China and Europe: 1500-1800

The Silver Trade, Part 1

The story of silver in China is really interesting and has been misunderstood for a long time. From 1500 to 1800, Mexico and Peru produced something like 85 percent of the world's silver. During that same period at least a third and some people would say over 40 percent of all that silver eventually wound up in China. Now what was going on there and what does it mean? The Europeans of course were not shipping the silver to China as an act of donation or charity. They were getting goods in return, such as silk, porcelain, and later especially tea.

The large volume of silver that was going there and the volume of other goods that must therefore have been coming back illustrate the dynamism of the Chinese economy. Silver supported the staggeringly large export sector. This is interesting for many reasons because it invalidates one of our stereotypes of China: that China turned its back on the sea and was not interested in the outside world.

Instead, we see massive foreign trade, which was attested to by all the silver coming in. So then the next question becomes, What did they want all this silver for? What were they doing with it? The main thing they were doing with it is monetizing it. They were making it their money supply.

The Chinese Demand for Silver [VIDEO]

TRANSCRIPT: Traditionally in the West, we've always told the story the other way around, in which the key to the story is that the Europeans find this supply of silver, and the Europeans are the ones who want spices, silk, porcelain, et cetera. They go out to China. They don't have very much to sell that the Chinese want. And so they sell silver. When you tell the story that way, then it always sounds as if it's European demand, European desire, European initiative that drives the whole story. And the Chinese are treated essentially as passive. They had goods the Europeans wanted, but the Europeans had no goods they wanted. Why would that be? Why would these people have no consumer desires? That's a little odd from a modern perspective. And so the story then always becomes that silver is money that is given to the Chinese to cover what we would today call a balance-of-payments deficit.

Well, there are two big problems with that story. One is the one that I already mentioned, that the Chinese were sucking silver out of Japan, well before they started sucking it out of Latin America. But the second is that, interestingly enough, during the same period in which these huge amounts of silver are flowing into China, small but not trivial amounts gold are actually going in the other direction, out of China towards Europe, because the exchange rate between silver and gold is more favorable for gold in Europe, so the gold flows that way, the silver flows the other way.

The reason why this really matters (is) because it makes us see that it's not "money" in the modern sense that the Chinese were demanding; it's a particular commodity—silver—that they want to use in certain ways, partly for money but also for candlesticks and hair pins and jewelry and all sorts of other things. And once you see it that way, once you see this not as a balance-of-payments deficit caused by a lack of Chinese demand for anything, but simply a commodity trade in which the Chinese have a very strong demand for this commodity that they can't produce, mainly silver, while the Europeans have a demand for certain commodities they can't produce at that point, such as silk and porcelain, and later, tea, then you see a world in which the Chinese are every bit as much active, desiring, consuming, and so on and so forth as the Europeans are.

And previously, we had tended to have a story in which either we treated the Chinese as being somehow so virtuous that they had no consumer needs or no consumer desires, and so the Europeans had to give them this "money." And, in fact, there's one famous scholar who writes about how all the silver of Latin America was dug up from the ground in Latin America only to be shipped across the Pacific and eventually to be buried again in China. There's this sort of image of passivity, inertness ... the silver comes to China and "does nothing." Well, no, it doesn't "do nothing"; it fuels this enormous demand for a medium of exchange. It's tremendously important.

So we either saw the Chinese as, sort of, so virtuous that they were above commerce, or so undesiring and uncurious and so forth, that they had no consumer demand. That also makes them sound peculiarly "unready" for modernity. But in fact, they're right in there. They're demanding a particular commodity for which they have a tremendously important use.

For more or less coincidental geological reasons, China simply has very little in the way of precious metals: not much gold, virtually no silver, reasonable amounts of copper but not massive amounts. However, the huge Chinese population, something on the order of a quarter of humanity for most of the time since we've had decent records, developed an unusually dynamic, commercially sophisticated economy, which needed a medium of exchange: money. And that posed an enormous problem, which the Chinese solved in the Song dynasty by inventing the world's first paper money.

Chinese paper money, Ming dynasty.
North Wind Picture

This again is one of the signs of early modernity: that they managed to find a medium of exchange that was extraordinarily cheap to produce. Paper money cost very little, but it required a certain technological sophistication, such as good printing. And again, it required social institutions: paper money is only as good as people's willingness to trust it.

For a couple hundred years, China had a paper currency that worked quite well, centuries before anybody else had it. This didn't last, however, because when later dynasties, the Yuan and then especially the early Ming, got into fiscal crises, they did what many governments in many moments have done: they tried to solve the problem by printing money, and they undermined confidence in it.

And once burned, people are shy for a long time. It will be centuries before they trust paper money again. It meant that this huge commercial economy had to be supplied with something else, with coinage. And what China turns to, for a whole series of reasons that are imperfectly understood, is silver.

Silver Turns to Opium

The drying room of an opium factory in India, late nineteeth century.
North Wind Picture Archives

Eventually the Europeans, for reasons of their own, became reluctant to continue shipping so much silver to East Asia. This is largely because they preferred to hoard the silver so that they could use it to pay mercenaries in their ongoing wars. They started looking for something else to export to China and found that they were in a real bind because there were very few things that they produce more efficiently than the Chinese could. The thing that eventually filled the gap left when the Europeans tried to cut back on their silver shipments was opium.

Opium served a whole series of functions for the British in particular. It helped make their new colony in India profitable by providing a very ready revenue source. It saved on the silver that they no longer wanted to ship and, of course, the story of the opium trade to China then gets us into a whole different period of world history and different kinds of links between China and the outside world.

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