Silver, fiduciary money, and the Chinese economy, 1890–1935

There are debates in the existing literature over whether silver outflows from China due to the American Silver Purchase Act (ASPA) of 1934 resulted in an economic crisis in China. However, all arguments in the debate rely on the assertion that the ASPA caused severe deflation—a claim with weak support in the data. In this paper, we investigate the bigger picture by using a newly consolidated historical Chinese dataset covering 1890–1935 to investigate the long‐run relationship of silver outflows, international trade, and fiduciary money. We find a mitigation effect of terms of trade after a decrease in the silver price triggered silver outflows from 1890 to 1934. More importantly, we find that the issue of fiduciary money was responsive to silver outflows such that China's aggregate money supply was not severely affected by the outflows. As a result, we clarify the puzzle of why China encountered neither serious deflation nor an economic crisis when the ASPA occurred.