The Gold Standard and the Disappearance of the Mexican Silver Dollar as International Currency in Japan and East Asia Markets, 1850-1905

Abstract

In 1899, Japan’s Finance Minister Masukata Masayoshi, stated that by the time of the Meiji Restoration, “the universal medium of exchange in the trade of the Far East was the Mexican dollar.” By the turn of the century the Mexican Silver dollar, as the dominant international currency, had disappeared not only from Japan but also from East Asia markets. Three main questions arise: How the Mexican dollar became the main international currency in East Asia? Why it disappeared? Departing from the 16th century, this paper traces the origins of the Mexico silver dollar as an international currency to reveal the main causes for its disappearance during the second half of the 19th century. Until the dawn of the 19th century there was at least a tri-metallic world market, however, the predominant was a de facto silver standard. The more rapidly increasing world supply of silver, and its concomitant decline in price relative to gold and copper, induced and permitted the silver standard increasingly to impose itself in the world market economy. Between 1493 and 1850, Mexico produced around 42% of the silver circulating around world. Moreover, Mexico and South America Spanish colonies supplied 86% of the silver required to create a world market economy during this period. Therefore, because of natural competitive advantages Mexican silver coins became widely used and fully-fledged international currency. The Europe’s trade deficit with China and the East Asia region was balanced with the silver from the Spanish colonies in America. It was one of the few products the Europeans could introduce in Eastern markets until the industrial revolution. Adam Smith in 1776 said; “The silver of the new continent seems in this manner to be one of the principal commodities by which the commerce between the two extremities of the old one is carried on, and by means of it, in great measure, that those distant parts of the world are with one another.” Nineteenth century was the period of the development and consolidation of two political and two economic institutions: The balance of power system; the liberal state, the self-regulating market economy, and the international gold standard, which symbolized a unique organization of the world economy. Of these institutions the gold standard proved crucial for the smooth interrelation among the nations since it was the mechanism that integrated domestic economies into a world market. During the last quarter of the 19th century, it became established as the dominant system in world trade. The adoption of the gold standard, capitalism, free market economy implied for Mexico the subrogation of the facto silver standard for gold standard and the disappearance of the Mexican silver dollar as an international currency especially in Japan and East Asia markets. As long as the countries were adopting the gold standard the demand for silver coins declined, to the point that the main Mexico export product, the Mexican dollar, went out of the market. Simultaneously, the decreasing demand for silver produced a fall in its value relative to gold, which in turn depreciated the exchange between Mexico and gold-currency nations and consequently led to a lessening in Mexico’s terms of trade. Using as case study: Japan, China, the Philippines, the Straits Settlements, Indochina and the United States, it is observed that the demand for Mexican silver dollars in these countries and regions inexorably ceased. Although there were particular circumstances in each of them, the common cause for the decline in the demand and eventually disappearance of Mexico’s silver dollar was the adoption of the Gold Standard from 1875 to 1900. Particularly in East Asia, it threatened to reduce the market not merely for the coins of Mexico, but also of its unminted silver as well. To avoid continuing losses Mexican government adopted the Gold Standard in 1905.