Introduction

Although the post-2001 dollar depreciation discussed in Chapters 1 and 2 was not part of any officially declared government policy, the 40% devaluation of the dollar against gold in 1933–1934 reflected US policymakers' determination to free the economy from persistent deflationary pressures and was accompanied by a rapid acceleration of domestic money supply growth (cf. Friedman and Schwartz, 1963; Bernanke, 2002). This US monetary expansion was fueled by large-scale silver purchases, under which the US government issued silver certificates in exchange for the newly purchased silver – with these silver certificates then circulating as currency and adding to the nation's money supply. The US silver purchases had major implications for China as well. In the early 1930s, China and the British crown colony of Hong Kong were essentially alone in still linking their currencies to silver. As the world price of silver rose in response to the US silver purchase program, these silver-based currencies appreciated in value.