Saturday, July 28, 2007

A Biased History Lesson

When you helm a "silver investment" website and live in the middle of silver mining country, well you've got a bias. Bond isn't the most gifted writer, but he makes a couple of fine points in his own roundabout way. Enjoy.

The China Syndrome

Friday, July 27, 2007
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 naïvely 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.

No comments: