Money and Government: A Study of China and Japan from a Historical Perspective (SpringerBriefs in Economics) 9811688737, 9789811688737

Table of contents :
Preface
Contents
About the Author
1 A Preliminary Introduction
1.1 Definition of Money
1.2 The Role of Money
1.3 Money and Government
1.4 Money in Premodern China
1.5 A Comparison Between China and Japan
1.6 The Copper-Silver Price Ratio in the Qing Period
References
2 Puzzles of the Monetary Regime in Premodern China
2.1 Introduction
2.2 Three Puzzles
2.2.1 Low Extraction of Seigniorage
2.2.2 Asymmetric Treatment to Copper Cash and Silver Bullion
2.2.3 Cautiousness for Paper Note Issuing
2.3 Some Previous Studies
2.4 Preconditions and Motivations
2.5 Weak but Despotic Government
2.5.1 Strength Might Be Different for Different Periods
2.5.2 Strength Might Have Different Dimensions
2.6 A Theoretical Framework
2.6.1 The Condition of No-extracting Policy
2.6.2 The Marginal Benefit of Silver Currency Provision
2.6.3 The Cautiousness to Paper Note Issuing
2.7 Conclusions
References
3 The Divergence Between China and Japan
3.1 Introduction
3.2 A Comparison of the Monetary Regimes Between China and Japan
3.2.1 The Monetary Development in Modern Japan
3.2.2 The Monetary Development in Modern China
3.2.3 Some Other Differences in the Modernization Process Between China and Japan
3.3 The Explanations in the Previous Studies
3.3.1 A Perfect Plan May Not Be Necessary
3.3.2 Knowledge and Technology Could Be Imported from Abroad
3.3.3 Financial Support for Monetary Reform
3.3.4 Conflicts Between Central and Local Governments
3.3.5 Nationalist Sentiments
3.4 The Motivation of Monetary Reform
3.5 The State Capacity
3.6 Definition and Measurement
3.7 The Spontaneous Order
3.8 Conclusions
References
4 ``The Worst Currency'' or ``The Best Arrangement''?
4.1 Introduction
4.2 ``The Worst Currency''
4.3 ``The Best Possible Arrangement''
4.4 A Simple Analysis Based on Optimum Currency Area Theory
4.5 Conclusions
References
5 An Epilogue
5.1 The Recent Monetary Policy in Japan
5.2 The Conflicts Between China and USA
5.3 The Challenge of Monetary Digitalization
References
Index

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SPRINGER BRIEFS IN ECONOMICS

Qing-yuan Sui

Money and Government A Study of China and Japan from a Historical Perspective

SpringerBriefs in Economics

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Qing-yuan Sui

Money and Government A Study of China and Japan from a Historical Perspective

Qing-yuan Sui Yokohama City University Yokohama, Japan

ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-981-16-8873-7 ISBN 978-981-16-8874-4 (eBook) https://doi.org/10.1007/978-981-16-8874-4 © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

This book is dedicated to Prof. Masayuki ¯ Otaki (18th November, 1955—2nd July, 2018).

Preface

This book is motivated by two simple but under-researched questions. The first one is regarding the way of money supply. Nowadays, everyone believes that unless there are enough reasons for market failure, monopolistic supply under bureaucratic planning will immediately bring inefficiency. However, money seems to be an exception. In every major country of today’s world, money is monopolistically provided by the government, under bureaucratic planning. Why? The standard theories do not sufficiently explain this point; hence, it may be helpful to see money from a historical perspective. The second question is regarding the differences between China and Japan in the monetary modernization process. In 1850s, when the Western powers started reaching the East Asian area, the monetary systems in China and Japan showed similar premodern characteristics: the government only partially involved in money supply; multiple mediums, including bullions, foreign coins, officially or privately minted coins, paper notes, were circulated as money in the same area and the exchange rate between different kinds of mediums was complicated and confusing. However, after a relatively short period of reform, Japan unified the monetary standard under the complete control of the central bank. In contrast to Japan, although the monetary reform was strongly requested by domestic reformers and foreign powers, China continued its primitive and chaotic monetary regime until the 1930s. What factors influenced the differences between China and Japan? While The Great Divergence, which is the differences in the path of economic and social development between Europe and Asia, especially between Western Europe and China, has been a hot topic recently, the divergence between China and Japan in modern times should be equally, if not more, important. In the mid-nineteenth century, China and Japan had nearly similar cultural backgrounds and technological development compared with European countries. The comparison between China and Japan will help us to analytically focus on some more fundamental issues. In almost all countries of today’s world, the monetary system is centralized. Money is supplied monopolistically, and so, uncompetitively, by a special government-like institution called central bank. Although the degree of government intervention to economic activities differs among different countries, from period to period, this style vii

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of money supply is quite common in the capitalist economies like USA or Japan as well as the socialist economies like China or North Korea. In the planning era, money had never been eliminated from the so-called socialist countries, no matter how the extremists denied the function of money. Moreover, money has not been supplied without planning or state’s management in the so-called capitalist countries or market economies at least since World War II. Money is important because it is positioned at the center of the overlap area between market and government. It is the most important commodity in a market economy for most agents, from the rich to the poor. However, the standard economic theory does not clearly explain why money is needed or who should take the responsibility to provide it. In reality, no market functions could be realized without using certain kind of money. Hence, talking about market mechanism without money, as is introduced in a standard microeconomics textbook, is like talking about motions in a vacuum. Although such discussions may be full of theoretical interests, we have no ways to understand the principles of object movement on earth, let alone to build, say, an efficient and safe traffic system based on such discussions. In this book, I mainly focus on the period from the mid-nineteenth century to midtwentieth century. The phrase of premodern monetary system refers to the monetary system before 1930s for China and before 1880s for Japan. I do not introduce the general monetary history. Instead, I focus on and discuss some selected issues. I present a short preliminary introduction of the monetary system in China and Japan in premodern era in Chap. 1. In Chap. 2, I then discuss why China accomplished the creation of a single monetary standard so late. By the 1930s, China was one of the few countries in the world where the government could not effectively manage the monetary system. China successfully unified the monetary standard for the first time in 1935. This inquiry is motivated by the fact that China has often been described as a traditional oriental despotic country. Based on this opinion, it is natural that China should have been among the first countries in the world having state-managed fiduciary money. However, in the real history, the opposite occurred. I construct a simple model based on principal and agent theory to explain the puzzle. In Chap. 3, I compare the monetary modernization processes between China and Japan. I argue that the differences of motivation caused by some historical episode and the differences of state capacity caused by the historical evolution determined the consequences and differences in monetary reforms between China and Japan. Chapter 4 discusses the following question: given the management and regulation of state in premodern China, can we observe any aspects that are consistent with the theory? Here, I based on Mundell’s theory on optimum currency area (OCA). I suggest that the movement of copper-silver price ratio was quite consistent with the prediction of OCA. In that sense, the monetary regime in premodern China did have certain rationalities by itself. However, this kind of arguments cannot sufficiently justify the monetary system, because many other important factors, especially the role of the state, cannot be simply taken as given.

Preface

ix

My discussions are deeply related to the topics of the role of government that encompasses many contemporary challenges and frictions in the world, including the unconventional monetary policy in Japan and the recent conflict between China and the USA. It also relates to the recent development of digital currency, such as libra, etc. To the extent to which the trust on intrinsic valueless commodity needs enforcement, these new devices could not serve as money without cerntain kind of support from the government. I believe that a good understanding of the function of money and its relationship with government could contribute to the welfare of people and reduce many unnecessary and ideology-based conflicts between countries with different cultural backgrounds. I discuss these points in the last chapter. Yokohama, Japan

Qing-yuan Sui

Acknowledgments I thank Akiyoshi Horiuchi, Masaharu Hanazaki, Debin Ma, and Masuyuki Nishijima who served as commentators at different developmental stages of this project. I also wish to thank the Development Bank of Japan Inc. for their support in this work.

Contents

1 A Preliminary Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Definition of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The Role of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Money and Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Money in Premodern China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 A Comparison Between China and Japan . . . . . . . . . . . . . . . . . . . . . . . 1.6 The Copper-Silver Price Ratio in the Qing Period . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 4 5 6 7 8

2 Puzzles of the Monetary Regime in Premodern China . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Three Puzzles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Low Extraction of Seigniorage . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Asymmetric Treatment to Copper Cash and Silver Bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Cautiousness for Paper Note Issuing . . . . . . . . . . . . . . . . . . . . . 2.3 Some Previous Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Preconditions and Motivations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Weak but Despotic Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1 Strength Might Be Different for Different Periods . . . . . . . . . 2.5.2 Strength Might Have Different Dimensions . . . . . . . . . . . . . . . 2.6 A Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.1 The Condition of No-extracting Policy . . . . . . . . . . . . . . . . . . . 2.6.2 The Marginal Benefit of Silver Currency Provision . . . . . . . . . 2.6.3 The Cautiousness to Paper Note Issuing . . . . . . . . . . . . . . . . . . 2.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11 11 13 13 14 14 15 19 20 21 21 22 24 25 25 25 26

3 The Divergence Between China and Japan . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.2 A Comparison of the Monetary Regimes Between China and Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 xi

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Contents

3.2.1 The Monetary Development in Modern Japan . . . . . . . . . . . . . 3.2.2 The Monetary Development in Modern China . . . . . . . . . . . . . 3.2.3 Some Other Differences in the Modernization Process Between China and Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Explanations in the Previous Studies . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 A Perfect Plan May Not Be Necessary . . . . . . . . . . . . . . . . . . . 3.3.2 Knowledge and Technology Could Be Imported from Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Financial Support for Monetary Reform . . . . . . . . . . . . . . . . . . 3.3.4 Conflicts Between Central and Local Governments . . . . . . . . 3.3.5 Nationalist Sentiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 The Motivation of Monetary Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 The State Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Definition and Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 The Spontaneous Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30 33

46 47 48 49 50 55 60 62 63 65

4 “The Worst Currency” or “The Best Arrangement”? . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 “The Worst Currency” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 “The Best Possible Arrangement” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 A Simple Analysis Based on Optimum Currency Area Theory . . . . . 4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69 69 70 71 73 77 77

5 An Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 The Recent Monetary Policy in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Conflicts Between China and USA . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 The Challenge of Monetary Digitalization . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79 79 81 82 83

41 43 46

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

About the Author

Qing-yuan Sui is the Professor of Economics at the Yokohama City University, Japan. He received his doctoral degree from Tokyo University. His research is mainly in the area of money and banking system. E-mail: [email protected]

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Chapter 1

A Preliminary Introduction

Abstract Money-using can solve market incompleteness. We sketch a rough image of money in premodern China and Japan, and introduce the main skein argument of the book. Comparision from a historical perspective could explain the role of money and the function of state. Keywords Incomplete contract · General acceptability · Uniform monetary standard · Monopolistic supply

1.1 Definition of Money Money is hard to define. Whether a piece of material can serve as money depends not only on its physical or chemical properties but also on how the users believe that this piece could or could not be served as money. This means that money must also be defined based on something beyond the properties or the characteristics of this piece of material itself, the general acceptability. As the general acceptability is outside of money in any form, the definition must be described under some specific institutional environments. Usually, the discussions in a typical textbook adopt a compromised approach. The fundamental functions of money, such as medium of exchange, store of value, and unit of account, are listed at first. Then the definition goes: anything that simultaneously serves these functions and is generally accepted as money can be defined as money. This approach is logically problematic because it needs the concepts of money function before knowing what money is like. In this book, I do not bite on the problem of money-definition and simply adopt the above compromised approach. Instead, I focus on how money has evolved from the historical perspective. Comparing the importance of monetary issues like the theory of money demand and money supply or the monetary transmission mechanism, the questions of what kind of money should a society use or who should take the responsibility to provide that money, which seems to be unquestionable, are seldom discussed in a standard textbook of economics. A phrase like “suppose consumers can freely buy or sell goods of x and y at prices of px and p y ” is an usual assumption in the discussions © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4_1

1

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1 A Preliminary Introduction

of a microeconomics textbook. On the one hand, by this assumption, money as a medium of exchange is totally redundant as long as the exchange between x and y under the prices goes smoothly. On the other hand, in a typical macroeconomics textbook, the academic analysis of monetary policy simply adopts cash-in-advance as given or treats money symmetrically with other commodities in the utility function. In the major part of discussions around monetary policy or monetary transmission mechanism, the relations between the quantity of money and some other macroeconomic indicators, such as inflation rate, rate of unemployment, foreign exchange rate, and growth rate of GDP, are the basic concerns. The problems like who is responsible for providing money and how should the money be provided are seldom asked or are simply introduced under some mechanical assumptions. The history of money contains substantive topics. In this book, I concentrate on a few questions regarding the historical emergence of modern form of money, especially that in China and Japan. By modern form of money, I mean that the money has the following characters: 1. The government—usually in the form of central bank, a quasi-government agency—monopolistically takes the responsibility to provide money. 2. The money provided by the government is in the fiat form by the same name and under a unified standard. However, the money as a commodity is intrinsically worthless. 3. Payment finality or payment completion by money is enforced by the law. Some authors often use different concepts to describe this modern form of money. For example, Sargent and Velde (2001) discussed the long history of the realization of “standard formula.” Helleiner (2003) argued that “territorial currencies” were first created after the nineteenth century. These different concepts reflect different aspects of monetary history the authors wanted to emphasize. These concepts are overlapping for the above three characters. Surprisingly, in today’s world, almost all countries maintain their monetary standard in this same form. Other important aspects, for example, the ways to choose their leader, the rules to distribute wealth among different groups and the degree to constrain people’s personal opinion, differ across countries. If we can understand the function of money in supporting efficient market transactions and the government’s role in supporting a well-functioning monetary system, we can treat market and government in a more harmonious way to raise social welfare.

1.2 The Role of Money Although discussing the role of money for the society is not our main concern in this book, it is important to clarify what the role of money in a market economy. Glasner (1998) introduced a theory of state monopoly over money. He insisted that the need to maintain the emergency revenue for the government, which is necessary to tackle internal or external threats, is the main reason of state monopoly. My discussion for

1.2 The Role of Money

3

the state monopoly is based on the historical perspectives of China and Japan. Before showing the results, we need to understand why money is important for a society. If we can confirm that money-using could solve some kinds of market imperfections, we can conclude that maintaining a well-functioning monetary system is a necessary part of maintaining a well-functioning market because this role deeply relates to the market efficiency. In the discussion of the role of money, the concept of double coincidence of wants is the most frequently described phrase in the textbooks. While William Stanley Jevons’s famous expression is widely quoted, Sargent and Velde (2001, p. 104) pointed that the Roman jurist Julius Paulus had mentioned this concept 1800 years ago. However, the concept of double coincidence of wants is merely a theoretical fiction. It is doubtful, however, that the condition of double coincidence would really be needed when a buyer, after getting the provision of certain goods or services from a seller, must immediately prepare the goods or services that the seller wants. In the real world, we do observe many such cases: the delivery of goods or services occur only in one direction with no immediate payments. Instead of trying to find some goods or services the seller is wanting, it is more likely that the buyer may try to accomplish the transaction by certain kinds of contracts. The contract may be explicit or implicit or even based on oral agreements. Theoretically, we can attain market efficiency in a perfectly competitive and complete market. This market is well described in the Arrow–Debreu model. In this market, every commodity or service, including that is to be delivered in a future date, is priced under competition. Each transaction is well-managed by contracts. Besides the assumption of perfect information between buyers and sellers, which means that the information distribution between them is symmetric, it is also assumed that there is no problems or no costs to document each clause in the contract for every contingency in detail, to enforce the clause in the contract and punish the possible ex post deviant or fraud behaviors. Contracts under such circumstances are called complete contracts. It is clear that complete markets require complete contracts. In reality, however, markets on their own are never complete. Complete contracts are necessary for the Arrow–Debrue markets to work; however, markets that satisfy this kind of completeness are rare in the real world. The meaningful arguments are not how to realize efficiency in a competitive, perfect, and complete market, but how to improve market efficiency when markets are not perfect or not complete. There are many implicit or explicit institutional devices that help to overcome the problems of contract incompleteness. Money solves the problem in its own way, by providing finality for simpler and easier execution of contracts. We argue that to amend the market incompleteness is a more straightforward reason to explain the role of money. Consider a situation in which a consumer i buys something from another consumer j. Consumer i may try to promise, or make a contract, that he will return some favors to j in the future. In this situation, i must try to make his promise reliable and executable. Usually the costs of such contract are high enough to offset the benefits

4

1 A Preliminary Introduction

from the transaction. In this case, instead of to paying back to j by such promise, if i could use money, then by paying money, i and j could finish the transaction immediately and avoid the potential problems caused by incomplete contracts.

1.3 Money and Government Comparing the widely accepted importance of money-using, the questions like who should be responsible for providing money or is the state monopoly over money necessary, are not well discussed in the mainstream economics. However a group of scholars, for example, Hayek (1990) and Selgin (1988) criticized the state monopoly over money provision. Hayek even argued that depriving the monopoly power over money from governments is a necessary step to save civilization.1 Then how could it be possible that in today’s world in which there is no single country, from the West to the East, that seriously considers this kind of civilization saving problem raised by a Nobel laureate economist? In this book, I cannot answer a big question like this, but try to approach some specific points on money supply mechanism from the historical perspective. The topics on money and government closely relate with the problem whether the government could support or undermine market functions. The problem of this government role has profound implications. Clearly, the perceptions on the range of adequate government behavior lie in the recent conflicts between China and the USA. Although, currently there are no available theories to justify the state monopoly over money, historical perspective helps us to clarify the ideas. For example, Hayek argued that “[h]istory is largely inflation engineered by government,” because “the history of coinage is an almost uninterrupted story of debasements or the continuous reduction of the metallic content of the coins and a corresponding increase in all commodity prices.”2 However, historians tell us that in China, over 2000 years, the dynasties continuously minted copper cash with relatively stable weight, size, and purity. Copper cash had been the main form of money provided by the state until the end of nineteenth century. Besides several exceptional periods, in the long history of China, earning seigniorage was not the motivation for the state to provide money.3 Hayek also emphasized that the unobserved effectiveness of private money issuing is because no one has ever really tried to freely issuing money among the major countries.4 However, at least, if we check China’s society in the few decades around the beginning of twentieth century, we could observe that the unfettered competitive free issuing of money by various sectors did not bring any economic order other than disorder.

1

Hayek (1990, p. 133). Hayek (1990, pp. 33–34). 3 Kuroda (2014, pp. 99–100). 4 Hayek (1990, p. 133). 2

1.4 Money in Premodern China

5

1.4 Money in Premodern China I focus on the historical process of monetary modernization; hence I define premodern as the period before the appearance of a single standardized currency. I define the creation of the single standardized currency as monetary modernization. Based on these definitions, we can say that the monetary modernization in Japan was realized in 1870s, but not until the mid-1930s in China, about half a century later. China has a long history of government involvement in money supply. For over 2000 years, the governments, under different dynasties in different periods, continuously offered copper cash, which was kept surprisingly stable in weight and quality.5 Copper cash is also called as bronze coin or bronze cash. Some scholars argue that copper cash “was central to China’s monetary system”6 and “[f]iscal as well as monetary policy under successive dynastic regimes was premised on a bronze coin economy.”7 However, copper cash did not constitute the whole bulk of money especially after the sixteenth century. Silver currency formed another part of money. Especially since the sixteenth century, in which China was called “the silver sink,”8 China accumulated huge amount of silver. Most of the imported silver was used as currency. However, silver currency used in China was in a very primitive form. Except for the last few years of the Qing dynasty (1644–1911), the government did not touch the provision of silver currency, let alone provide silver coins. In contrast to most European countries and Japan, gold was seldom used in China as currency. Another kind of currency was paper note. However, during the whole Qing period, the government did not provide paper money besides some exceptional years, fearing that the potential risk accompanied with over-issuing and the resulting inflation would trigger the collapse of the dynasty.9 The private paper money was usually restricted to a narrow region. One more important characteristics of paper money in Qing period was that its usage was based on personal relationships and not on institutional support. From the above discussion, when we say currency or money in premodern China, I simply refer to copper cash and silver currency. Unlike what happened in many European countries and Japan, the government in premodern China did not, or could not, squeeze seigniorage income through money supply. The risk of inflation caused by seigniorage-squeezing motivation was kept at the lowest level. The Qing dynasty ended in 1911. In the next quarter century, the monetary regime in China has been described as “unquestionably the worst currency to be found in any important country at the beginning of twenty century.”10 At the beginning of the 5

Kuroda (2014, p. 99). Vries (2015, p. 254). 7 von Glahn (1996, p. 1). 8 Flynn and Giráldez (1995, p. 206). 9 Peng (2015 [1965], p. 597). 10 Young (1971, p. 163). 6

6

1 A Preliminary Introduction

twentieth century, China was among a few independent countries that did not yet have large-scale, state-managed fiduciary coinages.11 Since the existence of a powerful government with strong economic management ability is part of the necessary conditions for the monetary standardization, it is natural to expect that monetary reform may be much easier in despotic countries. However, this is not what we observe in China’s history. I will consider the question why China, as a traditional despotic country, failed to provide a uniform monetary standard currency. I believe that this question is crucial in understanding the so-called the Great Divergence. In Chap. 2, I will describe the main characteristics of monetary system in premodern China and discuss some previous studies on the evaluation of it. I also try to present a model to consistently explain the involvement of historical dynasties in the monetary management.

1.5 A Comparison Between China and Japan Both China and Japan had a long and unique history of money using. There are many unsolved puzzles. In Chap. 3, I will ask and discuss the question of why Japan, which had kept a similar confused and complicated monetary system until the mid-nineteenth century, succeeded in unifying its monetary system “in a single morning.”12 By comparing China and Japan, we can know the decisive factors that promote the formation of modern monetary system. The involvement of government in money supply in Japan could be traced back at least to seventh century, when Fuhon-sen was minted. In the next 300 years, Japan’s court continuously produced currencies. Those cashes were known as the twelve ). Although those coins “looked just like imperial coins (k¯och¯o j¯unisen the coins of China and were supposed to be an imitation.”13 some scholars argue that the twelve imperial coins may have not circulated as the medium of exchange in the modern sense, but solely served as means of tribute or gift.14 Until the mid-tenth century, copper cash was continuously minted. However, from tenth century to sixteenth century, the government in Japan stopped providing money. In about 500 years, Japanese economy wholly depended its money using on imported foreign coins, especially those from China. It is said that “no other countries in the world could depend solely on imported foreign coins, without issuing money by itself over five hundred years.”15 11

Helleiner (2003, p. 34). Fukushima (1988, p. 73) used this phrase to describe that after Meiji Restoration, Japan quickly became a legislatively civilized country. We believe the monetary reform was almost accomplished in the same time and on the same speed. 13 Shinj¯ o (1962, p. 2). 14 Okubo ¯ and Shikano (1996, p. 160). 15 Okubo ¯ and Shikano (1996, p. 161). 12

1.5 A Comparison Between China and Japan

7

The beginning of seventeenth century marked a new monetary era for Japan. After militarily and politically putting the country under his control, Tokugawa Ieyasu started to create a new monetary system based on precious metals, including gold, silver, and copper, which is called the three-currency system (sanka seido ) by monetary historians. Comparing Tokugawa’s monetary regimes with China in the same period, the following points need to be emphasized. First from the beginning of seventeenth century, gold coins were minted, and gold currency was an important currency in the monetary regime of Japan, while the “virtually complete absence of gold”16 as currency was a prominent feature in China. Second, the Tokugawa government largely depended of its fiscal revenue on seigniorage. It is said that the metal of gold contained in Manen Koban, which was the coin minted in the last few years of Tokugawa period, was lower than one-tenth of that contained in Keich¯o Koban with the same face value.17 The latter gold coin was minted at the beginning of seventeenth century. It is often emphasized that Tokugawa Ieyasu firstly unified monetary regime in Japan.18 However, simply the authority to supply money was unified by Ieyasu. It was by no means the unification of monetary standard. In fact, “at the time of Meiji government’s establishment, Japan’s monetary regime was full of chaos,”19 as many different metals were used as money and the exchange rates between them were unstable and complicated. It is natural to regard that the whole Tokugawa period was dominated by such chaotic situation. However, by the Meiji Restoration, Japan succeeded in unifying its monetary in a relatively short period and established a uniform monetary standard under the Bank of Japan in 1885. In Chap. 3, I ask how Japan succeeded in the quick establishment of the modernization of money and what were the fundamental differences between China and Japan.

1.6 The Copper-Silver Price Ratio in the Qing Period The third question raised in this book is, to what degree could we observe the characteristics of premodern monetary system in China that is consistent with the theory. The theoretical predictions are from Mundell’s optimum currency area theory (OCA).20 I will show that changes in the price ratio of copper cash to silver bullion were quite consistent with the theoretical predictions. We could infer the situation of premodern China much like the model setting in Mundell (1961)’s OCA theory, although in China, the different currencies were not only among different areas, but also among different transaction groups or among 16

von Glahn (1996, p. 8). Mikami (1996, p. 284.) 18 Miyamoto and Shikano (2003, p. 169). 19 Bank of Japan (1982, p. 5). 20 Mundell (1961). 17

8

1 A Preliminary Introduction

different commodities. However, the government in premodern China did not, or had no way, to control the relative price between copper and silver currencies. On the one hand, copper cash was used in the form of minted coin, produced by central or provincial governments. It is believed that copper cash produced in the earlier dynasties or foreign countries was also circulated. On the other hand, silver currency was left untouched by the government. The only policy of the government on silver “was to prohibit the export of silver.”21 By comparing the historical evidence and the prediction from the OCA model, I find that the copper-silver price ratio moved consistently with the theoretical prediction. I could conclude that the monetary regime in premodern China based on the co-existence of copper cash and silver tael, had certain kinds of rationality. I will discuss a model of OCA and investigate the consistency of historical evidence and theoretical predictions in Chap. 4. However, we should note that when evaluate the monetary regime in premodern China, “other things should not be taken as given.” That is, the multiple monetary standards at the same time complicated material assaying and value calculation, which were necessary for market exchanges and raised transaction costs tremendously. At the end of the Qing period, it was clear to many people that the chaotic monetary system in China “constituted a major obstacle to commercial development,”22 which means that the burden of multiple monetary standards may have largely outweighed the merits of the consistency with OCA. My answers may be primitive and tentative. As Friedman argued, “what is true of monetary theory is equally true of monetary history.”23 One reason that money is an interesting topic is that it is a typical area of state intervention and government management. I believe that the discussion in this book will help us to better understand the economy system of China, Japan, and other countries in the world.

References Bank of Japan (1982) Nihon Gink¯o hyakunenshi (Hundred year history of the Bank of Japan, vol 1. Nihon Shinyo Chosa Kabushiki Kaisha Shuppanbu, Tokyo Flynn DO, Giráldez A (1995) Born with a “silver spoon”: the origin of world trade in 1571. J World Hist 6(2):201–221 Friedman M (1992) Money mischief: epsodes in monetary history. Harcourt Brace & Company, New York Fukushima M (1988) Nihon shihonshugi no hattasu shi (The development of Japan’s capitalist and private law). Tokyo Daigaku Shuppan Kai, Tokyo Glasner D (1998) An evolutionary theory of the state monopoly over money. In: Dowd K, Timberlake R (eds) Money and the nation state: the finacial revolution, government and the world monetary system. Transaction Publishers, New Brunswick, pp 21–45

21

Vries (2015, p. 253). von Glahn (1996, p. 8). 23 Friedman (1992, p. 1). 22

References

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Hayek F (1990) The denationalisation of money: the argument refined, 3rd edn. Institute of Economic Affairs, London Helleiner E (2003) The making of national money: territorial currencies in historical perspective. Cornell University Press, Ithaca Kuroda A (2014) Kahei shisutemu no sekaishi: “Hitaish¯osei” wo yomu (A history of monetary system in the world: on the asymmetric characteristics). Iwanami Shoten, Tokyo Mikami R (1996) Edo no kahei monogatari (A monetary story of Edo). Toyo Keizai Shinp¯osha, Tokyo Miyamoto M, Shikano Y (2003) The emergence of the Tokugawa monetary system in east Asian international perspective. In: Flynn D, von Glahn R, Giráldez R (eds) Global connections and monetary history, 1470–1800. Ashgate, Aldershot, pp 169–186 Mundell R (1961) A theory of optimum currency areas. Amer Econ Rev 51(4):657–665 ¯ Okubo T, Shikano Y (1996) Kaheigaku no rekishi to kong¯o no hatten kan¯osei (The history of numismatics and its perspectives in the future). Financ Stud 15(1):157–184 Peng X (2015) [1965]) Zhongguo huobishi (A history of money in China). Shanghai Renmin Chubanshe, Shanghai Sargent T, Velde F (2001) The big problem of small change. Princeton University Press, Princeton Shinj¯o H (1962) History of the Yen. Kinokuniya Books Store, Tokyo Selgin G (1988) The theory of free banking. Roman & Littlefield Publishers Inc, Lanham von Glahn R (1996) Fountain of fortune: money and monetary policy in China, 1000–1700. University of California Press, Berkeley Vries P (2015) State, economy, and the great divergence: Great Britain and China, 1680s–1850s. Bloomsbury Academic, London Young A (1971) China’s nation-building effort, 1927–1937: the financial and economic record. Hoover Institution Press, Stanford

Chapter 2

Puzzles of the Monetary Regime in Premodern China

Abstract I discuss three puzzles for the behaviors of government in maintaining monetary systems in premodern China: the asymmetric treatment of copper cash and silver bullion, the low extraction of seigniorage income in copper cash minting, and the high degree of cautiousness for issuing paper note. Some institutional factors are more important than the technological constraints in explaining these puzzles. I also suggest a principal-agent based model to explain the puzzles consistently. Keywords Oriental despotism · Weak government · Precocity · Copper cash · Silver bullion · Principal-agent model

2.1 Introduction Why did the China’s government fail to manage and maintain a uniform monetary standard until 1930s? The answer to this question may differ for periods before and after the mid-nineteenth century. Before the mid-nineteenth century, there were no clear requests from domestic sectors or foreign powers to unify monetary standard. However, it had become more and more clear that the monetary regime in China was “unquestionably the worst currency to be found in any important country”1 at the beginning of twentieth century. It was considered that such monetary regime raised transaction costs and impeded the smoothness of transaction, especially trade between China and foreign countries. At the turn of twentieth century, Chinese government was requested by Western countries and Japan to set the monetary reform as a high priority goal. However, a single and uniform standardized monetary system did not realize until the mid-1930s. By contrast, Japan accomplished the monetary reform from a situation quite similar to China in 1850s to a uniform monetary system under the Yen in 1870s. This fact suggests that potentially, it is possible to accomplish the monetary reform in a relatively short period, and in the case of China, something unique in the social structure could impede the reform. The word premodern refers to the period before 1930s for China. I discuss issues of monetary regime in China

1

Young (1971, p. 163).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4_2

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2 Puzzles of the Monetary Regime in Premodern China

before 1850s in this chapter and leave the issue of monetary reform after 1850s for the next chapter. Why do I raise these issues? First, China has a long history of state’s involvement in money supply and was the first country in the world to issue paper money by the government. While many scholars such as Needham (1954) and Pomeranz (2000) discussed some difficult questions on the divergences of social development between Western Europe and China,2 monetary reform is more directly related with the function of government than that of other aspects of the social institutions. This point can be confirmed by some cases of successful monetary reform such as the birth of Yen in the first two decades of Meiji period of Japan or the birth of Renminbi in the years around 1950 following the establishment of socialist government in China.3 In both cases, monetary standard was quickly unified under a powerful government. Second, China has also often been described as a typical oriental despotic country.4 It is natural to expect that the government in China should be capable enough to manage or control the monetary system. However, the reality is that it was among the latest group of countries to successfully change the traditional monetary system into the modern form. By discussing the issues of monetary management of the government in premodern China, we can better understand its truly despotic nature. After all, the degree of government intervention to the market economy is still and will continuously be the central issue of conflicts between China and some Western countries, especially the USA. Comparing the discussion on the so-called clash of civilization,5 the analyses on the wisdom and defect in the monetary system may be more straightforward to the solution of human conflicts because money is the most commonly observed institutional arrangement among countries with different cultural backgrounds. At the same time, as analyzed in the last chapter, money is the “commodity” that is commonly and monopolistically provided by the government in almost every country in the world. I simply expect that a fair evaluation on the effectiveness and the limitation of the government in China will help us to have a better understand of the functions and limitations of market and state, and avoid the unnecessary conflicts based on some ideological concepts. In the following discussions, I first describe the distinct characteristics of monetary system in premodern China. I summerize these characteristics as three puzzles. In Sect. 2.3, I critically discuss some famous previous researches on the explanation of these puzzles. As a preparation of the analysis in Sect. 2.6, in which I present a theoretical framework to understand the monetary regime in premodern China, I introduce the recent work by Helleiner (2003) in Sect.2.4 and discuss the despotic nature of the government in premodern China in Sect. 2.5. In the last section of this chapter, I conclude the discussions.

2

See also O’Brient (2010), Brandt et al. (2014). Wang (2012). 4 von Glahn (2016, p. 1). 5 Huntington (1996). 3

2.2 Three Puzzles

13

2.2 Three Puzzles Copper cash, silver bullion, and paper note were the three major forms of currency circulated in China before twentieth century. Before showing the theoretical framework, it is helpful to summarize how each form of currency was treated differently by the dynasties.

2.2.1 Low Extraction of Seigniorage In the long history of China, dynasties witnessed been ups and downs; however, copper cash was surprisingly continuously provided by the government of each dynasty. As Kuroda pointed out: The most prominent characteristics of Chinese copper cash is its spacial uniformity and temporal consistency. ... Over two thousand years, although the copper cash had been produced by different dynasties, the weight of one coin had been consistently kept at about four grams and the fineness had been kept at the level of eighty percent copper. This is surprising.6

Scholars often emphasize that, as a rule, extracting the seigniorage revenue was the most important motivation for governments to provide currencies. For example, Before the nineteenth century, there is little question that seigniorage goals were central to the state’s involvement in the monetary system.7

However, this was not the case for copper cash provision in premodern China, as it seems to be true that [s]ince the Ch’ing (Qing) government could afford to give up seigniorage from issuing fiat money, there is no reason it should insist on obtaining seigniorage from silver coinage.8

Adachi (1991) also concluded that in the late Qing period, the provision of copper cash by the government was not motivated by seigniorage extracting. However, it is hard to believe that the Qing government was benevolent enough to give up seigniorage. The answer to the question why the China’s governments in history gave up extracting seigniorage from copper cash should be based on other explanations. Helleriner pointed out that one important feature of traditional monetary systems before the emergence of territorial currencies was that low-denomination money was disconnected from the official currency.9 This is also not true for China. Copper cash was low-denomination money from the beginning and mainly provided officially by the government for over 2000 years.

6

Kuroda (2014, p. 99). Helleiner (2003, p. 91). 8 Chen (1975, p. 363). 9 Helleiner (2003, p. 23). 7

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2 Puzzles of the Monetary Regime in Premodern China

2.2.2 Asymmetric Treatment to Copper Cash and Silver Bullion The period from the mid-sixteenth to the mid-seventeenth century is called “silver century,” during which huge amounts of silver as the result of international trade were imported to China.10 In some later periods, China also experienced massive silver flight in eighteenth and nineteenth century because of various reasons. These in and out of silver caused substantial changes of the society. Lin (2006) used the expression of “upside down” to describe that (t)he Qing dependence on foreign supplies of another strategic good, silver, from the late eighteenth century on foreshadowed the Qing’s drastic decline relative to Japan in the East Asian order in the modern period.11

In contrast to the heavy involvement in copper cash provision, the government of each dynasty never touched silver coin casting except for the final few years of the Qing dynasty. As we laterly discuss on the research of Kat¯o, this asymmetric treatment of copper cash and silver bullion puzzled many researchers. We need a non-ad-hoc framework to explain the government behavior.

2.2.3 Cautiousness for Paper Note Issuing Compared to copper cash and silver bullion, paper note was an area in which the policy of government in each dynasty changed most drastically. It is also the area in which the government behaved so inconsistently from the contemporary viewpoint that some analysts even describe the appearance of paper money in China as precocity.12 Paper note is an extreme form of fiduciary money, compared with metal currencies. In today’s world, paper note issued by a central bank is the main form of currency in most countries. In 1023, the government of Song dynasty (960–1279) took over the private paper bill in Sichuan as official currency. Initially, the paper currency was well managed as it was convertible, although the convertibility was soon suspended. This may be partly because in the later periods of Song dynasty, the government was fiercely and militarily confronted with the Northern forces, and the issuance was out of control and caused serious inflation. The Yuan dynasty (1279–1368) further developed a unified monetary system based on paper note and “achieved surprising success,”13 although this success lasted only for about 20 years. In the final periods of Yuan, “every day’s printed paper notes were countless.”14 Accompanied by a heavy inflation, 10

von Glahn (1996, p. 113). Lin (2006, p. 296). 12 von Glahn (1996, p. 8), Zhu (2012, p. 34). See also Yang (1952, pp. 51–61). 13 von Glahn (1996, p. 56). 14 Shi (1984, p. 48). 11

2.2 Three Puzzles

15

the monetary system based on paper did not appear again in China until twentieth century. Knowing the potential destructive effects of inflation on the dynasty, Qing’s government was extremely cautious in paper note issuance.15 Although the construction of monetary system based on paper currency eventually failed, it was about 800 years earlier than the same challenge in other countries. This is why it has been often called precocity. As we argue later, the failure of the establishment of the paper monetary system was a institutional phenomenon than a result of technological constraints.

2.3 Some Previous Studies In this section, I discuss some classical analyses on the monetary system in premodern China. As I mentioned previously, the determining factors for monetary system fundamentally differ for the periods before and after the mid-nineteenth century. Contemporarily, money is defined as the sum of currency and deposits. Currency is usually homogeneously and exclusively provided by a quasi-government agency, the central bank. Deposits, typically provided by private banks, can also serve as the medium of exchange or easily be converted into currency, though usually they are not the legal tender. Because in the most periods discussed in this chapter banking industry had still not developed, currency simply stands for money. So, I use the terms money and currency interchangeably. Von Glahn pointed out, “[c]uriously, despite the frequent citation of monetary phenomena as key causal factors in socioeconomic change, the monetary history of imperial China remains largely terra incognita.”16 However, the reality is that the topics on monetary history of imperial China have been profoundly investigated by researchers. It is true that many important issues are still unanswered. The socalled terra incognita is deeply related to the lack of commonly accepted theoretical frameworks, especially on the role of government in monetary management. My analyses are based on the following theoretical perceptions. First, the existence of a powerful and stable government is a necessary condition to establish a uniform monetary system. Second, to a certain extent, a uniform monetary system can improve the efficiency of market transaction. Third, the government concerns the balance of the costs and benefits in a wide sense to determine the regulation and intervention. Finally, the objective function of each dynasty may differ from that of the whole society. In the later section, I will construct a theoretical framework reflecting these points. Before showing the result, it is useful to see how the characteristics of monetary system in premodern China are explained in the previous studies. Kat¯o (1926) thoroughly discussed the moneyness of precious metals like gold or silver in Tang and Song periods. In answering the question why the government did not cast silver into coin but simply satisfied using silver currency in bullion form, he 15 16

Peng (2015[1965], p. 597). von Glahn (1996, p. 9).

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2 Puzzles of the Monetary Regime in Premodern China

listed the following factors that may have affected the government involvement in money supplying17 : 1. the casting costs may have heavily burdened the government; 2. the private or illegal casting may have been serious; 3. the government may have felt no need to invoke the potential risk caused by state involvement in silver coin casting. While Kat¯o did not ask the same question as what I asked at the beginning of this chapter, these factors relate to the incentives and effectiveness of national monetary management. Kat¯o did provide a useful theoretical framework by emphasizing the balance of costs and benefits to the dynasties to analyze the construction of monetary system. Of course, we should also pay attention to the possibility that the objective function of the government, as an agent, could have largely differed from that of the whole society, the principals. The discussion along this line helps us to understand why dynasties had continuously provided copper cash even when the government could hardly earn positive seigniorage.18 The incentive for casting copper cash could be explained by weighing certain benefits on maintaining the imperial prerogative for the government. These kinds of benefits could be large even though the seigniorage directly earned was low. However, there remain problems in these explanations. Why were the net benefits for the government negative in the case of silver coin casting and positive in the case of copper cash casting? Should we believe that taking the copper cash casting by the government as given, any additional casting of other kind of money would provide no political value for the maintenance of prerogative? Or, is it true that the nationalization of silver would have been particularly more difficult than that of copper because the supply of silver mainly depended on importation from abroad? Kat¯o’s analysis suggests use of a principal-agent model to explain the behavior of the government and the historical evolution of monetary system. On the one hand, Helleiner (2003) discussed the preconditions and motivations why policymakers in many European countries introduced territorial currencies in the nineteenth century. The concept of territorial currencies shares the same basic characters of uniform standard money discussed in this book. Helleiner listed the first motivation for the state to introduce territorial currencies as the construction of markets and reducing transaction costs.19 On the other hand, it is believed that “Chinese theorists linked the invention of money to the ruler’s crucial responsibility for securing the livelihood of his subjects.”20 If these were true, we could expect that the dynasties should have put more positive weight on the construction of a uniformed monetary system in their cost-benefit calculation. However, the uniform monetary system did not realize in China, which means that the government may have not prioritized creating a uniform monetary system as an effective way to secure the livelihood of ruler’s subjects. 17

Kat¯o (1926, pp. 419–423). Chen (1975, p. 363), Zhu (2012, vol. 1, p. 227). 19 Helleiner (2003), Chap. 3. 20 von Glahn (1996, p. 25). 18

2.3 Some Previous Studies

17

Miyashita (1952) improved Kat¯o’s analysis and explained the dominant factors influencing the basic characters of monetary system in the Qing period. These characters include the fact that I am concerned with here, that is, the dynasties failed to provide an uniformed monetary system. He first raised the weak state and the powerful guilds in the society as the reason of coexistence of the national and private monetary system. The former refers to the the copper cash sector and the latter to the silver tael sector. Miyashita then added the following three factors that critically determined the basic characters of the Qing’s monetary system: 1. the backwardness of casting technologies; 2. people’s preference for metalism or bullionism; 3. the heavy dependence on the pre-capitalist system.21 I have pointed that the existence of a powerful and effective government is necessary to create a uniform monetary system. However, we also need to consider how to combine the concept of a traditional despotic government with a dynasty that was so weak that it could not maintain a well-functioning monetary system. Orientally despotic China is often described as a highly centralized country. It is said that “the Chinese empire was believed to share the basic features of ‘oriental despotism’ in general.”22 How to consistently explain a despotic empire and its weak government, as are often described, in parallel in the same country and same period? After all, many contemporary problems relating to too-weak or too-strong intervention by the government are still unsettled.23 Monetary system cannot be established without the application of industrial technologies. It is true that the high costs for silver coin casting assumed by Kat¯o (1926) were largely affected by the availability of technology. However, for the following reasons, the considerations based on technological constraints cannot explain the puzzles I posed earlier. First, it is difficult to explain the asymmetric treatment by the government to the casting of copper cash and to the non-casting of silver bullion only by technological constraints. Second, we often observe that some revolutionary changes in the monetary system were not accompanied by the changes in industrial technologies. For example, Japan, during 1860s–1880s, and China, during a few years around 1950, experienced the “single morning” establishment of uniform monetary system in which the domestic technologies were not largely changed. Third, the technological constraints may be less important in the case of paper currency than coins. Helleiner (2003) argued that the technological impact may have been less dramatic in helping to standardize domestic note issues. However, he cited the reason as “because paper currency was not used as extensively as coins in most countries.”24 At least for China, these arguments are not correct. In fact, in the period of Yuan, the dynasty had “achieved surprising success in establishing paper money

21

Miyashita (1952, pp. 39–43). von Glahn (1996, p. 1). 23 We often observe discontinuous changes in financial regulations after a financial crisis. 24 Helleiner (2003, p. 53). 22

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2 Puzzles of the Monetary Regime in Premodern China

as a medium of exchange.”25 However, the success did not continue for long time. One of the problems was the existence of large scale of forged notes. However, it is not clear whether such problems were caused by technological constraints. For example, in 1286, the dynasty court rewarded two officials for their accomplishment of the mission of food transportation. The award was printing plate with which the receivers could print notes at their will.26 It is not difficult to imagine that such practices would easily cause the monetary supply out of control. However, this kind of monetary management failure was hardly related to any technological problem. Finally, while the development of technologies does help the government to produce high-quality coins or notes at lower production costs, new technologies also simultaneously improve the counterfeiter’s ability to make forged coins or notes much easier. Without other institutional support, it would be difficult for technological development, as an independent factor, to help the government to construct a uniform monetary standard. After all, besides the different treatment of copper and silver related currency as I have discussed above, the explanation of Miyashita on the limits of technology could at most fit the situation of the period before 1850s. It could not explain the fact that the uniform monetary system did not appear in China until 1930s, because the technology was available, at least, through importation. Japan did establish its modern monetary system with the help of foreign technology. I will discuss this issue further in the next chapter. People’s preference for metalism or bullionism is at most irrelevant. With the benefit of hindsight, we know that after the socialist government established in 1949, the government created the Renminbi monetary system in a very short period, which was highly uniform.27 The preference for metalism or bullionism did not show any effective resistance in that period. For the characteristics of China’s society of the pre-capitalist propensity, Miyashita’s explanation seems to be less helpful. First, one of the most important aspects of capitalist economy is the development of market transaction or commercialization. There is no evidence that the level of commercial development was low in the Qing period compared to other countries. After all, both the characters of monetary system and the development stage of the economy are the results of institutional developments. We should not use just one aspect of the results to explain the other results. Chen (1975) focused on the monetary system in China from 1650 to 1850 and answered why the government failed to fix the exchange price between copper coin and silver tael, and why the government did not give up the dual monetary system to adopt a single standard. Because fixing the exchange price between different currencies means fixing the monetary standard, these questions are simply different expressions of why the government failed to maintain a uniform monetary system.

25

von Glahn (1996, p. 56). Zhang (2001, p. 441). 27 Wang (2012). 26

2.3 Some Previous Studies

19

Chen concluded that “the theory of optimum currency area gives rather satisfactory answers to these questions.”28 I discuss in Chap. 4 the theory of OCA and explain that the movements of coppersilver price were in a way consistent with this theory. The message by Chen seems to be that the monetary system in Qing’s period had the rationality of itself no matter whether it functioned to support economic development or not. While I cannot deny this conclusion, I believe it is not a meaningful suggestion. After all, every existence has its reason. Whether a historical phenomenon is rational or not largely depends on the assumption of whether the related factors are taken as endogenous or exogenous. Chen simply took the behavior of the government as totally exogenous. The problem of the point is that this conclusion does not help us to understand the interaction between the government behavior and the construction of a wellfunctioning monetary system.

2.4 Preconditions and Motivations To a certain degree, my analysis shares a common interest with that of Helleiner (2003), although I pay more attention to the difference between China and Japan. Helleiner defined territorial currencies as the currencies exclusively and homogeneously maintained by sovereign countries.29 As discussed in Chap. 1, we can interpret territorial currencies defined by Helleiner as the modern form of money managed by the government discussed in this book. Helleiner emphasized that territorial currencies were only a modern creation, that is, the first emergence of territorial currencies was in the nineteenth century and in most countries, territorial currencies became standard monetary structure in the twentieth century.30 He also emphasized that “[m]any of the activities associated with the construction of territorial currencies relied on the nation-state’s unprecedented capability to influence and directly regulate the money in use within the territory it governed.”31 That is, the existence of a powerful and well-managed government is a necessity for the emergence of territorial currencies, which refer to the territorially homogeneous and nationally exclusive currencies. In explaining the background of the emergence of territorial currencies, Helleiner raised two preconditions and four motivations of the government that are necessary for the construction of territorial currencies. The two preconditions are the emergence of nation-state and the application of new industrial technologies that can be thought as factors that were exogenous to governments. The four motivations for the government to supply territorial currencies are 1. the desire to construct national markets; 2. the control of macroeconomic economy; 28

Chen (1975, p. 360). Helleiner (2003, p. 1). 30 Helleiner (2003, p. 2). 31 Helleiner (2003, p. 7). 29

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2 Puzzles of the Monetary Regime in Premodern China

3. the fiscal goals, that is, as a tool to maximizing seigniorage revenue and 4. the strengthening of national identities. In fact, we can rearrange Helleiner’s arguments into two categories. One is the exogenous conditions for the involvement, the regulation, or the enforcement ability of governments. The other one is the endogenous behavior of governments. Although the development of technologies is crucial to construct and manage monetary system, as discussed later, we can simply take this factor as an exogenous condition influencing the management costs of money provision for the government. After emphasizing that the monetary reform requires strong capability for the government and it was the emergence of nation-state in the nineteenth century that brought the government with such strong capability, Helleiner continuously and cogently analyzed why the regime-shift government could accomplish the monetary reform. The government with strong capacity could effectively enforce legal tender law and force people to accept whatever money it declared to be valid. By this capacity, it is also possible for the government to cultivate and maintain trust, both interpersonally and between people and the government, which is particularly necessary in the case of fiduciary money. It is also emphasized that the government’s strong capacity, with the help of technological development, may have been important in preventing counterfeiting. Helleiner’s analysis reminds us by acknowledging the importance of state’s role for monetary modernization. I will compare the regime-shift between China and Japan in Chap. 3. In the remaining part of this chapter, I discuss the problem of how to explain the involvement of Chinese dynasties in monetary management before 1850s in a consistent way.

2.5 Weak but Despotic Government There is one point that is commonly argued in Miyashita (1952) and Helleiner (2003). Miyashita pointed out that the weakness of the government was one of the reason for the Qing dynasty to maintain the monetary system in the premodern style. Helleiner suggested the emergence of nation-state, where the administrative power has been greatly strengthened is one of the preconditions for the appearance of territorial currencies. While these analyses immensely contribute to our understanding of the transformation of modern monetary system, they are not sufficient. Helleiner has not clearly defined how to judge the strength of a government. While mentioning the failure of the monetary reform of China before 1930s, he pointed out the reasons as follows: The weakness and lack of authority of China’s central imperial state in this period was a key obstacle preventing China from creating a more homogeneous and nationally integrated monetary system.32

On the other hand, as pointed out by von Glahn, traditionally, 32

Helleiner (2003, p. 156).

2.5 Weak but Despotic Government

21

the Chinese empire was believed to share the basic features of “oriental despotisms” in general.33

We need to know how to synthesize the weakness that prevented China from creating a modern monetary system and the despotic character that is still the main factor influencing the relations between China and other countries even in the twentyfirst century. Here, I tentatively provide my answers to these problems and show a theoretical model to explain the behavior of government in China for the monetary management.

2.5.1 Strength Might Be Different for Different Periods It is possible to consider that the weak and despotic governments dominated China for separated periods. That is, the government of China might have been weak only for an exceptionally temporary period like from the mid-nineteenth century to the mid-twentieth century, while for the other periods of history, despotism was its basic feature. This explanation sets the weakness and despotism as the two polar points of the same dimension and treats the periods when the government failed to reform the monetary system as the period in which the government was weak and regards other periods as the period when the government was strong and despotic. While this scenario successfully explained the failure for the period after the 1850s, we cannot understand where the strong and autocratic government came from and why did the government become weak and powerless at the time when it needed sufficient management ability to reform the institutions. We need an explanation upon a basis more consistent with the history.

2.5.2 Strength Might Have Different Dimensions It may also be possible that a despotic government is by no means equal to a government with high management capability. This possibility means that we should tell the difference between the economic dimension and the political dimension in considering the effectiveness or the strength of a government. A government may be economically weak but politically strong, or economically strong but politically weak. Based on this explanation, China’s government might have been politically despotic but lacked the capability required to create a uniform monetary standard. Studies have pointed out the low economic managerial ability of the government in traditional China’s society. For example, in an article analyzing whether the Chinese imperial government was hostile to commerce and industry and whether this formed a major element for the failure to achieve modernization, Perkins concluded: 33

von Glahn (2016, p. 1).

22

2 Puzzles of the Monetary Regime in Premodern China If the imperial government of China was an obstacle to industrialization, it was more because of what it did not do than because of harmful efforts which it did undertake.34

We believe that what Perkins regards deeply relates to the weak capability of the government in managing the economy. Even in the contemporary time, although today’s China is often criticized as a brutal surveillance society, there is no evidence that the crime-arrested ratio or the tax capture ratio is higher than that in other developed countries. Still, we need to consider why had the governments in European countries become economically strong accompanied with the appearance of the nation-state in the nineteenth century, but the government in China had not? The concept of the nation-state is largely different in China compared to that in European countries. First, there are enough reasons to believe that the nation-state emerged in China from a much earlier time than that in Europe as many Chinese people have used the same language and shared the same cultural value for over 2000 years. Second, the concept of the nation-state is only meaningful when considering a nation in a situation contending with other nations. In this sense, in the long history of China, a typical Chinese might have not been consciously considering himself or herself as a member of the nation. Although China was often attacked by the northern forces, these attacks were much less often than the conflicts between different countries that happened in Europe. At least, in the whole Qing period, the danger of attacks from the North was not high, mostly because of the Qing dynasty rulers themselves were from the North. This conception of the nation-state has important implications only under the environment of international competition, which never had been a serious issue in China before the mid-nineteenth century. When considering the rivalrous environment of China with other nations, the conscious mind of a Chinese as a member of a typical nation at that time was not as so repelled as that in Europe.

2.6 A Theoretical Framework It seems to be easy to separately explain the following aspects of the historical monetary issue in China, such as the government’s involvement of copper cash casting, the asymmetric treatment to silver bullion, or the cautiousness to touch paper money issuance of Qing’s government. However, we need a theoretical framework to explain these aspects simultaneously. In this section, I try to analyze the government’s behavior summarized in Sect. 2.2 using a principal-agent model. This model views the relationship between the government and the constituents as an implicit agreement. In the modern time, the government, as the agent, maximizes the utility of itself subject to various institutional constraints, such as congress, division of power, office term, and election. The constituents, as the principal, threaten the government by voice or vote to influence the government in a way to enlarge the social welfare. 34

Perkins (1967, p. 491).

2.6 A Theoretical Framework

23

The specific feature of the government in premodern China is that the government faced few of the above institutional constraints. The division of power was not clear; there was no term of office for the leader; and the constituents had no legitimate right to change the government by vote or referenda. The only way to change the government was by an extreme form of voice, the violent rebellion to overthrow the old dynasty, which has been repeatedly occurred in China’s history. Under such circumstances, on the one hand, as long as the risk of rebellion was low, the government may practice a kind of benevolent sage-king policy under which various national projects were started. On the other hand, when the government began to worry about the legitimacy of their control over the country, the ruler may devote a huge amount of resources, including human life, to sustain their authority. To analyze the motivations of managing the currency system by the dynasties and the rationality of their choices, I consider a simple situation. There are many potentially possible choices. I assume three kinds of means to provide currencies by the government. The three means correspond to copper(c), silver(s), and paper note( p) provisions. The copper currency provision policy c could be divided into provision policy with seigniorage extracting (cs , ss , and ps ) and provision policy without extracting (cn , sn , and pn ). Here, c = 0, s = 0, or p = 0 stands for noneinvolvement. We know that the premodern governments had chosen c = cn , s = 0 and p = 0. The task here is to explore the conditions in which the choice of the government is rational. For each choice, say c = cn , there are four elements affecting the benefits and costs for the government. • B: the benefit of prerogative effect. It is believed that the state creation of money “was exclusively an imperial prerogative.”35 I assume that this prerogative effect of any currency, copper, silver, or paper note, is the same. I also assume that the total value of this prerogative effect is constant, no matter how many currencies are created. That is, when multiple kinds of currency are issued, the provision of the second or third currencies is of little significance to increase prerogatives to the authority, because showing prerogative is at most a symbolic phenomenon. B also includes the revenue of seigniorage if the government adopts an extracting policy. • C: the production costs. These costs include the costs of mine management, metal purchasing and allocation, casting or printing and so on. I assume that the production costs of the silver coin are not higher than that of the copper coin. Considering that the face value of a silver coin is larger than that of a copper coin with the same weight, at least the manufacturing cost of silver coin is not higher than that of copper coin. C should also includes the costs for preventing forgery. • E: the effects on market performance and economic development. Although few governments in premodern China would have ever considered to improve market efficiency consciously, as long as some kinds of money are provided, it can improve the social welfare to a certain degree. I assume that this effect 35

von Glahn (1996, p. 246).

24

2 Puzzles of the Monetary Regime in Premodern China

remains same for money in any form of copper coin, silver coin, or paper note. This effect is also independent of whether the government extracts seigniorage from money provision. Because the ultimate goal of rulers is to earn the respect and obedience of the people and the respect and obedience of the subjects to the rulers depends on the market performance and economic development, the market performance improving or economic development promoting effects indirectly influence rulers’ utility. • H : the costs caused by the potential risk. This risk stands for social panic caused by the failure of currency management. It directly threatens the maintenance of the dynasty. I assume that H does not differ between copper and silver. I also assume that the rulers believed that paper notes would have been mostly risky. This may be because the government did not have effective tools for paper note management and the rulers were well aware that it had been so in history. We can use x to stand for a particular money provision policy. x could be one of c, s, p. It could also be a combination of c, s, and p. For a money provision policy x, we can define the ruler’s utility function as follows: U (x) = E(x) + B(x) − C(x) − H (x) To justify that a policy x is preferred to another policy, say y, by the rulers or preferred to doing nothing, it is necessary that U (x) > U (y) and U (x) > U (0). Next, I use this framework to explain the three puzzles of currency policy in premodern China as the results of utility maximization by the government.

2.6.1 The Condition of No-extracting Policy By the argument of von Glahn, the prerogative effect is large enough so that doing nothing is not the optimal choice of the government. The problem here is, why was the government willing to give up extracting seigniorage? I do not think that the government was not interested in revenue, as suggested by some scholars.36 Instead, the extracting policy, although could increase the term of B, may endogenously increase cost terms. If the government earns seigniorage by money supply, the provided money must have the fiduciary nature. That is, the face value becomes higher than the metal value in the coins. As a result, private casting becomes attractive. If there are no effective measures to prevent such private casting, it is impossible to maintain the currency system. If the costs of such preventive measures is too high, no-extracting policy may be the best solution. This possibility was vividly described by Yongzheng, an emperor of Qing. “If the copper in the coin is too heavy, it will bring private melting. If it is too light, it will bring private minting. 36

Chen (1975, p. 363).

2.6 A Theoretical Framework

25

... It’s very hard to track them down.”37 The no-extracting policy is by no means that the dynasties did not care for the revenue. On the contrary, it was a result of cost-minimizing considerations.

2.6.2 The Marginal Benefit of Silver Currency Provision By the above assumptions, as a separate currency policy, silver currency coinage may dominate copper currency coinage in that the benefit terms E(s) and B(s) may be higher than E(c) and B(c) or the cost terms C(s) and H (s) may be lower than C(c) and H (c). In this sense, the non-involvement of silver currency provision was a puzzle. However, if we consider the combination of multiple policies together, it may not be a mystery at all. That is, conditional to the situation that the copper cash had already provided, the additionally created prerogative effect by silver coinage is small. Coupled with the fact that copper cash had been supplied by the government thousands of years ago, it was natural to regard that there is no need for the rulers to create a second symbol to show their dignity to its subjects.

2.6.3 The Cautiousness to Paper Note Issuing The cautiousness of the Qing dynasty to issue paper note, the policy p = 0, could be because the government largely and negatively judged the potential risk of inflation, so that the term H ( p) dominates other benefit terms, even though the production costs of paper note is low. Again, this judgment was based on the historical experiences and the lack of effective measures to control the circulation. It seems to be rational for the Qing dynasty to avoid issuing paper currency under such judgement. By this model, I can consistently explain the behavior of the government in premodern China in maintaining its monetary system. Needless to say, these explanations are hypothetical and tentative. We need further empirical evidence to support the arguments.

2.7 Conclusions The no-extracting of seigniorage, the asymmetric treatment to copper and silver coinage, and the high degree of cautiousness are the puzzles in monetary system of premodern China. The weakness of the government in premodern China may not 37

Li (2007, p.6).

26

2 Puzzles of the Monetary Regime in Premodern China

contradict its character of despotism. That is, the government could be politically despotic but economically or managerially weak. Although it seems easy to explain some specific features of the monetary system, we need a model to understand the whole picture in a consistent way. Besides the direct benefits and costs, I considered the subjective judgement of rulers and the traditional sage-king philosophy to explain these puzzling aspects of monetary system in premodern China. Further work is needed to justify the explanations in this chapter.

References Adachi K (1991) Shindai zenki ni okeru kokka to zeni (The state and cash in the early Qing period). Orient Res 49(4):671–697 Brandt L, Ma D, Rawski T (2014) From divergence to convergence: reevaluating the history behind China’s economic boom. J Econ Lit 52(1):45–123 Chen C (1975) Flexible bimetallic exchange rates in China, 1650–1850: a historical example of optimum currency areas. J Money Credit Bank 7(3):359–376 Helleiner E (2003) The making of national money: territorial currencies in historical perspective. Cornell University Press, Ithaca Huntington S (1996) The clash of civilizations and the remarking world order. Simon & Schuster, New York Kat¯o S (1926 [1965]) T¯os¯odai ni okeru kingin no kenky¯u (A study on gold and silver in Tang and Song period). Toyo Bunko, Tokyo Kuroda A (2014) Kahei shisutemu no sekaishi: “Hitaish¯osei” wo yomu (A history of monetary system in the world: on the asymmetric characteristics). Iwanami Shoten, Tokyo Li Q (2007) Jingrong shijiaoxia de Kangqian shengshi: yi zhiqian wei hexin (The hey day of Kangxi and Qianlong under a financial angle: consider the copper cash). Hunangshan Shushe, Hefei Lin M (2006) China upside down: currency, society, and ideologies, 1808–1856. Harvard University Asia Center, Cambridge Miyashita T (1952) Ch¯ugoku heisei no tokushu kenky¯u (A special study of the Chinese currency). Nihon Gakujutsu Shinkokai, Tokyo Needham J (1954) Science and civilization in China, vol 1. Cambridge University Press, Cambridge Peng X (2015 [1965]) Zhongguo huobishi (A history of money in China). Shanghai Renmin Chubanshe, Shanghai Perkins DH (1967) Government as an obstacle to industrialization: the case of nineteenth-century China. J Econ Hist 27(4):478–492 Pomeranz K (2000) The great divergence: China, Europe, and the making of the modern world economy. Princeton University Press, Princeton O’Brient P (2010) Ten years of debate on the origins of the great divergence. https://reviews.history. ac.uk/review, No. 1008. Accessed 19 July 2020 Shi Y (1984) Zhongguo huobi jinrong shilüe (A brief monetary history of China). Tianjin Renmin Chubanshe, Tianjin Wang C (2012) Xin Zhongguo huobi tongyi chutan (A primary discussion on monetary unification in new China, 1949–1953). Xueshu Jie 173(10):195–208 von Glahn R (1996) Fountain of fortune: money and monetary policy in China, 1000–1700. University of California Press, Berkeley von Glahn R (2016) The economic history of China: from antiquity to the nineteenth century. Cambridge University Press, Cambridge Yang L (1952) Money and credit in China: a short history. Harvard University Press, Cambridge

References

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Young A (1971) China’s nation-building effort, 1927–1937: the financial and economic Record. Hoover Institution Press, Stanford Zhang J (2001) Zhongguo huobi sixiang shi (History of Chinese monetary philosophy). Hubei Renmin Chubanshe, Wuhan Zhu J (2012) Cong zhiyou dao longduan: Zhongguo huobi jingji liangqian nian (From laissez-faire to monopoly: the monetary economy of China - past and present). Yuanliu Chuban Shiye Gufen Youxian Gongsi, Taipei

Chapter 3

The Divergence Between China and Japan

Abstract In this chapter, I perform a qualitative and quantitative comparison of the monetary regime between China and Japan. Then, I ask and try to answer why the modernization of money succeeded in a relatively short period in Japan but not in China. The differences in motivations to reform monetary standard and state capacities to enforce the laws are crucial to explain the time gap of the emergence of monetary uniform between these two countries. The concept of spontaneous order is not helpful in explain this difference and is not appropriate for a catching-up country. Keywords Monetary regime · Differences between China and Japan · Meiji Restoration · Spontaneous order · Monetary unification · State capacity

3.1 Introduction I have mentioned that after the mid-nineteenth century, Japan quickly succeeded in unifying the monetary standard. In contrast to the case of Japan, the basic feature of the chaotic monetary regime did not change in China until 1930s. In this chapter, I discuss what factors determined this divergence. My point is that it is the differences in motivations to reform the monetary system and the differences in state capacity between the two countries determined the failure in China and the success in Japan. That is to say, in addition to some occasional factors affecting the motivations of leaders in the two countries for monetary reform, Japan’s succuss was largely reflected on the high level of state capacity, and vice versa, the failure of China in unifying its monetary system was because the government’s lack of capacity as an ordinary country. I also point out that the concept of spontaneous order is not useful in explaining these differences. In the next section, I first discuss the differences of monetary regime between China and Japan both qualitatively and quantitatively. Then, I overview and discuss some previous studies on the differences of monetary development between China and Japan. I compare my explanations with some other arguments in the previous researches. In Sects. 3.3 and 3.4, I compare the differences of motivation for monetary reform and state capacity between these two countries, which are fundamentally © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4_3

29

30

3 The Divergence Between China and Japan

important to the understanding of the monetary modernization process in each country. In Sect. 3.5, I continue to discuss how and why the state capacity in China was weak and that in Japan was strong. In Sect. 3.6, I critically review the effectiveness of spontaneous order in explaining institutional reforms for catching-up countries. The last section concludes the whole discussion of this chapter.

3.2 A Comparison of the Monetary Regimes Between China and Japan In this book, when I refer to uniform money or uniform currency, I mean that the money is provided under a unified standard. However, the expressions like “monetary unification” are often used in different contexts. For example, the Bank of Japan (1990) described the governing of Japanese monetary regime by Ieyasu at the beginning of the seventeenth century as “the unification of money.” Here, the word “unification” solely means the exclusive authority of money supply. It does not mean that the unit of account was unified by Ieyasu. In fact, there were many different kinds of money concurrently used in Japan util 1870s. In the case of metal coinages, gold, silver, and copper coins were used in different standard by different people or different area. The famous words “sanka seido (three-currency system)” are often used to describe the style of metal coins—gold, silver, and copper coins—circulation in Japan before the 1870s. Furthermore, huge amount of different kinds of paper notes ) were issued in different domains. Basically paper notes from differ(hansatsu ent domains were not substitutable. Ieyasu unified the authority of money supply, but the money itself was not unified at all. This chapter aims to discuss the role played by the state in the monetary modernization processes of China and Japan. Before the discussion, it may be worthwhile to have a look at how the monetary systems evolved up to the modernization.

3.2.1 The Monetary Development in Modern Japan Figure 3.1 illustrates the monetary regime in Japan before and after 1870s. Yamamoto (1994, p. 64) listed the metal coins circulated in Japan in 1869 right before the Meiji government began to unify the monetary standard. There were nine kinds of gold coins, seven kinds of silver coins, and seven kinds of copper coins. All of them had different names and exchanged by different standards. Equally if not more chaotic were the case of the paper notes (hansatsu) that were more regional specific than metal coins. It is said that by the end of Tokugawa, there were 1694 different kinds of paper note circulated in certain area of Japan.1 As I discuss more detail later in this 1

Takaki (1903, p. 31).

3.2 A Comparison of the Monetary Regimes Between China and Japan

31

Fig. 3.1 Monetary regime in prewar Japan

chapter, Japan unified its monetary standard under the Yen in 1871, and after 1899, all of the paper notes in domestic circulation were issued by the Bank of Japan. I next quantitatively describe the monetary system in Japan before 1870s. Here, I focus on metal coins only. This is because the role of financial institutional deposits in monetary functioning was limited in this period. Another reason is that I will compare the situation with that of China, in which the reliable statistics of deposit in the same period was unavailable. Table 3.1 shows some basic figures of monetary circulation in Japan before Meiji Restoration. Panel (a) is based on the estimation by Iwahashi (2019). I also add some other information in Panel (b) to evaluate the relative scale of money to compare with China. Although the same Chinese character was used to describe monetary account, it had totally different content in the two countries. In Japan, ryo ( ) is the name of the unit of gold coin, while in China, liang ( ) was the name of unit of silver currency. I use “ryo” to describe the unit of gold coin for Japan and “tael” to describe the unit of silver currency for China. Table 3.1 tells some interesting points of money circulation in Japan in the mid-nineteenth century. First, gold metal played a large part of role as money. By the end of Tokugawa, the ratio of gold coins to total metal coins was over 50%. According to Yamamoto (1994, p. 64) the ratios of gold, silver, and copper coins were 54%, 42%, and 4% in the end of 1860s, which are quite close to the figures in Table 3.1. Second, in the nineteenth century, major part of

32

3 The Divergence Between China and Japan

Table 3.1 Money in premodern Japan Panel (a)

Year Gold coin Silver coin (in Silver coin Copper coin Total metal gold standard) (by weight) coin 1000 ryo 1695 1710 1714 1736 1771 1818 1832 1858 1869

10,627 15,050 19,405 10,838 19,114 19,114 23,699 28,315 74,321

1000 ryo

1000 ryo

1000 ryo

1000 ryo

5,933 16,804 20,536 52,392

5,467 10,755 18,120 10,204 8,600 4,208 5,361 3,902 2,344

1,305 1,825 1,950 2,410 4,273 4,043 3,782 6,655 10,097

17,399 27,630 39,475 23,452 31,987 33,298 49,646 59,405 139,154

Panel (b)

Year Population Rice price

mil. person momme /koku 1695 1710 1714 1736 1771 1818 1832 1858 1869

26.5 27.3 27.5 28.3 29.4 30.9 31.4 33.0 34.3

67.4 55.7 70.1 118.0 631.6

Money Money per capita per capita in currency in rice ryo

kg

0.61 0.94 1.37 0.74 0.94 0.95 1.46 1.60 3.76

126.0 159.6 195.5 147.5 65.8

Note The data of gold, silver and copper coin are from Iwahashi (2019, 148). The data of population are from http://www.ggdc.net/Maddison/Oriindex.htm The exchange rates between gold and silver coin are from Shimbo (1978, pp. 171–173) The rice price in 1869 is estimated using price index in Shimbo (1978, p. 282) Calculations and transformations are base on the following formula: 1 koku = 150 kg

silver currencies was used by tale in standard of gold, not by weight as silver bullion. In 1869, over 95% of silver currency was counted by tale. Third, per capita money stock measured by rice shows a clear increasing trend in the first half of nineteenth

3.2 A Comparison of the Monetary Regimes Between China and Japan

33

century. However, in the last ten years of Tokugawa, per capita money measured by rice largely dropped. The main reason of this drop was the inflation caused by various problems. I will mention this problem again later. However, the metal of gold contained in one ryo was not the same for different periods due to the repeated debasements by the Tokugawa shogunate. By Mikami (2011, p. 284), the gold contained in 1-ryo gold coin (koban) casted at the end of Tokugawa period (two pieces of Manen Nibu Kin) was only one-eleventh of the 1ryo gold coin casted at the beginning of Tokugawa period (Keich¯o Koban). Recently, studies began to positively evaluate the shogunate debasements. That is, they not only provided temporary relief for the government budget, but also satisfied the money demand caused by the economic development and population growth. When we use the amount of rice to describe the amount of per capita money, we observe that per capita money could buy 148–195 kg of rice. This number largely dropped due to the fierce inflation in the final few years of Tokugawa. Table 3.2 presents the statistics of currencies in Japan from 1872 to 1945 and some related ratio. In calculating the sum of paper notes or the sum of total currencies in Japan, I subtract the currencies issued by Taiwan Bank or Chosen Bank for data consistency. It should be emphasized here that these currency figures are not based on estimation or value transformation. The original data are from officially published information and are evaluated by the unit of Yen. After 1871, money in Japan was unified under a single uniform standard. Although the base of monetary standard changed back and forth between gold standard, or gold-silver double standards in different periods, all of the money in Japan after 1871 was circulated under a single uniform standard at the same point of time. From Table 3.2, we can observe that although the monetary standard was unified in 1871, and the Bank of Japan took the responsibility of money supply only after 1885, there was quite a long period before the notes were dominantly issued by the central bank. Only after the last few years of the nineteenth century the ratio of the notes of Bank of Japan to the whole currencies was above 90%. We can also observe that the per capita money measured by rice steadily increased except the last few years before the end of the World War II.

3.2.2 The Monetary Development in Modern China This section describes the monetary development in China. Figure 3.2 shows the China’s monetary regime before World War II. Broadly speaking, the monetary regime in China before 1930s was the same as that in Japan before 1870s in the sense that the government only partially participated in the money provision. There were also some important differences between the monetary regime in China before 1930s and that in Japan before 1870s. Firstly, while gold was the major part of metal coins in Tokugawa Japan, it was completely absent in China’s monetary system. Silver and copper coins were the two major parts of money in China. By Yan (2012), the ratio of silver currency to copper

34

3 The Divergence Between China and Japan

Table 3.2 The amount of money supply in Japan after Meiji Year Coin Paper note Currency BOJ note GDP mil. yen mil. yen mil. yen mil. yen mil. yen 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906

12 39 60 59 53 57 56 56 52 44 42 47 50 54 56 38 31 37 42 43 42 46 51 63 70 76 92 81 82 89 93 94 98 103 117 135

24 48 56 60 68 80 94 100 107 119 166 164 159 153 144 132 124 122 136 138 137 142 163 169 171 188 185 212 224 239 205 256 229 214 232 233 287 313 342

24 50 56 73 108 140 153 154 164 175 222 216 204 196 190 183 178 178 174 169 175 184 206 212 217 238 248 282 300 330 286 338 318 307 327 331 389 430 477

4 39 53 63 74 103 116 126 149 150 180 198 226 197 251 229 214 232 233 287 313 342

516 506 486 567 727 700 759 715 678 710 795 789 807 854 942 1,042 1,123 1,110 1,181 1,320 1,531 1,643 1,930 2,164 2,282 2,381 2,450 2,502 2,659 2,987 3,042 3,257

Population Rice price mil. person yen/kg

35 35 35 35 36 36 36 36 37 37 37 38 38 38 39 39 39 39 40 40 41 41 41 42 42 42 43 43 44 44 45 46 46 47 47

0.0059 0.0076 0.0076 0.0063 0.0047 0.0054 0.0067 0.0055 0.0049 0.0049 0.0055 0.0085 0.0069 0.0073 0.0075 0.0076 0.0077 0.0083 0.0103 0.0125 0.0084 0.0105 0.0107 0.0110 0.0126 0.0118 0.0114 0.0132 (continued)

3.2 A Comparison of the Monetary Regimes Between China and Japan Table 3.2 (continued) Year Coin Paper note Currency mil. yen mil. yen mil. yen 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945

138 147 153 161 167 168 173 166 164 176 203 207 213 182 197 265 270 299 307 313 316 333 351 333 330 343 372 390 407 428 472 453 397 407 443 460 379 385 322

Note See appendix

370 353 349 397 429 444 421 381 421 587 816 1,178 1,661 1,600 1,737 1,696 1,744 1,652 1,617 1,556 1,654 1,678 1,603 1,426 1,324 1,385 1,482 1,549 1,619 1,767 2,292 2,563 3,642 4,813 6,390 7,617 10,838 18,539 56,336

508 500 502 557 596 612 594 546 585 763 1,019 1,385 1,873 1,782 1,934 1,962 2,014 1,951 1,924 1,869 1,970 2,012 1,955 1,759 1,653 1,728 1,854 1,939 2,026 2,195 2,763 3,016 4,039 5,220 6,832 8,076 11,217 18,924 56,658

35

BOJ note mil. yen

GDP mil. yen

Population Rice price mil. person yen/kg

370 353 349 397 429 444 421 381 421 587 797 1,087 1,515 1,400 1,521 1,538 1,676 1,626 1,599 1,542 1,641 1,666 1,591 1,414 1,312 1,374 1,470 1,538 1,608 1,756 2,281 2,474 3,394 4,453 5,925 7,070 10,185 17,729 55,441

3,692 3,715 3,728 3,871 4,402 4,709 4,945 4,673 4,923 6,064 8,475 11,678 15,242 15,679 14,683 15,361 14,720 15,364 16,043 15,757 16,071 16,281 16,064 14,498 13,105 13,653 15,004 16,405 17,516 18,632 24,521 28,046 34,630 41,238 46,995 56,927 66,808 77,986 287,074

47 48 49 49 50 51 51 52 53 53 54 55 55 55 56 57 58 58 59 60 61 62 63 64 65 66 67 68 69 70 70 71 71 71 72 72 73 74 72

0.0144 0.0133 0.0113 0.0110 0.0145 0.0170 0.0183 0.0139 0.0109 0.0115 0.0164 0.0257 0.0367 0.0373 0.0266 0.0303 0.0273 0.0293 0.0320 0.0300 0.0280 0.0235 0.0241 0.0227 0.0154 0.0172 0.0176 0.0210 0.0238 0.0248 0.0265 0.0287 0.0363 0.0365 0.0706 0.1048 0.1389 0.1731 0.2072

36

3 The Divergence Between China and Japan

Fig. 3.2 Monetary regime in prewar China

currency was 3 to 1 in the first half of nineteenth century. Second, in contrast to the repeated debasement by Tokugawa government in Japan, the debasement of the Qing dynasty was rare. Third, in most part of the Qing period, silver money was used in bullion form, while the major part of silver money in Japan was used by tale. In contrast to Japan, there were no domestically casted silver coins in China before the end of nineteenth century. Finally, huge amount of foreign currencies including silver dollars and paper notes was directly circulated in China. For example, according to Peng (2015 [1965], p. 660), at the end of Qing period, the ratio of foreign silver dollar to the total silver currency and the ratio of paper notes issued by foreign institutions to the total paper notes were 38.6% and 36.0%, respectively. In contrast, Yamamoto (Yamamoto 1994, pp. 100–101) reported that in Japan, foreign silver dollars “did not enter domestic market directly and the circulation was limited only in some treaty ports.” Besides these differences of money used in China and Japan, it should be emphasized that some assertions by Hayek are not suitable for the case of China. For example, Hayek emphasized that

3.2 A Comparison of the Monetary Regimes Between China and Japan

37

the history of coinage is an almost uninterrupted story of debasements or the continuous reduction of the metallic content of the coins and a corresponding increase in all commodity prices.2

It seems that Hayek did not notice these historical phenomena in premodern China. By various reasons analyzed in the last chapter, the debasements were not a common story in China at all. One more point emphasized by Hayek is that I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments—though the gold and silver discoveries in the 16th century had a similar effect.3

Things in China were just the opposite. The officially provided coin, the copper ). It was the problem of deflation, cash, constantly faced shortage (qian huang not the inflation, that made the consumers in China suffer, especially for small transactions or transactions for daily life. Reliable estimates on the money stock in China before twentieth century are rare. Using available information, I calculate the amount of currency, the sum of copper, silver coin, and paper note in the first half of twentieth century. These estimates are very rough. The source information and the assumptions used to fill the missing data might not have been appropriate. Nonetheless, it is useful to use this information to quantitatively approach the monetary system in prewar China. Table 3.4 shows the estimates of copper, silver, and paper note of China in 1901– 1945. I also add the information on GDP, population, and rice price to calculate the amount of currency in relative terms. Table 3.5 shows the same information as that of Japan in Table 3.3. It should be pointed out that the currency data for Japan are based on officially published data and are highly reliable. In contrast, the information on China is based on estimation, which may be accompanied with high degree of inaccuracies. Another important point is that the currency in Japan was highly uniform after 1870s, not only for the authority to monopolistically provide money like what Tokugawa shogunate had practiced, but also for the unit of standard. The unit of standard was uniform under Yen. The kind of money be used in transactions did not depend on locations, industries, or trader’s status. In contrast to Japan, the chaotic using of silver bullion, silver coin, copper cash, and paper notes issued by domestic or foreign institutions were concurrently circulated in China until 1935. Although all currencies in Table 3.4 were expressed in the term of Yuan, originally they were circulated under different names and exchanged under different standards. Even after the Currency Reform that successfully unified money in proper area of China in 1935, Japanese military or Chinese communist forces issued and circulated their own currencies in their occupied areas. Tables 3.1, 3.2, 3.3, 3.4 and 3.5 also tell us some interesting points regarding the monetary development between China and Japan. 2 3

Hayek (1990, p. 33). Hayek (1990, p. 34).

38

3 The Divergence Between China and Japan

Table 3.3 Relative scale of money supply in Japan after Meiji Year Currency/ Paper note/ BOJ note/ GDP currency paper note % % % 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908

29.8 32.3 36.1 39.2 29.7 29.1 25.8 26.6 26.9 25.1 22.4 22.1 20.9 20.5 19.5 19.8 18.8 19.6 20.2 18.8 18.4 18.3 17.1 13.2 14.8 13.4 12.5 13.1 12.5 13.0 14.1 14.6 13.8 13.5

63.5 56.9 61.4 65.3 65.3 68.0 74.6 76.1 78.2 78.3 75.5 72.4 69.9 68.7 78.2 81.5 78.6 77.2 79.0 80.0 78.7 78.8 74.7 75.3 74.6 72.2 71.7 75.7 71.9 69.8 71.1 70.3 73.6 72.8 71.7 72.7 70.6

3.0 28.6 38.7 45.8 52.3 63.1 68.3 73.5 79.1 81.0 85.0 88.5 94.8 96.4 98.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Currency pc by yen yen

Currency pc by rice kg

3.1 4.0 4.4 4.4 4.6 4.9 6.1 5.9 5.6 5.3 5.1 4.9 4.7 4.6 4.5 4.4 4.5 4.7 5.2 5.3 5.4 5.8 6.0 6.8 7.2 7.8 6.7 7.8 7.3 6.9 7.3 7.3 8.4 9.2 10.1 10.7 10.4

1,001.3 736.1 693.7 806.8 1,032.8 874.7 694.8 828.8 887.2 922.5 847.7 609.1 759.4 739.1 780.3 787.4 879.0 863.9 754.8 533.4 928.0 693.4 645.0 660.7 578.9 713.4 805.1 768.1 744.1 780.9 (continued)

3.2 A Comparison of the Monetary Regimes Between China and Japan Table 3.3 (continued) Year Currency/ GDP % 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945

13.5 14.4 13.5 13.0 12.0 11.7 11.9 12.6 12.0 11.9 12.3 11.4 13.2 12.8 13.7 12.7 12.0 11.9 12.3 12.4 12.2 12.1 12.6 12.7 12.4 11.8 11.6 11.8 11.3 10.8 11.7 12.7 14.5 14.2 16.8 24.3 19.7

39

Paper note/ currency %

BOJ note/ paper note %

Currency pc by yen yen

Currency pc by rice kg

69.5 71.1 71.9 72.6 70.9 69.6 71.9 76.9 80.1 85.1 88.7 89.8 89.8 86.5 86.6 84.7 84.0 83.3 83.9 83.4 82.0 81.1 80.1 80.1 79.9 79.9 79.9 80.5 82.9 85.0 90.2 92.2 93.5 94.3 96.6 95.6 98.4

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 97.6 92.3 91.3 87.5 87.5 90.7 96.1 98.4 98.9 99.1 99.2 99.3 99.2 99.2 99.1 99.2 99.2 99.3 99.3 99.4 99.5 96.5 93.2 92.5 92.7 92.8 94.0 95.6 98.4

10.3 11.3 12.0 12.1 11.6 10.5 11.1 14.3 18.8 25.3 34.0 32.1 34.5 34.5 35.0 33.4 32.5 31.0 32.2 32.4 31.1 27.5 25.5 26.2 27.7 28.6 29.5 31.5 39.5 42.8 57.0 73.1 95.4 111.7 153.0 256.4 378.7

915.3 1,031.1 823.3 711.2 631.6 754.4 1,017.6 1,244.8 1,149.2 986.3 927.4 862.4 1,294.8 1,139.0 1,279.9 1,139.7 1,016.0 1,034.6 1,150.8 1,378.8 1,290.5 1,215.5 1,654.9 1,525.1 1,574.9 1,364.1 1,239.8 1,272.0 1,488.7 1,489.8 1,571.3 2,003.2 1,350.9 1,066.1 1,101.6 1,481.8 1,828.0

Note Data in this table are calculated from Table 3.2

40

3 The Divergence Between China and Japan

Table 3.4 The amount of currency in China in the first half of twentieth century Year Silver Copper Paper note Total GDP currency mil. yuan mil. yuan mil. yuan mil. yuan mil. yuan 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937

1,627 1,616 1,612 1,602 1,597 1,583 1,560 1,551 1,556 1,572 1,600 1,614 1,641 1,631 1,617 1,596 1,580 1,598 1,637 1,705 1,729 1,758 1,808 1,827 1,873 1,913 1,961 2,039 2,117 2,167 2,200 2,195 2,188 2,055 1,918 1,781

425 420 414 409 403 398 392 387 381 376 370 365 359 354 348 343 338 332 327 321 316 310 305 299 294 288 283 277 272 266 261 256 250 245 239 234

93 118 116 117 136 115 112 143 107 114 143 157 163 118 209 233 287 282 251 281 369 368 387 410 519 571 637 737 854 922 864 889 938 1,109 1,414 2,439 2,067

2,145 2,154 2,142 2,128 2,136 2,095 2,064 2,080 2,044 2,062 2,113 2,136 2,163 2,103 2,175 2,172 2,205 2,212 2,215 2,308 2,413 2,437 2,499 2,537 2,686 2,772 2,880 3,053 3,243 3,355 3,325 3,339 3,375 3,409 3,571 4,453 3,930

11,718 11,388 12,889 12,474 11,561 11,623 14,398 15,776 16,606 18,248 19,031 20,701 21,780 23,190 27,938 29,179 31,704 34,336 33,250 32,753 29,460 25,488 28,648 33,898

Population mil. person 402 404 407 409 411 414 416 418 421 423 428 432 437 442 447 452 457 462 467 472 474 475 477 479 480 482 484 486 487 489 493 496 500 503 505 508 511 (continued)

3.2 A Comparison of the Monetary Regimes Between China and Japan Table 3.4 (continued) Year Silver mil. yuan 1938 1939 1940 1941 1942 1943 1944 1945

Copper

Paper note

mil. yuan

mil. yuan 3,406 7,395 13,195 23,849 52,441 1,099,286 2,930,117 6,712,787

Total currency mil. yuan

41

GDP

Population

mil. yuan

mil. person 513 516 519 522 524 527 530 533

Note See appendix

• Although Bank of Japan was established in 1882 to take the responsibility of note issuing, it took time to become the dominant player to supply paper notes. • The ratio of currency to GDP was high in the first three decades of Meiji period. After 1900, except some outliers right before the end of the World War II, this ratio moved to a relatively stable range between 11 and 14%, The high ratio before 1900 may reflect the relatively underdevelopment of banking sector. Currency does not include bank deposits. Although not shown in the table, after adding bank deposits as part of money, the ratio of money to GDP shows a constant increasing trend over the whole period except a few years right before the end of war. • In the first half of twentieth century, the amount of currency per capita measured by rice purchasing power was higher in Japan than that in China. This amount in Japan showed an increasing trend. The same amount in China decreased until the last few years before the end of the World War II, in which the hyperinflation was observed.

3.2.3 Some Other Differences in the Modernization Process Between China and Japan The argument on monetary system is only meaningful in the context of general economic developments. It is widely known that the social and economic development of China was largely behind Japan in the prewar period. This differences of the modernization process between China and Japan can be compared in different ways. One of the best ways to illustrate the differences may be to compare the development of railroad industry. Before 1860s, there were no railway transportation in both countries. After each country was opened by the Western powers, railroad construction was promoted by the leaders in both countries. After all, the conflict on the ownership of railroad companies triggered the collapse of

42

3 The Divergence Between China and Japan

Table 3.5 Relative scale of currency in China in the first half of twentieth century Year Rice price Currency/ GDP pc by GDP pc by Currency pc Currency pc GDP yuan rice by yuan by rice yuan/kg % yuan kg yuan kg 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936

0.0337 0.0474 0.0449 0.0390 0.0307 0.0417 0.0534 0.0502 0.0401 0.0509 0.0568 0.0565 0.0513 0.0457 0.0527 0.0507 0.0464 0.0471 0.0494 0.0684 0.0689 0.0796 0.0796 0.0729 0.0779 0.1122 0.1051 0.0795 0.0961 0.1211 0.0874 0.0808 0.0573 0.0731 0.0876 0.0742

18.5 18.5 16.9 17.4 19.1 19.0 15.4 14.6 14.5 13.4 13.1 12.3 12.3 12.0 10.3 10.5 10.2 9.8 10.0 10.2 11.5 13.4 12.5 13.1

26.8 25.8 28.8 27.6 25.3 25.2 30.8 33.4 35.1 38.4 39.9 43.2 45.3 48.1 57.7 60.1 65.1 70.2 67.5 66.0 58.9 50.7 56.7 66.7

522.6 564.1 547.9 545.1 545.6 534.4 624.6 488.8 509.0 482.2 501.1 593.5 581.9 428.7 549.5 756.2 676.9 579.8 771.8 817.2 1,027.4 693.9 647.3 899.3

5.3 5.3 5.3 5.2 5.2 5.1 5.0 5.0 4.9 4.9 4.9 4.9 4.9 4.8 4.9 4.8 4.8 4.8 4.7 4.9 5.1 5.1 5.2 5.3 5.6 5.7 6.0 6.3 6.7 6.9 6.7 6.7 6.8 6.8 7.1 8.8

158.1 112.4 117.3 133.4 169.3 121.5 92.9 99.0 121.3 95.8 87.0 87.4 96.5 104.1 92.4 94.9 104.0 101.7 96.1 71.5 74.0 64.4 65.8 72.7 71.8 51.2 56.6 79.1 69.2 56.7 77.2 83.3 117.7 92.8 80.7 118.1 (continued)

3.2 A Comparison of the Monetary Regimes Between China and Japan Table 3.5 (continued) Year Rice price yuan/kg 1937 1938 1939 1940 1941 1942 1943 1944 1945

Currency/ GDP %

GDP pc by yuan yuan

GDP pc by rice kg

0.0896 0.0978 0.1688 0.4834 1.0426 5.0681 20.5637 162.0473 10,640.0198

43

Currency pc Currency pc by yuan by rice yuan kg 7.7 6.6 14.3 25.4 45.7 100.0 2,085.8 5,530.5 12,603.6

85.9 67.8 84.9 52.6 43.9 19.7 101.4 34.1 1.2

Note See appendix

the Qing dynasty. We can take the differences of railway transportation between the two countries as a symbolic example for the differences of modernization. This discussion intends to clarify the background of the overall economic development that corresponded to the monetary systems. Table 3.6 reports the capacity of passenger and freight traffic by railway in China and Japan in the prewar period. Although the population of China was 7–10 times that of Japan, both the passenger and freight traffic capacity of Japan in absolute volume, let alone for the per capita measures, were much larger than that of China and there were no signs that the gaps between the two countries narrowed before the end of World War II. These gaps in the economic development between the two countries are the causes, also the consequences of the monetary systems we discussed in this chapter. The discussion in the chapter largely depends on the perception that the monetary reform of Japan in the 1870s improved the market efficiency and contributed to the later-on economic development. While it is not my objective here to identify the causality between monetary regime and economic development, the information in Table 3.6 consistently supported this perception. My focus here is on the factors that influence the differences of modern monetary regime development between the two countries. The central issue here is how did the state support the development of monetary regime.

3.3 The Explanations in the Previous Studies While few studies directly compare the modern monetary development between China and Japan, some studies analyze the failure of monetary reform in the late Qing period, which is indirectly related to the issue I am concerned here. Zhuo (1986) summarized the monetary reform in later Qing period as “a rare case of reform in the

726 1,731 3,048 4,032 5,198 6,788 14,725 20,873 23,499 28,768 59,904 97,453

1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945

1,376 993 3,162 3,761 3,762 4,349 1,438 1,820

Passenger mil. km × person China

2,251 4,541 4,111 3,477 6,489 499 366

China

Japan 108 525 1,192 2,210 3,528 5,536 9,932 12,199 11,886 15,134 28,740 19,313

Freight mil. ton × km

Freight mil. ton × km

18.2 41.7 69.5 86.5 105.7 128.7 265.4 352.7 367.9 419.0 839.0 1,349.8

Passenger per capita km × person Japan

3.9 2.2 6.8 7.9 7.6 8.2 2.7 3.3

Passenger per capita km × person China 2.7 12.6 27.2 47.4 71.7 104.9 179.0 206.1 186.1 220.4 402.5 267.5

Freight per capita km × ton Japan

5.0 9.8 8.6 7.0 12.2 0.9 0.7

Freight per capita km × ton China

Note The data of railway transportation of Japan are from J1211_001, J1212_001, Long Term Economic Statistics database, Hitotsubashi University http://webltes.ier.hit-u.ac.jp/repo/repository/LTES/ The data of China are from Yan (1955, pp. 207–208) The data of population are from http://www.ggdc.net/Maddison/Oriindex.htm. Linear interpolation method is used in some cases of missing year

Passenger mil. km × person Japan

Year

Table 3.6 A comparison of traffic compacity by railway between China and Japan

44 3 The Divergence Between China and Japan

3.3 The Explanations in the Previous Studies

45

world that takes such a long time but harvests nothing.”4 However, Zhuo did not give an explicit definition of what a successful monetary reform should be like. Here, I simply refer to the failure of monetary reform in the late Qing period as the failure of the unification of monetary standard. Compared to other studies, especially scholars from the mainland that focus solely on the brutality of foreign imperialists or on the political legitimacy of the current authority, Zhuo analyzed the process of monetary reform with less ideological considerations. Zhuo (1986, pp. 96–102) listed the main reasons of the failure as follows: 1. Lack of a perfect plan. The whole process of the reform was based on a “find-it and fix-it” approach, and no fundamentally effective measures were considered. 2. Lack of experts. Zhuo mentioned the names of Hu Yufen, Zhang Zhidong, and Yang Yizhi, among others, who were the representative reformers on the monetary system at the end of nineteenth century, and pointed out that from the view point of Western experts, no one could have been capable enough to formulate a feasible reform plan. 3. Lack of enough funds. It is assumed that to write off the old currencies, the government needs huge amount of funds. The Qing government had already seriously suffered by the demands of indemnity payments and the military expenditure; thus it had no ability to bear such a huge burden. So, the Qing court could not execute the reform without financial support. 4. Conflicts between central and local governments. As minting of silver or copper coins could earn profits in the form of seigniorage gain, local governments had strong incentives to share them with the central government. As a result, the late Qing government failed to completely take the monopoly position of money supply. 5. The existence of nationalist sentiments. Ordinary people tended to overly react to the suggestions in the reports of monetary reform, especially that suggested by foreign experts. To the extent that these suggestions might have been necessary, for example, to hire foreign staffs in the monetary reform committee, such kind of sentiments could negatively influence the reform. Although Zhuo discussed that these factors as the main forces that had negatively affected monetary reform in the late Qing period, I believe that these forces, if they should have effectively affected the monetary reform in late Qing period, they must also have been equally important for the whole period before 1930s.5 Zhuo also mentioned some other factors that caused the failure of the reform, such as the country’s size, underdeveloped traffic system, people’s life style and habits, the presence of foreign residence, and the extraterritoriality etc. While a large number of factors would have potentially involved in the monetary development in China, I am also aware that saying that all factors are important is no more than saying that no 4

Zhuo (1986, p. 96). Comparing the state of Qing, the new government of Republican China did not show an improved ability for monetary reform. As Fairbank (1983, p. 351) pointed, the Republic government seemed to be more “rudderless, unprincipled, and ineffective.”

5

46

3 The Divergence Between China and Japan

factor is important. In the next discussion, I focus on the above five points in detail. I show that if we carefully compare the history in other periods or other countries, many of Zhuo’s points are at most irrelevant.

3.3.1 A Perfect Plan May Not Be Necessary As long as we separately consider the monetary reform in China, we cannot deny that the lack of a perfect plan for the monetary reform may have caused some inconsistency problem and made the reform impossible. However, if we look outside China, we could observe that at least from the experience of Japan, a perfect plan may be neither possible nor necessary. It is well known that for the first few decades, the monetary reform in Japan was filled with trial and error. For example, the initial draft of the New Coinage Act was supposed to establish the monetary regime based on silver standard. However, only before a few months of its promulgation, the monetary standard was changed to gold mainly by the supplication of Ito Hirofumi, who had been inspecting American monetary system abroad. Nonetheless, the monetary standard had to be changed again to silver standard by the reality of silver using in Japan. It was by the indemnity from China after 1895 did Japan finally realize gold standard.

3.3.2 Knowledge and Technology Could Be Imported from Abroad It is true that very few domestic official staffs had a good understanding of modern monetary theory. However, the knowledge could be imported from abroad. In the case of Japan, although domestic experts were rare, the Meiji government employed many foreign experts, including bankers and scholars to support the monetary reform. Right after the Restoration, the first plan for the new monetary system was based on the suggestions of John Robertson, the manager of Oriental Bank Corporation.6 It is well known that the first Director of the Imperial Mint in Osaka was the former Master of the Royal Hong Kong Mint, T. W. Kinder. In fact, in the first few decades, Japanese government hired quite a large number of foreign experts from Western countries. Table 3.7 shows the number of the foreign experts hired by Meiji government. The Chinese government had employed the “money doctors” and these foreign experts enthusiastically accomplished a hard job, although did not succeed.7 Records show that many excellent foreign scholars and experts devoted their energies to support monetary reform in China. Comparing the lack of state capacity of the government, the lack of domestic experts seems to be at most of secondary importance. 6 7

Ono (2000, pp. 47–48). Ho (2016).

3.3 The Explanations in the Previous Studies

47

Table 3.7 Foreign experts employed by the Meiji government Science Engineering Business teaching 1870s 1880s 1890s 1870–90

1,300 1,698 3,566 6,564

2,210 2,613 2,070 6,893

593 897 566 2,056

Other

Total

1,698 1,244 277 3,219

5,801 6,453 6,479 18,732

Source Howe (1996), p. 258

3.3.3 Financial Support for Monetary Reform To unify the currency standard means to create a new kind of currency under new uniform monetary standard and abolish all the old currencies. Does this process need sufficient financial support? As long as the government insists on writing off all of the old currencies by compensating old currency holders with species, like an usual shopping activity, financial support is definitely needed, at least temporarily. However, a few examples show that the government accomplished the monetary reform without any external financial support. Furthermore, to the extent the government could issue new fiat currency that has no intrinsic commodity value at all, advance payment by species may not be necessary. China successfully accomplished the monetary reform “in a single morning.” This happened during 1949–1950. Accompanied with the victory of the Communist Party over the Nationalist government, the new government quickly created a new currency, Renminbi. It is said that on the same day of communist army’s entering into Shanghai, 40 trucks fully carrying paper notes of Renminbi drove into Shanghai together.8 However, the currency of Renminbi was not, and also is not now, supported by either gold or silver or any foreign exchanges. Under the powerful enforcement of the new government claims, the old currencies including silver coins, currencies issued by the old government, and foreign currencies had been quickly exchanged to Renminbi. For example, in Tianjin, the second largest city in northern China, the first announcement of the monetary regime-change was on January 16, 1949. After that, on January 26 of the same year, “the ratio of Renminbi to total currencies in the market reached 93%.”9 In his analysis of the establishment of Renminbi system, Zhu concluded that “the new government, ‘using nothing’, successfully realized the monopolistically control of currency and social wealth.”10 While the Nationalist government received some financial support from Great Britain and America when they set up a uniform monetary standard in 1935, there was no evidence that the socialist government received any such support from for8

Zhu (2012, vol. 2, pp. 52–53). Zhao and Liu (2009, p. 68). 10 Zhu (2012, vol. 2, p. 55). 9

48

3 The Divergence Between China and Japan

eign countries when it started a new monetary regime during 1949–1950. The experience of Renminbi establishment tells us that depending on the effectiveness of legal enforcement and the using of fiat money, financial support may not be necessary. I can safely say that the lack of financial support was not the main cause of the failure of monetary reform in late Qing period. It should be emphasized that the establishment of Renminbi was not aimed at improving market function. In the next few decades, the new currency served simply as a tool of economic planning, not as a tool to support market functions.

3.3.4 Conflicts Between Central and Local Governments While the conflicts between the central and local governments must have negatively affected the monetary reform in late Qing, these conflicts should not be classified as causal or exogenous. They were at most a part of the result caused by other fundamental factors. After all, any kind of reform may affect the interests of certain persons or groups. If the existence of conflicts between different groups always forms some dominant forces negatively, there will be no hope for success of any kind of reform. Literature on modern monetary system in China are filled with episodes of the ineffective or powerless government of China in managing and regulating the economy especially for the period around the turn of the twentieth century. Here are a few examples: • In Daoguang period (1821–1850), the governor of Jiangsu province tried to mint their own silver coin, but “forgeries was flooding, beauty laws and good policies could not be executed.”11 • In April 1899, considering that there were too many mints of silver coin operated in each province, the Qing government decided to stop local minting except Hubei and Guangdong. However, “this order could not be effectively carried out.”12 • In 1909, the Qing government noticed the chaotic state of paper note issuing and tried to rectify the problems and unify the note issuing. The government announced the Regulations of General Bank Notes, which stipulated the issue limit and prohibited additional issuing. In 1910, the government delivered Rules for Exchange of Bank Notes, which required 50% of reserves and called back 20% of the privately issued notes. However, “these orders were not carried out.”13 In analysis of government regulation in this period, Cheng pointed that “chaos in the first decades of the twentieth century made it impossible to carry out any such policy.”14 11

Shen (1974, p. 638). Zhang (2003, p. 90). 13 Zhongguo Shehui Kexueyan Jindaishi Yanjiusuo and Zhonghua Minguoshi Yanjiushi (1982, p. 29). 14 Cheng (2003, p. 162). 12

3.3 The Explanations in the Previous Studies

49

• In 1931, the New Banking Law was promulgated. However, “for various reasons, this law was not implemented.”15 It is not difficult to add more episodes to the list. All these phonomena had a common set of institutional elements: the lack of management or regulation ability of the Chinese government. It is not the existence of the conflict of interests between different groups that is common for any kind of social reform, but the lack of capacity of management or ability of co-ordination for the government to achieve the goal of reform. The presence of Western and Eastern powers in China may have influenced the autonomy and efficiency of the government. However, this may not be the whole story. The same kind of problems exist even after a century. In an analysis of the Chinese economic development that was stimulated by the so-called reform and open policy after 1978, Minami pointed out that “the administrative function of governments is extremely poor. Local governments do not always follow the regulation of central government, and the administrative guidance does not work well in the private sector.”16 The conflicts between the central and local governments were the results of the weakness of state capacity, which I will discuss later in this chapter.

3.3.5 Nationalist Sentiments Although the economic literature usually limits the function of money only to the economic area, such as medium of exchange, unit of account, or store of value. Some arguments emphasize other kind of functions of money. “It was thought that territorial currencies might encourage identification with the nation-state at a deeper psychological level.”17 Helleiner further pointed out that the desire to strengthen national identities was one more reason for policymakers in each country to construct territorial currencies.18 Here, as I declared in the previous chapter, the concept of Helleiner’s “territorial currency” has the same meaning of “money in modern form” or “uniform currency” in this book, which the government of China tried, but failed to realize before 1930s. However, Zhuo argued this issue in a different context to Helleiner’s discussion. He pointed that people over-reacted to the advices or suggestions by foreign experts. “The sentiments of anti-imperialist and nationalist hindered the people from engaging in rational reform.”19 It is true that national sentiments influenced the process of monetary reform. After all, without the national sentiments of anti-imperialism, anticolonialism, or nationalism, it is difficult to explain why Chinese finally chose the 15

Li (2010, p. 83). Minami (1990, p. 28). 17 Helleiner (2003, p. 11). 18 Helleiner (2003, p. 100). 19 Zhuo (1986, p. 102). 16

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3 The Divergence Between China and Japan

proletariat despotic government after the World War II. Here, I will not dig this challenging issue further, instead I list the following points: • The xenophobic feeling in Japan was equally, if not more, as serious as that in China. For example, “Sonn¯o j¯oi” is one of the famous political slogans at the end of Tokugawa or the beginning of Meiji. The later half of this slogan means “expulsion of the foreigners.” • As observed in Table 3.7, the xenophobic feeling did not largely affect Japanese to learn from the West. • Not only the monetary reform for Japan in 1870s, but also that for China in 1930s or around the years of 1949–1950, the government succeeded in establishing new monetary system and dealt well enough so that the nationalist sentiments did not fundamentally bother the reform, although by quite different approaches. Therefore, the existence of xenophobic sentiments itself is not the fundamental reason of failure of monetary reform. King raised a different sentiment issue, similar to what we discussed in Chap. 2, “the traditional reluctance of the Chinese, a reluctance well justified by experience, to accept government fiat money.”20 Such reluctance was a natural result or symptom caused by government behaviors and market conditions, but not the fundamental determinant of the monetary structure. When the Renminbi, a currency that was not backed by any species or foreign exchange from the beginning, appeared as the only currency in China during 1949–1950, this kind of reluctance did not limit or block its circulation in any manner.

3.4 The Motivation of Monetary Reform Generally speaking, monetary modernization in Asian countries should involve a large number of influencing factors, such as political regime and people’s traditional inhabits, especially the presence of Western powers. It is nonetheless helpful to concentrate on certain critical factors. My explanation on the differences of monetary reform processes between China and Japan after 1850s is based on two hypotheses. One is on the differences of motivation and the other one is on the differences of state capacity. In this section, I explain the first one; the second one will be discussed in the next section. The principal-agent model introduced in Chap. 2 assumes that players’ decisionmaking depends on their utility function, that is, the motivations determine the actions of each player. In China, until the end of nineteenth century, very few people touched the issue of monetary reform. In contrast, in Japan, from the beginning of Meiji Restoration, the currency reform was given a high priority compared with reforms in other areas.

20

King (1965, p. 9).

3.4 The Motivation of Monetary Reform

51

Table 3.8 Selected chronology in the early Meiji period Year Contents of reform 1868/10/23 1871/6/27 1871/8/29 1872/9/4 1873/7/28 1876/3/28 1876/8/5

Era is changed to Meiji New Currency Act is promulgated Abolition of Domains is announced Fundamental Code of Education is proclaimed Land Taxes are revised Sword Prohibition is announced Kinroku Bond Issuing Act is promulgated

In 1895, Hu Yufen, a local official from Beijing, submitted a proposal to the Emperor to suggest the reform of the currency system, urging the adoption of a uniform currency system. Although this memorial was already half a century away from the Opium War, Kann said that Hu’s proposal “belongs the distinction of having first advocated currency reform for China.”21 In Kann’s words, in China, no one had ever touched the issue of the currency system reform before 1895. While many scholars and thinkers had been discussing some kind of issues of currency problem constantly in the periods including the eighteenth or the first half of nineteenth century,22 very few of them considered the necessity to unify the monetary standard, let alone to reform the overall monetary system to catch up with the developed powers. Contrary to the situation in China, the Meiji reformers regarded the currency problem as the first important issue to be reformed from the beginning. The New Coinage Act was promulgated in May 1871. As Table 3.8 indicates, the currency reform started much earlier than the reforms in other area, such as education and land tax. It was even earlier than the announcement of Abolition of Domains (haihan ). chiken After the first contact with the Western powers, the Meiji government’s strong desire to reform the currency system was in sharp contrast with that of the Qing government. Why were the perceptions of importance of currency reform so different between these two countries? The first point is that although the leaders of both countries were engaged in certain kind of reform, persons in charge and their positions differed. In China, all the reforms before the last few years of nineteenth century were centered on some conservative senior officials of the old government or members of the royal family. Their priority must have been the survival of the old system instead of allowing any institutional changes. They felt what they needed was simply the Western weapons and technologies, not their institutions or law and political systems. For example, when Prince Yixin , the most influential reformer in the later half of nineteenth century, and his followers began to reform the military troops, “not surprisingly they believed that China’s problem was not so much the quality of her 21 22

Kann (1927, pp. 356–357). Some of them are introduced in Lin (2006).

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troops as that of their weapons.”23 Unlike the Chinese reformers, after overthrowing the Tokugawa shogunate, the Meiji new leaders in Japan engaged in reforms to survive Japanese society, not the old shogunate system. Furthermore, the degree of penetration to the two countries by Western powers might also have more or less affected the content and process of reform. For example, in mid-nineteenth century, huge amount of foreign silver coins were circulated in almost everywhere in China. In contrast, as I mentioned before, the foreign silver coins were not widely used in Japan domestically. While the above-mentioned differences between reformers in China and Japan and the differences in some initial conditions have been relatively well documented in previous studies, here, I emphasize another factor that may be more important but less mentioned by previous researchers for the formation of incentives of reformers in Japan but not observed in China. That is, the so-called “gold rush” occurred at the end of Tokugawa. Usually, gold rush refers to the phenomenon that happens around a newly discovered gold mine. However, gold rush in the mid-nineteenth-century Japan has a special meaning.24 In July 1858, “Treaty of Amity and Commerce” was concluded between Japan and America, which usually have been listed on the top of the unequal treaties between Japan and Western powers. In Article V of this treaty, the rule of currency exchange between foreign and domestic traders was regulated as follows25 : All foreign coin shall be current in Japan, and pass for its corresponding weight of Japanese coin of the same description. Americans and Japanese may freely use foreign coin in making payments to each other. As some time will elapse before the Japanese will be acquainted with the value of foreign coin, the Japanese Government will, for the period of one year after the opening of each harbor, furnish the Americans with Japanese coin, in exchange for theirs, equal weights being given and no discount taken for recoinage. Coins of all descriptions (with the exception of Japanese copper coin) may be exported from Japan, and foreign gold and silver uncoined.

The “equal weights” principle applied solely to the price of foreign silver coin (Mexican or American silver dollar) against Japanese silver coin (ichibu gin). This principle had a profound consequence. Table 3.9 shows the weight and content of major gold and silver currencies in Japan and America in 1858. From Table 3.9, we can easily confirm that at the end of Tokugawa, the price of gold to silver was about 1:5, much lower than that of America, around 1:15, which was also the silver to gold price in the international markets. As usually discussed in the economics, the existence of price difference means the existence of arbitrage opportunities. From a theoretical point of view, the arbitrage opportunities were equally provided for foreign and Japanese people. On the one hand, foreign merchants could first use Mexican or American silver dollars to exchange for Tenpo Ichibu Gin (Japanese 23

Fairbank (1978, p. 494). See Frost (1970), Bytheay and Chaiklin (2016). 25 https://worldjpn.grips.ac.jp/documents/texts/pw/18580729.T1E.html. Accessed on January 20, 2021. 24

3.4 The Motivation of Monetary Reform Table 3.9 Gold and silver currencies of Japan and America in 1858 Weight (gram) Content of gold Japanese currency Tenpo Koban 11.22 56.77% Tenpo Ichibu Gin 8.62 0.21% American currency 10 dollar eagle gold coin 16.7 90% silver dollar coin 26.7 – Domestic exchange rate in Japan and America Exchange rate in Japan Tenpo Koban = 4 pieces of Tenpo Ichibu Gin Exchange rate in America 10 dollar eagle gold coin = 10 pieces of silver dollar coins

53

Content of silver 43.23% 98.86% – 86.50%

Note The information of American silver dollar is from Takahashi (2018, p. 114); the information of other currencies are from wikipedia Tenpo Koban, https://ja.wikipedia.org/wiki/%E5%A4%A9%E4%BF%9D%E5%B0%8F%E5%88%A4 Tenpo Ichibu Gin, https://ja.wikipedia.org/wiki/%E4%B8%80%E5%88%86%E9%8A%80 10 dollar eagle gold coin, https://en.wikipedia.org/wiki/Eagle_(United_States_coin)

silver coin) weight-by-weight in Japan and then exchange Tenpo Ichibu Gin for Tenpo Koban (Japanese gold coin) in Japan’s domestic market and finally exchange koban for silver coin in the international market. By these transactions, a foreign merchant could earn arbitrage profit. On the other hand, Japanese merchants could also earn arbitrage profit by the following transaction strategies. That is, first to exchange koban for silver dollar in international markets and then exchange the silver dollar for domestic silver currency in domestic markets. However, the reality was that, at that time, very few Japanese merchants engaged in international trade, let alone selling koban directly in international markets.26 It needs to be emphasized that although there existed a large gap in the price ratio of gold and silver between international and Japan’s domestic markets, the use of Japanese silver coins was basically in the form of supplementary currency. However, when Japan began negotiating with Western countries after the isolationist policy for some 200 years, there was no way for Japanese representatives to persuade foreigners that the system in Japan was different.27 The phrase “pass for its corresponding weight” meant that the above-mentioned arbitrage transactions would generate profits. The Bakufu government was well aware of the possibility of such speculation and decided to create a special silver coin for 26

Bytheway and Chaiklin (2016, p. 284) noted that “most Japanese people never saw gold coins before 1859.” 27 Okada (1955, pp. 18–19) pointed another possibility that the government of Japan may have strategically negotiated with the Western powers in order to earn some political freedom.

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foreign currency exchange with more silver content, the Ansei Nishu Gin. The silver content in Ansei Nishu Gin was so large that it was called the “foolish nishu.”28 However, the efforts of the government were easily rejected by foreign powers. As predicted by the Japanese government, the weight-by-weight principle caused outflow of Japanese gold coins. However, although many scholars have devoted their energies to estimate the amount of outflow,29 “no one will ever know the exact value of the gold, silver, and copper exported from Japan during the ‘gold rush’.”30 Some estimation says the outflow volume was 20 million ryo, while other estimation suggests the number was only ten thousand ryo.31 The gap is 2000 times! Here, I do not intend to pursue the exact figures of outflow further, but need to emphasize the consequences by this episode. I believe that the impact of this event to motivate Meiji reformers to change the monetary regime was the most important influencing factor for the formation of new monetary system. Superficially, this outflow of gold was caused by the gap of gold-silver price ratio between Japanese domestic and international markets. However, the real problem behind the picture is that after a long period of isolationist, Japan was totally outside the international order. By newly recasting debased gold coins in 1860, the government succeeded in stopping the outflow of gold, but with a serious inflation. “It became almost a cliché of Japanese politics in the 1860s that rising prices could be blamed on the presence of foreigners.”32 After the outflow of gold and the occurrence of inflation, the reformers began to understand that unless they change the institutional rules, including monetary system, such kinds of accident would be unavoidable. Unfortunately, few studies focused on the impact of the “gold rush” on the motivation of monetary reform in early era of Meiji. Goldsmith lamented that “how the Japanese economy, and in particular its financial sector, coped with this situation, which seems to have prevailed until the late 1870s, is not evident from the literature available in European languages.”33 In fact, so is the literature available in Japanese language, which solely concerns the scale of the outflows, instead of its impact on the whole economy, in particular the process of currency reform. However, we can still observe some relevant evidence from the records. For exam¯ ple, Okuma Shigenobu, the chief of the Finance Ministry, who played an important role in the currency system, repeatedly expressed the idea of preventing the currency outflow or gold coin outflow (kinka ranshutu, tsuka ranshutu). The records can be found in the private or official documents.34 These concerns undoubtedly were influenced by the “gold rush.”

28

Mikami (2011 [1975], p. 169) Some examples include Fujino (1994), Ishii K (1984), Ishii T (1987), and Takahashi (2018). 30 Bytheway and Chaiklin (2016, pp. 290–291). 31 Takahashi (2018, p. 3). 32 Bassino and Ma (1989, p. 287). 33 Goldsmith (1983, p. 20). 34 Tsujioka (1986), Fukuda (2015). 29

3.4 The Motivation of Monetary Reform

55

On the contrary, after the Opium War, although the Qing government was defeated repeatedly by the foreign powers, there was no obvious damage solely due to the different currency systems between China and foreign countries. Until the turn of the new century, as pointed by Kann, no one proposed to change the currency system. Of course, no reform could be expected to occur without any motivation.

3.5 The State Capacity I have discussed that in China, there was little demand to create a uniform currency regime in the first 50 years after the Opium War. However, after the end of the nineteenth century, situations changed. Not only domestic politicians and scholars called for the creation of a uniform currency, but also the main Western and Eastern powers officially required the Qing government to provide a unified coinage in the official treaties. • On September 5, 1902, China and Great Britain concluded “Treaty respecting commercial relations, etc.” It is stipulated in Article II: China agrees to take the necessary steps to provide for a uniform national coinage which shall be legal tender in payment of all duties, taxes and other obligations throughout the Empire by British as well as Chinese subjects.35

• On October 8, 1903, “Treaty of commerce and navigation” was concluded between China and Japan with a similar clause in Article VI: China agrees to establish itself, as soon as possible, a system of uniform national coinage and provide for a uniform national currency which shall be freely used as legal tender in payment of all duties, taxes and other obligations by Japanese subjects as well as by Chinese subjects in the Chinese Empire.36

• Again, on the same day of the treaty between China and Japan, treaty between China and the United States (“Treaty for the extension of the commercial relations”) made the same request: China agrees to take the necessary steps to provide for a uniform national coinage which shall be legal tender in payment of all duties, taxes and other obligations throughout the Empire by the citizens of the United States as well as Chinese subjects (Article XIII).37

Therefore, after the turn of the new century, the lack of motivation was no longer the reason for the delay of monetary reform. In fact, the Qing government promulgated a series of rules and regulations on monetary system in 1904. Despite of this, the uniform monetary standard in China was not realized until 1935. The second explanation for the difference in the process of currency unification between China 35

MacMurray (1921, p. 343). MacMurray (1921, p. 413). 37 MacMurray (1921, p. 430). 36

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and Japan is that compared with Japan, the Chinese government lacked the corresponding capacity of state that is needed to accomplish monetary reform. While the concept of state capacity is not easy to define, I simply assume that state capacity refers to the ability of governments to enforce the laws. At the end of this section, I will discuss it in detail. Helleiner emphasized that “in enabling territorial currencies to emerge. ... authorities required a strong capacity to influence the people who lived in the territories they governed.”38 Here, territorial currency defined by Helleiner means the same as the unified money we refer to in this book. Helleiner also pointed out that this “kind capacity did not exist until the emergence of nation-states in the nineteenth century.”39 In the process of the emergence of nation-state, by enforcing legal tender laws, or the creation of nationally consolidated taxation systems, national infrastructure projects, nationwide military conscription, and the establishment of national networks of post offices, railway station, and state-regulated banks, the public authorities aquired “a much stronger ability to regulate the forms of money used by the population.”40 The significant role of power of nation-state or the strength of authority for the creation of modern form of money, especially when money partakes characters of token money, is also emphasized by other researchers, such as Giddens (1985) and von Glahn (1996). It is well known that in the first few decades of twentieth century, including both the end of Qing dynasty and the initial few decades of the Republican period, Chinese governments were too weak to accomplish monetary reform. Ma and Zhao (2020, p. 538) described this period as “an era of political decentralization and disintegration.” In fact in the works of mainland scholars referring to the monetary system in the late Qing or the early Republican period, “incompetent government” seemed to be a frequently used phrase.41 Helleiner agreed that the weak state capacity in China was the main reason of the failure of monetary reform before 1930s. “The weakness and lack of authority of China’s central imperial state in this period was a key obstacle preventing China from creating a more homogeneous and nationally integrated monetary system.”42 Ono made a similar point: The implementation of the monetary unification plan was carried out because the Meiji government had already successfully gained the hegemony over the country and this laid a good foundation for the reform. Had the government failed to gain the power that is necessary for the modernization, no matter how the foreigners request, no matter what the domestic forces demand, the nationwide currency could not be unified. These facts were clearly proved by the experience of Japan in Tokugawa period and of China in Qing period.43

38

Helleiner (2003, p. 42). Helleiner (2003, p. 43). 40 Helleiner (2003, pp. 43–44). 41 For example, Shi (1984, pp. 108, 223, 238, 248), Hong (1993, pp. 350, 379), and Xiao (1984, p. 38). 42 Helleiner (2003, p. 46). 43 Ono (2000, pp. 79–80). 39

3.5 The State Capacity

57

Of course, we should not overlook that the presence of foreign powers in China might have largely constrained the government’s capacity. Here, I concentrate on some domestic factors because the weakness of the state was not entirely caused by foreign powers’ presence in China. If the concept of state capacity is crucial to explain the differences of modern monetary reform between China and Japan, we need to discuss the following questions. Why was the state capacity in Japan strong but that in China weak? After all, China has been considered as a typical example of despotism. For example, it is pointed out that “both Western and Asian scholarship portrayed imperial China as a static society whose periodic changes in regime barely caused a ripple on the stagnant pond of despotism.”44 How could a country like imperial China be too weak and powerless to accomplish monetary reform? Let us first look at Japan’s situation. As state capacity existed with the emergence of nation-state in Europe, the state capacity emerged in modern Japan accompanied by the Meiji Restoration. The Meiji Restoration is often considered as the start of the modernization process in Japan. In fact, it was also the process in which the power was centralized to the new government. In an influential book, E. Herbert Norman emphasized that the establishment of the modern state of Japan was based on autocratic bureaucrats and the Meiji Restoration was a revolution from above and autocratically carried out. Unlike the liberal revolutions in some European countries, Japan had to skip some stages from feudalism into capitalism. As a result, he concludes: It was only through an absolutist state that the tremendous task of modernization could be accomplished without the risk of social upheaval which might attend the attempts to extend the democratic method in a nation which had emerged so suddenly and so tardily from feudal isolation.45

Norman explained the reason for this style of reforms: The speed with which Japan had simultaneously to establish a modern state, to build an up-to-date defense force in order to ward off the dangers of invasion (which the favorable balance of world forces and the barrier of China could not forever postpone), to create an industry on which to base this armed force, to fashion an educational system suitable to an industrial modernized nation, dictated that these important changes be accomplished by a group of autocratic bureaucrats rather than by the mass of the people working through democratic organs of representation.46

Maybe, we should add the realization of the uniform monetary standard onto the list of reform raised by Norman. He continued to justify the Restoration as that the urgent situation to protect the country from Western powers, and the required speed to establish a modern state left the leaders no other choice but to change the country in an autocratic or paternalistic way. The autocratic or paternalistic way seemed to the Meiji leaders the only possible method if Japan was not to sink into the ranks of a colonial country.47 44

von Glahn (2016, p. 1). Norman (1940, p. 102). 46 Norman (1940, p. 47). 47 Norman (1940, p. 47). 45

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3 The Divergence Between China and Japan

It is clear from the analyses of Norman that by Meiji Restoration, Japan established a powerful and centralized government, much more powerful than any other previous historical period. As a result, it is natural to believe that the Meiji government had enough power and capacity to accomplish the monetary reform. In contrast, for China, studies suggest that traditionally, the state capacity of Chinese government was low. For example, “even in normal times the imperial bureaucracy, although highly centralized in its formal organization, did not penetrate very deeply into Chinese society, including those aspects of society which constituted the economy.”48 I have already observed some examples of the weak ability to enforce the laws by the government in the process of monetary reform in the last section. Worse, the government often failed to comply with their own laws, which endogenously weaken its law enforcement ability. For example, in April 1899, in order to end the chaotic silver coin casting by provincial governments, the court decided to stop provincial minting, except that of Hubei and Guangdong. However, in June of the same year, when the Jilin province applied to continue casting silver coin under the excuse of competing with foreign currencies, the same court immediately allowed the application.49 One more important aspect is that from the late nineteenth to early twentieth century, China experienced the collapse of the Qing Empire. There are many similarities as well as differences between the Republican Revolution in China and the Meiji Restoration in Japan. One big difference is that the Republic Revolution in China overthrew the Qing dynasty, but did not bring new order in China as a nation-state after the Revolution. As Fairbank and Feuerwerker (1986) pointed out: There was no consensus as to what forms of activity “national revolution” embraced.50

Xu (1994) also gave similar points on the Republican Revolution: The Republicans did not prepare on how to construct a new government and what kind the new government should be like. They even did not know what to do.51

The abolition of monachy in China and the reinforcement in Japan significantly affected the effectiveness of state of capacity between the two countries. In Japan, when the Western powers appeared, the ruler in charge was the shogunate, not the emperor. It seemed that the shogunate should bear the responsibility of weak and ¯ feeble, and so should be overthrowed. By restoration of imperial old order (Osei ), Japan found a form that contains and represents the various interest fukko groups. In China, the same responsibility fell on the Qing monarch. The counterpart ¯ of “Osei fukko” in China was “drive out the Manchus, restore Chinese rule.”52 Until 1911, China had been ruled by the Manchu emperor. Unlike Japan, the abolition of the emperor was the first important goal of the Republican Revolution in China. This 48

Fairbank and Liu (1980, pp. 59–60). Shen (1974, pp. 798–803). 50 Fairbank (1983, p. 603). 51 Xu (1994, p. 6). 52 Fairban and Liu (1980, p. 491). 49

3.5 The State Capacity

59

revolution, at least in the first few decades, greatly weakened the effectiveness of the government administration. Fairbank (1983) summarized the consequences of the Republican Revolution as follows: However much the monarchy may have been castigated for its political failures, it had been a sacred institution, symbolizing the interdependence of the Chinese value system and the socio-political order. The break-up of this unitary institution, and even more its apparent sequel in a rudderless, unprincipled and ineffective republic, was profoundly dispiriting.53

Qian described a similar point from a different angle: The discontent to the Qing dynasty transferred to a discontent to the whole polity tradition and changed to the discontent to the whole traditional culture. However, when the whole traditional culture was denied, so were the pride and trust of the public.54

Primarily, this chapter aims to explain why it was half a century later in achieving monetary unification in China than in Japan. The main proposition of this book is that the operation of the monetary system, whether successful or unsuccessful, is closely related to government behavior. The above analysis suggests that along with the lack of motivation for monetary reform, the lack of state capacity is another critical element that explains the delay of monetary reform in China, compared with the quick accomplishment of Japan after the country was opened. These explanations are consistent with the later successful monetary reforms. In 1935, the Nationalist government first accomplished monetary unification in China. In 1949, the socialist government reunified the monetary system under Renminbi. Both of them succeeded only after the authorities effectively controlled the major part of the whole country. In the above analysis, I implicitly assumed that monetary standard unification is an indispensable step of modernization, and only confirmed how governments of Japan and China were involved in this step. However, monetary unification is not sufficient for the economic growth and development. As Stiglitz (2018, p. xxx) pointed out, “good currency arrangements cannot ensure prosperity but flawed currency arrangements can lead to recessions and depressions.” Although socialist government unified currency right after the communist forces controlled the country, the real economic take-off happened 30 years later. Monetary system and other social institutions, including state administration, are closely related to each other. Some aspects of these institutional arrangements could be endogenously determined by others. By historical and international comparisons, we could identify some instrumental changes to describe more clearly the relationship between monetary system formation and government behavior.

53 54

Fairbank (1983, pp. 350–351). Qian (2001, p. 168).

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3.6 Definition and Measurement So far, I have discussed the concept of state capacity in a simple manner. I simply took it as the government’s ability to enforce laws. After all, monetary reform could not be successfully carried out under a government that has no sufficient ability to execute the law. However, the concept of state capacity is hard to define. Until the present day, there is no universally accepted definition on state capacity. Some studies equate state capacity with military capacity.55 Others emphasize the importance of measures of bureaucratic autonomy.56 The state fragility (the antonym of state capacity) is also seen as “inherently a multidimensional concept.”57 In the field of political science, it is pointed out that the deficiency of academic analysis of government behavior is a “strange absence.”58 The same “strange absence” also occurs in the field of economic science. It is said that the issues related to state capacity “have not been much studied by economists, so precise measurement is certainly an issue.”59 These absences largely reflect the intense ideological conflicts due to the cold war. Thanks to “the end of history,” now, we can discuss the function of the state with less ideological restrictions. Recently, more and more researchers have started to care about the problems correlated with state capacity.60 Besley and Persson defined state capacity as “the institutional capability of the state to carry out various policies that deliver benefits and services to households and firms,”61 which is close to the argument in this book. Cingolani et al. (2015) discussed the difficulties in defining the concept of state capacity. However, no matter how difficult to define or measure it, state capacity should be defined on the base of abilities of the government to support market function. Money-using is clearly the most important element for the market to work. The way of monetary managements and the related regulations are the essential part of state capacity. Here, instead of a detailed discussion on the definition and measurement problems of state capacity, I discuss two relevant issues. (1) How is the state capacity in socialist China? (2) How is the state capacity assumed in the radical argument in Hayek’s works? For the first question, I have already discussed similar issues in Chap. 2. The conclusion is that a despotic government does not necessarily mean that the state capacity is strong. Here, I continue to discuss whether this proposition is suitable for the socialist period. This discussion has modern significance because China is still a socialist country. I am also concerned about the second issue because Hayek is considered a representative figure who strongly denies state intervention. So to 55

Koyama et al. (2018, p. 179). Fukuyama (2012). 57 Besley and Persson (2011, p. 5). 58 Fukuyama (2012). 59 Besley and Persson (2011, p. 7). 60 For example, Besley and Persson (2011), Sng and Moriguchi (2014), Dincecco (2017), Ma and Rubin (2019), and Besley (2020). 61 Besley and Persson (2011, p. 6). 56

3.6 Definition and Measurement

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check how does he view state capacity and how much his views are contradictory or consistent with ours will help us to further deepen our understanding of the theory on money and government. After the communist force controlled the country, China has been under “the dictatorship of the proletariat.”62 However this kind of dictatorship did not improve the state capacity in China even in the planning period. For example, there was a scene in the CCTV (China Central Television) program in the late of 2014: a 90-year-old veteran soldier came to the program expecting to find his former comrades. He was a former member of the People’s Volunteers. The latter is the name of Chinese army that took part in the Korean War. This old veteran soldier had lost contact with his comrades for more than 60 years. Considering the People’s Volunteers were officially created by the government, and this man was also a fighting hero, the fact that he could not find his comrades for more than 60 years after he returned is sufficient to show the poor performance of the state administration. In Japan, on the contrary, although the nation was defeated in the World War II, veteran soldiers were taken care of by the government under the law after the end of war. Besides the economic compensations for the veterans, it is unthinkable that a surviving soldier totally lost contact with other surviving comrades. If we judge state capacity as the quality of services provided by the government to its citizens, the level of state capacity in Japan, which is a decentralized market country, seems to be much higher than that in China, which is believed to be a country with centralized planning. A planning economy or a despotic society does not necessarily mean that the government there could maintain strong state capacity. One more point should be emphasized is that even in some radical arguments that deny government intervention, the state capacity is often assumed to be effective. For example, Hayek repeatedly suggested the importance of depriving the power over the supply of money from governments. However, it seems that the government’s effective ability to enforce laws is implicitly assumed in his arguments. I shall further assume that the name or denomination a bank chooses for its issue will be protected like a brand name or trade mark against unauthorized use, and that there will be the same protection against forgery as against that of any other document. These banks will then be vying for the use of their issue by the public by making them as convenient to use as possible.63 While governments should not interfere in this development by any conscious attempts at control (i.e. any acts of intervention in the strict sense of the term), it may be found that new rules of law are needed to provide an appropriate legal framework within which the new banking practices could successfully develop.64

Preventing forgery is a hard job. In America, “[a]t the start of the civil war, as many as 50 percent of U.S. bank notes in circulation are estimated to have been counterfeit.”65 In the sense of effectively enforcing the law, it seems that Hayek 62

MacFarquhar and Fairbank (1987, p. 261). Hayek (1990, p. 46). 64 Hayek (1990, p. 129). 65 Helleiner (2003, p. 30). 63

62

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was considering a society in which the state has strong capacity. It is clear, as we have seen, that the government of Qing dynasty and Republican China in the first few decades did not have such capacity. It seems that Hayek was promoting small governments. However, in terms of state capacity, the governments supposed by Hayek are stronger than those of most developing countries, including the planningperiod People’s Republic of China. As described by Besley and Persson, “in most developed countries, by contrast, nearly everything works.”66 Therefore, the critical problem is not whether the government should be big or small, but whether the government could work to support market function.

3.7 The Spontaneous Order In the argument of the emergence of institutions, Hayek emphasized the importance of spontaneous order, that is, institutions cannot be created by the conscious design or the deliberate control. The basic tools of civilization—language, morals, law and money—are all the result of spontaneous growth and not of design.67

However, this argument neglects the importance of differentiating between the situation of a front-runner and a catching-up country. For a front-runner, like Great Britain in seventeenth century, as Hayek argued, there is no way to design or consciously create a new kind of monetary system. In contrast, for a catching-up country, because the target to attain is relatively clear, the conscious planning or deliberate control is by no means meaningless. I believe that the front-runner does not represent all. For a large part of the world, the emergence of institutions for those who try to catch up or learn something from the front-runner is as important as the innovative creation for the front-runner. Around 1850s, both Japan and China were in the similar situation to catch up with the Western powers. However, at least in the case of monetary reform, the two countries took quite different paths. Fukushima (1988, p. 73) described the process of modern legislation construction in Japan after Meiji Restoration as if these were realized in a “single morning.” This statement is not necessarily an exaggeration. H. G. Wells, a famous English writer, described the rapid changes of Japanese society during the same period as follows: In 1866 she was a mediaeval people, a fantastic caricature of the extremest romantic feudalism; in 1899 hers was a completely Westernized people, on a level with the most advanced European powers. She completely dispelled the persuasion that Asia was in some irrevocable way hopelessly behind Europe. She made all European progress seem sluggish by comparison.68 66

Besley and Persson (2011, p. 6). Hayek (1979, p. 163). 68 Wells (1922, p. 382). 67

3.7 The Spontaneous Order

63

I believe that the monetary reform and the establishment of uniform monetary standard were among the most important and obvious parts of these changes. Whereas in the case of China, despite the urgent request for monetary reform from abroad and the helping hand of money doctors, Chinese government did not succeed in unifying its money standard until 1930s, half a century later than Japan. Because of World War II and the domestic war, the new monetary system was short lived. The socialist government started a new money system, Renminbi, after 1949. All these consequences are hardly the results of spontaneous order.

3.8 Conclusions The differences in the development of monetary system between modern China and Japan is more obvious than any other aspects. Japan quickly and successfully unified nationwide monetary standard in 1870s. In contrast, the first uniform monetary standard in China was realized in 1930s. Monetary reform was given a high priority in Japan. The motivation to reform monetary system in China was weak before the last few years of the nineteenth century. In Japan, the strong motivation to reform its monetary system was stimulated by the outflow of gold coin happened right before the Meiji Restoration. In China, there was little voice for currency reform until the end of the nineteenth century. The second factor that explains the differences in monetary reform between the two countries is the differences in state capacity. This partially reflects historical traditions and partially relates to the differences in the process of nation building since the mid-nineteenth century. In Japan, by Meiji Restoration, the central government earned strong power than any other periods in the history to manage the economy. In contrast, around the periods of the Republican Revolution, China experienced the weakening of centralized government. The definition or measurement of state capacity should be based on the ability of government to support market function. A planning economy or a despotic society does not mean a government with strong state capacity. The argument of spontaneous order may not be appropriate for the developing or catching-up countries because the goal of reform is relatively clear.

Appendix of Table 3.2 • Currency BOJ note stands for bank note issued by Bank of Japan. Data on coin, paper note, and BOJ note are from Asakura and Nishiyama (1974). • Population Population data are from Table 001_1_1, Bank of Japan (1990). • GDP

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GDP data are calculated based on the following information. – 1875–1883. Use national income estimated by Yamada in Table 010_1_1, Bank of Japan (1990). – 1885–1929. Use gross national product, in Table J0108_006 from Long-Term Economic Statistics (LTES) database, Hitotsubashi University. – 1830–1944. Use gross national product, in Table JPA08_008 from LTES. Definition of the data may differ in different data sources. To adjust the differences, we start from 2017 using the latest GDP information from National Accounts of Japan provided by Cabinet Office, and then track back the whole series using the growth rate for earlier period from other sources. Information for GDP in 1945 is missing. We use the average of GDP in 1944 and 1946 for 1945. • Rice price Rice price data are from in Table J0805_001 from LTES. Information for 1939– 1945 is missing. I fill the blank by linear interpolation. In the calculation it is assumed that 1 shou is equal to 15 kg.

Appendix of Table 3.4 • Silver and copper currency The data of copper coin, silver coin, and bank note are based on Sui (2014, p. 386, CD Table 5.2.3). The yuan price of tael before 1933 is calculated by 1 yuan = 0.715 tael for the period before 1936. • Paper note Figures of 1910–1936 are from Table C.9 in Rawski (1989, p. 380). Figures of 1901–1909 are estimated under the assumption that the paper notes circulated in China were changed at the same rate as the paper notes issued in China by Hongkong and Shanghai Banking Corporation. Figures of 1937–1945 are from Zhongguo Renmin Yinhang Zonghang Canshishi (1991, p. 862). • GDP Nominal GDP is calculated using the information in Table 8 of Liu (2008, p. 95). • Population The data of population are from http://www.ggdc.net/Maddison/Oriindex.htm. Some missing data are estimated by linear interpolation method.

Appendix of Table 3.5 The average tael price of rice in 1861–1870 is from Peng (2015 [1965], p. 609). We combined this figure with the price index data from Peng (2006, pp. 168–175) to construct rice price data for the whole period. Other figures in Table 3.5 are calculated based on the information from Table 3.4.

References

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References Asakura K, Nishiyama C (1974) Nihon keizai no kahei bunseki (A monetary analysis and history of the Japanese economy: 1868–1970). S¯obun Sha, Tokyo Bank of Japan (1990) Meiji ik¯o honp¯o shuy¯o keizai t¯okei (Japanese Main Economic Indicators after Meiji). Nihon Keizai Shimbun Sha Bassino J, Ma D (1989) Japanese unskilled wages in international perspective, 1741–1913. Res Econ Hist 23:229–48 Besley T, Persson T (2011) Pillars of prosperity: the political economics of development clusters. Princeton University Press, New Jersey Besley T (2020) State capacity, reciprocity, and the social contract. Econometrica 88(4):1307–1335 Bytheway S, Chaiklin M (2016) Reconsidering the Yokohama “gold rush” of 1859. J World Hist 27(2):281–301 Cheng L (2003) Banking in modern China: entrpreneurs, professional managers, and the development of Chinese banks, 1897–1937. Cornell University Press, Ithaca Cingolani L, Thomsson K, Crombrugghe D (2015) Minding Weber more than ever? The impacts of state capacity and bureaucratic autonomy on development goals. World Devel 72:191–207 Dincecco M (2017) State capacity and economic development: present and past. Cambridge University Press, Cambridge Fairbank J (1978) The Cambridge history of China, vol 10, Late Ch’ing, 1800 – 1911, Part 1. Cambridge University Press, Cambridge Fairbank J (1983) The Cambridge history of China, vol 12, Republican China 1912 – 1949, Part 1. Cambridge University Press, Cambridge Fairbank J, Feuerwerker A (1986) The Cambridge history of China, vol 13, Republican China 1912 – 1949, Part 2. Cambridge University Press, Cambridge Fairbank J, Liu K (1980) The Cambridge history of China, vol 11, Late Ch’ing, 1800 – 1911, Part 2. Cambridge University Press, Cambridge Frost P (1970) The Bakumatsu currency crisis. Harvard University Press, Cambridge Fukuda M (2015) Meiji shoki kinhonisei no seikaku (The characteristics of the gold standard at the beginning of Meiji), vol 19. Bulletin of the department of Japanese history faculty of letters, University of Tokyo, pp 1–17 Fukushima M (1988) Nihon shihonshugi no hattasu shi (The development of Japan’s capitalist and private law). Tokyo Daigaku Shuppan Kai, Tokyo Fukuyama F (2012) The strange absence of the state in political science. The American Interest. Blog entry, February 2012 Fujino S (1994) Nihon no manei sapurai (Money supply in Japan). Keis¯o Shob¯o, Tokyo Giddens A (1985) The nation-state and violence, volume 2, a contemporary critique of historical materialism. Polity Press, Cambridge Goldsmith R (1983) The financial development of Japan, 1868–1977. Yale University Press, New Heaven Hayek F (1979) Law legislation and liberty, vol 3. The olitical order of a free people. The University of Chicago Press, Chicago Hayek F (1990) The denationalisation of money: the argument refined, 3rd edn. Institute of Economic Affairs, London Helleiner E (2003) The making of national money: territorial currencies in historical perspective. Cornell University Press, Ithaca Ho T (2016) Money doctors and their reform proposals for China reconsidered, 1903–29. Oxf Econ Pap 68(4):1016–1038 Hong J (1993) Zhongguo jinrong shi (A history of finance in China). Xinan Caijing Daxue Chubanshe, Chengdu Howe C (1996) The origins of Japanese trade supremacy: development and technology in Asia from 1540 to the Pacific War. Hurst & Company, London

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Ishii K (1984) Kindai Nihon to Igirisu shihon (The capital of modern Japan and the Great Britain). Tokyo Daigaku Shuppan Kai, Tokyo Ishii T (1987) Bakumatsu kaik¯oki keizaishi kenky¯u (A study on the economic history at the end of Bakumatsu). Y¯urind¯o, Yokohama Iwahashi M (2019) Kindai kahei to keizai hatten (Money and economic development). Nagoya University Press, Nagoya Kann E (1927) The currencies of China: an investigation of silver & gold transactions affecting China, with a section on copper. Kelly and Walsh, Shanghai King F (1965) Money and monetary policy in China, 1845–1895. Harvard University Press, Cambridge Koyama M, Moriguchi C, Sng T (2018) Geopolitical and Asia’s little divergence: state building in China and Japan after 1850. J Econ Behav Organ 155:178–204 Li J (2010) Zhongguo jindai yinhang fa yanjiu (1897–1949): Yi zuzhifalü wei shijiao (On the legal system of bank in modern China (1897–1949): from the angle of organization, law, and institution). Peking University Press, Beijing Lin M (2006) China upside down: currency, society, and ideologies, 1808—1856. Harvard University Asia Center, Cambridge Liu W (2008) Dui zhongguo 1913–1926 nian GDP de gusuan (An estimation of China’s GDP in 1913–1926). Chin Soc Econ Hist Study 3:90–98 Ma D, Rubin J (2019) The paradox of power: principle-agent problems and administrative capacity in Imperial China (and other absolutist regimes). J Comp Econ 47(2):277–294 Ma D, Zhao L (2020) A silver transformation: Chinese monetary integration in times of political disintegration, 1898–1933. Econ Hist Rev 73(2):513–530 MacFarquhar R, Fairbank J (1987) The Cambridge history of China, vol 14, The People’s Republic, Part 1: the emergence of revolution China 1949 – 1965. Cambridge University Press, Cambridge MacMurray J (1921) Treaties and agreements with and concerning China, 1894–1919. Oxford University Press, New York Mikami R (1996) Edo no kahei monogatari (A monetary story of Edo). Toyo Keizai Shinp¯osha, Tokyo Mikami R (2011 [1975]) En no tanj¯o: kindai kahei seido no setsuritsu (The birth of the Yen: the building of modern monetary system). Kodansha, Tokyo Minami R (1990) Ch¯ugoku no keizai hatten: Nihon tono hikaku (The economic development of China: a comparision with Japan). Toyo Keizai Shinposha, Tokyo Norman EH (1940) Japan’s emergence as a modern state. Institute of Pacific Relations, New York Okada S (1955) Bakumatsu ishin no kahei seisaku (The monetary policy in Bakumatsu and Restoration era). Moriyama Shoten, Tokyo Ono K (2000) Kindai Nihon heisei to Higashi Ajia ginkaken: En to Mekishiko doru (The monetary system of modern Japan and silver currency area in East-Asia: Yen and Mexican dollar). Mineruva Shobou, Tokyo Peng K (2006) Qingdai yilai de liangjia: Lishixue de jieshi yu zaijieshi (Grain price since Qing dynasty: historical interpretation and reinterpretation). Shanghai Renmin Chubanshe, Shanghai Peng X (2015 [1965]) Zhongguo jinrong shi (A history of money in China). Shanghai Renmin Chubanshe, Shanghai Qian M (2001) Zhongguo lidai zhengzhi deshi (The gains and losses of China’s polities). Sanlian Shudian, Beijing Rawski T (1989) Economic growth in prewar China. University of California Press, Berkeley Shen Y (1974) Zhongguo jindai huobishi ziliao (1822–1911) (Monetary historical materials of modern China (1822–1911). Xuehai Chubanshe, Taibei Shi Y (1984) Zhongguo huobi jinrong shilüe (A brief monetary history of China). Tianjin Renmin Chubanshe, Tianjin Shimbo H (1978) Kinsei no bukka to keizai hatten: zen k¯ogy¯oka shakai he no s¯ury¯o sekkin (Price movements and economic development in Tokugawa Japan: A quantitative investigation of the pre-modern Society). Toyokeizai Shinposha, Tokyo

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Sng T, Moriguchi C (2014) Asia’s little divergence: state capacity in China and Japan before 1850. J Econ Growth 19(4):439–470 Stiglitz J (2018) The Euro: how a common currency threatens the future of Europe. W. W. Norton & Company, New York Sui Q (2014) Senzenki no kahei ky¯oky¯u kahei ry¯uts¯ury¯o (Money supply and monetary circulation in prewar period). In: Minami R, Makino F (eds) Ajia ch¯oki keizai toukei 3, Ch¯ugoku (Asia’s long-term economic statistics, vol 3, China). Tokyo, Toyo Keizai Shinposha Takaki M (1903) The history of Japanese paper currency, 1868–1890. John Hopkins Press, Baltimore Takahashi S (2018) Bakumatsu no kinka ry¯ushutsu to Yokohama y¯ogin s¯oba (The outflow of gold coin and Yokohama foreign exchange market at the end of bakumatsu). Nihon Hyoronsha, Tokyo ¯ Tsujioka M (1986) Okuma Shigenobu no zaisei keizai seisaku (Financial and economic policies of ¯ Shigenobu Okuma). Keizai Kenkyu Ronshu (Hiroshima University of Economics) 9(4):55–79 Wells HG (1922) A short history of the world. Penguin Books Ltd, New York von Glahn R (1996) Fountain of fortune: money and monetary policy in China, 1000–1700. University of California Press, Berkeley von Glahn R (2016) The economic history of China: from antiquity to the nineteenth century. Cambridge University Press, Cambridge Xiao Q (1984) Zhongguo gudai huobi shi (Monetary history of ancient China). Renmin Chubanshe, Beijing Xu F (1994) Zhonghua minguo zhengzhi shi (The political history of Republic China). Renmin Chubanshe, Beijing Yamamoto Y (1994) Ry¯o kara En he: Bakumatsu Meiji zenki kahei mondai kenky¯u (From Ryo to Yen: Currency Reforms in the Meiji Restoration). Minerva Shob¯o, Tokyo Yan H (2012) Zhongguo de huobi jinrong tixi: jiyu jingji yunxing yu jingji jindaihua de yanjiu (Monetary and financial systems of Modern China from 1600 to 1649: A study on economic performance and Modernization). Zhongguo Renmin Chuban She, Beijing Yan Z (1955) Zhongguo jindai jingjishi ziliao xuanji (Selected statistical materials on China’s modern economic history). Zhongguo Shehui Kexue Chuban She, Beijing Zhang G (2003) Zhongguo jingrong tongshi, vol 2, Qing yapian zhanzheng shiqi zhi Qingmo shiqi (1840–1911) (A general financial history of China, vol 2, from the Opium War to the end of Qing (1840–1911)). Jinrong Chubanshe, Beijing Zhao Y, Liu Z (2009) Tianjin shuaixian shixian xin Zhongguo bizhi tongyi (The first emergence of new China’s currency unification in Tianjin). Huabei Jinrong 3:67–69 Zhongguo Renmin Yinhang Zonghang Canshishi (1991) Zhonghua minguo huobishi ziliao, vol 2, 1924–1949 (Monetary historical materials of Republic of China, vol 2, 1924–1949). Zhong Hua Shu Ju, Beijing Zhongguo Shehui Kexueyuan Jindaishi Yanjinsuo, Zhonghua Minguoshi Yanjiushi (1982) Zhongguo diyijia yinhang: Zhongguo Tongshang Yinghang de chuchuang shiqi (The first bank in China: the start-up of Commercial Bank of China). Zhongguo Shehui Kexue Chubanshe, Beijing Zhu J (2012) Cong zhiyou dao longduan: Zhongguo huobi jingji liangqian nian (From laissez-faire to monopoly: The monetary economy of China - past and present). Yuanliu Chuban Shiye Gufen Youxian Gongsi, Taipei Zhuo Z (1986) Zhongguo jindai bizhi shi: 1887–1937 (A history of monetary reform in modern China). Guoshiguan, Taipei

Chapter 4

“The Worst Currency” or “The Best Arrangement”?

Abstract The assessments of the monetary system in Qing period in China are divided. The changes in copper-silver price ratio were consistent with the prediction of OCA theory. But this is not enough to affirmatively evaluate the currency system. An appropriate evaluation should aim at improving market performance. Keywords Currency shortage · OCA · Copper-silver price ratio · Price rigidity · Market efficiency

4.1 Introduction In China’s long history, before the unification of monetary standard in 1930s, the government was only partially involved in money supply. The money supply in silver currency sector or paper note sector had been in a state of laissez-faire, and this state lasted until the end of nineteenth century. Although a large portion of silver currency was traded by weight or tael, the unit of silver currency was highly region-specific. The purchasing power of tael in place A was not the same as that in place B, not because of the difference in commodity prices, but simply due to different standards of unit of account. The paper note, mainly issued by private institutions, was also limited to specific area. Even the officially minted copper cash was not in a unified form. The value of copper cash also shifted in different places. On the one hand, it is said that at the beginning of the twentieth century, China had “unquestionably the worst currency to be found in any important country.”1 On the other hand, there are many studies that affirmatively evaluate the monetary system of imperial China. In this chapter, I focus on the monetary system in late Qing period and compare some of the evaluations and discuss the preconditions of these arguments. Although some evaluations on the same monetary system are quite different and even opposite, there may not be logical contradictions between them. The key point is whether we regard the government’s ability to manage the monetary system as exogenous or endogenous. 1

Young (1971, p. 163). © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4_4

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In the next two sections, I introduce several diametrically opposite evaluations of the monetary system in the late Qing dynasty. In Sect. 4.4, I consider a theoretical model based on Mundell (1961) and verify that some characteristics of the price ratio of copper coin to silver bullion are consistent with the theoretical prediction. However, I do not think this consistency is sufficient to justify the monetary system in that period because the government did not play an active and effective role in the model.

4.2 “The Worst Currency” There is probably no more vivid description of “the worst currency” in the late Qing than the Edkins’ review introduced by Kann. Its chaotic eccentricities would drive any occidental nation to madness in a single generation, or more probably such gigantic evils would speedily work their own cure. In speaking of the disregard of accuracy I have mentioned a few of the more prominent annoyances. ... One hundred cash are not 100, and 1,000 cash are not 1,000, but some other and totally uncertain number, to be ascertained only by experience.2

I cannot find what a good monetary system should be like from the description of Edkins. Obviously, the reference in his mind is the British currency system, the currency under the uniformed standard by government’s initiative, which is also the one quickly realized in Japan by Meiji Restoration. It seemed that the differences were so obvious that they did not need any theoretical or empirical research to prove it. Any arguments on the efficiency or rationality of such monetary system in imperial China seems to be out of the question. That enormous losses must result from such a state of things is, to any westerner, obvious at a glance, although the Chinese are so accustomed to inconveniences of this sort that they seem almost unconscious of their existence, and the evils are felt only as the pressure of the atmosphere is felt. ... Under these grave disabilities the wonder is that the Chinese are able to do any business at all, and yet, as we daily perceive, they are so accustomed to these annoyances that their burden appears scarcely felt, and the only serious complaint on this score comes from foreigners.3

If a good monetary system should be judged by how it can reduce transaction costs, the monetary system in the late Qing dynasty undoubtedly involves very high transaction costs. Although transaction costs are difficult to measure, the profit scale of traditional financial institutions, which took currency exchange as their main business, should be regarded as part of the transaction costs brought by the currency system at that time. One more interesting point raised by Edkins and Kann is that only foreigners raised the serious complaint. Here, these foreigners mainly refer to people engaged 2

Kann (1927, p. 415). The original source is from North China Herald, 1889. North China Herald was an English newspaper issued in China. 3 Kann (1927, pp. 416–417).

4.2 “The Worst Currency”

71

in international trade with China. Apart from the possible limitations in the ability to understand the monetary issues or freely express individual opinions, the reason of “so accustomed to these annoyances” simply reflected the lifestyle of that time. If the mobility of population were low and everyone spent their lives in a fixed area, the currency system at late Qing might not be so inconvenient as felt by the foreigners. Whether the transaction costs were high may depend on the lifestyle of a typical Chinese. After entering the twentieth century, an increasing number of Chinese politicians or scholars began to care about the currency system. It seemed that Edkins’ view was gradually accepted by Chinese people. In December 1920, in a draft of law reform on monetary reform, Liu Zhendong, a famous expert on currency in the Republican period, argued that “in China, there does exist money, but does not exist monetary system.”4 Another example is that, in the 58th congress meeting of national government in March 1928, the following was announced in a bill draft: The disorder of currency in our country has reached the extreme today. It is accused by the domestic people and ridiculed by foreigners. It has a long history to trace back to the reasons. There has been no plans by the government to unify currency standard in the history. We have, as a matter of fact, no monetary system at all.5

Although few of them mentioned the relationship between monetary system and market efficiency, there seemed to be a consensus that pure competition may not necessarily produce order. Such outright negation of concurrent monetary system drove the later reform of the monetary system.

4.3 “The Best Possible Arrangement” More than 80 years after the argument of Edkins, a totally different comment appeared in a top journal of economics. Chau-Nan Chen argued: Given the social structure and economic conditions prevailing in premodern China, the monetary arrangement described above, complicated, and chaotic as it appears, may have been the best possible arrangement.6

Although Edkins’ arguments came from some direct daily observation in the Chinese society and Chen’s conclusion was made after some theoretical considerations, there is nothing more contradictory than “the worst currency” and “the best possible arrangement.” As von Glahn pointed out, “the monetary history of imperial China remains largely terra incognita.”7 Before we discuss the related theoretical and empirical problems, it is helpful to see some other recent analyses that affirmatively assess the Chinese monetary system in late Qing period. 4

Chen (1932, Monetary Regime, p. 1397). Chen (1932, Tael, p. 152). 6 Chen (1975, p. 372). 7 von Glahn (1996, p. 9). 5

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William T. Rowe saw the monetary regime of Qing as creative. He pointed, along with grain price stabilization policy, (a) second policy area in which the Qing state showed impressive acumen and vigor was its management of the money supply. ... It thus sought to maintain monetary stability over time and across regions by creatively adjusting the relative supply of the two monetary metals in circulation—as with the granary system, effectively using the market to manage the market.8

In most part of Qing period, the two major forms of currency were the copper cash and silver bullion. The government, including central and local, officially provided copper cash, but did not mint any silver coins except the last few years of Qing.9 The exchange rate between copper cash and silver bullion was determined by the market conditions. The exchange rate changed flexibly, and the volume of copper cash and silver bullion and so the real total money stock also automatically adjusted by market forces. This is what Rowe described as “creatively adjusting,” although it is hard to believe that the government was consciously trying to control the money stock in such a way. Akinobu Kuroda, by a series of careful analyses,10 suggested that the way in which the monetary system worked may have reflected market forces and competitions between players. For example, the existence of multiplicity of currency and the resulting plurality in the unit of account could be explained by market conditions such as seasonality in money demand and lower propensity to assemble small currency on demand. Behind these affirmative assessments, there are some points in common among these discussions as the preconditions in their arguments. The first one is that the ability of government to provide fiat money is taken as given. Historically, this assumption may not be too restrictive. Emperor Yongzheng stressed in his imperial edict that the metal of copper contained in the cash should not be too much or too little to prevent private melting or private casting.11 If it could not expect to excavate new mineral resources or import large quantities from abroad in a short time, the government’s ability to supply money could be considered as fixed in the short term. However, this argument is only valid for commodity money, not for fiat money whose value does not depend on the metal value but on the issuer’s creditability. In this sense, the above discussions assume that the government’s ability to provide fiat money was totally limited. The second implicit assumption in these arguments is the high degree of fluctuation in money demand. Money demand could dramatically change due to harvest, disaster, war or other political and social factors. Here, high degree is a relative term compared to the above-mentioned ability of money supply by the government. The fluctuation in money demand has been true in history, and it is also true in today’s world. Third is the limits of market price adjustment. This assumption is often described in different forms. According to Kuroda (2019), currency shortages (qianhuang) were 8

Rowe (2009, p. 57). Lin (2006, p. 34). 10 Kuroda (2008, 2013, 2019). 11 Li (2007, p. 6). 9

4.3 “The Best Possible Arrangement”

73

one of the key factors to understand the monetary phenomena, including to “accept local currency despite its limited convertibility.”12 The phrase “currency shortage” appears frequently in the literature discussing the currency system in modern China. However, it should be pointed out that “currency shortage” is simply an alternative expression of certain kind of market dysfunction, especially the price rigidity. Alternatively, the currency shortage could also be expressed as the failure of the quantity theory. By the simplest version of quantity theory, money stock M and general price level P should move parallel, that is, M = k P, where k is a constant parameter as long as the market price is flexible enough to adjust market disequilibrium. Under these assumptions, the so-called currency shortage would never happen. Say it again from the opposite, the frequently occurrence of currency shortage could be considered as that the price adjustment had not been sufficient. The volume of real money stock is measured by general price level. While the market efficiency depends on the adjustment of relative price ratios between different goods or services, relative price ratio has nothing to do with the total volume of money. Theoretically, as is often assumed in microeconomics textbooks, any commodity could be a numeraire and could play the role of unit of account. The endowment of this commodity there, however, is not a problem. As Friedman argued, in mentioning whether there would be enough gold to serve as monetary reserves, that “in principle, one ounce would be enough.’ So, it is safe to say that currency shortage is closely related with the rigidity of general price. OCA theory13 suggests that under certain conditions including price rigidities and constraints on mobility of production resources, the optimal number of currencies for market participants may not converge to a single kind. The logic is as follows. If the market prices are sticky to the demand or supply shocks and the production factors, including labors and capitals, are not mobile enough to absorb disequilibrium, the existence of an area-specific currency system accompanied by a flexible exchange rate regime between different areas could alleviate economic distress in certain circumstances. However, the currencies need not be area-specific: they could be commodityspecific or sector-specific. In the next section, I use the logic of OCA to confirm some efficiency improving respects of the existence of plurality of currencies in the same area. I also try to find some historical evidence that is consistent with the theoretical analysis.

4.4 A Simple Analysis Based on Optimum Currency Area Theory In this section, I use a simple model to analyze some endogenously determined pattern of the exchange rate between copper cash and silver bullion in the environment of 12 13

Kuroda (2019, p. 115). Mundell (1961).

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4 “The Worst Currency” or “The Best Arrangement”?

Qing period. I then confirm some historical evidence that are consistent with the theoretical conclusion. The idea here largely depends on Mundell (1961) that pointed out that under certain conditions, the flexible exchange rate may serve to adjust disequilibrium. The main difference between Mundell model and the analysis here is that Mundell focuses on the different currencies between different areas whereas the model here focus on the different currencies used by different groups in the same area. Assume that the utility function of an average consumer is U = U (x, z)

(4.1)

where x stands for necessary goods, say foods, and z indicates luxury goods, say alcoholic beverages. At the same time, I also assume that the transactions of necessary and luxury goods are separated by different currencies, in that foods are by copper cash and alcoholic beverages are by silver currencies. There are markets for transactions between different currencies and qs is the exchange rate of silver currency in terms of copper cash. Let px be the price of foods in terms of copper cash and pz be the price of alcoholic beverages in terms of silver currency. qs pz is the price of alcoholic beverages in term of corresponding copper cash. The following condition is required for Pareto efficiency: ∂U ∂x ∂U ∂z

=

px qs p z

(4.2)

The left-hand side of equation of (4.2) shows the marginal substitution between x would largely increase relative to ∂U . So, to satisfy and z. In a year of bad harvest, ∂U ∂x ∂z the optimal condition, the market prices must be adjusted to increase qsppx z . However, there are enough reasons to believe that the price rigidities of px , pz may prevent the adjustment in a quick time. Still, we can expect the exchange rate qs between different currencies to do a good job. In the case described above, a downward movement of qs (cheap silver currency in terms of copper cash) help the market adjustment. As will see later, we observe this situation in the historical records. We can use the results from Wang (2014) and Han (2014) to confirm this pattern of exchange ratio movement. Using some historical documents and government records, Wang (2014) analyzed the trends of copper-silver price ratio during disaster or war time. In the 11 cases of natural disaster, with no exceptions, the copper-silver price ratio was higher in areas that suffered the disaster. In another ten cases of domestic warfare caused by rebellions or other reasons, with some exceptional short period of increase in silver price at the beginning of the turmoil, the overall trends of higher copper-silver price ratio are observed, also with no exceptions. Han (2014) focused on the catastrophic famine caused by drought in 1877–1878, which was the most serious natural disaster during the whole Qing period. Han’s analysis showed that in Shanxi, the province that was most seriously influenced by

4.4 A Simple Analysis Based on Optimum Currency Area Theory

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Fig. 4.1 Copper-silver price ratio in Shanxi around the years of drought

the disaster, copper silver price in 1877–1878 largely increased accompanied with the increase of food price. During these two years, cross-sectionally, the price of copper cash in Shanxi was also much higher than other area. Figure 4.1 shows exchange rate between copper cash and silver tael in 1871–1881 in Shanxi area. The original data are from Han (2014, p. 84–85). I averaged the prices reported from each area within Shanxi province. The price of silver in terms of copper cash clearly decreased in 1877–1879, a period in which Shanxi was hit hard by the disaster. Figure 4.2 compares the silver price between Shanxi and Shanghai, in which Shanghai is assumed to be less affected by the drought. Clearly, the decline of silver price relative to copper cash could also be observed by cross-sectional comparison. The evidence in these figures is consistent with the prediction of theoretical analysis and is Pareto-efficiency improving. However, we should remind that this efficiency-improving effect was constrained by the monetary regime at that time. Wang (2014) and Han (2014) did not mention the logic of OCA. They explained their results based on changes of demand of copper cash and silver bullion, and none of them said anything on the welfare implications of these changes. The OCA theory tells us that a higher price of copper cash relative to silver tael could help to alleviate the disequilibrium. We can interpret that disaster or the famine as the occurrence of relative to ∂U . If the food shortage (declining of the supply of x), which raises ∂U ∂x ∂z prices of px and pz are not flexible enough to afford the adjustment, still by lowing the relative price of silver to copper (qs ), the right-hand side of Eq. (4.2) could be increased to restore the equilibrium.

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4 “The Worst Currency” or “The Best Arrangement”?

Fig. 4.2 A Comparision of copper-silver price between Shanxi and Shanghai

Chen (1975) descriptively argued the effectiveness of OCA theory in interpreting the monetary system in Qing period, although he did not provide any direct evidence. Chen interestingly concluded: The little admixture of fiat and fiduciary elements in the monetary system have contributed to making silver bullion and copper cash rather poor substitutes for each other.14

The interesting points are that among the seemly contradictory conclusions on the rationality of the monetary system in premodern China, from Edkins to Chen, the fundamental differences are not their logics but the differences in the assumed preconditions, especially the assumption of state capacity. The crucial points that commonly underlie the affirmative assessments of Rowe, Chen, or Kuroda are that the limitation on the ability to provide fiat money by the government or the existence of currency shortage are taken as given. By adding the assumptions such as the existence of seasonal fluctuating money demand or the lack of adjustment of flexible market price, it can be concluded that the monetary system of Qing was “creative,” “best arrangement” or the multiplicity of currency and the resulting plural units of account were a result of market evolutions. By contrast, Edkins implicitly assumed that the chaotic monetary system of Qing should be and could be improved by some institutional reforms under the initiative of the government. Could the fact that some observed endogenously determined properties be sufficient to justify institutional arrangement? The answer depends on how many of the preconditions are assumed to be exogenous. The problem with Chen (1975)’s argument is that he takes the “little admixture of fiat and fiduciary element” as given. While 14

Chen (1975, p. 361).

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considering monetary system, the government interventions and regulations should not be taken as external or exogenous factors. I have discussed in the last chapter that the monetary standard in Japan was quickly unified under the government initiative. It is also true that territorial currencies in Europe could not be accomplished without the effort of governments. As pointed out by Helleiner, “(t)he construction of territorial currencies was accomplished only when state authorities addressed” the features of pre-nineteenth-century monetary systems, “nothing particularly ‘natural’.”15

4.5 Conclusions The assessments on monetary system in Qing period are widely divided, from “the worst currency” to “the best possible arrangement.” The crucial point behind these dispersed evaluations is how to consider the state capacity in changing the monetary system. The negative assessments implicitly assume the possibility of improvement by governments, while the affirmative assessments consider the disability to provide fiat money or take the existence of currency shortage as given. Price rigidity, currency shortage, and disability to provide fiat money are closely related factors. Some endogenously determined properties for the monetary system of Qing consistent with theoretical predictions can be confirmed. However, these consistencies cannot justify whether a monetary system is well-functioning or not. To judge a sound monetary system, we should consider of whether the system can improve the efficiency of market transactions and whether the system is maintained at the minimum costs.

References Chen C (1975) Flexible bimetallic exchange rates in China, 1650–1850: a historical example of optimum currency areas. J Money Credit Bank 7(3):359–376 Chen D (1932) Zhongguo jindai bizhi wenti huibian (Collection of issues on the Chinese modern currency system). Ruihua Yinshuju, Shanghai Han X (2014) Wanqing zaihuang zhong de qianyin bijia biandong jiqi yingxiang (The Change and influence of price relations between silver and copper cash in famine in the late Qing dynasty: centering Shanxi province during the Ding-wu disaster). J Hist Sci 5:79–92 Helleiner E (2003) The making of national money: territorial currencies in historical perspective. Cornell University Press, Ithaca Kann E (1927) The currencies of China: an investigation of silver & gold transactions affecting China, with a section on copper. Kelly and Walsh, Shanghai Kuroda A (2008) What is the complementarity among monies? An introductory note. Financ Hist Rev 15(1):7–15 Kuroda A (2013) Anonymous currencies or named debts? Comparison of currencies, local credits and units of account between China, Japan and England in the pre-industrial era. Socio-Econ Rev 11(5):57–80

15

Helleiner (2003, p. 31).

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Kuroda A (2019) Famine of cash. In: Gomez G (ed) Monetary plurality in local regional and global economies. Routledge, New York, pp 114–122 Li Q (2007) Jingrong shijiaoxia de Kangqian shengshi: yi zhiqian wei hexin (The heyday of Kangxi and Qianlong under a financial angle: consider the copper cash). Huangshan Shushe, Hefei Lin M (2006) China upside down: currency, society, and ideologies, 1808–1856. Harvard Univeristy Asia Center, Cambridge Mundell R (1961) A theory of optimum currency areas. Amer Econ Rev 51(4):657–665 Rowe WT (2009) China’s last empire, the great Qing. The Belknap Press of Harvard University Press, London von Glahn R (1996) Fountain of fortune: monetary and monetary policy in China, 1000–1700. University of California Press, Berkeley Wang H (2014) Qingdai shehui dongdang shiqi yinqian bijia guilü zhi tanxi (Social instability and fluctuations of the currency in Qing dynasty). J Hebei Univ 37(1):5–14 Young A (1971) China’s nation-building effort, 1927–1937: the financial and economic Record. Hoover Institution Press, Stanford

Chapter 5

An Epilogue

The two central concepts discussed in this book are money and government. While the answers in this book may be much less than what I have questioned, it is still helpful to discuss several issues that are of significance to the present and near future. One issue is related to Japan’s recent economic policy and the other one is related to the international relations between China and America. And the public utilization of digital money cannot be without the involvement of government.

5.1 The Recent Monetary Policy in Japan People’s perception of money has changed. Galbraith (1975) introduced the consideration on money and banking of John Adams, one of the founding fathers of the United States, who served as the second president of America from 1797 to 1801 as follows: John Adams held that every bank bill issued in excess of the quantity of gold and silver in the vaults “represents nothing, and is therefore a cheat upon somebody.”1

However, in the end of March 2021, the Bank of Japan issued 613 trillion Yen base money. This amount corresponded to 110% of GDP in the same year. At the same time, the Bank of Japan held only 0.44 trillion Yen in the form of gold bullion. The main assets in the vaults backed to this huge amount of base money are the holdings of government bond, which reached 532 trillion Yen. By the standard of John Adam, the base money issued by the Bank of Japan is full of cheating. The reality, however, is that in the modern world, more or less, every central bank supplies base money in

1

Galbraith (1975, p. 36).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4_5

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5 An Epilogue

Table 5.1 Annual growth rate of some indicators in Japan Year Growth rate between 1993 and 2019, % Nominal GDP Base money Currency M1 M2 Broad money GDP deflator consumer price index

0.46 10.79 4.36 6.46 2.71 1.84 −0.60 0.04

Note Original data are from the web site of Bank of Japan and Cabinet Office of Japan. The year of 1997 and 2014 are excluded in the calculation of price measures to avoid the influences of changes of consumption tax rate. Broad money is calculated from 1995 to 2019

a similar manner, without sufficient amount quantity of gold, silver, or other species in their vaults. Not only the definition of creditable money, but also many principles believed to be true about money, price, and economic development are facing serious challenges in recent years. Table 5.1 shows several data of money, price and economic development of Japan in recent years. After the bubble, from 1993 to 2020, there has been no single year in which the growth rate of money (M2) was lower than the growth rate of nominal GDP in Japan. The average growth rate of currency, M1, and M2 are 4.36%, 6.46%, and 2.71%, respectively. The average growth rate of nominal GDP is 0.46%. The average rate of inflation in the same period are 0.04% and −0.60%, respectively, when the prices are measured by consumer price index and GDP deflator respectively. The average growth rate of base money, which is controlled by the central bank, is 10.79%, much higher than any other figures in the same table. These facts are amazing enough because Friedman said, “the single most important and most thoroughly documented” proposition is that “inflation is always and everywhere a monetary phenomenon.”2 After a few decades, this “single most important and most thoroughly documented” proposition lost its validity. Keynes would have said it again that “in the long run we are all dead.”3 If this phrase was used to criticize quantity theory, we must say that a quarter century is by no means a short run. What happened in Japan reflects the new problems brought about by the relationship between money and government. Money has become an important means of saving, rather than being used entirely for shopping, as the quantity theory assumes. The boundary between currency and government bond is becoming more and more unclear.

2 3

Friedman (1992, p. 262). Keynes (1929, p. 80).

5.1 The Recent Monetary Policy in Japan

81

Despite the repeated monetary easing, people have not lost their creditability in the value of money. This is good news. At the same time, we should reconsider the efficacy of stimulating the real economy simply by changing the amount of money. Another problem that we should consider from the recent experience in Japan is the size government. On the one hand, as pointed out by Besley (2017), a large fiscal size need not mean an obstacle to the function of the market. On the other hand, a large part of government expenditure is maintained by borrowing. As a result, the government accumulated huge amount of debt. Borrowing is not an ordinary way to keep the government functioning; we need to consider how to keep the necessary government revenue in a normal way.

5.2 The Conflicts Between China and USA The size and the reach of government in China not only puzzled competent historians in the past,4 but also is and will be the central issue in the conflict between China and other Western countries. The different ideas and practices around state capacity constitute the main reason for the conflict between China and the USA. Before judging who is right and who is wrong, we should realize that reducing such conflicts improves the welfare of many people in the world. On the one hand, for China, “there are ... many continuities between contemporary Chinese government and the older Chinese imperial tradition.”5 It is pointed by a Japanese scholar recently that a serious problem for China’s justice is that the basic norm of rules and governance are still not established by itself.6

These continuities may include the low degree of accountability for the government and the fact that the personal will of a particular leader could be even more important than the constitution. On the other hand, the problem with the US is that the government is often portrayed as a destroyer than a supporter of the market order. It seems that as long as an enterprise is willing to cooperate with the government, it must be a bad enterprise. Even though “there is no significant economy that has developed successfully through policies of free trade and deregulation from the get-go. What has always been required is proactive interventions.”7

4

Rowe (2009, p. 54). Fukuyama (2016, p. 387). 6 Kawashima (2018, p. 23). 7 Studwell (2013, p. 226). 5

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5 An Epilogue

5.3 The Challenge of Monetary Digitalization In the contemporary world, monetary regime is basically maintained by the cooperation of central and private banks. The central bank provides the anchor (monetary base) of money,8 and the private banks provide deposits that are convertible into the anchor and transferrable among different accounts. Although this regime has “constantly been challenged,”9 the world has experienced an unprecedented speed of monetary digitalization in recent years, and this has triggered deep concern from the regulatory community. Surprisingly, the socialist China and the capitalist America (or Western countries) have taken similar actions in dealing with these new challenges. In China, Ant Financial, an affiliate company of Alibaba Group, owns the largest digital payment platform. In October 2020, this company announced a plan to raise fund through initial public offering (IPO) in Shanghai and Hong Kong Stock Exchanges. However, this plan was suspended by the government. On the eve of the IPO, the Central Bank of China, the China Securities Regulatory Commission, the China Banking and Insurance Regulatory Commission and the State Administration of Foreign Exchange jointly interviewed executives of ant group. It is said that such a interview jointly by the four regulatory agencies is extremely rare in China. In America, Facebook released Libra on 18 June 2019. In the next two weeks, regulatory agencies including US Federal Reserve, Bank of England, Bundesbank and Bank of France announced that they “would carefully examine Libra, and apply tough regulatory standards to it.”10 As I write this in November 2021, it is still not clear when Ant Financial (now Ant Group) may be listed and when Libra (now Diem) may be issued. It is even difficult to imagine what the money would be like in the next ten years. However, one thing is clear. That is, the issuance and management of money, whatever the form, could not be without the involvement of the government. The most important proposition we want to expound in this book is that economic development and market order are inseparable from the role of government. The ideology-based conflict may only intensify the antagonism. If not, it may lead to more serious nationalism. It is true that the government of China had disrupted the market order in the past. These kind of examples fill the history of China in the recent hundred years, especially in the planning period. However, after nearly 30 years of the reform and open policy, the Chinese government has realized the power of the market. If we believe that tomorrow’s people will be smarter than today’s people, we should also expect that there will be a better understanding on the function of the government.

8

Brunnermeier et al. (2019). Helleiner (2003, p. 218). 10 Zetzsche et al. (2021, p. 81). 9

References

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References Besley T (2017) Size (of government) doesn’t matter. In: Frey B, Iselin D (2017) Economic ideas you should forget. Springer International Publishing AG, Cham, pp 17–20 Brunnermeier M, James H, Landau J-P (2019) The digitalization of money. NBER Working Paper Series, No 26300 Friedman M (1992) Money mischief: episodes in monetary history. Harcourt Brace & Company, New York Fukuyama F (2016) Reflections on Chinese governance. J Chin Gover 1(3):379–391 Galbraith J (1975) Money: whence it came, where it went. Houghton Mifflin, Boston Helleiner E (2003) The making of national money: territorial currencies in historical perspective. Cornell University Press, Ithaca Kawashima S (2018) Ch¯ugoku: Hitaish¯ona sekaikan zenmen ni (China: pushing its asymmetric vision of the world). Nihon Keizai Shinbun. Accessed 3 Aug 2018 Keynes JM (1929) A tract on monetary reform. MaCmillan and Co., Limited, New York Rowe WT (2009) China’s last empire, the great Qing. The Belknap Press of Harvard University Press, London Studwell J (2013) How Asia works: success and failure in the world’s most dynamic region. Grove Press, New York Zetzsche D, Buckley R, Arner D (2021) Regulating Libra. Oxf J Leg Stud 41(1):80–113

Index

A Adachi, K., 13, 26 Alibaba Group, 82 Ansei Nishu Gin, 54 Ant Financial, 82 Arrow––Debreu markets, 3 Asakura, K., 63, 65

B Bank of Japan, 7, 8, 30, 31, 33, 41, 63, 64, 79, 80 Bassino, J., 54, 65 Besley, T., 62, 65, 81, 83 Brandt, L., 12, 26 Brunnermeier, M., 82, 83 Bytheway, S. J., 53, 54, 65

C Chaiklin, M., 52–54, 65 Chen, C., 13, 16, 18, 19, 24, 26, 71, 76, 77 Chen, D., 64, 71, 77 Cheng, L., 48, 65 Cingolani, L., 60, 64 Complete contract, 3 Complete market, 3 Copper cash, 4–8, 11, 13, 14, 16, 17, 22, 25, 37, 69, 72–77 Copper-silver price ratio, 8, 69, 74, 76 Crombrugghe, D., 65 Currency Reform, 37, 67

D Daoguang, 48 Diem, 82

Dincecco, M., 60, 65 Double coincidence of wants, 3 E Edkins, J., 70, 71, 76 F Facebook, 82 Fairbank, J., 45, 52, 57, 58, 61, 65 Feuerwerker, A., 58, 64 Flynn, D. O., 5, 8, 9 Foolish nishu, 54 Friedman, M., 8, 73, 80, 83 Frost, P., 52, 65 Fuhon-sen, 6 Fujino, S., 54, 65 Fukuda, M., 65 Fukushima, M., 6, 8, 62, 65 Fukuyama, F., 60, 65, 77, 81, 82 G Galbraith, J., 79, 82 General acceptability, 1 Giddens, A., 56, 65 Giráldez, A., 5, 9 Glasner, D., 2, 8 Gold rush, 52, 54 Goldsmith, R., 54, 65 Gold standard, 33, 46 Great divergence, 6, 9 Guangdong, 48, 58 H Haihan chiken, 51

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Q.-y. Sui, Money and Government, SpringerBriefs in Economics, https://doi.org/10.1007/978-981-16-8874-4

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86 Hansatsu, 30 Han, X., 74, 75, 77 Hayek, F., 4, 9, 36, 37, 60–62, 65 Helleiner, E., 2, 6, 9, 12, 13, 16, 17, 19, 20, 26, 49, 56, 61, 65, 77, 82, 83 Hong, J., 56, 65 Ho, T., 46, 65 Howe, C., 47, 65 Hubei, 48, 58 Huntington, S., 12, 26 Hu Yufen, 45, 51

I Ishii, K., 54, 64 Ishii, T., 54, 64 Ito, H., 46 Iwahashi, M., 31, 32, 66

J Jevons, W. S., 3 Jiangsu, 48 Jilin, 58

K Kann, E., 51, 55, 66, 70, 77 Kat¯o, S., 14–17, 26 Kawashima, S., 82 Keich¯o Koban, 7, 33 Keynes, J. M., 80, 83 Kinder, T. W., 46 King, F., 50, 66 K¯och¯o j¯unisen, 6 Koyama, M., 60, 66 Kuroda, A., 4, 5, 9, 13, 26, 72, 73, 76, 77, 78

L Libra, 82 Li, J., 49, 66 Lin, M., 14, 26, 51, 66, 72, 78 Li, Q., 25, 26, 72, 78 Liu Zhendong, 71

M MacFarquhar, R., 61, 66 MacMurray, J., 55, 66 Ma, D., 60, 66 Manen Koban, 7 Medium of exchange, 1, 2, 6, 15, 18, 49

Index Meiji Restoration, 6, 7, 29, 31, 50, 57, 58, 62, 63, 70 Mikami, R., 7, 9, 33, 54, 66 Minami, R., 49, 66 Miyamoto, M., 7, 9 Miyashita, T., 17, 18, 20, 26 Monetary digitalization, 82 Monetary reform, 6, 11, 12, 20, 29, 43, 45–50, 54, 55–60, 62, 63, 71 Monopolistic supply, 1 Moriguchi, C., 60, 66, 67 Mundell, R., 7, 8, 70, 73, 74, 78

N Nation-state, 19, 20, 22, 49, 56–58 Needham, J., 12, 26 New Banking Law, 49 New Coinage Act, 31, 46, 51 Nishiyama, C., 63, 64 Norman, E. H., 57, 58, 66

O O’Brient, P., 12, 26 Okada, S., 53, 66 ¯ Okubo, T., 6, 9 ¯ Okuma, S., 54 Ono, K., 46, 56, 64 Optimum currency area (OCA), 7, 8, 19, 69, 73, 75, 76 Oriental despotism, 12, 17, 21 ¯ Osei fukko, 58

P Paper note, 5, 11, 13–15, 23–25, 30, 31, 33, 36–39, 41, 47, 48, 63, 64, 69 Paulus, J., 3 Peng, K., 64, 66 Peng, X., 5, 9, 15, 26, 36, 64, 66 Perkins, D. H., 21, 22, 26 Persson, T., 60, 62, 65 Pomeranz, K., 12, 26 Precocity, 11, 14, 15 Principal-agent model, 11, 16, 22, 50

Q Qian huang, 37 Qian, M., 59, 66 Qing dynasty, 5, 14, 20, 22, 25, 36, 43, 56, 58, 59, 62, 70

Index R Rawski, T., 26, 64, 66 Renminbi, 12, 18, 47, 48, 50, 59, 63 Republican Revolution, 58, 59, 63 Robertson, J., 46 Rowe, W. T., 72, 76, 78, 81, 83 Rubin, J., 60, 66

S Sanka seido, 7, 30 Sargent, T., 2, 3, 9 Seigniorage, 4, 5, 7, 11, 13, 16, 20, 23–25, 45 Selgin, G., 4, 9 Shen, Y., 48, 58, 66 Shikano, Y., 6, 7, 9 Shimbo, H., 32, 67 Shinj¯o, H., 6 Shi, Y., 14, 26, 56, 66 Sichuan, 14 Silver bullion, 7, 11, 13, 14, 17, 22, 32, 37, 70, 72, 73, 75, 76 Silver coin, 5, 14, 16, 17, 23, 24, 30, 32, 36, 37, 47, 48, 52, 53, 58, 64, 72 Silver sink, 5 Silver tael, 8, 17, 18, 75 Sng, T., 60, 66, 67 Sonn¯o j¯oi, 50 Spontaneous order, 29, 30, 62, 63 Standard formula, 2 State capacity, 29, 30, 46, 49, 50, 55–63, 76, 77, 81 Stiglitz, J., 59, 67 Store of value, 1, 49 Studwell, J., 81, 83 Sui, Q., 64, 67

T Takahashi, S., 53, 54, 67 Takaki, M., 30, 66 Tenpo Ichibu Gin, 52, 53 Tenpo Koban, 53 Territorial currencies, 2, 13, 16, 19, 20, 49, 56, 77 The Opium War, 51, 55 Thomsson, K., 65 Tokugawa Ieyasu, 7, 30

87 Tokugawa shogunate, 33, 37, 52 Tsujioka, M., 54, 67

U Uniform monetary standard, 1, 6, 7, 11, 18, 21, 47, 55, 57, 63 Unit of account, 1, 30, 49, 69, 72, 73 Upside down, 14

V Velde, F., 2, 3, 9 Von Glahn, R., 5, 7, 8, 9, 12, 14–18, 20, 21, 23, 24, 26, 56, 57, 67, 71, 78 Vries, P., 5, 8, 9

W Wang, C., 12, 18, 26 Wang, H., 74, 75, 78 Wells, H. G., 62, 67

X Xiao, Q., 56, 67 Xu, F., 58, 67

Y Yamamoto, K., 30, 31, 36, 67 Yan, H., 33, 67 Yan, Z., 44, 67 Yang, L., 14, 26, 45 Yen, 11, 12, 31, 33, 37 Yixin, 51 Young, A., 5, 9, 11, 27, 69, 78 Yuan dynasty, 14

Z Zetzsche, D., 82, 83 Zhang, G., 48, 67 Zhang, J., 18, 27 Zhang Zhidong, 45 Zhao, L., 56, 66 Zhao, Y., 47, 67 Zhu, J., 14, 16, 27, 47, 67 Zhuo, Z., 43, 45, 46, 49, 67