There is a segment from this article that I want to unpack:

The Great Depression was a global crisis—almost. Every significant economy was devastated, with one notable exception: China. The reason was simple. In 1929, the US and every other major nation pegged their currencies to gold. As the economic historian Barry Eichengreen has described, adherence to this standard punished countries by imposing “golden fetters" that led to crippling deflation. The fixed exchange rates of the gold standard helped transmit the monetary shocks around the world.

Clearly, the silver standard didn't help China in the later years, but I'm keen to understand how China's economy fared so well in these specific years: 1929-1931. When I read the above, I'm not exactly sure what the logic is. My best hunches were:

  • Price of gold increased faster than the price of silver because gold is more of a "haven" asset, and thus providing China with more competitive exports
  • Or, the peg to silver itself wasn't the main factor, but merely being pegged to something different than the other countries which helped China avoid the transmission effects

But after looking at historical prices of both metals leading up to and following the Great Depression, I saw divergence, but not dramatic divergence. So my intuition has been depleted.


How did the Silver Standard insulate China from the broader economic contractions?


As argued by Ho (2014) the silver standard helped China because downward trending silver prices were producing mild inflation during the period 1929-31 and also helped to devalue exchange rate between gold and silver.

First, as already discussed in this Economics.SE answer, mild inflation is important for an economy to avoid excessive unemployment due to nominal rigidity of wages especially in the recession. In fact this is one of the many reasons why the conventional wisdom of combating recession is expansionary monetary policy (see Blanchard et al. Macroeconomics a European Perspective).

Furthermore, it is worth noting that Great Depression was so severe in US because US monetary policy went in exactly opposite direction to the above mentioned conventional wisdom. As famously argued by Friedman and Schwartz in the monetary history of the United States the Great Depression would arguably be only mild recession if Fed would not decide to pursue disastrous contractionary monetary policy.

Second, as discussed by you and also in the article you linked increasing gold prices and decreasing silver prices allowed the exchange rate depreciate vis-à-vis gold standard currencies and currency depreciation is another conventional way of countries fighting recessions (again see Blanchard et al mentioned above). Normally, this policy can be risky because other countries could also competitively devalue their currency leading to potential currency wars, but in this case as their currency depreciated gold standard currencies appreciated.

Also, I disagree with your assessment here:

But after looking at historical prices of both metals leading up to and following the Great Depression, I saw divergence, but not dramatic divergence. So my intuition has been depleted.

According to data from macrotrends the price of gold rose between Jan1929-Dec1931 from approximately ${\\\$}315.38$ to ${\\\$}402.71$ (growth rate of $\approx +27\%$), while price of silver decreased from ${\\\$}8.07$ to ${\\\$}5.17$ (change of $\approx -35\%$) in the same period. Or in another terms the ratio of prices $Gold/Silver$ changed from approximately $39$ to $78$ (approximately doubled) - that is quite a large change in exchange rate. I would be surprised if such appreciation of Gold vis-à-vis Silver would not result in some non-trivial boost for Chinese exports.


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