By 1935, the silver standard, which had defined China’s monetary system for centuries, was in crisis. While most major economies had already abandoned silver-backed currencies in favor of gold or fiat money, China remained the last major nation still using silver as the foundation of its monetary system. However, a series of external pressures—including the U.S. Silver Purchase Act of 1934—triggered severe deflation, capital flight, and a financial meltdown, forcing the Nationalist government to abandon silver and introduce a fiat currency system in 1935. This shift marked the final collapse of the silver standard worldwide, ensuring that silver would never again serve as the foundation of a major economy.
1. The Economic Pressures Leading to the 1935 Reform
- The U.S. Silver Purchase Act and the Silver Drain
- In 1934, the U.S. passed the Silver Purchase Act, requiring the U.S. Treasury to buy large amounts of silver to artificially raise prices.
- As a result, global silver prices soared, making silver more valuable as a trade commodity than as currency.
- This led to massive silver outflows from China, as speculators and traders smuggled silver to the U.S. for profit.
- Deflation and Economic Collapse
- With silver leaving China, the money supply contracted, triggering severe deflation—a drop in prices that caused business failures, wage declines, and rising debt burdens.
- Farmers, merchants, and banks suffered as credit dried up, leading to widespread financial instability.
- Political Instability and the Urgency for Reform
- The Nationalist government (Kuomintang, KMT), led by Chiang Kai-shek, recognized that remaining on the silver standard was unsustainable.
- China needed a modern financial system, free from dependence on global silver prices and external market fluctuations.
2. The 1935 Currency Reform: The Shift to Fiat Money
- Abolition of the Silver Standard
- On November 4, 1935, the Nationalist government officially abandoned the silver standard, ending centuries of silver-backed currency in China.
- This decision was influenced by economic necessity and the advice of Western financial experts, particularly from Britain and the U.S..
- Introduction of the Fabi (法幣) Fiat Currency
- The new currency, Fabi (法幣, “Legal Tender Currency”), was introduced as China’s first true fiat currency.
- Unlike silver-backed money, Fabi was not tied to any metal, but rather controlled by the Chinese central government.
- The Central Bank of China, the Bank of Communications, and the Farmers Bank of China were given authority to issue Fabi, replacing silver as the national currency.
- Foreign Support and Stabilization Efforts
- To strengthen confidence in the new system, China secured financial support from Britain and the U.S., which helped stabilize Fabi’s value.
- British banks in Shanghai and U.S. financial advisors worked with the Chinese government to ensure a smooth transition from silver to fiat currency.
3. The Impact of the 1935 Currency Reform
- Short-Term Economic Stabilization
- With silver no longer being drained out of the country, China’s money supply stabilized, and deflation slowed.
- The banking system regained liquidity, allowing businesses and trade to recover.
- The End of Silver as a Global Monetary Standard
- China’s decision to abandon silver marked the final collapse of the silver standard worldwide.
- After China’s shift, no major country used silver as a national currency standard, confirming silver’s complete removal from global finance.
- Long-Term Challenges and Inflation
- Although Fabi initially helped stabilize the economy, it later suffered from hyperinflation during World War II and the Chinese Civil War.
- By 1949, the Chinese Communist Party replaced Fabi with the Renminbi (RMB), issued by the People’s Bank of China.
4. The Legacy of China’s Abandonment of Silver
- The Shift Toward Modern Monetary Policy
- China’s 1935 reform marked the country’s first step toward a modern central banking system, allowing for greater control over the economy.
- It also aligned China with the global trend of fiat currency, setting the stage for future monetary policies.
- Silver’s Transition to a Commodity
- After 1935, silver was no longer viewed as money, but instead became a commodity used in industry, trade, and investment.
- This transformation reshaped silver’s role in the economy, making it more similar to gold as a store of value rather than a medium of exchange.
- A Global Turning Point for Monetary Systems
- The collapse of the silver standard in China reinforced the dominance of gold and fiat currencies in global finance.
- Governments and central banks moved toward more flexible monetary policies, no longer tied to metal reserves.
Conclusion: The Final End of the Silver Standard
China’s abandonment of silver in 1935 was the last major event in the decline of the silver standard, marking the definitive end of silver-backed money worldwide. Triggered by U.S. silver policies and economic instability, China’s transition to fiat currency (Fabi) represented a critical turning point in global finance. From this moment onward, silver would never again serve as the foundation for national monetary systems, instead becoming a commodity used for industry and investment.