The China Syndrome: Silk Road or Silver Road?

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I had
one of those First Order experiences people talk about, two years
ago, standing athwart the cobblestoned roads of a little city in
China called Lijiang, poised at the southernmost end of the Himalayas,
in the shadow of the Jade Dragon Snow Mountain towering above us
at three miles in elevation. Through this millennia-old city courses
the Jinsha River, cut into canals that house fish pens to serve
the quaint eateries, which serve up fresh-caught perch with yak-meat
and beer locally brewed from the Jade Dragon’s glacial waters.

These cobblestones
form the ancient Silk Road, but it dawned on me, standing there
and pondering the old city, that "Silk Road" is a misnomer;
that its proper name should be The Silver Road. For if you view
"western civilization" from an Asian perspective, Silver
Road is exactly what it was.

Let’s envision
this mysterious part of the world as Marco Polo would have found
it, in 1280 AD, at the age of 20, when he arrived in China with
his father and uncle, both Venetian traders on their second trip
to the Middle Kingdom.

We think of
silk and tea when we think of the China of that era, but the Polos
also encountered an enlightened and gracious and curious Chinese
ruler, the Khan, who asked if upon their return to Europe they would
petition the Pope in Rome to dispatch 100 theologians and scholars
to Beijing so that he might learn of European culture and theology.
The Polos also encountered in China a magical cleaning cloth that
could be itself cleaned by throwing it on the fire for a bit; asbestos.
And that was not all. China had an iron manufacturing industry whose
output would not be equaled by Europe for another five centuries;
an Imperial Post Office, with second-class, first-class and Royal
Priority Mail services; a complex, canal-based transportation system;
and a prodigious salt-manufacturing industry. (Salt, before the
invention of refrigeration, was a commodity almost as precious as
gold.)

All these things
were new to the Europeans. Friendly relations were established between
the Pope and the Kahn, and Europe and China, using the Polos and
their successors as emissaries. Soon trade was vigorous between
the two worlds, picking up where trade between China and ancient
Rome had left off.

Over the Silver
Road from China to Europe came technology: silk, gunpowder, spaghetti,
ceramics and tea. Technologies that Europe, still largely feudal,
agrarian and caught up in internecine warfare, had neither the will
nor the skill to produce. But mercantile China was not giving this
stuff away! The accepted means of payment? Why, of course, gold
and silver. And particularly silver. China’s love-affair with silver
as money predates recorded time, but was well-established before
the birth of Christ. Silver was informally monetized by 475 BC,
and was officially declared the currency of the land by the Yuan
Dynasty which commenced in 1279, about the time the trade routes
with Europe were opening back up. Silver remained China’s official
money until well into the 1930s, when the Middle Kingdom became
the last great civilization to cave into the seductions of fiat
money. An interesting footnote to this time in trading history was
that China valued silver more highly than did Europe’s central banks:
10 ounces of silver could be exchanged for one ounce of gold in
China, whereas in Europe, the going rate was 16:1.

In the ensuing
centuries since the Polos commerce between East and West was so
intense that by the year 1800, China had wound up with half of the
world’s silver — in European, Persian and even American denominations.
Half the world’s money! Earlier than 1800, Europe, in its effort
to sustain trade with China, had colonized the New World to mine
and coin yet more silver and gold. There are the ruins of a Spanish
smelter and mint about 12,000 feet above sea level in the Peruvian
Andes that I have seen, and I was told in Arequippa, Peru, that
it was the Spanish custom to bring the silver and gold they were
mining there down from the mountains to the coast, where the gold
was loaded onto the galleons for dispatch to Europe; the silver,
however, was drop-shipped from South America directly to China to
keep the current accounts deficit with China in line. Indeed there
are splendid examples of gilt Chinese pottery to be found up and
down South America’s West Coast as a testament to this.

But even with
Europe’s new-found silver and gold in the New World, they could
not keep up with their payments and, thus, came along 1800, with
China holding the cards. This of course was the source of considerable
pain to European pride and solvency. So, their treasuries depleted
of real money, the English pursued another course of action: they
got into the dope-peddling business. The famed tea trade between
Britain and China, and China and the Americas, those great Clipper
ships, weren’t built just to haul tea. They weren’t running dead-head
back to China, their holds empty. No, they were introducing sweet,
addictive, stupefying opium from India and Pakistan to the population
of China in order to get their silver back. It had devastating results.

Its money and
its youth threatened, an infuriated China outlawed opium in the
early 1800s, first to preserve the mental health of its people,
second to preserve the integrity of its silver treasuries, which
by 1500 AD had made Asia the major player in what was then arguably
the first fully integrated global economy. But mercantile China,
used to thriving on peaceful trade and innovation rather than war
and conquest, was at a total loss to confront the Royal Navy, which
sailed and later steamed to Chinese ports escorting boatloads of
British merchantmen larded with the dreaded drug.

By the 1830′s,
writes historian Richard
Hooker
:

"(T)he
English had become the major drug-trafficking criminal organization
in the world; very few drug cartels of the twentieth century can
even touch the England of the early nineteenth century in sheer
size of criminality. Growing opium in India, the East India Company
shipped tons of opium into Canton [now Guangzhau] which
it traded for Chinese manufactured goods and for tea. This trade
had produced, quite literally, a country filled with drug addicts,
as opium parlors proliferated all throughout China in the early
part of the nineteenth century. This trafficking, it should be
stressed, was a criminal activity after 1836, but the British
traders generously bribed Canton officials in order to keep the
opium traffic flowing. The effects on Chinese society were devastating.
In fact, there are few periods in Chinese history that approach
the early nineteenth century in terms of pure human misery and
tragedy. In an effort to stem the tragedy, the imperial government
made opium illegal in 1836 and began to aggressively close down
the opium dens."

Fault the frustrated
Chinese government for actually starting the Opium Wars, if you
must. To enforce its prohibition (and its sovereignty) China sent
a rag-tag fleet of junks out to intercept a British opium shipment
in Canton in November 1839. Though the junks were hopelessly outgunned,
an indignant Queen Victoria dispatched the Royal Navy to exact revenge.
For two years the Royal Navy mercilessly hammered China's shore
batteries, ultimately prevailing. (The Chinese, it seems, did not
embrace Klausewitz's philosophy that war is merely an extension
of politics. They navely believed that reason and technology would
trump all else.)

Humiliated
by this defeat, China signed the Treaty of Nanking in 1842, followed
a year later by the British Supplementary Treaty of the Bogue. These
provided that the ports of Guangzhou, Jinmen, Fuzhou, Ningbo, and
Shanghai should be open to British opium trade and British residence;
in addition Hong Kong was ceded to the British. Sensing blood France,
Russia and the United States all piled in with similar treaties
granting similar access. In essence, the West subdivided the Middle
Kingdom.

A sort of 19th-century
prototype of the Treaty of Versailles, the Nanking Treaty also called
for the scalp of Lin Tse-hsü, the Imperial Commissioner at
Canton — he was the author of China's anti-opium policy — and the
poor guy was dishonoured and fell on his sword. Maggie Thatcher's
return of Hong Kong to Chinese sovereignty 150 years later wasn't
an act of surrender at all; it was merely the return of stolen goods,
maybe even an imperial act of contrition, a rare event in this nasty
age.

It took China
nearly 100 years to shake itself from the stupor of the opium trade,
during which period China endured the hideous predations of the
Japanese during the 1930s and 1940s, and later the savagery of the
cultural revolutions of Mao Zedong, both of which served virtually
to wipe out China’s cultural and intellectual best.

Yet here we
are, a mere 31 years after Mao’s death, confronted with a new China,
vigorous and increasingly prosperous, teaching the West once again,
as it has for two millennia, how to play the trade game. And we
are, once again, not learning very well. Anthony Fell, formerly
vice-chairman of the Royal Bank of Canada, had this to say about
the West’s, and particularly the United States’, trade imbalances
with our Pacific neighbour:

"The U.S.
annual trade deficit, now running at a rate of more than three-quarters
of a trillion annually, or 6.3 percent of GDP, is a huge concern.
It’s not prudent for the U.S. to depend on foreign bond buyers to
finance domestic consumption. Asian countries produce low-cost goods
which are shipped to the United States, the U.S. ships dollars back
to Asia, and then the Asians purchase U.S. treasuries.

"One could
say this is a giant international Ponzi scheme. I don’t think this
model is viable or sustainable. Asian central banks will not want
to accumulate U.S. dollars at the current rate forever. There is
no free lunch. Virtuous circles like this, where everyone appears
a winner, always come to an unhappy ending."

Well, an unhappy
ending for some, that’s for sure. In the wake of China’s defeat
in the Opium Wars, the Chinese official Wei Yuan, in 1850, published
an article in the "Illustrated Gazatteer of Maritime Countries"
in which he argued, and I am again quoting from Richard Hooker,
"that the Europeans had developed technologies and methods
of warfare in their ceaseless and barbaric quest for power, profit
and material wealth. Civilization, represented by China, was in
danger of falling to the technological superiority of the Western
powers. Because [in Wei's view] China is a peaceful and civilized
nation, it can overcome the West only if it learns and matches the
technology and techniques of the West."

Well, just
since my first trip to China in 2004 they’ve launched astronauts
into space and shot one of their own satellites out of the sky.

A comment one
often hears from people returning from their first visit to China
is, "Better teach your grandchildren how to speak Chinese and
you’d better teach them how to do laundry." I submit that there
is an alternative to having to learn all the multiple dialects of
Chinese, or to teaching your kids how to do laundry, for that matter.
And that is to learn to speak Silver, the ancient and renascent
money of China. This is the lesson of that First Order Experience
on the cobblestones of the Silver Road in Lijiang.

And if you
are in possession of real money, Silver, then that is all the Chinese
you will ever need to learn.

July
27, 2007

David
Bond [send him mail] worked
30 years in the newspaper business as a general assignment and political
reporter and editor, on both coasts, Alaska and Canada, garnering
numerous national awards for his work. He now covers precious metals
equities.

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