The chart below shows inflation rates going back to 1750, which reflects the changing value of money. The periods
of relatively stable inflation early on were largely the result of China using metals (silver and copper) as money.
Instead of a central currency being printed, raw weights of metals were exchanged as money (i.e., there was a Type
1 monetary system). When the Qing Dynasty broke down, provinces declared independence and issued their own
currencies through their silver and copper and valued by their weights (i.e., the Type 1 monetary system was
retained), which held their value which is why, even during this terrible period, there was not an exceptionally high
level of inflation measured in this money. However debt (i.e., promises to deliver this money) grew in the 1920s
and 1930s, which led to the classic debt cycle in which the promises to deliver money far exceeded the capacities
to come up with the monies to deliver so there was a default problem, which led to the classic abandonment of the
metal standard and the outlawing of metal coins and private ownership of silver. As previously explained,
currencies are used for 1) domestic transactions, which the government has a monopoly in controlling and can
get away with them being fiat and flimflam, and 2) international transactions, in which case the currencies
must be of real value or they won’t be accepted. As a rule, the better money is that which is used for
international transactions. The test of the real value of a domestic currency is whether or not it is actively used
and traded internationally at the same exchange internationally as domestically. When there are capital
controls that prevent the free exchange of one’s domestic currency internationally that currency is more
susceptible to being devalued, which is also why one of the standards for being a reserve currency is that there
are no capital controls on it. So, as a principle, when you see capital controls being put on a currency, especially
when there is a big domestic debt problem, run out of that currency.
In China in the mid-1930s two currencies existed—one that was fiat paper that was used domestically and one that
was gold and silver that was used for international payments. The fiat paper one that was used domestically was
printed abundantly and devalued a lot, even as the government issuing it controlled less and less territory as it lost
the civil war, which is why we see the hyperinflation shown in the chart during that period. Remember, as a
principle, get out of fiat currencies during debt crises and wars because they will be printed a lot to fund debt
payments, which will lead them to be devalued and to high or hyperinflation. As shown in the chart below, after
the turbulence of World War II and the civil war, in December 1948, the first RMB was issued as a fiat currency
that was kept in limited supply to end the hyperinflation. In 1955 a second issuance of RMB was made, and in
1962 a third was issued. From 1955 to 1971 the exchange rate was fixed at 2.46 to the US dollar. From 1972
through the late 1970s, China did a better job of restraining money and credit. You can see another round of high
inflation from the late 1970s to the early ’90s. It was caused by the global devaluation of money against gold in
1971, global inflationary pressures, China phasing out its price controls, easy credit, and lack of spending controls
among state-owned enterprises. In 1996 convertibility was allowed for current account items but not for the capital
account. From 1997 until 2005 the exchange rate to the dollar was kept at 8.3. In 2005 the peg with the dollar was
ended.

The charts below show the value of Chinese currency in dollar terms and in gold terms since 1920, plus the
inflation and growth rates over this period. The history for the currency rates is so fragmented before that that it is
not worth referencing. As you can see, there were two devaluations, one at the setting up of the new exchange rate
in 1948, and a series of devaluations from 1980 until the early 1990s, largely aimed at supporting exporters and
managing current account deficits,11 which led to the very high inflation during that period. As shown, growth was
relatively fast and erratic until around 1978, then fast and much less erratic since 1978 until the recent brief plunge
due to COVID-19.
Generally speaking the very long and volatile history of markets and economies has given the Chinese, and
especially Chinese economic policy makers, the same sort of deep and timeless perspectives about money, debt,
and economies as they have for other history. However, that is not totally true. While it has given most Chinese a
strong desire to save and an appropriate sense of risk that innately drives them to save in safe liquid assets (e.g.,
cash deposits) and tangible assets (e.g., real estate and some gold), most Chinese investors have limited
experiences in some riskier assets such as equities and risky debt, so they can be naïve in these areas, though they
are learning very fast. When it comes to policy makers understanding how money, credit, monetary policy, fiscal
policy, and the economy work, and how to restructure bad debts, I have found China to have great perspective and
to be world-class.
Now let’s look a bit more closely at China’s history from 1800 until now.