Dope, Dollars & Deficits

DO DEFICITS MATTER? Right around the time that English missionaries produced the first Bible in Chinese, the British Empire found... ... itself with a trickier kind of translation problem.Exporting the English language to China – and a little Protestant godliness besides – was proving much easier than exporting British-made goods.Imports from abroad, in contrast, just kept on growing as the industrial revolution steamed ahead at home, sucking in the new consumer favorites – tobacco, sugar, coffee, calicoes, porcelain and silk.By the early 19th century, of course, Britain owned the plantations of the West Indies and the factories of Bengal. So those deficits didn't even exist, let alone matter. But "the British were spectacularly unsuccessful in finding trade goods that the Chinese wanted or needed," as Jonathan Spence, professor of history at Yale, noted in his Reith Lectures for the BBC earlier this week. Thus "there was the problem of trade imbalances." And stuck for consumer items to ship back across the oceans, London's merchants were forced to pay in cash.For the British, money meant gold, just as it did until the last gasp of the Gold Standard one hundred years later. But the Chinese wanted silver.(They never did get round to using gold, in fact. And while Britain recovered early from the Great Depression by abandoning gold for credit-money in 1931, one theory holds that China side-stepped it entirely by sticking to its silver standard...)Translating English pounds into Chinese yuan in the 1830s meant selling gold for silver, and that meant dealing on Europe's precious metals market. Paying a commission to the bullion dealers of Paris or Prussia – as well as shipping it all back and forth – only added further to the transaction costs of running up that yawning trade gap.What to do? A little of the British Empire's raw cotton found a market in China, but it wasn't nearly enough to close the trade gap. Gold bullion continued to flow out of London, aggravating the "bullionist" school of economists and policy-makers. They feared a shortage of coin in the domestic British economy, plus a fall in the Pound Sterling's international value...as well as giving work to foreign laborers, and paying profits to their foreign masters...while leaving the London exchequer impoverished should it ever need to fund a military defense of the home front.And so "it was this melancholy failure of the balance of trade that led to the under girding of the opium business in China," explains Prof. Spence. Opium grown in India "started to be sold to the Chinese by British traders, and later by American traders, because the West simply could not find enough products to attract the Chinese in a sort of barter exchange at the time."Widespread dope-smoking and the social breakdown it can invite rarely chimes with government policy – not domestically, at least. Opium had long been banned by imperial decree from Nanjing. But after ten years of trying to fend off Britain's drug dealers without damaging the inflows of silver, the Qin authorities finally cracked and made a stand, seizing 20,000 chests of the drug – some 1,200 tonnes – landed in Guangzhou.London responded first with a gun-boat, and then the all-out Opium War of 1839. It ended three years later with the Treaty of Nanjing. Britain's military might won the island of Hong Kong, plus reduced trade tariffs, freedom from Chinese law for its ex-pats, as well as "most-favored nation" status.