Appendix to Chapter 7
Alternative Interpretations of China's Departure from Silver
The discussion in this chapter of the China episode is an expanded version of Anna Schwartz's and my discussion in our Monetary History (1963, pp. 489–91) and offers essentially the same interpretation of the episode. That interpretation has recently been questioned by Loren Brandt and Thomas Sargent and by P. H. Kevin Chang on the basis of two more recent sets of statistical estimates.
We had taken it for granted that the export of silver (particularly in 1934 and 1935) produced a decline in China's stock of money that spread the deflation from internationally traded goods to the general price level. We also had regarded the depressed economic conditions reported by contemporary observers as largely a consequence of the monetary deflation.
There is no disagreement that the rise in the price of silver produced a severe deflation. The question is, how? And was the higher price of silver really a catastrophe for China, as we maintained, or a boon?
Estimates of gross domestic product by K. C. Yeh (1964) indicate that real income in China fell appreciably from 1933 to 1934, primarily because of bad agricultural harvests, but was not otherwise particularly depressed between 1932 and 1936 (see Brandt and Sargent 1989, table 5, p. 46). Estimates of the Chinese money supply by Thomas Rawski (1989, pp. 312–400) indicate that an increase in bank notes and bank deposits more than offset the decline in specie as a result of silver exports, so that the total quantity of money rose, not only prior to 1931 but also from 1931 on (see Rawski 1989, table C16, p. 394). Taken at face value, these two sets of estimates are inconsistent with our interpretation of the episode as a monetary deflation.
Loren Brandt and Thomas Sargent (1989) regard this additional evidence as suggesting that the episode was one of "free banking" on a specie standard in which the higher real