Silver in a global context, 1400-1800

DENNIS O. FLYNN

Having been manufactured in the form of ornaments and monies for ages, including state-sanctioned silver ingots stamped in Cappadocia more than 4,000 years before, silver was the paramount monetary substance in the world prior to the ascendance of “the Gold Standard” during the second half of the nineteenth century.

Pre-eminence of the white metal continued during Greek and Roman times, including the Hellenistic Near East. Over 5,000 tons of silver (140.5 tons per year) in the form of coined silver talents were issued during 330-294 bce, thanks largely to acquisition of Persian treasury by Alexander the Great.¹

Babylonian price data gleaned from tens of thousands of cuneiform documents have led R. J. van der Spek to view silver objects (including coins) as trade items suitable for supply-and-demand analysis within silver markets themselves, while specifically rejecting the portrayal of silver flows as balancing items that passively respond to trade imbalances in “real” (i.e. non-monetary) sectors.^{^[192]} ^{^[193]} Silver flowed to, and was retained within, Hellenistic Babylonia because population growth and economic development attracted specific types of silver used for tax and other payments in the regional economy. The stock of silver increased via importation due to silver's high valuation within Babylonia, an elevated price caused by strong demand-side forces in that region. Babylonian textiles and other exports were exchanged for equivalent silver imports (some coined, some not coined). From this point of view, van der Spek sees the influx of silver, and the efflux from silver-source areas, in terms of bi-directional trade that was balanced.

Silver flowed relentlessly into China throughout most of the time period covered in this chapter, yet the situation was quite different earlier.

During the thirteenth century, silver and silver-backed paper money substituted for copper-based coins, but despite this transition away from copper toward silver-based monies, the unification of trade across Afroeurasia under the Mongols led to the export of Chinese silver in reaction to powerful demandside forces in Muslim states from Persia to Spain, where silver's purchasing power rose to double its level in China.^{^[194]} In sum, demand-side forces helped raise the purchasing power of silver in West Asia and the Mediterranean, while silver's purchasing power had fallen in East Asia due to substitution of paper money that served as a substitute for physical silver within China. It was profitable to relocate silver from low-value markets within China to high-value markets in western Asia, Europe and North Africa.

Decisive transformation occurred again during the fifteenth century when Chinese fiscal crises led to massive issuance of paper money that was supposed to be backed by silver. Official silver reserves were nowhere near adequate to maintain confidence in the context of over-issuance of paper monies, however, so the market value of paper money plummeted. Resulting bouts of hyperinflation destroyed China's silver-exchange standard in the 1430s. Marketplace abandonment of paper money meant that private merchants and local governments increasingly relied upon physical silver itself, leading to relentless “silverization” forces that eventually spread empire-wide, notwithstanding repeated Ming efforts to halt the dominating spread of silver. Since explosive demand-side expansion occurred during a time of sharp decline in Chinese silver mine production, the market value of silver in China surged to double (100 percent price premium) silver's value in the Mediterranean world.^{^[195]} Thus, overvaluation of silver within Ming China completely reversed prior undervaluation of silver in China during the Mongol period. The neighboring Choson court subsequently permitted silver mining in Hamgyon province in 1515 and Korean “silver continued to flow out of the country and even gained a reputation in China as high quality silver.”^{^[196]}

I have not encountered argument to the effect that high Chinese silver prices stimulated the mid-fifteenth century Central European surges in silver mine activity, but such a conclusion is plausible.

Venetian silver exports eastward alone were double the combined mint output of England and the Low Countries. According to John Munro, “The very marked difference in bimetallic ratios certainly indicates that silver was generally always scarcer and thus relatively more valuable... in eastern Asia than it was in Europe.”^{^[197]} Ottoman conquest of Central European mining regions eventuated in a 1503 Ottoman-Venetian treaty, and the English Levant Company was founded in 1581, both formed for the explicit purpose of exporting silver through Ottoman commercial networks. Multiple Ottoman maritime and overland trade routes, including silk roads, carried silver eastward during the sixteenth, seventeenth, and eighteenth centuries.

Japan had traditionally imported silver from China from the late eleventh century into the fifteenth century, since the only significant Japanese silver mines then were located in Tsushima province, an island that also served as a vector for the introduction of Chinese mining technology into Japan via Korea. “Despite its later reputation as a primary silver supplier to China, Japan was in fact not always an exporter of precious metals. In the midfifteenth century, the silver and copper coins circulating in Japan were largely from foreign countries... The major source of foreign currency was Korea... It was in the mid-fifteenth century when silver began to be smuggled from Korea to Japan.”^{^[198]}

China's exportation of significant quantities of silver to the Mediterranean, to Japan and elsewhere prior to Chinese monetary and fiscal collapse in the 1430s contrasts sharply with China's subsequent ascendancy as earth's most prolific importer of silver. Indeed, China's transformation into world history's largest silver “suction pump” led to the birth of global trade during the sixteenth century.^{^[199]} Within a few decades of the Columbian voyages, the world's greatest silver mines were discovered in the 1540s in Mexico and Upper Peru, leading to a pattern of American silver exports to China that persisted into the twentieth century.

Motivation for sixteenth-century silver production was clear: Silver's purchasing power in China had soared to double its European value, which itself far exceeded silver-mining costs in Spanish America. This provides a straightforward example of arbitrage at work - buy where price is low and relocate it for sale where price is high - a lesson intuitively understood by merchants throughout the world. Thanks largely to robust demand emanating from China, silver prices (though declining gradually) managed to exceed silver production costs for a century. A Spanish empire could not have existed in the absence of profits generated (directly and indirectly) through trade connected to American silver and its Chinese markets. Indeed, the Portuguese, English, Dutch, and others who subsequently entered Asian waters were likewise motivated by profits generated by cargoes overwhelmingly comprising Spanish-American silver.

This trade pattern existed simultaneously within Asia, since prodigious Japanese silver mine discoveries from the 1530s fundamentally altered the trajectory of Asian history. The Shogun gained complete control of Japanese silver mines, which enabled him to subdue roughly 250 formidable lords (daimyos) and thereby pave the way for the unification of Japan in 1600, initiating two and a half centuries of Pax Tokugawa that lasted into the second half of the nineteenth century. Japanese silver was destined primarily for Chinese end-markets, of course, throughout the sixteenth and much of the seventeenth century. The Portuguese initially served as convenient middlemen for the export of Japanese silver to China via Nagasaki Bay, until the Shogun inserted Dutch intermediaries in place of Portuguese in the 1630s.

In sum, world silver production flowed relentlessly into China because tremendous profits accrued to those who transferred silver toward/to endmarkets within China. Massive Chinese exports were required in order to purchase vast silver imports. Balance between exports and imports was achieved through global market mechanisms beyond the control of anyone.

Visualization of supply and demand mechanisms

This chapter portrays silver's progression through space and time via application of supply-and-demand mechanisms that elucidate market forces that drove - and continue to drive - production and relocation of monetary and non-monetary items alike. The supply-demand approach presented below contrasts sharply with traditional historical depictions that portray region-to- region physical transfers of silver coins as responses to alleged trade imbalances. Trade-imbalance arguments seem sensible at a surface level. If an individual spends more than their income, then they must either surrender savings (or borrow) to make up the difference. Similarly, if a region's imports exceed the region's exports, residents of the net-import region must

Silver in a global context, 1400-1800 surrender coins in order to pay for purchase rates that exceed the rate of sales abroad. According to this line of reasoning, monetary-sector outflows are effects, while trade deficits (i.e. non-monetary imports in excess of nonmonetary exports) are causes. Thus, coin outflows are deemed derived, residual monetary effects caused by trade imbalance, the root cause of which is net-imports of non-monetary items across borders.

According to this formulation, direct supply-and-demand analysis is confined to flows of non-monetary items. Direct application of supplydemand analysis to cross-border monetary flows (including silver coins) is deemed unnecessary, since monies are perceived to merely counter-flow in sufficient quantities required to offset non-monetary trade imbalances across regions. For instance, economic historian David Landes has written that the eighteenth-century “European appetite for Chinese goods grew rapidly... [which] posed a payment problem. The Europeans would like to pay with their own manufactures, but the Chinese wanted almost nothing they made... So the Europeans paid in bullion and specie.”^{^[200]} Similarly, Jonathan Spence stated that “growing demand in Europe and America for Chinese...

goods has not been matched by any growth in Chinese demand for Western exports... The result was a serious balance- of-payments problem for the West.”^{^[201]} ^{^[202]} Flow of precious metals (as monetary items) to Asia was required in order to pay for Europe's trade deficit with Asia: “Europe tended to import more from Asia, in the form of spices, silk, textiles, and other goods, than it exported to the east. The difference was paid in the form of specie... They [Ottomans] could not prevent the outflow of specie to the East arising from the trade deficits in that direction.”¹¹

Evidence from global monetary history contradicts this traditional tradedeficit explanation by economic historians, however, since “money” did not in fact flow across borders in response to non-monetary trade imbalances. Were trade-deficit explanations valid, a bundle of various monetary substances would have flowed simultaneously to trade-surplus countries such as China. Yet survey of the four main monetary substances in global history during our time period - silver, gold, copper, and cowry shells - reveals trade patterns that contradict the trade-deficit arguments sketched immediately

above.¹² First, geological forces, quite independent of human agency, led to endowments of three natural-resource substances that were infused into coins - silver, gold, and copper - each concentrated at specific locations around the globe. (Humans did select locations for aquaculture-farming of cowries, but locational choices were sharply limited by geography for this fourth monetary substance as well.) In general, concentrations of monetary raw materials were determined by geological forces independent of trade- balance/trade-imbalance issues of any particular time or place.

Second, the proportion of any particular monetary substance destined for relocation to a specific end-market location depended upon the extent to which concentrations of human beings expressed ability and willingness to purchase and maintain that particular monetary substance. There was immense Chinese demand to hold silver for centuries, for instance, but no similar demand to hold gold existed in China; in consequence, silver from around the world was sent to China for centuries, whereas gold was simultaneously exported from China during considerable time periods. Substantial gold zones existed within Japan and also within India, on the other hand, so gold consequently gravitated to specific heavily populated gold regions within those countries; silver settled in silver regions of Japan and India, however, because dense populations in those specific regions preferred the white metal over gold. Any number of similar examples indicate that nation states (for which trade balances are normally calculated) serve as poor units of analysis in monetary history generally, since monetary preference differed from region to region within nations. In a similar vein, concentrated human demand to hold cowry shells was huge in specific end-markets within Asia as well as within West Africa, while equivalent end-markets for cowry shells did not develop within Europe or the Americas; thus great amounts of shell money gravitated toward specific end-markets within Asia and West Africa because of intense end-demand at these locations. The same logic applies to the prolific seventeenth-century Japanese copper-mine output that mainly fed China, but was also exported in large volume to locations of concentrated demand in Europe and elsewhere. Swedish copper fed European industries (including mints) and population centers that demonstrated robust demand (not because of some presumed trade deficit), and copper exports to Africa followed the same set of rules. Third, and as a consequence of the foregoing, distinct trade routes connected production-site concentrations to specific concentrations of end-market demand that were distinct for each monetary substance.

In sum, the world's four main monetary substances never traveled worldwide in tandem; indeed, they were often exchanged for each other while traveling in opposite directions over time periods that stretched up to a century. Historical facts contradict trade-deficit reasoning as applied to the abstract category “money”; trade-deficit reasoning is powerless to explain movements of each specific monetary substance from unique endowment sources to final destination end-markets that exhibited unique characteristics. Monetary items should neither be lumped together into a “money” catch-all category, nor treated as compensating residuals that purportedly derive motion only as counter-balancing flows that respond to non-monetary market imbalances. The fundamental “real” versus “monetary” dichotomy taught in present-day economics textbooks is an obstacle to understanding global monetary history.

As mentioned, worldwide silver production flooded into China for centuries, sometimes as bullion and other times as specific coin types, depending upon conditions during a given time period. Payment for tens of thousands of tons of Chinese silver imported over centuries took the form of equally prodigious exports of Chinese silks, ceramics, tea (later on), and other items. In short, export goods were swapped for import goods. Since the Chinese did not collectively lend in order to finance massive purchase of Chinese exports to the rest of the world up to the nineteenth century - the Chinese accepted payment overwhelmingly in silver instead - there was no “trade imbalance” in need of finance. Silver imports were exchanged for non-silver exports.

This historical setting differs fundamentally from the trade deficit of the United States today, for instance, whereby United States residents collectively borrow from the rest of the world in order to pay for net imports. Huge US net borrowing today does indeed imply an equally huge US trade deficit, since net imports require borrowing outside of the United States. But Europeans (and other areas beyond China) during the 1400-1800 period of this chapter did not borrow to finance massive imports of Asian wares; they therefore could not have experienced trade deficits vis-a-vis China. Global trade during our period was not “balanced” via massive international loans, as is the case today. In sum, systematic modern-style trade imbalances existed neither between hemispheres nor within them during the time period covered in this chapter. Those who invoke trade-deficit reasoning to explain global movements of monies during our period fail to distinguish between the trade involved in the relocation of physical monies centuries ago, and the actual debt-financed trade imbalances that exist today. Description of the production and relocation of each monetary substance in a global perspective requires direct application of supply-and-demand mechanisms to each individual monetary item in its own right. Treatment of monies as imbalanceresiduals must be rejected.

The Unified Theory of Prices

Supply and demand mechanisms presented in this essay were constructed in order to analyze monetary and non-monetary products within a single theory that can be described as a Unified Theory of Prices. The theory is “unified” in the sense that the price of each monetary substance is treated in the same fashion as the price of any non-monetary substance; this procedure requires imposition of an abstract Ratio Unit of Account Money (RUAM). Thus, when the market value of a non-monetary item rises, other things equal, its RUAM price increases from, say, 10 RUAMs/unit to 12 RUAMs/unit. Similarly for a monetary item, when the market value of a dollar bill rises, other things equal, then its RUAM price increases from, say, 5 RUAMs/dollar to 6 RUAMs/dollar. In each case, the rise in market value is expressed as more RUAMs per item. In this sense, supply and demand for each individual money is treated the same as supply and demand for any non-monetary good. Integration and unification of monetary theory with non-monetary theory, however, also requires introduction of Inventory Supply and Inventory Demand functions that together determine prices of all goods expressed in terms of abstract RUAMs.¹³

Inventory Supply simply refers to the number of units of a good owned by a party (or group of parties). For example, 2 loaves of bread might currently exist in a family breadbox, in which case family Inventory Supply of bread equals 2 loaves. The family may wish to hold 4 loaves of bread at the moment, on the other hand, which means that family Inventory Demand equals 4 loaves of bread. Deficiency of Inventory Supply (= 2 loaves) vis-a-vis Inventory Demand (= 4 loaves) would be easily remedied if the family were

1 ³ More complete discussion of conventional conceptions of the “value” of money in conventional microeconomics and macroeconomics, in contrast to this chapter's treatment of the price of each particular physical money, can be found in Dennis O. Flynn and Marie A. Lee, “A Restatement of Price Theory Monies,” in G. Depeyrot (ed.), Three Conferences on International Monetary History (Wetteren, Belgium: Moneta, 2013), pp. 293-314. to purchase 2 additional loaves of bread that day (= 2 loaves/day). Purchase Demand (= 2 loaves/day) raises Inventory Supply (units owned) from 2 loaves to 4 loaves by day's end, other things equal. Purchase Demand thus adds to inventory stocks. In addition, the family may elect to consume a loaf of bread that day, thereby reducing inventory holdings (from 2 initial loaves) to i loaf by day's end, other things equal. Consumption Demand therefore functions to deplete inventory stocks over time. The family may both purchase and consume bread during the day, of course, in which case Purchase Demand would have to increase to 3 loaves/day (rather than 2 loaves/day) in order to raise Inventory Supply to 4 loaves (net of i loaf/day consumption) in conformity with Inventory Demand at 4 loaves in the breadbox. As this example illustrates, Purchase Demand acts to raise inventory holdings, while Consumption Demand acts to lower inventory holdings; Consumption Demand offsets Purchase Demand. Such commonsense conclusions contradict the conventional Law of Demand, however, since the Law of Demand conflates Purchase Demand and Consumption Demand into a single function labeled simply “demand.” These two demand concepts clearly cannot be synonyms, however, since Purchase Demand enhances inventory holdings while Consumption Demand depletes inventory holdings. In short, the Unified Theory of Prices posits three intuitive and interdependent demand notions - Inventory Demand (which ultimately determines inventory holdings), Purchase Demand (which adds to inventory holdings), and Consumption Demand (which depletes inventory holdings). Inventory holdings - which are components of wealth - occupy center stage at all times.

Intuitive functions also exist for the supply side of the Unified Theory of Prices. Production Supply involves fabrication of new loaves of bread that add to pre-existing bread stocks held by the bakery. Bakery sales to wholesale, retail or end-market customers, on the other hand, deplete bakery inventory holdings of bread. Thus, three interrelated supply notions can be distinguished in relation to inventory holdings. As mentioned previously, Inventory Supply simply refers to inventories held at a given point in time. Production Supply enhances inventory holdings, other things being equal, while Sales Supply depletes inventory holdings of the seller. Again in contrast to the conventional Law of Supply - which conflates production supply and sales supply into a singular supply function - the Unified Theory of Prices posits three interacting and interdependent supply notions: Inventory Supply (i.e. inventory holdings), Production Supply (which adds to inventory holdings), and Sales Supply (which depletes inventory holdings). The conventional

Law of Supply, on the other hand, conflates production supply and sales supply into a singular “supply” function, while ignoring Inventory Supply entirely. In short, the Unified Theory of Prices posits three intuitive, interdependent supply notions - Inventory Supply (inventory holdings at a point in time), Production Supply (which adds to inventory holdings), and Sales Supply (which depletes inventory holdings). Again, inventory holdings, which are components of wealth, occupy center stage at all times for the Unified Theory of Prices.

Hydraulic Metaphor

Three versions of the Unified Theory of Prices exist: (1) a mathematical version; (2) a graphical version; and (3) an intuitive, visual Hydraulic Metaphor version that is easiest to comprehend.¹⁴

The intuitive “Hydraulic Metaphor” is introduced next in order to visually demonstrate essential features of the Unified Theory of Prices (UTP). Begin with the simplest view: an isolated market not yet permitted trade with the outside world. Three UTP supply concepts - production supply, inventory supply, and sales supply - are visualized in hydraulic terms in Figure 9.1. Production Supply (PS) simply refers to fresh production of additional units. Since the producer must maintain an inventory of its own good in order to have new product on hand for sale into nearby Market A, Producer Inventory refers to producer holdings of its own product. Market A's Inventory Supply (IS_A) refers to the total amount of the product held by all parties within Location A; hence, the volume of liquid within Location A's container represents inventory supply in that location (IS_A) (Figure 9.1).

Figure 9.1 also shows three UTP demand concepts in hydraulic terms - Purchase Demand, Inventory Demand, and Consumption Demand. Volumecapacity of the container represents Inventory Demand (ID_A): ID_A represents quantity of the item people in Location A are willing and able to hold at

1 ⁴ The only published exposition of mathematical foundations that underlie the UTP is a bare-bones treatment (Appendix A: Derivation of Stock Demand) in Kerry W. Doherty and Dennis O. Flynn, “A Microeconomic Quantity Theory of Money and the Price Revolution,” in E. G. van Cauwenberghe (ed.), Precious Metals, Coinage and the Changes of Monetary Structures in Latin America, Europe and Asia (Leuven University Press, 1989), pp. 185-208 (republished in Dennis O. Flynn, A Price Theory of Monies: Evolving Lessons in Monetary History (Wetteren, Belgium: Moneta, 2009)). A more complete (unpublished) mathematical version, “Consumer Demand in Comparative-Static and Dynamic Analysis” (July 1986), can be found at website: www.unifiedtheoryofprices.org

prevailing prices. Purchase Demand (PD_a) for individual entities in Location A involves additions to purchaser inventory-stocks. Consumption Demand (CD_a) depletes inventory holdings in Location A. The single stream between the Producer and Area A is labeled sales supply (SS_prod) toward the top of its flow, and is relabeled purchase demand (PD_a) on the Market A side of the price axis. In other words, what appears as sales supply (from the Producer vantage point) appears as purchase demand (from the vantage of those in Area A). For visual simplicity, additions to inventory in any location are depicted as “darkly shaded bubble inflows” of liquid, while subtractions from a location's inventory are depicted as “lightly shaded bubble outflows” of liquid. Also, “lightly shaded bubble outflows” shown rising above the liquid stock (IS) in Figure 9.1 are labeled “evaporation = decay” and represent subtractions from that location's inventory stock (e.g. spoilage, or wear and tear). For visual simplicity, all subtractions from inventories are represented as lightly shaded bubble outflows. Thus, consumption demand (CD_a) is represented as a lightly shaded bubble outflow because units consumed are subtracted from Market A inventory holdings. (Note that “consumption” demand for a good under the UTP is characterized by two simultaneous requirements: (i) the activity must generate utility (i.e. satisfaction); and (2) the activity must also deplete inventory. Requirement (2) employs a restriction that does not exist in conventional analysis, since Inventory Supply and Inventory Demand are not acknowledged in standard microeconomics.) According to this scheme, Producer sales supply (SS_prod) is depicted as a lightly shaded bubble outflow in the left upper portion of product flow from Producer Inventory into Market A; lightly shaded bubble outflow sales supply (SS_prod) undergoes metamorphosis into darkly shaded bubble inflow purchase demand (PD_a), however, when viewed from the perspective of Market A buyers. In other words, Sales Supply from the Producer's point of view is identical to Purchase Demand from the point of view of buyers in Market A; ownership of (recently manufactured) items is transferred from producer to Market A customers. Producer Sales Supply is shown as a lightly shaded bubble outflow because sales deplete Producer inventories, while purchase demand is shown as a darkly shaded bubble inflow because items purchased enlarge inventories held in Market A. Any ownership exchange can be viewed from the perspective of inventory-depleting sales supply, or alternatively from the perspective of inventory-enlarging purchase demand. This (SS_prod = PD_a) exchange represents the rate at which inventories are transferred (relocated) from producer to Market A residents.

So long as additions to Market A inventory (via purchase from the producer) equal subtractions from Market A inventory due to decay plus consumption, Figure 9.1 depicts a “steady state” situation (assuming normal profits). That is, the system is self-regenerating over time, assuming undisturbed conditions. “Steady state” is the dynamic equivalent of “equilibrium” in comparative-static analysis. (A dynamic version of the Hydraulic Metaphor can be viewed at www.unifiedtheoryofprices.org.)

Applications of the Hydraulic Metaphor to the history of silver

It is often (inaccurately) asserted that China has always acted as a “suction pump” for attracting silver. A decisive step toward a silver-based economy indeed occurred during the early thirteenth century when Mongol conquest of China led to repudiation of (copper-based) coin, which in turn led to eventual domination by silver and silver-backed paper money. Despite this turn toward a silver economy within China, however, silver was actually exported from China to Western Asia during the thirteenth century, as mentioned in the opening section of this chapter. Since convertible Chinese paper monies served as substitutes for silver domestically, these paper silver substitutes pushed the white metal out of China. Muslim states from Spain to Persia had meanwhile returned to a silver standard with sufficient force to pull silver westward from China; silver was attracted westward because demand-side growth fueled a doubling of silver's market value vis-a-vis its purchasing power within China (100 percent price premium in the West). In sum, the unification of Islamic merchant communities across Eurasia facilitated silver's east-to-west migration in response to arbitrage opportunities. Moreover, elevated market values westward simultaneously encouraged silver mining in Southwest China, particularly in Yunnan.

Fiscal crises within China led to excessive issuance of paper monies later on, however, which in turn generated hyperinflations that destroyed China's silver-exchange-paper-money standard by the 1430s. Private-market participants understandably refused worthless paper monies and demanded payment in physical silver instead. Thus, an enormous fifteenth-century surge in demand for silver within Ming China - simultaneous with a sharp decline in Chinese silver mine production - caused the market value of silver in China to reverse its previous pattern of undervaluation within China during the Mongol era. By the mid-fifteenth century, China had indeed become the world's primary “silver sink” due to overvaluation of silver within China vis-avis the rest of the world.

Central European silver production quintupled from the middle of the fifteenth century in part because of improved mining technology, but also presumably due to buoyant end-market demand emanating from within China. Rising European silver values no doubt stimulated surges in European mining and mintage; silver's purchasing power nevertheless rose ever higher eastward, with the pinnacle in China:

In dealing with this Mercantilist “problem,” however, we need to find answers to two related questions: why did Europe require so much “treasure” in conducting its trade with the Levant, and more generally with Asia; and why was such a large proportion in the form of silver?... The very marked difference in bimetallic ratios certainly indicates that silver was generally always scarcer and thus relatively more valuable - in terms of both gold and commodities - in eastern Asia than it was in Europe.¹⁵

After their conquest of ConstantinopleZIstanbul in 1453, the Ottomans invaded the Balkans and gained control of important Central European silver mines. Central European silver - irrespective of whether under Muslim or Christian governance - stimulated trans-Eurasian trade networks, due to

1 ⁵ Munro, “South German Silver,” pp. 924-5. improvements in European mining technology but also due to lucrative endmarkets within Asia (and presumably especially within China).

Silver and the birth of globalization

Long after the initial fifteenth-century collapse of China's silver-exchangepaper-money system, inventory demand for silver within China continued to expand, thereby causing its market value to soar. By the time silver mines of unprecedented abundance were discovered during the first half of the sixteenth century - in Spanish America and in Japan - silver markets within China yielded far higher prices than elsewhere in the world. By the 1590s, bimetallic ratios indicate that silver's purchasing power (relative to gold) within China was double silver's market value in, say, Spain. In other words, the disintegration of China's paper-money system led to a 100 percent price premium for silver within China eventually, as depicted in Figure 9.2. Not only had the private sector moved relentlessly to silver as a monetary medium, but the trend toward “silverization” was bolstered as local and regional governmental units followed suit by insisting upon receipts and payments in the form of silver. Realizing that the silverization of China was unstoppable, the Ming dynasty finally relented and declared key taxes empire-wide payable in silver while implementing “Single Whip” tax reforms in the 1570s through which a complex series of tax, labor, and tribute obligations were converted into a single payment in silver.

Given the escalation in market value of silver within China, small wonder that merchants and governments throughout the world responded to such stark arbitrage possibilities: massive quantities of American and Japanese silver were shipped to China in exchange for Chinese exports. Merchant profits were immense in both directions, since there also existed robust, simultaneous international demand for Chinese exports, especially silks and porcelain. Lucrative end-markets for silver within China were recognized throughout Asia, but also by the Portuguese (first to navigate around the Cape of Good Hope), and later the Dutch, English and other Europeans. Considered as a group, European silver shipments via the Cape Route grew at a remarkably steady rate for centuries.^{^[203]}

Figure 9.2: 100 percent silver-price premium in China vis-a-vis world, 1590s

American silver also flooded eastward through Baltic trade routes, via the Mediterranean, through the Red Sea, the Persian Gulf, and along numerous overland trade routes, including silk roads. Armenians, Jews, Ottomans, Persians and a multitude of other traders swapped silver in exchange for Indian and Chinese textiles, gold, and of course pepper and spices from South and Southeast Asia.

At 15,000+ feet in the Andes, mines at Potosi in Upper Peru (Bolivia today) may have disgorged half of the total world silver production at times during the Potosi-Japan Cycle of Silver (1540s-1640), and Mexican mines were major sources of silver as well. Perhaps three-quarters of Spanish-American silver flowed across the Atlantic Ocean. The Spanish Crown was remarkably successful at the control and taxation of American silver flows, notwithstanding the existence of huge and unknowable quantities smuggled (including down the so-called “Back Door” of the Andes to Buenos Aires and Sacramento on the Atlantic) in order to avoid the royal quinto (20 percent) and other taxes. Most legal flows were shipped up South America's Pacific Coast to Panama, where they crossed overland to the Atlantic Ocean. Peruvian silver then joined Mexican silver (exported through Vera Cruz) in Havana. Heavily guarded Spanish fleets then crossed the Atlantic to southern Spain, the fountainhead for redistribution of American silver, much of which was ultimately destined for China and to a lesser extent for India.

Significant quantities of Andean silver continued up the Pacific Coast past Central America, and on to the excellent port at Acapulco, Mexico. Peruvian silver was then loaded aboard arguably the largest ships in the world, the Acapulco-Manila galleons. Such huge ships were not required to transport 50 tons of silver (two million pesos) annually throughout the seventeenth century, but capacious maritime capacity was required to accommodate staggering volumes of Chinese silks that crossed eastward on the return voyage to Mexico via the Pacific Ocean. Japanese foreign trade at this time likewise boiled down to a straightforward swap of Japanese-silver-for-Chi- nese-silks, but less capacious ships were typically capable of handling intraAsian trade cargoes.

The Acapulco-Manila galleons provided Spain's only direct access to lucrative Asian markets, since other Europeans had already established trade routes around the Cape of Good Hope. Despite intense efforts by the Spanish Crown to control the Acapulco-Manila trade, however, smuggling became increasingly prevalent as silver prices gradually declined. Spain never did control trade between the Philippines and mainland Asia, on the other hand, since Asian trade networks (in which Europeans participated) dominated this bi-directional trade. Silks were the main Chinese export, while silver of course dominated Chinese end-market imports. Overall, and contrary to claims in the historical literature, trans-Pacific trade generated huge profits for the Spanish Crown, which is why the Acapulco-Manila galleon trade persisted for 250 years.

The transition from Figure 9.2 to Figure 9.3 provides a simplified depiction of worldwide decline in the market value of silver during the sixteenth and

Figure 9.3: End of the Potosi-Japan cycle of silver, end of arbitrage by 1640

part of the seventeenth century. Since monetary systems were widely silverbased, price inflation during this period - the Price Revolution - is attributable to the worldwide decline in value of silver monies. More units of this less-valuable commodity were required to purchase items that did not decline in value. Once the market value of silver declined to the cost of production at the most efficient mines, it could fall no further (in the absence of cost-reducing technology). In sum, the Price Revolution ended around 1640. Unprecedented surge in worldwide silver mining had augmented global silver stocks to a greater extent than growth in silver's inventory demand, which explains silver's loss in purchasing power at about ι percent per year (roughly the rate of silver-content price inflation). As the price of silver descended slowly toward American and Japanese mining costs, profits were slowly squeezed. Global silver price pressures drove the great Central European silver mines out of business first, since mineral extraction was more expensive in older, deeper mines. Excess profits were eventually eliminated for American and Japanese mines as well by around 1640.

Prodigious silver exports from Japan, in addition to Spanish-American silver exports via the Atlantic and - subsequently via countless Afroeurasian trade networks - Pacific oceans, led to relentless accumulations of silver within China over time. These accumulations eventually drove Chinese silver prices down to the level of rest-of-the-world silver prices by 1640 (Figure 9.3), bringing closure to the Japan-Potosi Cycle of Silver (1540s- 1640). Permanent linkage between the New World and Asia across the Pacific Ocean originated truly global trade during the Japan-Potosi Cycle of Silver when Manila was established as a Spanish entrepot in 1571. Yet the sixteenthcentury birth of globalization extended far beyond economic considerations alone, since there was simultaneous release of profound biological forces that have shaped - and continue to shape - evolutionary forces worldwide over the past five centuries.

There can be no doubt that profits motivated global maritime and overland trade routes that were awash in silver destined for end-markets in China. Silver-laden ships and overland vessels also contained American plants and seeds that physically reshaped landmasses worldwide, however, notwithstanding that the economic values of these plants and seeds were negligible at the time of their dissemination worldwide. The introduction of just three previously unknown American crops during the sixteenth century - maize, sweet potato, and peanut - was an essential factor that contributed to the eventual doubling of China's physical landmass, and more than doubling of its population to perhaps 30 percent of the world population by the end of the eighteenth century. Such explosive physical transformations within the world's largest economy could not help but affect countless internal and external markets, of course, Having previously “silverized” already, demandside expansion caused the price of silver within China to vault to a 50 percent premium by 1700 vis-a-vis the price in the rest of the world. In response, Mexican silver production during the eighteenth century exceeded the silver output of all of Spanish America during the two previous centuries combined. Naturally, non-silver markets were also heavily impacted throughout the globe, due to economic, ecological, demographic, epidemiological, and cultural forces that became (and remain today) increasingly interlinked at a planetary level as a result of the Columbian Exchange. The salient point emphasized here is simply that silver-market profits unintentionally initiated a five-century series of complex recursive interactions among ecological, epidemiological, botanical, demographic, and cultural - and back again to further economic - forces that are components of global evolution from sixteenth-century origins into the early-twenty-first-century era.

Visualization of global silver markets via Hydraulic Metaphor mechanisms is portrayed in Figure 9.4. (Note that Figures 9.4, 9.5, 9.6, and 9.7 abstract from most productive processes in the interest of simplicity. In addition, silver is assumed to be a non-consumable product that decays slowly.) Elevation of China's container base illustrates the 50 percent price premium within the Chinese silver market by 1700 - due to surging Chinese demand for silver - relative to silver prices elsewhere in the world. Escalating Chinese

Figure 9.4: 50 percent silver-price premium in China vis-a-vis world, 1700

Figure 9.5: Global silver-price equilibration, 1750

Figure 9.6: Carolus dollar market, early nineteenth century

demand for silver was driven largely by the burgeoning Chinese population, stimulated, in turn, by the introduction and gradual dissemination of American plants. Silver's 50 percent price premium in China yielded arbitrage potential recognized worldwide, an incentive that contributed mightily to an unprecedented surge in global silver production, mostly in Mexico this time around. Durable and non-consumable, silver stocks accumulated in

Figure 9.7: Silver bullion market, early nineteenth century

sufficient volume to eventually force price downward until arbitrage profits were (again) eliminated globally by 1750, as shown in Figure 9.5. Figure 9.4 and Figure 9.5 together summarize the market forces that determined the beginning and end dates of the half-century Mexican Cycle of Silver (1700-50). Inventory Demand (IDC) ultimately determined the volume of silver that settled within China, at a price that ultimately settled at world price by 1750. Conventional laws of supply and demand are equipped neither to recognize nor to describe equilibration processes that last 50 years (1700-50) or 100 years (1540s-1640), thus illustrating the need for economic models that explicitly focus upon processes of accumulation through time.

The Hydraulic Metaphor provides a useful model for understanding why American silver continued to pour into China after 1750, even though arbitrage gains depicted in Figure 9.4 had been eliminated. First, keep in mind that the non-arbitrage situation depicted in Figure 9.5 implies that merchants earned “normal profits”; elimination of arbitrage gains simply means that above-normal profits had been squeezed out. Second, silver is assumed to be a durable, non-consumable good, but a small percentage of silver wears out and is lost. For simplicity, assume a modest 1 percent “decay rate/evaporation” for Figure 9.5. Assume further that the stock of silver held within China was 500 million pesos in 1750 (a purely speculative number). One percent annual loss of the silver stock therefore implies shrinkage of the Chinese silver stock from 500 million to 495 million pesos after one year, in the absence of replenishment. Thus, importation of 5 million pesos (about 2.5 tons) in silver per year would be required in order to simply maintain the existing stock of 500 million pesos. Yet we know that population growth was robust in eighteenth-century China, so inventory demand for silver must have grown, and not necessarily proportionally. In short, it may have been necessary to import, say, 10 million pesos in silver annually just to maintain a silver price consistent with zero economic profits (i.e. prevalence of normal profits). Unprecedented silver mining in Mexico and Peru throughout the eighteenth century makes sense in view of requirements to adjust global silver stocks to non-arbitrage levels. As stated earlier, invocation of trade-imbalance logic to justify flows of silver (or other substances) is unnecessary and misleading. Chinese trade was balanced in the sense that imports of silver, opium, and other items were offset (i.e. paid for) by various Chinese exports, notably tea and numerous Chinoiserie items that became the rage in Europe and elsewhere during the eighteenth century.

Distinct forms of silver

Not only is separate theoretical treatment of the intrinsic content of each monetary substance required - i.e. conceptual separation of silver from gold, from copper, and from cowries - it is also essential to conceptually sub-divide each intrinsic substance according to distinct perceptions depicted in historical sources. For instance, nineteenth-century Chinese monetary history furnishes evidence of the need for disaggregation of specific forms of silver, as Richard von Glahn attests:

...decline in Chinese silver imports during the second quarter of the nineteenth century must be considered in the context of the demand for particular types of money, both in China and in the global market, not simply the supply of silver in general. In this respect, we must also pay attention to the rapid adoption of the Spanish peso as a new monetary standard... What drove the sharp increase in silver imports during the 1780s-1820s was not the demand for silver in general, but the demand for a stable means of payment.¹⁷

1 ⁷ Richard von Glahn, “Monetary Demand and Silver Supply in 19th-Century China,” in Empires, Systems, and Maritime Networks Reconstructing Supra-Regional Histories in Pre-19th Century Asia (Ritsumeikan Asia Pacific University, Beppu, Oita, Japan: Working Paper Series 2011), p. 75.

Distinction must be drawn between silver-bullion imports vis-a-vis silver-coin imports, as emphasized previously, but it is also essential to differentiate among markets for specific types of silver coins. Alejandra Irigoin argues convincingly that abrupt change in quality control at early- nineteenth-century Mexican mints created momentous reactions within Chinese end-markets for particular coins.¹⁸ The Chinese central government had not minted silver coins previously, and privately minted coins within China contained diverse weights and fineness. “Tael” referred to an amount of silver, but the Tael was nonetheless ill suited to function as a general monetary substance because at least 67 recognized Tael standards co-existed. Moreover, bullion itself was ineligible as a candidate for general money because hiring a professional shroff was required to assess bullion purity. Reputable foreign coins (even broken ones) did not present equivalent assessment difficulties, on the other hand, which explains why foreign silver coins commanded premiums within Chinese marketplaces. The Carolus dollar from Mexico had already become the most trusted and prestigious coin within early-nineteenth-century China. An unfortunate byproduct of the Mexican war of independence after 1808, however, was the production of fresh Mexican coins of unreliable quality, a development quickly and widely recognized within Chinese markets. Given shattered Chinese confidence in freshly minted Mexican coins, previously minted Carolus dollars commanded a substantial and escalating price-premium in Chinese markets. As a result, arbitrage again assured that massive quantities of Carolus dollars were imported into China. As indicated in Figure 9.6, buoyant Inventory Demand for Carolus dollars within China led to sharply higher values for Carolus dollars in particular (shown by the elevated height of the Carolus container base). Arbitrage gains were realizable by simply buying relatively cheap Carolus dollars outside of China for shipment and sale at substantial price premium within Chinese markets.

Notwithstanding massive Chinese importation of Carolus dollars, substantial volumes of silver bullion (Sycee) were simultaneously exported from China during the first half of the nineteenth century. One traditional explanation is that Chinese opium imports caused exports of silver bullion, yet silver and opium had both been huge simultaneous Chinese imports during the second

1 ⁸ Alejandra Irigoin, “A Trojan Horse in Daoguang China? Explaining the Flows of Silver in and out of China,” London School of Economics, 2013. half of the eighteenth century, so how can one argue that Chinese opium imports caused Chinese exports of silver during the early nineteenth century, when Chinese opium imports had failed to cause Chinese exports of silver during the preceding time period? Once again, historical facts contradict weak theoretical claims that imports of a “real” non-monetary product (opium) caused exports of a “monetizable” product (silver bullion). Whether monetized or not, silver was and is as “real” as any non-silver product. Moreover, analysts should directly analyze the specific market under investigation, rather than impute reactions in one market based upon alleged imbalances in remaining markets collectively. For various reasons that shall not detain us here, including massive environmental problems within China, the Chinese economy collapsed during the nineteenth century. General shrinkage of the Chinese economy must have implied shrinkage in Inventory Demand for many products within China, presumably including diminution of Inventory Demand to hold silver bullion. Figure 9.7 depicts shrinkage in Inventory Demand for silver bullion; note that volume capacity for Chinese silver bullion markets in Figure 9.7 is intentionally shown with relatively small capacity relative to volume capacity of Chinese silver bullion markets in Figure 9.5. Owing to shrinkage in Inventory Demand for silver bullion, China's silver bullion price in Figure 9.7 is depicted as depressed vis-a-vis silver bullion prices in the rest of the world. As with any trade good, arbitrage gains were realizable through purchase of cheap silver bullion (Sycee) within China this time, in order to relocate and sell the white metal in non-Chinese markets where the silver bullion price was higher (in India, for instance). Under such circumstances, it is unsurprising to encounter evidence of Chinese imports of Carolus dollar coins coincident with simultaneous Chinese exports of silver Sycee bullion. Moreover, different types of silver coins could be (and sometimes were) both imported and exported at the same time. Explanation for concurrent import and export of items within a category - such as distinct types of silver coins, or distinct types of silver bullion - requires theoretical mechanisms that explicitly acknowledge separate markets for each product, since market participant perceptions themselves lead to divergent market prices that appear in archival records and discussion of prices. The main point of this chapter is that clear depiction of evolving markets in a global context - including specific silver (monetary and non-monetary) objects distributed worldwide between 1400 and 1800 - requires that each product be viewed independently to the maximum extent possible (i.e. disaggregation), and that focus upon inventory analysis (accumulation through time) prevails.

Summary

Silver has been a uniquely important commodity for thousands of years. Confiscation of pre-existing silver stocks, such as Alexander the Great's capture of Persian silver, involved transfers of wealth. But recipients of transferred wealth in silver form may prefer to diversify new wealth into a mix of assets, which could be accomplished through the exchange of silver for other goods as alternative forms of wealth. Concentrations of wealth, in addition to individual preferences, determine geographical end-market locations for silver items and non-silver goods. This chapter offers an intuitive visual model - the Hydraulic Metaphor - designed to describe where and how specific forms of silver eventually settled.

In global monetary terms, silver was more important than gold up to the late-ninteenth century. The history of silver is therefore inextricably intertwined with monetary history generally. A widespread problem in monetary history - the aggregation of various monetary substances into a catch-all category “money” - is attributable to instructions from modern monetary theory itself. The narrowest definition of “money” in economics textbooks involves the aggregation of monies fashioned out of diverse substances. Yet we have seen that productive concentrations of each of the four most important monetary substances between 1400 and 1800 - silver, gold, copper, and cowry shells - differed for each one, as determined by geological forces. Moreover, while some end-markets certainly contained more than one kind of money at a time, these four substances by and large did not travel together in tandem as “money” anywhere. Rather, each monetary substance was attracted to specific geographical locations that attracted particular items; relocation of monetary items was guided by the same profit motivation that guided trade in non-monetary goods. Theoretical aggregation of these diverse monetary substances renders global monetary history unintelligible, while disaggregation offers clarification.

Aggregation of diverse monetary items at the level of the nation-state also raises the issue of distinct monetary regions within a country. Gold was not an important monetary substance in China, for instance, but there were significant gold-money regions in Japan, India, and many other parts of the world. Silver became the dominant monetary substance in China (along with copper-based monies), notwithstanding the fact that the Chinese did not mint silver coins. On the other hand, silver was heavily minted in Japan, home to major silver mines. Silver was also heavily minted in India, a land without silver mines. Both India and Japan contained regions dominated by silver, along with regions dominated by gold. Monetary theories need to operate at regional levels. Persian larin coins were common in the Maldive Islands, the most prolific source of cowry shells on earth, millions of pounds of which were exported to Asia and West Africa, the latter via European ports. And of course there were countless “lesser” monetary substances such as lead, which were of significance at specific locations around the world.¹⁹

Seemingly bewildering distributions of monetary substances around planet Earth can be comprehended, however, only when each monetary substance is conceptualized as a distinct entity. Each was produced in specific locations, was destined for particular end-markets, and traveled via trade routes that facilitated relocation from place of production to final end-market destination. This logic applies to all goods, monetary and non-monetary alike. Silver objects were “real” products in their own right, items created through a sequence of processes, beginning with access to working capital and expertise in prospecting, through rock mining, ore extraction, refining, alloying, manufacture (including minting of coins), and eventual distribution of final silver products to dispersed end-markets, often in defiance of political boundaries.

Silver in a global context, 1400-1800

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