A 'Trojan Horse' in Daoguang China?: Explaining the flows of silver (and opium) in and out of China

Economic historians have offered several explanations for China’s cycles of silverisation and de-silverisation in the 18th and 19th centuries focusing either on exogenous supply shortages in world silver markets or an outflow of silver as a consequence of opium imports. This paper challenges both existing “supply-side” and “demand-side” explanations. Section two shows that the supply side change was not a decline in the quantity of silver but in the quality of imported silver coins after the 1820s. Section three shows that this led to a decline in demand because China did not perform as a classic bi-metallic system as usually assumed. Because China lacked monetary sovereignty, the Chinese adopted a foreign coin, the Spanish American peso as the preferred means of payment in some areas of southern China, and increasingly further into the interior. Section four presents evidence for the exchange rate premium of the Spanish American silver coin over other coins and, more importantly, over silver sycee in China after the 1790s. This allowed for large-scale arbitrage by means of acquiring silver sycee in China for export, while bringing coined silver to China. Underlying this sort of 'dollarization' in China was opium. Hence section five shows that opium imports did not trigger the outflow of silver. Instead the flight of silver in fact seems to be the cause for large opium imports.