Freshwater macro, China's silver standard, and the yuan peg

1934 Chinese silver dollar with Sun Yat-sen on the obverse side. The ship may be in freshwater.

I've been hitting my head against the wall, these past few weeks trying to understand China's monetary policy, I may have started in the distant past by the need to work harder than doing a project, especially with the country's experience during the Great Depression. In a study break, I was surprised to see that Paul Krugman's recent post topic freshwater macro bears a striking resemblance to my own admittedly esoteric reading Chinese history of money.

Unlike most countries, China is in the Great Depression a silver standard. Minded, at least until it is made of freshwater economists people Krugman's post, it has been to protect China from the first stage of the Great Depression, the silver standard imposed on it only by a terrible betrayal of the challenges inside the country devaluation of silver prices. This will ultimately lead China to abandon the silver standard. This consensus view is embraced Milton Friedman and Anna Schwartz's A Monetary History of the huge favorite in the United States.

This consensus is a decisive non-fresh water to take things, because it depends on money illusion as sticky prices and features, the conclusions generated. After all, given the huge rise in the price of silver, silver, as long as China's prices and wages, mutually beneficial price, you can adjust smoothly downward, then forced China internal devaluation would be relatively simple. However, if the necessary adjustments, hindering the rigid then the price will be locked in unrealistically high levels, resulting in unsold inventory, unemployment and economic recession.

Simply add more color, China's internal devaluation is both fell swoop imposed on it by US President Franklin D. Roosevelt, the first from 1933 by the German Union of gold in the United States, then start by buying the highest quality silver number in 1934. The first step, in the United States and helped push up prices include all silver in the World ignite economic recovery. As for the second, Roosevelt fulfill campaign promises to those who support him to live in a strong lobby to thank the western silver mines silver Feng states. Silver, it has dropped from 60 cents in 1928 to 1932 less than 30 cents on the dollar rebounded above the level in 1928, as shown in the chart. According to a contemporary account, Arthur N. Young, United States National government financial adviser, "China through the well-off to a deep depression."

Freshwater macro, China's silver standard, and the yuan peg

As I mentioned at the beginning, this consensus is a freshwater economists, there are less than fresh challenge them, Thomas Sargent (who was once known as "distilled water"), in 1988 Theses with Loren Brandt (RePEc link). The new data show that China's GDP growth in 1933, only a slight decline in 1934, this poor harvest due to interference, rather than money. So much a brutal internal devaluation.

According to Sargent and Brandt, it seems, "there is inflation and output growth between China little or no Phillips curve trade-off." Speak in non-Econo, deflation.not.bad. They put forward several reasons, including the name of a short duration contracts and village mechanisms "bargain loan payments and adjustments case of crop failure." In essence, China's prices were very quickly adjust to silver incredible rise.

Four years later, Friedman replied (not Schwartz), he was called to the freshwater economists "very imaginative and theoretically attractive explanation." (RePEc link here). His view is that foreign trade data, which is obviously more than the output data Sargent and Brandt rely on a solid statistical basis, indicating that imports have declined from 1931 to 1935 on the basis of a true from 1933 to 1935 , especially sharp so we return to the story, which seems to be on the rise, silver does occur in significant drag on China's economy, although Friedman reluctantly allows the fact that perhaps he may be "overestimated" the actual impact of silver deflation.

So this war economic giant desalination lead story, which Roosevelt silver purchase * Some * might have a detrimental effect on China. China will continue to stay in the silver standard, although it may have any predetermined final fine-tuning is a bank run, in the financial center of Shanghai opened 1934 deposits rose steadily withdraw from their accounts at the expected depreciation of the white metal of some combination of currency , foreign exchange controls, and a full exit from the silver standard, this process in 1988 Kevin Zhang overview paper (and Friedman cited). This self-realization mechanism, in essence, the recent run of Greece is very similar, it may encourage the authorities to sever the linkage of money, silver, put it on a legal standard management. China's economy continues in 1935 and 1936 performed well, although all ended in 1937 with the Japanese invasion.


As I mentioned at the beginning of these events and their freshwater and non-freshwater economists considered the way in my opinion have some relevance to modern China's monetary policy. As in 1934, China has achieved a certain degree of imported functions in US monetary policy. The yuan effectively pegged to the dollar, so any change in the purchasing power of the dollar led to concurrent changes in the purchasing power of the yuan.

There is an asterisk to that. In 1934, China is a relatively open economy, and today China's use of capital controls. Through a fixed asset, these controls allow cross-border arbitrage more difficult, so as to China's monetary authorities have a certain degree of latitude in establishing a do under the Chinese monetary policy. However, capital controls increasingly porous over the years, especially the efforts of internationalization of the RMB, which requires a more open capital markets, upward momentum. By maintaining the linked exchange rate, and become more open, China's monetary policy has become more like it was in 1934.

As best I can tell, the Fed's main exports to China Xiye Lun is increasingly tight monetary policy. One initiative in this regard, though imperfect, is astonishing rise of the dollar in the past year. Given its PEG, the RMB has been along for the ride. Tightness, another sign of the United States is Scott Sumner of nominal GDP growth in the gaming market, which shows the name of 2015 is expected to decline from about 5 to 3.2 percent. This is quite a drop. In a longer time scale, that the Fed has always been the missing 2%, the core personal consumption expenditure price target since 2009, or that the employment cost index just print the lowest monthly increase since records began.

If China's price is so flexible, Brandt and Sargent in 1934, claiming that they, the dollar again tightened, like the rise of silver, it is a cause for concern in China. However, if the rigid Chinese prices to some extent, then, we've got a Friedman and Schwartz explain imported from Yellen tight monetary policy may have a very real impact on the Chinese economy, and the The size of the rest of the world to China.

Interestingly, since 2014 China has been expanding its monetary authorities allowed the renminbi against the US dollar trading band. The PEG, which authorities since 2005 was gently pushed, has entered the stopped state. The last time China allowed to stop crawling peg higher during the 2008 credit crisis, stop Scott Sumner once and say that saved the world from depression.

China's gross domestic product [Edit: GDP growth] continues to drop to a new low for decades, and monetary authorities consistently punch their stated inflation target. In the suspended revaluation, the Chinese government is likely to be similar to the silver standard in the implementation of Friedman and Schwartz style outlet to save their economy from tightening of US monetary policy. This time, it's not a crazy silver purchase plan, that is at fault, but the Fed's strange silence, in order to reduce the interest rate at 0.25% or less what. In addition, from Yellen crunch can only provoked more than offset China ...... unless of course, thinking of the kind of basic Wallace and Brandt rooted with the Chinese authorities decided to allow domestic prices to take adjustment the full impact.

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