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    China Business
     Feb 17, 2011


Silver and opium
By Antal E Fekete

The Opium Wars do not belong to the glorious episodes of Western history. Rather, they were instances of shameful behavior the West still has not lived down.

Mercantilist governments resented the perpetual drain of silver from West to East in payment for Oriental goods (tea, silk, porcelain) that were in high demand in the Occident, while facing low demand in the Orient for Occidental goods. From the mid-17th century, more than 9 billion Troy ounces, or 290 thousand tonnes, of silver was absorbed by China from European countries in exchange for Chinese goods.

The British introduced opium along with tobacco as an export item to China in order to reduce the trade deficit. Under the

 

disguise of free trade, the British, the Spanish and the French, with the tacit approval of the Americans, continued sending their contraband to China through legitimate as well as illegitimate trade channels even after the Chinese dynasty put an embargo on opium imports.

Because of its strong appeal to the Chinese masses, and because of its highly addictive nature, opium appeared to be the ideal solution to the Westís trade problem. And, indeed, the flow of silver was first stopped, and then reversed. China was forced to pay silver for her addiction to opium smoking that was artificially induced by the pusher - the British.

Thus silver was replaced by opium as the mainstay of Western exports. In 1729 China, recognizing the growing problem of addiction and the debilitating and mind-corrupting nature of the drug, prohibited the sale and smoking of opium, allowing only a small quota of imports for medicinal purposes. The British defied the embargo and ban on opium trade, and encouraged smuggling. As a result, British exports of opium to China grew from an estimated 15 tonnes to 75 tonnes by 1773. This increased further to 900 tonnes by 1820; and to 1,400 tonnes annually by 1838 - an almost 100-fold increase in 100 years.

Something had to be done. The Chinese government introduced the death penalty for drug trafficking and put British processing and distributing facilities on Chinese soil under siege. Chinese troops boarded British ships in international waters carrying opium to Chinese ports and destroyed their cargo, in addition to the destruction of opium found on Chinese territory. The British accused the Chinese of destroying British property and sent a large British-Indian army to China in order to exact punishment.

British military superiority was clearly evident in the armed conflict. British warships wreaked havoc on coastal towns. After taking Canton (Guangzhou), the British sailed up the Yangtze River. They grabbed the tax barges, inflicting a devastating blow on the Chinese as imperial revenues were impossible to collect. In 1842, China sued for peace, with a pact that was concluded in Nanking and ratified the following year. In the treaty, China was forced to pay an indemnity to Britain, open four port cities where British subjects were given extraterritorial privileges, and cede Hong Kong to Britain. In 1844 the United States and France signed similar treaties with China.

These humiliating treaties were criticized in the House of Commons by William E Gladstone, who later served as prime minister. He was wondering "whether there had ever been a war more unjust in its origin, a war more calculated to cover Britain with permanent disgrace". The Foreign Secretary, Lord Palmerston, replied that nobody believed that the Chinese governmentís motive was "the promotion of good moral habits", or that the war was fought to stem China's balance of trade deficit.

The American president, John Quincy Adams, chimed in during the debate by suggesting that opium was a "mere incident". According to him "the cause of the war was the arrogant and insupportable pretensions of China that she would hold commercial intercourse with the rest of mankind not upon terms of equal reciprocity, but upon the insulting and degrading forms of the relations between lord and vassal."

These words are echoed, 160 years later, by President Barack Obama's recent disdainful pronouncements to the effect that China's exchange-rate policy is unacceptable to the rest of mankind as it pretends that China's currency is that of the lord, and everybody else's is that of the vassal.

The peace of Nanking did not last. The Chinese searched a suspicious ship, and the British answered by putting the port city of Canton under siege in 1856, occupying it in 1857. The French also entered the fray. British troops were approaching Beijing and set on to destroy the Summer Palace. China again was forced to sue for peace. In the peace treaty of Tianjin, the port for Beijing, China yielded to the demand to create 10 new port cities, and granted foreigners free passage throughout the country. It also agreed to pay an indemnity of five million ounces of silver: three million to Britain and two million to France.

This deliberate humiliation of China by the Western powers contributed greatly to the loosening and ultimate snapping of the internal coherence of the Qing Dynasty, leading to the Taiping Rebellion (1850-1864), the Boxer Uprising (1899-1901) and, ultimately, to the downfall of the Qing Dynasty in 1912.

The present trade dispute between the US . and China is reminiscent of the background to the two Opium Wars. Once more, the issue is the humiliation and plunder of China as a "thank you" for China's favor of having provided consumer goods for which the West was unable to pay in terms of Western goods suitable for Chinese consumption. The only difference is the absence of opium in the dispute.

Oops, I take it back. The role of opium in the current dispute is played by paper. Paper dollars, to be precise.

In 1971, an atrocity was made that I call the Nixon-Friedman conspiracy. To cover up the shame and disgrace of the default of the US on its international gold obligations, Milton Friedman (following an earlier failed attempt of John Maynard Keynes) concocted a spurious and idiotic theory of floating exchange rates. It suggests that falling foreign exchange value of the domestic currency makes it stronger when in actual fact the opposite is true: it is made weaker as the terms of trade of the devaluing country deteriorates and that of its trading partners improves.

President Richard Nixon was quick to embrace the false theory of Friedman. No public debate of the plan was permitted then, or ever after. Under the new dispensation, the irredeemable dollar was to play the role of the ultimate extinguisher of debt, a preposterous idea. The scheme was imposed on the world under duress as part of the "new millennium", shaking off the "tyranny of gold", that "barbarous relic", the last remnant of superstition, the only remaining "anachronism of the Modern Age".

The ploy was played up and celebrated as a great scientific breakthrough, making it possible for man to shape his own destiny rationally, free of superstition, for the first time ever. Yet all it was a cheap trick to elevate the dishonored paper of an insolvent banker (the US) from scum to the holy of holies: international currency. The fact that fiat paper money has a history of 100% mortality was neatly side-stepped. Any questioning of the wisdom of experimenting with it in spite of logic and historical evidence was declared foggy-bottom reactionary thinking.

The amazing thing about this episode of the history of human folly was the ease with which it could be pushed down the throat of the rest of the world, including those nations that were directly hurt by it, such as the ones running a trade surplus with the US. Their savings went up in smoke.

The explanation for this self-destructing behavior is the addictive, debilitating and mind-corrosive nature of paper money, in direct analogy with that of opium. The high caused by administering the opium pipe to the patient (read: administering quantitative easing, or QE) had to be repeated when the effect faded by a fresh administration of more opium (read: QE2).

If the patient resists, like China did in 1840, then a holy opium war must be declared on it in the name of the right of others to free trade. Now 170 years later, a New China once more demurs against the paper-torture treatment it was subjected to by the American debt-mongers and opium pushers.

But beware: if the West starts another Opium War, this time it is not China that will be on the losing side.

Antal E Fekete has since 2001 been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996, Professor Fekete won the first prize in the International Currency Essay contest sponsored by Bank Lips Ltd of Switzerland.

(Copyright 2011 Antal E Fekete)

(From March 5 through 13, 2011, the New Austrian School of Economics will hold a course on "Adam Smith's Real Bills doctrine and circulating capital" at the Martineum Academy in Szombathely, Hungary. This is the second in a four-course series on Austrian Economics, a branch of economic science based on the work of Carl Menger (1840-1921). On Monday, March 14, the school will hold a seminar on "Basis, Co-basis, Permanent Backwardation of Gold and Silver and What It Means", the third in the series. For further information on both course and seminar, please contact Dr Judith Szepesvari, e-mail: szepesvari17@gmail.com.)


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